Dear Jonathan:

Last month, you responded to a reader’s question about the possibility the FCC would soon overhaul the Universal Service Fund and make significant changes to the carrier contribution methodology.  I’ve read some recent news reports that indicate the FCC is not only revamping Universal Service, but would also change the way carrier’s pay compensation to other carrier’s for carrying their traffic.  The details regarding both the Universal Service Fund and Intercarrier Compensation reform proposals appear to be very sketchy at this time.  From your vantage point as a Washington, D.C. insider, are you able to shed any light on the situation?

- In the Dark



Dear In the Dark,

You are not alone.  D.C. insiders, many in Congress, state regulatory commissioners and even FCC Chairman Kevin Martin’s fellow Commissioners were mystified by the Universal Service Fund (“USF”) and Intercarrier Compensation reform proposals that were recently floated.  In fact, the secrecy surrounding Chairman Martin’s draft Order was a major reason the reform proposal was taken off the FCC’s Open Meeting agenda one day shy of the scheduled November 4th (Election Day) vote.  Even now, the specific details of Chairman Martin’s bold attempt to reform USF and Intercarrier Compensation remain unclear. 

Reports indicate that Martin’s proposed rules were aligned with a proposal submitted jointly by AT&T and Verizon in an ex parte letter in late August.  Last month’s Legal Line column provided details of the “numbers-based” USF reform proposal outlined in the ex parte.  A draft Order was first circulated among the Commissioners just three weeks before the scheduled vote, and is reported to have included provisions to radically reform the entire USF regulatory system – from how contributions are determined to how distributions of support payments are allocated.  

The draft Order undoubtedly would have resulted in far-reaching changes to the way carriers compensate each other for carrying and exchanging traffic with one another.  Consistent with the AT&T/Verizon proposal, we understand the proposed Intercarrier Compensation rules would have subjected all traffic touching the public switched telephone network (“PSTN”) – including in-state access traffic – to federal “reciprocal compensation” mandates, under Section 251(b)(5) of the Communications Act.  And, it is widely reported that the rules would have mandated a flat, uniform rate of $0.0007; an amount substantially less than the per minute rates currently imposed by many smaller and rural incumbent carriers and competitive local carriers alike.

We’ve also heard of the following additional “details” (rumors) of Martin’s failed bid to reform USF and Intercarrier Compensation:

•    Would raise the FCC Line Charge on Residential customers from its current $6.50 cap, possibly up to $10.00 a month (the FCC Line Charge does not go to fund the FCC, but is direct revenue to local phone companies);

•    Would raise the FCC Line Charge on Business customers as high as $13 to $15 per month (up from just above $9.00);

•    Would raise or add a new USF Tax to pay for broadband Internet Access deployment to underserved areas;

•    Would permit states to impose USF obligations on VoIP Telephony services;

•    Would subject dial-up Internet Access traffic to access charges by removing the Enhanced Service Provider exemption.

Had the proposal been approved on November 4th, large local carriers, including AT&T and Verizon, would undoubtedly have benefited greatly, both in terms of reduced carrier-to-carrier costs and additional USF support payments for broadband deployment.  Smaller, more rural carriers, such as CenturyTel, Embarq, Windstream, and the myriad independent rural telcos, would most likely have suffered a decrease in access revenue.  Though, truth be told, because Chairman Martin withdrew the proposed USF and Intercarrier Compensation reform proposal off the table one day before the vote, and because his proposed rules were never disclosed to the public, we are left speculating as to the specific details and impacts on various industry segments.

As detailed below, it was this total lack of public disclosure that ultimately led Chairman Martin to pull the Order from the FCC’s November 4th agenda. 



Possible Impact on Prepaid Industry

Universal Service and Intercarrier Compensation affect every single participant in the telecommunications industry to one degree or another.  Providers are impacted either directly or indirectly because the industry is highly inter-dependant.  Prepaid calling card providers and prepaid wireless/MVNOs are no exception.  Whether or not Chairman Martin’s specific reform proposal (whatever it might be), or some variation thereof, ultimately becomes the law of the land, the prepaid industry should pay close attention to the debate.

The prepaid industry may not see itself being directly impacted by Intercarrier Compensation reform, since, superficially, it would appear the debate is between “the big local telcos,” like AT&T & Verizon, and their competitors.  But in reality, every telecommunications provider is affected because, one way or another, every carrier pays to have their calls originated, transported and terminated.  There’s insufficient detail to fully understand how Chairman Martin’s proposal would ultimately affect prepaid service providers – either positively or detrimentally – but suffice it to say, the prepaid industry would be impacted by a change.  This we know to be true because, in its June 2006 Prepaid Calling Card Classification Order, the FCC ruled that all prepaid calling card services, even “enhanced” cards, were “telecommunications services” subject to traditional access charges and universal service fund obligations.  The FCC even imposed quarterly Certification obligations in this Order, which require prepaid providers to certify to their transport providers their percentage of interstate use (“PIU”), each and every quarter.

We do know that any Intercarrier Compensation reform efforts would be primarily aimed at lowering long-distance transport costs.  Thus, it can be expected that the price of wholesale, interstate long distance would have been reduced had Martin’s plan been adopted.  In fact, should the FCC mandate a significantly lower, uniform national rate for Intercarrier Compensation, wholesale rates for the termination of long distance calls to rural and high-cost areas would decrease – significantly, in some cases. 

Wireless providers who sell prepaid domestic calling plans will benefit the most from these reforms, but all prepaid calling card providers who provision service domestically will most likely see a decrease in costs.

Alas, Chairman Martin’s attempt to create some “change” of his own met with failure, at least for the time being. The issue was not necessarily because the proposed rule changes were, themselves, problematic – any reform of this magnitude is certain to have its winners and losers.   No, the Chairman failed because the process and timing of his reform effort had all the earmarks of a closed, backroom deal; something lacking transparency in every sense of the word.



Lack of Transparency in FCC’s Rulemaking Process Causes Stir

Although the FCC has been considering reforming the USF and Intercarrier Compensation programs for as long as the rules have been in existence, it didn’t make any serious progress until recently, when it seized upon a proposal submitted by AT&T, later joined by Verizon and embodied in the late August joint ex parte letter.  Most of the industry debate over the reform proposals transpired in an extremely brief period during September and early October.  Much of the discussion occurred in ex parte meetings with Commissioners and FCC staff or through ex parte letters.  Yet the FCC offered very few concrete details about the rules, other than what was suggested in the joint AT&T/Verizon proposal, which ultimately led to a flurry of speculation.  By mid-October, Chairman Martin was already floating a draft version of an Order for consideration by the other Commissioners.  The details of this plan were never made public. 

This lack of public disclosure and the perception that Chairman Martin, a Republican appointee, was seeking to push through a last minute sweetheart deal for AT&T and Verizon quickly led to vocal and fervent opposition.  For instance, the National Association of Regulatory Utility Commissioners (“NARUC”) and several state public utility Commissioners, individually, voiced their opposition to the FCC’s secretive process.  In numerous ex parte filings made throughout October, NARUC and state Commissioners asserted that the FCC’s failure to release a draft of the new rules for public comment was an outrageous violation of the Administrative Procedures Act.  According to NARUC, the lack of notice denied industry participants, both inside and outside of the FCC, the opportunity to fully digest the ramifications of the issues underlying the reform proposals.  NARUC pointed out that the most recent Notice of Proposed Rulemaking on Intercarrier Compensation was released nearly two years ago. Since then, although nearly 500 ex partes have been submitted in the docket, the FCC has never once publically disclosed any details of its proposed Intercarrier Compensation rules.

Despite the outrage, Chairman Martin scheduled the vote on his proposal.  It appeared the other four Commissioners were preparing to move ahead until the weekend before Election Day.  What may have finally convinced the Chairman to reconsider the bold reform proposal was a letter from over 100 members of Congress, which called upon the FCC to delay its vote.  Twenty-two Senators and 78 Representatives asked Chairman Martin to put out the details of the rule changes for 60 to 90 days of public comment on the specifics.  Instead of heeding Congress’ request, Martin begrudgingly withdrew the item from consideration. 

So while historic throngs of citizens cast their votes on November 4th, with a majority voting for “change,” the FCC did not. 

But the issues are not dead.  There remains great need for reform of both the USF program and Intercarrier Compensation.  Whether it is Kevin Martin or a new FCC Chairman, appointed by the newly elected Democratic President, who champions the reform effort, is yet to be seen.  Two things are certain… both time and political will are quickly running out for the lame duck Chairman.    

Subsequent to publishing this article, the FCC released a copy of Chairman Martin’s Draft Intercarrier Compensation Reform Order for public review and comment. Legal Line readers who wish to review the details of Martin’s proposed overhaul of the Intercarrier Compensation regime can download a copy from the FCC’s website at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-262A1.pdf.  The Draft Order can be found on page 23 at Appendix A.



 

Jonathan S. Marashlian is a partner at Helein & Marashlian, LLC, The CommLaw Group, a Washington, D.C.-area law firm specializing in federal and state telecommunications and technology matters. He can be reached at jsm@commlawgroup.com.