Eyes on VoIP, Telcos Propose New Fees

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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.