Who is Going to Pay for the IP Network?

Peninsular Telephone Company

Peninsular Telephone Company (Photo credit: Nick Suan)

Small telcos and most CLECs are waiting to see what will come from the changes due to converting to an all IP network for telephony. Today the telephony voice network utilizes TDM (time division multiplexing) technology that was originally developed for copper but that has been upgraded to use fiber. But the FCC has said that this old network is going to have to be upgraded to all-IP, meaning that voice will be carried by Ethernet similar to the way that data is transmitted.

I don’t think anybody is arguing that this kind of shift makes sense. IP trunking is far more efficient in terms of carrying more calls in the same amount of bandwidth. And a lot of companies have already implemented some IP trunking.

The important issue for small telcos and CLECs is how this transition is going to change their costs. In order to understand the possible change, let’s look at how voice traffic gets to and from small telcos and CLECs today.

  • Independent telephone companies connect with larger companies and neighboring companies by physical interconnection at mutual meetpoints. Historically, most of the meetpoints are located at the physical border between two neighboring telephone companies with each company owning the fiber and electronics in their own territory. And each telco is responsible for the costs of their portion of the network. Historically local calls have been exchanged for free in both directions and there are access charges in place for all telcos to get paid by the long distance carriers for using their network and facilities for long distance calls.
  • The rules governing CLECs were established by the Telecommunications Act of 1996. This Act laid forth the basic rule that a CLEC can interconnect with a telco network at any technically feasible point. This idea was fought hard by the large telcos who wanted CLECs to bring traffic to their tandems (regional hub offices). Once a CLEC has established a meetpoint, then it works pretty much the same as normal telco interconnection in that both parties are responsible for costs on their side of the interconnection. Sometimes local calls are interchanged for a fee and sometimes they are free (called bill and keep) and this is negotiated. The CLECs also bill access charges for carrying long distance calls.

There are a number of ways that IP trunking could be implemented, and each of them has financial consequences for small telcos and CLECs:

  • The IP network could be built to mimic the current PSTN. The routes would be roughly the same but the rules of interconnection would stay the same. But with IP trunking the network would be more efficient.
  • The large telcos could establish regional hubs and expect everybody else to somehow get their traffic to those locations. This would be a radical change for small telcos who would have to build or lease fiber from their rural location to the nearest regional hub. For CLECs this would completely undo the rules established by the Telecommunications Act of 1996 and would put all of the cost to get to the hubs onto them.
  • In the most extreme IP network there would be only a few large hubs to cover the whole US. This would be the most efficient in terms of the hubs, but it would require all telcos and CLECs to spend a lot of money to get their voice traffic to and from the hub.

Since I have been working in the industry the RBOCs (now AT&T and Verizon) have tried several times to put the burden and the cost of transporting calls onto the small telcos. But regulators have always stepped in to stop this because they realize that it would greatly jack up the cost of doing business in rural areas. I certainly hope that as we move to a more efficient network that we don’t end up breaking a system that is working well.

The downside to any plan that shifts cost to small telcos is that the cost of providing local and long distance service will increase in rural areas. The consequence of changing the CLEC rules will be less competition. The current interconnection and compensation rules have served the country well. Every caller benefits by having affordable rates to call to and from rural areas. And there is no doubt that higher communications cost would be a major hindrance to creating and keeping jobs in rural areas.

Regulatory Alert: Annual Access Charge Reform Tariff Filings Coming Due

Seal of the United States Federal Communicatio...

Seal of the United States Federal Communications Commission. (Photo credit: Wikipedia)

The second year of access reform is here again and most LECs and CLECs will need to file revised access rates by July 1. However, you should be aware that many State Commissions have their own requirements and time frames that need to be addressed in advance of the FCC’s date. As an example, the Public Utilities Commission of Ohio is directing that all affected ILECs and CLECs file the appropriate intrastate tariff amendment application or letter of compliance on or before May 1, 2013. This alert is to warn that in many states you are not going to have the luxury of waiting until July 1 to file your rates.

These filings are due to FCC Report and Order (WC Docket No. 07-135) which adopted a transitional intercarrier compensation restructuring framework for both intrastate and interstate interexchange and reciprocal compensation telecommunications traffic. In its recent March 26, 2013 release (WC Docket No.13-76) the FCC established procedures for the 2013 filing of annual access charge tariffs and Tariff Review Plans (“TRP”) for price cap ILECs, rate-of-return ILECs and CLECs that benchmark rates to price cap or rate-of-return ILECs. The Order sets an effective date of July 2, 2013 for the July 2013 annual access charge tariff filing. The Order establishes May 17, 2013 as the date that price cap ILECs must file their short form TRP. Affected ILECs and CLECs may make their tariff filings on either a 15 or 7 day notice (prior to the effective date) therefore affected ILECs and CLECs filing on a 15 day notice must file on June 17, 2013 and those filing on a 7 day notice must file on June 25, 2013. All filings must be made using the FCC’s Electronic Tariff Filing System (“ETFS”).

You also need to be aware that as part of the annual access charge tariff filing carriers will need to include the universal service charge contribution factor for the third quarter which begins on July 1, 2013. Note that in accordance with 47 C.F.R. § 54.712 of the FCC’s rules “…if a contributor chooses to recover its federal universal service contribution costs through a line item on a customer’s bill the amount of the charge may not exceed the interstate telecommunications portion of that customer’s bill times the relevant contribution factor.”

If you need help with these filings let us know. CCG also offers a service we call Regulatory Compliance where we notify our clients each year of every regulatory filing they need to make. It’s affordable and a great way to make sure that you meet all of your regulatory filing requirements.  Call Terri Firestein at CCG if you need help or want more information. She is at (301) 788-6889.