Twelve days after the FCC voted to adopt an order to transition today’s voice-focused Universal Service plan to focus instead on broadband, the order has not yet been released to the public. While stakeholders contemplate what’s up with that, we thought we’d take the opportunity to provide a run-down on the access charge recovery mechanism outlined by the FCC at the time the order was adopted. That’s a task that was too complex to undertake as part of our initial reporting on this topic, but which we promised we would get to.

Access charges, also known as inter-carrier compensation (ICC), are the per-minute fees that carriers pay to one another for terminating voice traffic to each others customers. In many rural markets, these charges tend to be proportionately higher than in urban/metro areas to help cover the high costs of building and maintaining communications networks in those rural areas.

But the access charge system has become increasingly less viable as a means of recovering network costs as more and more customers opt to go wireless-only. In addition, high access charges in rural areas have given rise to a range of avoidance schemes— including the particularly alarming and increasingly used option of not terminating calls to those areas at all.

For these reasons, the FCC’s Universal Service reform order calls for phasing out per-minute access charges over the next five to nine years and creating a recovery mechanism so that carriers can still collect at least part of the funding they would otherwise have obtained through the access charge system.

Consumers to bear some costs
The FCC envisions at least a portion of ICC revenues being recovered through higher monthly charges to subscribers. According to an executive summary of the reform order provided by the FCC, eligible carriers will be able to charge an access recovery charge (ARC) on monthly wireline telephone service, with a maximum annual increase of 50 cents for consumers and small businesses and $1 per line for multi-line businesses.

To protect consumers, the FCC also is adopting a strict ceiling that prevents carriers from assessing any ARC for any consumer whose total monthly rate for local telephone service is at or above $30. In addition, carriers are prevented from charging any ARC on customers who participate in the low-income Lifeline program.

The FCC projects that the average consumer will pay no more than 10 or 15 cents in ARC charges per month and that consumers will receive more than three times that amount in benefits in the form of lower long-distance charges and greater value on their wireless bills.

On the multi-line business side, the reform order prohibits carriers from charging ARC and subscriber line charges totaling more than $12.20 per line per month. In addition, carriers must apportion lost revenues eligible for ICC recovery between residential and business lines appropriately.

Connect America Fund will go toward access charge recovery
A portion of lost ICC revenues not recovered through the ARC are to be recovered through the Connect America Fund (CAF), the new broadband Universal Service program, which—like today’s program–will be self-funded by the telecommunications industry.

In the executive summary, the FCC notes that “We limit carriers’ total eligible recovery to reflect the existing downward trends on ICC revenues with declining switching costs and minutes of use.”

For price cap carriers, baseline recovery amounts will decline at 10% annually. Price cap carriers whose interstate rates have largely been unchanged for a decade because they participated in the FCC’s 2000 CALLS plan will be eligible to receive 90% of this baseline every year from ARCs and the CAF. In study areas that recently converted from rate-of-return to price cap regulation, carriers initially will be permitted to recover the full baseline amount but will decline to 90% recovery after five years. All price cap CAF support for ICC recovery will phase out over a three-year period beginning in the sixth year of reforms.

For rate-of-return carriers, recovery initially will be calculated based on their fiscal year 2011 interstate switched access revenue requirement, intrastate access revenues that are being reformed as part of the order, and net reciprocal compensation revenues. This baseline will decline at 5% annually to reflect “combined historical trends of an annual 3% interstate cost and revenue decline and 10% intrastate revenue decline,” the FCC said. In addition, the program will provide for “true ups” to ensure CAF recovery in the event of faster-than-expected declines in demand.

“Recovery mechanisms provide carriers with significantly more revenue certainty than the status quo, enabling carriers to reap the benefits of efficiencies and reduced switching costs, while giving providers stable support for investment as they adjust to an IP world,” the FCC wrote in the executive summary.

 So what does it all mean?
What the FCC proposes sounds reasonable, at least on the surface. The wild card is that in the reform order, the commission opted not to detail how existing high-cost support for price cap carriers would transition to ongoing broadband support. But considering that the FCC has promised not to increase the total amount of support that goes to rate-of-return carriers, and considering that the parameters of the access charge reform mechanism have been detailed, it should be possible to calculate—or at least closely estimate–the amount of funding remaining for ongoing broadband support.

Rural telco associations should have the information needed to make that calculation—and I’m hoping they will take the time to do the math soon and that the results will be forthcoming. Only then will rural telcos begin to be able to determine how Universal Service reforms will really affect them.

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10 thoughts on “Understanding the FCC Approach to ICC Reform

  1. "consumers will receive more than three times that amount in benefits in the form of lower long-distance charges"

    Right … Then I assume the order will mandate carriers to pass every penny of ICC savings on to the customer, just like they always have. <sarcasm>

      1. The IXCs are the phone companies, both large and small. Long distance is a very competitive market with dozens of IXCs in any given market. As costs drop, prices will also drop. In fact, the phone companies have a huge advantage in offering long distance over competitive IXCs because they do not have to pay originating access expenses. An ILEC/IXC pays no originating access, pays some terminating access to itself in other markets so they have a considerable cost advantage. That's why they have 60-70% of the long distance market.

        1. There are many "branded" IXCs, but only a few true underlying carriers. Regardless, the premise that reduced ICC costs translates to customer savings is ludicrous.. My state took action to normalize intrastate access charges which resulted in significant decreases in terminating access charges. Since that time, my bill has increased. Thanks for all the savings!

          1. There is no way these large companies will pass their savings along to the customer. They wanted the rates dropped and let the small companies charge their customers more to recoup the costs. They want to use the small phone companies network for free and the FCC is going to allow this. This is one of the most one sided rulings i have ever seen.

          2. I belive you are right,… independent company just charged me the max allowed(.50) not any thing like the lower amounts mentioned(.10 and .15)……..And from what I read they can also increase up to .50 each year….thus sticking it to the customer!!

  2. Where does the $0.0007 or $0.005 come in? The order says the decrease goes to bill-and-keep. Also interconnection goes to IP-to-IP. ICC basically goes away in 5 – 9 years as I read the summary. I don't see why a bill-and-keep IP-to-IP interconnection wouldn't eliminate IXCs as LECs simply interconnect with each other via public internet IP. Since VoIP providers can do the same, that should drive down LEC local line pricing as well. In 9 years, probably sooner, there will just be a broadband charge, little or no phone line revenue. Broadband will need to incorporate the USF now CAF revenue collection.

  3. I really do not understand all this mumbo jumbo…..I am just ticked that I am charged the max(.50) from my independant phone company and instead of it being called what it should "A TAX" they get by with saying it is a CHARGE…….what is the f..n difference!!

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