Copper Remains Golden for Legacy Networks

When three of the four Baby Bells decided in May to walk out of a telecom
industry summit crafting a new interconnection access fee system, they dealt
a serious blow to reforming a 20-year-old scheme that generates $14 billion
a year for the incumbent networks.

Meeting at the explicit suggestion of Federal Communications Commission
Chairman Michael Powell, a tenuous coalition of Baby Bells and their local
rivals, long distance carriers and rural telecom providers agreed to call a
truce in their internecine wars and to produce an industry consensus rate
reform solution to the FCC.

The new odd bedfellows all agreed access fee reform was necessary for
long-term survival against the competitive threats to long distance and
local voice traffic posed by cable, wireless and Internet-based telephone

Access fees are charges between traditionally defined phone companies for
originating and terminating calls on the legacy copper Bell networks. Most
of the fees flow one way to the Bells. Long distance provider AT&T has
frequently complained that access charges are its single largest expense.

The fees also help fuel the Universal Service Fund, which subsidizes the
cost of rural phone service and forces carriers to engage in fee
negotiations with 50 separate state utility commissions.

The regime is based on the 20th Century telecom economics of time and
distance, creating a system where it can cost more to send a call one mile
than it does 10,000 miles but has fostered low, albeit subsidized, local
rates for consumers.

Internet telephony-based phone services, by contrast, currently operate in a
virtually fee free, regulation free world. They pay low to no connection
fees since there are no current laws or regulations classifying Voice over
IP service. In the absence of an FCC classification or federal
law, the courts have rebuffed both Minnesota and New York when they
attempted to regulate VoIP as a traditional carrier. VoIP providers are
also currently not required to pay into the Universal Fund.

In April, the coalition, calling itself the Intercarrier Compensation Forum
(ICF), began to cobble together a plan calling for standardized access fees,
including Universal Service Fund payments, all under the control of the FCC,
principally resulting in lower long distance rates.

The Baby Bells would be
allowed to recoup their access fee revenue loss by raising rates for local
lines. A month later, Verizon , BellSouth
and Qwest all bailed on the plan.

Too Much Pressure, Too Quickly

The Baby Bell walk politically crippled the initiative since without all the
Bells onboard, the FCC is certainly not going to view the plan as an
industry consensus solution. The ICF nevertheless moved forwarded with only
SBC in its incumbent ranks and presented the FCC with a review of
the proposal earlier this week. Other members of the ICF include AT&T , MCI, Sprint , Level 3, Global Crossing, GCI, Iowa
Telecom and Valor. The coalition had once had more than 20 members.

“It surprises me they got as many parties to a consensus as they did,”
telecom technology analyst Kevin Werbach told,
predicting the proposal would carry “some” weight with the FCC, which has
seen its own efforts at rate reform thrown out by the courts. To add insult
to injury, on June 9, the Bush administration declined to take up the FCC’s
case before the Supreme Court.

Unless or until the FCC or Congress comes up with new access rules, fees are
expected to rise sharply next year when the Bells will be able to charge
market rates for access to their copper. AT&T has already announced it plans
to pull out of certain long distance markets.

Werbach, the former counsel for new technology policy at the FCC and current
assistant professor of legal studies at The Wharton School of the University of Pennsylvania, said VoIP is
adding to the sense of regulatory panic in Washington.

“Carriers are concerned that VoIP is putting too much pressure, too quickly
on intercarrier services,” Werbach said.

Stuart Elby, Verizon’s VP for network architecture, admitted to
BusinessWeek in May that “The VoIP market is bigger than we would have
guessed. We were wrong.”

Bells Claim ICF Plan Legally and Politically Unfeasible

Both Verizon and BellSouth said Wednesday their decision to withhold their
support from the ICF plan was based on their belief that reform calling for
increased local telephone rates is political suicide in an election year.
They further stated the plan couldn’t stand the inevitable litigation that
would result from the FCC stripping states of their right to regulate access

“As we have said in the past, any intercarrier compensation plan must be
politically viable and legally sustainable and must adequately address VOIP
and universal service,” Verizon spokesperson Larry Plumb said.

According to Plumb, it came time to vote on the ICF plan in May and “you had
to support the proposal in its entirety and you couldn’t advocate any
alternatives. Since we had concerns and the Forum operates under
confidentiality, we had to leave.”

BellSouth spokesperson Bill McCloskey added, “They [ICF] essentially said,
‘Everybody that’s onboard [with the plan] now, sign in blood. If not, leave
now.’ We didn’t think it was politically viable.”

Telecom attorney Bill Wilhelm, who won VoIP’s first big legal challenge when
he convinced the Minnesota Supreme Court that Vonage’s Internet-based
telephone service should not be be classified or regulated as a
telecommunication carrier, says it’s all about the money, not the

Wilhelm believes there is “general consensus” in the telecom industry that
broadband applications should not be regulated in the same manner as
facilities-based common carriers. The rub, he says, is “people want to know
how they get paid” in a tightly regulated telecom world turned upside down
by broadband.

“It’s really anything with IP. It could be voice or video,” he said. “Much
of the debate over VoIP is really a veiled argument about access charge
reform. The problem is there are so many different parties with so many
different interests.”

Wilhelm said VoIP underscores the irrationality of the current access system
based on time and distance.

“The current subsidy mechanism relies on geographic termination of calls,”
Wilhelm said. “With VoIP, you don’t know where the call is originating or
terminating. That’s one of the real problems with applying the existing
framework to VoIP. What the (ICF) proposal tries to do is move away from a
geographically sensitive regime to a geographically agnostic [system].”

The open question is how much, if any, of the ICF proposal will be embraced
by the FCC or Congress. The Commission is currently conducting an extensive
review of VoIP and other IP-enabled services and promises new regulations
early next year. No matter what the FCC decides, Congress appears inclined
to tackle telecom reform, including access fee reform and VoIP regulation,
next year. The process is sure to take the entire two years of the 109th

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