• FCC Gearing Up On Intercarrier Compensation -- "Phantom Traffic" and Universal Service Issues Under Review
  • December 12, 2005 | Author: Ross A. Buntrock
  • Law Firm: Womble Carlyle Sandridge & Rice - Washington Office
  • Last February the FCC indicated it would resolve intercarrier compensation and universal service issues in one grand proceeding. Nearly a year later, the FCC has made precious little progress toward a unified theory of intercarrier compensation. Indeed, in spite of its admonitions against a "piecemeal" approach to reform, the Commission appears poised to address two issues related to intercarrier compensation: (1) establishing compensation mechanisms for so-called "Phantom Traffic" and (2) overhauling universal service fund ("USF") collection and disbursement mechanisms.

    A Phantom Menace?
    "Phantom traffic" refers to traffic sent to a transit carrier or terminating carrier that lacks information: (1) to identify the carrier responsible for paying intercarrier compensation, (2) to jurisdictionally rate the call, or (3) both. Without adequate information for billing purposes, carriers receiving Phantom Traffic are unable to collect intercarrier compensation charges for providing traffic termination services.

    Rural carriers began raising Phantom Traffic claims primarily against wireless carriers about a year ago. Since that time, the BOCs and some CLECs also have begun making similar complaints. Indeed, some carriers have estimated that about 20% of the traffic they terminate is Phantom Traffic, and a variety of forms of Phantom Traffic have come to the forefront. As one example, some owners of "intaLATA 800" numbers are directing traffic to local providers without permission. As a result, originating carriers do not know who to bill access charges, and terminating carriers have no idea that they may be incurring those charges.

    Towards resolving Phantom Traffic issues, we expect that the Commission will adopt a "truth in labeling" rule, which will, at a minimum, require carriers to transmit identifying information with all traffic passed to other carriers. We similarly expect the Commission to adopt default rules for traffic that is inadequately or improperly labeled. For example, the Commission could establish a presumption that improperly labeled traffic is compensable at a high rate.

    Any effort to eliminate Phantom Traffic issues necessarily implicates a number of on-going FCC proceedings, including those related to petitions filed by Grande, SBC, and VarTec regarding who, if anyone, is responsible for intercarrier compensation associated with VoIP traffic and how such traffic should be jurisdictionally classified. Accordingly, any Commission order on Phantom Traffic will have significant financial impacts across industry sectors.

    USF Reform
    As for USF Reform, we expect the Commission to establish in the near term a USF contribution mechanism based on in-service telephone numbers. FCC Chairman Martin publicly has endorsed use of telephone numbers as a baseline for universal service contributions, and although this has raised a consumer clamor, no organized industry group has mounted any meaningful opposition to this approach. Some have estimated that the FCC's expected move will result in new charges of as much as $2.00 per month, per telephone number.

    All parties believe that universal service reform is badly needed. In less than four years, the FCC has increased its USF "quarterly contribution factor" from 6.8% to 10.2% of interstate revenues. As interstate revenues continue to decline through growth of VoIP and similar pressures, the FCC's existing contribution factor is expected to continue to increase if left unchecked.

    The primary benefit of utilizing telephone numbers is that the USF base immediately is expanded to include wireless telephone numbers and VoIP numbers. Moreover, there seems little doubt that carriers will be able to pass these charges on to their end user customers, which may be why little carrier opposition exists.

    That said, questions remain regarding whether and to what extent providers will be assessed universal service charges on broadband connections. Some quarters of the industry have suggested that dedicated broadband connections should contribute to universal service on a "unit" system, based largely on capacity. Such an expansion of universal service remains controversial, especially in light of the FCC recent action to classify broadband over DSL as an "information service" rather than a "telecommunications service."

    In addition to shoring up the universal service base, the FCC also is considering strengthening the eligibility requirements associated with drawing USF funds. In recent years, a large number of non-incumbent carriers, most notably wireless carriers, have begun drawing USF revenues after obtaining eligible telecommunications carrier ("ETCs") certification. Rural telcos have complained that the growth of ETCs has put enormous pressure on the USF system, and the FCC should limit ETC growth by making certification requirements more stringent. Of course, making ETC certification more difficult also would stand to limit competition faced by rural carriers.

    As with most FCC action, timing is difficult to predict. The rural carriers and Bell Companies are pushing the FCC to address Phantom Traffic and USF immediately, if not sooner. Aside from some consumer efforts to lobby against a telephone number-based USF system, little vocal opposition exists from competitive carriers, wireless providers, or cable operators. Given any lack of organized opposition, we expect the Commission to take action on Phantom Traffic and USF reform in early 2006.