BloostonLaw Telecom Update
Vol. 10, No. 37
October 3, 2007 FCC Seeks Comment On Alleged Access Stimulation The FCC has launched a Notice of Proposed Rulemaking (NPRM) to investigate cost and tariffing issues raised by allegations that some rural local exchange carriers (LECs) are experiencing significant increases in access demand, resulting in unreasonable access rates. The Commission noted that chat lines, conference calling and similar services can generate substantial growth in access traffic to the LECs from long-distance companies, which pay access fees to LECs at tariffed rates for every call delivered. In addition to the NPRM, the Commission granted in part a formal complaint filed by Qwest Communications alleging that Farmers and Merchants Mutual Telephone Company of Wayland, Iowa, earned an excessive rate of return. But the Commission ruled that Qwest could not recover damages because the Farmers tariff at issue was “deemed lawful” under the Communications Act. The Commission said that tariffed rates are set at levels targeted to recover the costs of providing access. Although it is reasonable for LECs to seek to increase demand for their services, the Commission said rates should remain just and reasonable over time as costs and demand change. In the NPRM, the Commission tentatively concludes that it must revise its rules so that tariffed rates remain just and reasonable even if a carrier experiences significant increases in access demand. The Commission asks for comment on several possible approaches to address alleged access stimulation strategies. For example, one proposal would require carriers to file revised tariffs if demand increases beyond a threshold level. The NPRM requests information about rate-of-return LECs, price-cap LECs, and competitive LECs. In the cases that have given rise to its inquiry, the FCC said that increased switched access traffic appears to be caused by the deployment of chat lines, conference bridges, or other similar high call volume operations in the service areas of certain rate-of-return or competitive LECs. The LECs may provide space in their central offices for the call operators’ equipment and may provide other services, including telephone numbers, for the call service operators. The chat lines or conference services, along with the associated number(s), are advertised, generally on the Internet, as being free (or for the cost of a long-distance call). Users of these services make interstate calls to those numbers and the local exchange carriers assess interstate access charges on the IXCs that deliver the calls. The applicable per minute access charge rates are often high because many of the carriers involved in these arrangements are small carriers whose rates were set based on higher than average per minute costs and a low volume of traffic based on historical levels. IXCs allege that the LECs experiencing or “creating” this access growth share the access revenues they receive with the service providers whose services are generating the demand growth. As a direct result of the increase in traffic volume, the LECs are alleged to be earning returns on these access services that are substantially above the maximum rate of return authorized by the Commission. The FCC invites interested persons to comment on the prevalence of these types of operations and to describe in detail how each type of service is provisioned. Interested persons should also identify other types of operations that may result in significant stimulation of access traffic and describe their provisioning arrangements. Parties should explain what interstate and intrastate fees the service provider pays to the LEC. The FCC also asks interested parties to describe in detail what monies or other benefits the LEC provides to the provider of the stimulating activity, including, for example, direct payments, revenue sharing, commissions, or free services. If possible, parties should quantify these benefits to the provider of the stimulating service. The FCC said it understands that carriers complaining about the access stimulation arrangements also offer conferencing and other services that may result in increased traffic. The Commission asks such carriers to explain how they provide each of the above mentioned services, including what charges they assess on the provider, whether access charges are assessed on such calls, and what compensation, if any, is paid to such provider. Just and reasonable rates: “The limited information we have suggests that, in certain instances, some LECs are experiencing dramatic increases in demand for switched access services,” the FCC said. According to the Commission, if the average cost per minute falls as demand grows, the realized rates of return are likely to exceed the authorized rate of return and thus the tariffed rates become unjust and unreasonable at some point. It is well established that there is a large fixed cost to purchasing a local switch and that the marginal or incremental cost of increasing the capacity of a local switch is low (some contend that it is zero) and certainly less than the average cost per minute of the local switch. Thus, if the average revenue per minute remains constant as demand grows, but the average cost per minute falls (which occurs if the marginal cost per minute is less than the average cost per minute) then profits (or return) will rise. This principle is equally applicable to all LECs. Moreover, the cost of local switching increases incrementally, while the price for local switching is established based on average costs, which are significantly higher. As a result, most of the switch costs are recovered by the demand used to establish the local switching rate. Carriers offering tandem switching services would experience a similar effect for their tandem switching costs. Accordingly, when local switching demand increases significantly, a carrier’s increased revenues generally will exceed any cost increases. As a result, a carriers’ rate of return at some point is likely to exceed the maximum allowed rate of return, making the rates unjust and unreasonable, the Commission said. It added that a similar effect to that associated with local switching would also occur in the transport segment of the exchange access network. As demand increases, the number of circuits needed for transmission will increase. Again, the incremental cost is lower than the average cost (although the disparity is likely not as great as in the local switching case), which would lead to the rates for transport becoming unreasonable at some point as demand increases. The FCC asked for comment on this analysis, and asked parties to submit data that quantifies the projected increase in investment and plant-related expenses associated with increases in switched access minutes. Carriers experiencing significant increases in local switching demand may also see a projected increase in their non-plant related expenses related to their switched access services. The FCC asked parties to identify with specificity any additional projected non-plant related costs that may be incurred as a result of the increased demand. Parties should quantify the amount of such projected increases to the extent possible in order to permit the FCC to evaluate the effect of the demand increase on the projected realized rate of return. If possible, parties should provide switched access investment and cost data they would expect to incur for increases in local switching demand of 30, 100, and 1000 percent over a representative base period. Parties should indicate the effect that such increased demand would have on the carrier’s rate of return. There are various other tariffing issues in this NPRM. Comments in this WC Docket No. 07-135 proceeding will be due 30 days after publication of the item in the Federal Register, and replies will be due 15 days thereafter. |
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