Industry’s Intercarrier Proposal Doomed to Failure

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Last Monday the Intercarrier Compensation Forum – a group of carriers including SBC, AT&T, MCI, Level 3, Valor, and Global Crossing – proposed a change in payments among telecommunications companies that carry communications traffic.


The proposal consists of reduced access charges from long-distance companies to local companies, increased federal line charges to be collected by local companies, and increases in universal service payments to the government.


American telecommunications carriers pay each other tens of billions of dollars annually to carry communications traffic and to terminate that traffic under so-called called intercarrier compensation. Some of the most complicated accounting in America is just an elaborate game of musical chairs with real money.


When the music stops, some lucky companies have more money than they started with; others have less.


The intercarrier compensation arrangements are also economically irrational. There is only a coincidental relationship between the accounting regime and the actual cost of doing business.


Some charges are too high, leading to both underutilization of the service and overinvestment in carriage and termination equipment. Some charges are too low, leading to the opposite result.


The FCC regulates this misaligned pricing system. Prices are set based on posted tariffs, which are a polite form of negotiations between private carriers and the government, rather than among private carriers in direct contractual relationships.


The FCC could solve the problem at will, since this structure of regulation is not required by law. But such a leadership role in telecommunications regulation has been largely abandoned by the FCC.


Today it has a reverse Midas touch: every issue it touches seemingly tarnishes, loses in court, or both.


Last week, the FCC deliberated a response to a writ of mandamus on reciprocal compensation. It also issued patently unlawful interim rules on local competition to replace earlier rules vacated by a court. Repeated court defeats breed inaction or worse.


Just four years ago, the FCC tried to solve the intercarrier compensation problem by working with a small group of large companies called the Coalition for Affordable Local and Long Distance Service (CALLS). The FCC and CALLS met for weeks behind closed doors without public input to hammer out new arrangements.


At the end of the secret deliberation process, the FCC railroaded new rules into place, ignoring public comments to the contrary. For example, U.S. West had publicly objected to the distribution of universal service funds under the CALLS proposal. But U.S. West at the time had its merger with Qwest pending before the FCC, which could safely ignore such objections.


Disaffected companies were quietly warned to get in line; they did. The process and the outcome of the CALLS proceeding were of dubious legality. But they were never fully challenged, and remain in place.


However, the CALLS rules no longer make sense, due to changing technology and market conditions, so the ICF coalition, with the tacit support of the FCC, put out its proposal.


Unfortunately the ICF proposal will never lead to results. Like CALLS, it was an ad hoc coalition with membership by invitation only. The FCC tacitly approved the process, and publicly defended its own inaction on intercarrier compensation because it was waiting for the ICF proposal.


When the ICF was conceived a few years ago, each of the founding companies believed that they could not afford to refuse to participate. The FCC was watching, and implicitly a government threat was perceived by those invited to participate.


Investment analysts have largely ignored the ICF proposal. To the extent the proposal will not be adopted, neglect is benign. To the extent the failure of the proposal reveals much that is wrong with federal telecommunications policy, the neglect is unfortunate.


The ICF deliberations resulted in important members of the coalition, such as Verizon, BellSouth, Qwest and other companies, dropping out. The resulting ICF proposal is diminished by the defections because these companies will now attack the proposal. It would have been difficult to pass the proposal anyway – with industry opposition, it becomes impossible.


The issue is likely dead for the current FCC. Nothing controversial will be attempted before the election, and some of the current commissioners may not long remain on the commission after the election.


Government agencies such as the FCC rightfully depend on outside parties to indicate inadequacies in current law. But the FCC should not rely on outside parties to propose the details of changes to laws and regulations. The FCC needs to deal with intercarrier compensation issues itself, and soon, and not rely on “outside” suggestions.


The New York Sun

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