Deregulating and Detariffing End-User Access Charges

The Commission’s proposal would eliminate ex ante price regulation of all five remaining access charges that incumbent local exchange carriers ("ILECs") can assess on end users and require both ILECs and competitive local exchange carriers ("CLECs") to detariff all such charges. (The FCC does not regulate CLECs access charges so long as they are just and reasonable.) The five end-user charges on the regulatory chopping block are:

• Subscriber Line Charge – A flat per-line fee, capped by the FCC, that ILECs can assess on customers to recover a portion of the costs associated with transporting calls on the ILEC’s local facilities. This charge, also referred to as the “SLC” (pronounced “slick”) or the End User Common Line Charge ("EUCL"), stemmed from the earliest access charge orders as a way to recover non-recurring charges associated with providing the ability to make interstate calls.
• Access Recovery Charge – An end-user charge created by the FCC in 2011 as a mechanism to mitigate reduced ILEC intercarrier compensation revenues from charges assessed on IXCs as a result of the transition to the intercarrier bill-and-keep regime. The ARC allowed ILECs to recoup some of the costs no longer collected from other carriers through per-minute access charges.
• Presubscribed Interexchange Carrier Charge – A fee that price cap ILECs can assess on multi-line business subscribers who do not presubscribe an IXC to recover a portion of the ILECs’ local transport costs. The PICC (pronounced “Pick-C”) was introduced shortly after the Telecommunications Act of 1996 with the advent of competitive local service.
• Line Port Charge – A monthly charge ILECs can assess to recover the cost associated with porting digital subscriber lines to the switch in the ILEC’s central office if it exceeds the cost for porting analog lines.
• Special Access Surcharge – A monthly charge to recover transit costs for calls that “leak” out of a private branch exchanges ("PBXs") onto the public network, such as when large business customers allow employees to use a PBX to make long-distance calls without incurring access charges. This charge has been in place since the early days of telephone access charges.

Notwithstanding the Commission’s proposed approach, the NPRM invites comments on “alternative approaches to determining where and under what circumstances [it] should eliminate” price and tariff controls. One such proposal it offers is a case-by-case assessment finding rate regulation is unnecessary if: (1) a competing voice provider serves 75% of the census blocks in the same area as the ILEC; (2) the Eligible Telecommunications Carrier in the area is subject to the reasonable comparability benchmark; or (3) the state has deregulated intrastate rates. The Commission also seeks comment on the whether it should mandatorily detariff other charges related to federal programs, such as pass-through fees for USF contributions.

USF Reporting Impact

The Commission’s proposed action may impact how carriers allocate revenues between interstate and intrastate jurisdictions for the purpose of determining USF contribution amounts. To prevent carriers from gaming the system to reduce their contributions, the FCC is seeking comment on two alternative proposals for allocating revenues: a 25% safe harbor, where 25% of revenues would be allocated to interstate services, or bright-line rules for how carriers allocate revenues.

Prohibiting Line Item Charges on Customer Bills

The second major piece of the NPRM is a proposal to prohibit all carriers (ILECs and competitive carriers) from assessing end-user access charges as separate line items on customer bills, which they are currently permitted to do. The FCC said that the carrier descriptions for these charges vary significantly and unnecessarily complicate customer bills. The Commission states that it has sought to reduce the ambiguity of carriers’ advertised rates and simplify customer bills using its Truth-In-Billing rules, and its proposed action here would be consistent with those goals. Prohibiting carriers from listing end-user access charges separately, the NPRM asserts, would result in advertised prices that are closer to the total prices that appear on customer bills. This would increase transparency for consumers by removing the inconsistent line item descriptions and enable consumers to more easily compare voice service offerings by different providers.

Comments on the proposed access charge reforms are due 30 days after the NPRM is published in the Federal Register, with reply comments due 15 days later.

Because this proposal would affect both incumbent and competitive carriers, and may impact federal USF reporting, telecommunications service providers should review the NPRM carefully. Now would be a good time to review the line item and surcharge structure of a carrier’s services to determine if any changes should be made.

As set forth in notes buried in the Code of Federal Regulations, these rules were not effective pending approval by OMB, to be followed by notice from the FCC of that approval. The Commission’s publications in the Federal Register on August 26 and August 27, 2013, now make these rule provisions immediately effective and enforceable.

As a practical matter, many industry participants may have proceeded as though these rules were already in effect or may have had analogous contractual obligations, but the rules’ formal effectiveness gives them teeth backed by potential enforcement before or by the Commission. Recent changes to the FCC pole attachment rate formulas that were upheld earlier this year brought the attachment rates for telecommunications carriers closer to those of cable operators under certain conditions, but in many circumstances there can still be a considerable difference in the two rates. For this reason, the National Cable and Telecommunications Association ("NCTA") brought a petition for reconsideration, which is still pending, in an attempt to bring the telecommunications carrier rate down to the cable operator rate in virtually all situations. Until that happens, if ever, where a cable operator is also providing telecommunications it will often be relevant whether the offering meets the definition of “telecommunications services,” both with regard to the rate paid and whether notice to the pole owner is required. Many cable operators may already be under a contractual obligation to notify pole owners when they begin to provide telecommunications services, but the Commission’s August 27 announcement now makes notice an effective obligation under the rules with attendant potential enforcement ramifications.

Similarly, this week’s Federal Register notices make formally effective rules not only regarding the content of complaints regarding pole attachments and access to other rights of way, which parties have been using as a guideline for more than a decade, but also the regulatory obligation of pole owners to make available information, upon request, regarding rates, terms, and conditions. More to the point, the now effective third sentence of Rule 1.1404(j) provides that a utility, within 30 days of receiving a request, must supply a cable television operator or telecommunications carrier information the utility relied upon to establish a rate, term, or condition for attachment to or occupation of the utility’s pole, conduit, duct, or other right-of-way. On its face, this obligation extends not only to annual attachment or conduit fees but charges for make ready and other non-recurring activities.

Again, as a practical matter many utilities have been in the practice of providing information to attachers regarding their annual attachments fees, but the now formally effective rule may prove another arrow in the quiver of existing and would be attachers questioning the level of any of a utility’s charges.

The Second Circuit’s decision represents the second federal appellate decision in little over a month shooting down arguments of AT&T seeking to limit the scope of their interconnection obligations under Section 251. In April, we reported that the United States Court of Appeals for the Sixth Circuit ruled that a State commission may fashion interconnection obligations under Section 251(a) that differ from those applicable under Section 251(c)(2).

The Second Circuit’s opinion addresses the rates and sections of the Act applicable to “transit traffic.” The Second Circuit described the “principal question [as] whether AT&T, an interconnecting carrier, is obligated under § 251(c)(2) to provide this routing of traffic, or transit service, at lower TELRIC rates or whether AT&T is permitted to charge higher negotiated rates” under Section 251(a). The Second Circuit recognized that the provision of transit traffic service by ILECs is essential to most CLECs entering the market. The Court further acknowledged that, if ILECs are allowed to impose higher, negotiated rates rather than TELRIC rates, then the additional costs imposed on the CLECs would put the CLECs at a competitive disadvantage. The Court concluded that allowing an ILEC to impose unregulated rates on indirectly interconnecting CLECs would undermine the very purpose of the Act, namely, to provide CLECs with the tools necessary to compete with the ILECs and to offset the inherent advantages that ILECs have through their infrastructure. The Second Circuit also found that nothing in Section 251(c)(2) limits that provision to the transmission and routing of traffic between a CLEC and the ILEC’s end users. Accordingly, the Court held that ILECs are obligated under Section 251(c)(2) to provide transit traffic service at TELRIC rates and not higher negotiated rates under Section 251(a).

While the Court limited its order to rates charged by the parties to contract in dispute, the application of this decision and its rationale is not limited to those parties. The Act provides the option of negotiated resolutions under § 252(a) and expresses a preference for those negotiated resolutions. The Court agreed with the District Court that the DPUC erred in imposing regulated rates on all of AT&T’s transit service contracts. The Court joined other federal appellate courts facing similar questions by concluding that the DPUC’s order would undermine Section 252(a) and the preference for negotiated outcomes. Thus, while the Court did not issue an order requiring the use of TELRIC rates for transit traffic, it found that TELRIC-based rates are available to CLECs when other rates are not agreed upon – at least they will be in Connecticut, New York and Vermont, the States bound by the Second Circuit.

In reaching its conclusions, the Court addressed two other topics of note. Before reaching the substance of the primary issues – the application of Section 251(c)(2) to, and the rates for, transit traffic – the Court held that the FCC’s consideration but current inaction on the topic of whether Section 251(c)(2) applied to transit service did not pre-empt State commission action on the question of transit traffic rates. Rather, the Court found, in the absence of guidance from the FCC, that Congress gave State commissions the “latitude to exercise their expertise in telecommunications and the needs of the local market” and that the State commission was free to rule on the issue.

The Court also rejected AT&T’s argument that, because the agreement in dispute was fashioned as a commercial agreement and not expressly a Section 252 interconnection agreement, the DPUC did not have the authority to review it. The Second Circuit held that the DPUC had the authority to review the agreement and determine whether the subject matter fell under Section 251, and therefore, was subject to the regulatory framework of Sections 251 and 252 – in other words that it was, in fact, an interconnection agreement. The DPUC made just such a determination by concluding that negotiations for transit service should have been conducted by the carriers pursuant to Section 252.

The American Electricity Power Services Corporation and other electric utility companies (“Petitioners”) challenged three aspects of the FCC’s Report and Order. (1) The Report and Order interpreted Section 224(b)(1) of the Act, which authorizes the Commission to regulate the rates, terms and conditions of “pole attachments” and assure that they are “just and reasonable,” to apply to incumbent local exchange carriers (“ILECs”) as “providers of telecommunications services.” Building on this interpretation, the Report and Order enabled ILECs to bring complaints before the FCC against investor-owned utility pole owners on whose poles they are attached, even though the statute excludes ILECs from the definition of “telecommunications carrier” for purposes of Section 224. (2) The Commission adopted a new pole attachment rate formula applicable to telecommunications carriers (the “telecom rate formula”) specifically designed to bring the telecom rate down to the same level as that paid by cable operators when the FCC’s presumed number of attachers is used in the telecom rate formula. (3) The Report and Order modified the FCC’s rules, which had limited to compensatory damages to be awarded only from the date of a complaint to the FCC going forward, to allow damages to be awarded for a period prior to the date of the complaint consistent with the applicable statute of limitations.

The Court denied all three challenges in their entirety, applying Chevron deference to the Commission’s interpretations. The Court’s opinion, quoting FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009), underscored that where the FCC modifies its regulations, as it did in the Report and Order, the hurdle the Commission must clear is a “modest” one. Specifically, the Commission “need not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better.”

First, the Court upheld the extension to ILECs by the 2011 Report and Order of complaint rights regarding the justness and reasonableness of rates, terms, and conditions applicable to ILEC pole attachments. The decision turned on the proper interpretation of the term “provider of telecommunications services” as used in Section 224. The Court agreed with Petitioners that in Section 153 of the Act, the term “telecommunications carrier” generally equates to the “term provider of telecommunications services,” and both terms include ILECs. But the Court disagreed with petitioners that the exclusion by Section 224 of ILECs from the definition of “telecommunications carrier” for purposes of that section commensurately narrowed the term “provider of telecommunications services” as used in that section as well. The Court found that where Section 224 uses the term “provider of telecommunications services” rather than the term “telecommunications carrier,” specifically in Section 224(b)(1), the FCC’s interpretation that Congress meant to include ILECs in the firmer term was entitled to deference. The Court went so far as to say it “very much doubt[ed] if the prior interpretation [of Section 224(b)(1) by the Commission to exclude ILECs from that subsection’s benefits] was reasonable.” But, even assuming that that earlier reading was reasonable, the Court found that, as required by the Fox case, the Commission offered sufficient reasons for the change in its interpretation of the statute and, thus, in the content of the FCC’s rules.

Second, the Court affirmed the Commission’s decision to adopt telecom rates under Sections 224(d) and (e) that the agency designed to be substantially equivalent to cable operator rates when the FCC’s presumed numbers of attachers was used. The Report and Order set the telecom rate as the higher of the pre-Report-and-Order telecom formula rate times a newly adopted “cost factor” – 66% for urban poles, and 44% for rural poles – or a rate aimed at covering all costs caused by an attachment. (Typically, the first result would be higher.) Petitioners contended unsuccessfully that, the use of the term “cost” in Section 224(e), must be interpreted such that the telecom rate formula will allow for recovery of fully allocated cost. Although the Court noted that the provisions of Section 224 limit Commission authority when adopting regulations to ensure that pole attachment rates are “just and reasonable,” in the case of the permissible telecom rate formula, the Court concluded that the operative term “cost” was undefined and ambiguous. For these reasons, the Court recognized the Commission’s discretion to interpret “cost” and establish a telecom rate formula resulting in rates substantially equal to the rates paid by cable operators in order to pursue the policy objective of removing non-cost-based distortions between telecom carrier and cable operator pole attachment rates. The Court, applying Fox, stated that the FCC’s decision must stand “[i]n the absence of some feature of the law or facts that contradicts the Commission’s effort to eliminate that distortion.”

Third, the Court affirmed the Commission’s decision to revise its earlier determination that attachers, when they have been overcharged by pole owners under Section 224, are entitled to refunds only starting at the date of the initial complaint. The Court made short shrift of the Petitioners’ challenge to the decision in the Report and Order to now determine refund periods “consistent with the applicable statute[s] of limitations.” The Court found the Petitioners’ challenge had “no serious statutory basis” and that the Commission adequately explained its reasons for the change in its rules to satisfy Fox, namely to remove the disincentives of parties to negotiate prior to filing a pole attachment complaint.

Now that the Court has decided the appeal, the stage is set for lobbying and for the Commission to rule on the two pending petitions for reconsideration filed following the adoption of the Report and Order. One, filed by the National Cable & Telecommunications Association and others seeks to modify even further the telecom rate formula to better align the telecom rate with the cable rate when the average number of attachers on poles differs from the traditional rebuttable presumptions of three in non-urban areas and five in urban areas. The other pending petition, filed by the Coalition of Concerned Utilities, seeks a number of minor but substantive rule changes in electric utilities’ that would be in favor when faced with attachment requests. Activity surrounding these petitions had been minimal pending the appeals following the initial comment period.

In addition, it remains to be seen whether the Court's decision upholding the complaint rights of ILECs will lead to a wave of ILEC complaints at the Commission. To date, only one such complaint has been filed, by Frontier West Virginia v. Appalachian Power Co. in June 2012, and it remains pending. Some ILECs may have been waiting to see how the appeal would be decided before deciding whether to pull the trigger and file. But before that happens, it is reasonable to expect that electric utilities will seek resolutions without adjudication rather than face unwelcome FCC precedent regarding rates, terms and, conditions in cases of joint use and ownership.