The FCC’s 2011 Intercarrier Compensation Transformation Order
adopted a framework in which terminating end office switching charges and most other charges associated with terminating traffic to the PSTN were to be reduced to zero over time, with bill-and-keep (i.e., no reciprocal compensation payments) as the preferred “end state for all intercarrier compensation.”
The transition to bill-and-keep is now complete for most carriers and network elements (or will be by 2020). One of the more notable exceptions, however, is the ability of local exchange carriers (“LECs”) to charge for “terminating transport.”
According to the FCC and a number of complaining carriers, these charges are increasingly being used as a source of revenue by conference calling and other call-attracting telephone services (such as chatlines and broadcast-over-telephone services), which generate a large number of in-coming calls. The process works as follows: the LEC serving the conference company charges the telephone company from which the call originates for the “cost” of routing the call from the point of interconnection to the central office from which the call is terminated to the end-user. (These are often billed as “tandem transport” charges.) The LEC then shares the revenue with the conference calling service, which enables the service to be offered for free (or at a low rate), which, in turn, attracts more calls. The FCC considers this to be market-distorting arbitrage and, in a recently issued Notice of Proposed Rulemaking
, has proposed several options for eliminating the practice.
In the ICC Transformation Order,
the FCC defined “access stimulation” as occurring when two conditions are met. First, the involved LEC must have a “revenue sharing agreement” that would directly or indirectly result in a net payment to the party being served (e.g., in this case the conference calling company) in which payment by the LEC is “based on the billing or collection of access charges from interexchange carriers or wireless carriers.”
Second, the LEC must also meet one of two traffic tests. An access-stimulating LEC either has “an interstate terminating-to-originating traffic ratio of at least 3:1” or a high growth rate.
The Transformation Order
adopted procedures to minimize the impact of access stimulation during the transition period while end-office switching charges were being phased out. A LEC engaged in access stimulation was required to reduce its access charges either by adjusting its rates to account for its high traffic volumes (if a rate-of-return LEC) or to reduce its access charges to those of the price cap LEC with the lowest switched access rates in the state (if a competitive LEC). These reduced rates lower the cost to IXCs and the amount of intercarrier compensation charges received by the LEC and the provider of high call volume services with which it has a revenue sharing agreement.
Arbitrage opportunities remain, however, because LECs can still assess transport charges on IXCs, and the emergence of “intermediate” access providers who are able to bill the IXCs for routing traffic. As the FCC explains in the NPRM, “today’s access arbitrage schemes are often enabled by the use of intermediate access providers selected by the terminating LECs.”
When an intermediate access provider is in the call path, the IXC pays access charges to the intermediate access provider and to the terminating LEC. The FCC believes that this network arrangement evades existing Commission rules intended to stop access stimulation to the extent that an intermediate access provider is not captured by the definition of “access stimulation,” and thus, is not subject to those rules.
The FCC’s Proposals
The FCC proposes to address the issue by disrupting the role played by the intermediate provider/LEC by requiring the terminating LEC (i.e., the LEC serving the conference company) to either: (i) bear the financial responsibility for the delivery of terminating traffic to their end office, or functional equivalent; or (ii) accept direct connections from either the IXC or an intermediate access provider of the IXC’s choice.
Under the first option, an access-stimulating LEC that does not offer direct connections to IXCs would bear all financial responsibility for applicable intermediate access provider terminating charges normally assessed to an IXC (from the point of indirect interconnection to the access-stimulating LEC’s end office or functional equivalent), and would be prohibited from assessing transport charges for any portion of transport between the intermediate access provider and the LEC’s end office or functional equivalent that the LEC, itself, provides.
Under the second option, the access-stimulating LEC would have to offer to connect directly to the IXC or with an alternative provider of the IXC’s choice.
These proposals continue the trend seen in recent FCC policy-making that has moved away from (1) the previously accepted “calling party pays” principle; and (2) the general authorization of indirect interconnection arrangements in most instances. The “calling party pays” principle was effectively repudiated in the ICC Transformation Order,
where the FCC determined that, with respect to terminating traffic, the LEC’s end user is the cost causer and therefore the terminating LEC should look first to its subscribers to recover the costs of it network.
The limitations on indirect interconnection was signaled in the Rural Call Completion Order, where the FCC placed express limits on the number of intermediate carriers a LEC or IXC could use in a call path.
While the foregoing options would preserve the ability of LECs to charge for transport in some circumstances, the NPRM also asks for comment on whether the FCC should reduce all tandem transport charges to bill-and-keep.
Doing so, the NPRM observes, would be consistent with the FCC’s overarching goals of discouraging arbitrage and ultimately transitioning all traffic to bill-and-keep. “It would also be consistent with the Commission’s finding in the USF/ICC Transformation Order
that with respect to terminating traffic, the LEC’s end user is the cost causer and therefore the LEC should look first to its subscribers to recover the costs of it network.”
Finally, the NPRM asks for comment on how and whether the FCC should address other intercarrier compensation issues, such as toll free tolling (8YY) arbitrage and limitations on revenue sharing arrangements between carriers and end-users that may give rise to access stimulation in the first place.
Please contact us if you have any questions about this proceeding.
 Connect America Fund, et al., Report and Order and Further Notice of Proposed Rulemaking, 26 FCC Rcd 17,663, ¶ 741 (2011) (“Transformation Order”).
 47 CFR 61.3(bbb)(1)(ii).
 47 CFR 61.3(bbb)(2).
 See 47 CFR §§ 61.38, 61.39, 61.26(g)(2).
 Id.¶ 9.
 Id. ¶ 10.
 ICC Transformation Order ¶ 746.
 DWT’s summary of the currently effective Rural Call Completion rules can be found here.
 Id. ¶ 24.