IP Convergence: Beyond VoIP, Beyond Cost Savings

Today the National Association of Regulatory Utility Commissioners’ Task Force on Inter-carrier Compensation NARUC filed its long-awaited “Missoula Plan” for inter-carrier compensation reform. Global Crossing supports the Missoula Plan and has been working towards inter-carrier compensation reform for over five years. No issue is of greater importance to the telecommunications industry than the system of money transfers that form the lifeblood of every carrier’s financial viability. Pay too much in access costs and operate in the red. But to paraphrase the Rolling Stones, if you see a red line on your revenue chart and want to paint it black, raise your access costs (for what is essentially a monopoly service) and watch everything improve. This game has been played since the 19th century when interconnection (really its denial) was a weapon in the fiercely competitive telephone industry.

In an improbable confluence of selfishness, self-preservation, and self-awareness, over 300 rural telephone companies agreed with 10 other industry members –AT&T, BellSouth, Cingular, Consolidated Communications, Commonwealth Telephone, Epic Touch, Global Crossing, Iowa Telecom, Level 3 , and Madison River Communications (yes that Madison River) – on a plan for comprehensive reform of the system of inter-carrier compensation that prevents this industry from delivering the telecommunications services the public wants and the economy needs.

The Missoula Plan is not perfect and certainly not the way I would have done things if I were in charge. But unilateral progress is impossible and the compromise garnered the support of the rural phone companies, without whom meaningful reform is impossible, while still delivering needed relief to the competitive industry. In the end, the absolute level of compensation is only barely as important as unifying all the disparate rates and recognizing that a minute is a minute and a packet is a packet and you really shouldn’t have to waste time, resources, and money figuring out which minute does what.

Today, it is too easy for an incumbent carrier to cast a shadow over every new service by suggesting the traffic is subject to access charges. Because access charges comprise such a significant cost of service, the true cost of service delivery is not known until a decision is made as to whether the minimum inter-carrier compensation charge (reciprocal compensation, reserved for the exchange of local traffic between local carriers) or the maximum inter-carrier compensation charge (access charges, reserved for traditional long distance traffic) applies to the service. The longer the decision takes, the greater the “harm” to those carriers who rely on access charges for a significant portion of their revenue.

And then of course, inter-carrier compensation’s evil twin brother “universal service” shows up with the chicken little argument about how the industry will collapse if new services bypass the access charge regime. You see, the flip side of inter-carrier compensation reform is universal service. Ever since the Kingsbury Commitment, access charges – shorthand for inter-carrier compensation – have been the primary tool by which government engineered its universal service goals for telecommunications. The Kingsbury Commitment’s call for “one policy, one system, universal service” initiated the system of internal cross-subsidies that have plagued this industry ever since. Charge more for long distance and local rates can remain low. Charge more for business and residential rates can remain low. Charge more for carrier access and rates for residential access can remain low. This all worked fairly well in a monopoly environment, but it wreaks havoc on the competitive process.

And since technology has pretty much flattened the cost characteristics of modern telecommunications, distance and duration don’t matter any more. Density and capacity do. Even density is becoming less of an issue as wireless technologies reduce the costs of serving remote customers. Yet the subsidies remain. Despite the fact that (as I argued in my inaugural entry), residential customers are really the ones who subsidize business customers and access charges are doing more harm than good.
Adam Thierer offers his views on just how inefficient this form of “universal service” is.

The Missoula Plan puts an end to this. Under the Missoula Plan, all rates for all traffic are unified. There are some variances for different classes of carriers, but within each of the three classes of carriers, rates are unified. The Missoula Plan creates three tracks for reform. Track 1 applies to all Bell Companies and competitors, including wireless, CLECs, cable, and VoIP and includes over 350 million wireline and wireless access lines. Track 2 applies to mid-sized wireline incumbents and includes approximately 12.5 million access lines. Track 3 applies to the smallest rural telephone companies and includes approximately 7.3 million access lines. So the Missoula Plan delivers meaningful reform for the majority of access lines while accommodating the concerns of the smaller incumbents.

I can’t speak as to why the other carriers supported this plan, but I can say that it is worthy of support, if for no other reason than this is the only comprehensive plan that delivers positive reform of a broken system. There are no other viable options. The industry cannot afford another five years of debate. It is time to embrace the Missoula Plan for what it is and accept the incremental improvement in the situation. Once rate unification is achieved, the rest becomes manageable and hopefully the Missoula Plan is accompanied by further reform of the universal service system.

Note: As of this entry, the complete Missoula Plan is not posted on-line. Look for it at the FCC’s web site.