Proposed FCC changes may have big impact on Telecom costs

For most enterprise customers, telecommunications regulation is a fact of life, requiring buyers to do what they can during negotiations to mitigate changes in state and federal law that could result in substantial cost increases during the term of the contract. Now, the Federal Communications Commission (FCC) is considering sweeping changes to mostly obscure rules concerning inter-carrier compensation and universal service that could have a large dollar impact on your future telecommunications purchases. These proposed changes come at a time when – and directly as a result of – enterprise customers are converging voice and data over Internet Protocol (IP)-based broadband networks and making greater use of wireless services.

Inter-carrier compensation is basically what carriers charge each other to originate or terminate traffic on another provider’s network. Telecommunications — including voice traffic that transits the public Internet or managed IP networks — is unique in that multiple service providers are usually required to complete a voice call. Rarely do calls (except possibly those in a corporate campus environment) originate and terminate on the same provider’s network. Compensation arrangements vary by geography and technology — with local traffic having one rate, intrastate calls a second rate and interstate calls a third rate. There is a separate compensation structure for wireless traffic, and IP-originated traffic (coming from broadband networks) has created another level of confusion (and a number of lawsuits). Per minute charges range from $0 to $.03 cents. The impact to large customers, is, ultimately, these costs are included within the rates charged to end users.

The FCC would like to rationalize these charges and eventually either make them go away all together or have them at a very low per minute rate — for example, $.0007 per minute, which has been accepted by many in the industry as the default rate for the termination of local traffic. The problem is that many mid-sized and smaller local phone companies claim to use these revenues to subsidize local rates in high cost-service areas. As these often rural local carriers offer more IP-based broadband services, questions arise whether these charges should continue at all.

One possible solution is to provide more direct subsidies through the Universal Service Fund (USF). The now $8 billion fund was created in part to help high cost telecommunications companies serving rural areas provide basic phone services at reasonable rates, but the fund also assists low-income consumers, rural health care providers, and schools and libraries. One proposal would expand funding to require all subsidized carriers to offer broadband service. Another would require no subsidies to areas where there is more than one service provider; another considers reverse auctions to determinate the lowest cost provider for these high cost areas.

Monies for the USF are provided from assessments to interstate and international telecommunications revenues, and contributors include traditional telecom carriers, VoIP providers and wireless carriers. While the USF supports worthy programs, for large users it looks like an enormous tax – adding about 15 percent to every monthly telecom bill (carriers are permitted but not required to pass through, without mark-up). When added to other local, state and federal taxes, the burden for some telecom customers represents about 25 percent of monthly services charges. Taxes this high are usually reserved for gasoline, cigarettes and alcohol.

The FCC is expected to resolve these complicated issues sometime this year. At the same time, the telecom industry is attempting to negotiate a resolution on its own. Accordingly, it may be time to take a look at your telecom contracts and see how (if) they address regulatory changes. Or, if you are in process of negotiating a new agreement, consider how you can ensure that you receive the benefits of regulatory changes and not just the burdens. In managed service or outsourcing arrangements for telecommunications services savvy enterprise customers have negotiated discounts and caps on the USF and similar surcharges which have resulted in considerable savings over the life of the transaction.