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Eyes on VoIP, Telcos Propose New Fees

Call it one step forward in a years-long slog to renegotiate interconnect fees among long distance and local phone service providers -- with the burgeoning growth of voice over IP (VOIP) keeping all parties on their toes.

Nine telecommunications providers have submitted a plan to the Federal Communications Commission that proposes new fees for wireline interconnect Charges, the fees that long distance providers have to pay to connect to local phone networks.

The plan, submitted Monday, is part of the FCC's new rule-making procedures, now that federal courts have ruled that the old tariff system on phone calls was stifling competition.

The telcos submitting the plan call themselves the Intercarrier Compensation Forum. The Forum consists of AT&T , MCI, Sprint , SBC , Level 3, Global Crossing, GCI, Iowa Telecom and Valor. In all, the group is comprised of five long distance carriers, a Baby Bell, a competitive local exchange carrier and two RLECs (rural local exchange carrier).

"Today's myriad network interconnection and intercarrier compensation schemes no longer reflect the world in which we live," the ICF proposal said. "Technological advances have given residential and business consumers telecommunications options that did not previously exist, including alternatives from local telecommunications providers, wireless services, and packet technology (VoIP). Regulators have developed today's diverse assortment of intercarrier compensation regimes in a piecemeal fashion as these technologies evolved, causing carriers artificially to distinguish calls."

For example, interconnect rates range from about 1.8 cents per minute to about 5.1 cents per minute. The disparity fosters all kinds of routing schemes and arbitrage call-routing plans with third parties in order to avoid higher charges.

But whether the latest proposal, which so far is exceedingly complex, goes anywhere with the FCC is a big question, according to a research note from Legg Mason's telecom analyst team.

"Prospects for early FCC implementation of the ICF plan (beginning by July 1, 2005) appear to be an uphill fight, but we believe the proposals will serve as a template for fundamental reform that is ultimately necessary, given the changing marketplace and technology," the investment firm said Tuesday.

David Kaut, a member of the telecom analyst team at Legg Mason, said although the proposal faces a maze of regulatory, legal and legislative hurdles, the growth of VoIP will keep the process alive.

"It's hard to over-emphasize the challenges ahead," he said of the proposal. "Even if the FCC is convinced [the ICF] has the legal authority to propose new fees, there are a lot of needles they have to thread here," he said.

But the VoIP influence is another factor as well. "Booming wireless and budding VoIP/broadband services are increasingly bypassing higher-cost traditional wireline rates, undermining the implicit rural subsidies buried in access charges, as well the explicit subsidies that depend in industry contributions based on interstate telecom revenues," the Legg Mason note said. "That trend is only exacerbated by increased industry bundling of services into flat-rate packages."

The growth of VoIP is likely to influence the carriers eventually to keep those new fees as low as possible. After all, Kaut said, as more businesses and consumers adopt the lower-cost alternative of VoIP, the carriers will be forced to lower their wireline intercarrier rates in order to compete.

"Instead of regulating charges up, they will be regulating them down," Kaut added. "If anything, they would like the charges to go to zero."

More than 20 telecom companies were part of the ICF talks until last May, Kaut noted, but suffered a major blow in May as it lost most of its members, including two of the four Bells -- Verizon , and Bell South -- as well as all of the RLECs and all but one of the CLECs in the group.

Gary Epstein, a telecommunications attorney with law firm Latham & Watkins, which is representing the ICF, told internetnews.com the presentation to the FCC will be followed with more detailed plans in the next few weeks as part of the rule-making procedures that are underway.

The proposal is facilitating changes that will allow the participating telcos to compete with wireless and Internet-based calls as well, he added. "What the plan does not do is apply the old system to VoIP or Internet-based calls," he added. "All we're saying with the plan is, 'Let the marketplace decide.'"