Thursday, August 19, 2004 - The Progress & Freedom Foundation Blog

ICF: The Good, The Bad and The Ugly

Regulatory geeks (that would be us) have been poring this week over the Intercarrier Compensation Forum (ICF) proposal to reform telephone access charges and universal service payments. The ICF has been at work for nearly a year now, and has suffered some notable defections, namely the rurals and the BOCs save SBC. Nonetheless, the ICF is a serious attempt to get at one of telecom's most intractable problems, the perversion of the price system to serve supposed universal service goals. My 72-hours of less-than-intense-study yields these reactions:

The Good: The good is that this is a serious proposal intended to confront head-on the crisis and distortion that the current USF and access charge system causes within communications markets. Making access charges uniform across jurisdictions and stepping them down from current levels is a signal accomplishment. Although I hate subscriber line charges (SLC) for the phony rates that they really are, reducing access charges and transferring the charges to the monthly recurring bill through this legerdemain is also to be applauded.

The Bad: The bad begins with the hyper-regulatory feel of the whole scheme. It is as if Rube Goldberg invented the system and then was asked to make an equally extravagant mechanism to do away with it. Regulatory lawyers created the scheme and they are now tasked with dismantling it, which is about as far from a market solution as you can think of. Further, the ICF proposal expands universal service funding in regards to both inputs and outputs. On the input side, VoIP and other broadband connections (cable modem and enterprise) are herded into the "USF taxable" category, which may be inevitable but is deeply unfortunate. It also doesn't begin to address the structural problems with rural telephony, which are immense and immensely costly. In the end, I understand many of the concessions to reality -- the SLC charge increase, the slowly stepped-down access reductions -- but I would prefer the replacement be pointing toward bilateral agreements and market mechanisms rather than regulatory fiat.

The Ugly: Any solution to the intercarrier compensation problem is bound to be ugly given the reliance interests, political imperatives and technological threats in the current system. To resort to some fuzzy words, this calls for exercise of prudence and artistry more than application to pure principle. The rural carriers in particular are too dependent on access for it simply to go away (in Colorado, many rural carriers realize 50-80% of their revenue from access and USF). The BOCs, meanwhile, have an entitlement through the mists of time and distant rate cases to these access recovery mechanisms. The IXC's, in turn, want desperately to reduce their costs as they seek to keep their head above water in a market that is being swamped by wireless and VoIP. Thus, there are the incentives for some sort of deal to be made, though it probably cannot be one to make most economists happy. So long as it begins to set the price system right and doesn't further exacerbate the "taxation by regulation" that is most of telecom rate-setting, there is quite a bit that could be swallowed in an intercarrier comp reform proposal.

My personal preference, dating from the reciprocal compensation dispute days, is for the regulators (and it must be the regulators who ultimately have the say so to fix this) to look to analogous markets to see the types of compensation arrangements they produce. In particular, the Internet backbone "tiering and peering" model of compensation was produced in a market environment with negotiated agreements between backbone carriers. One can reasonably guess that a market-driven intercarrier compensation scheme would look similar. That said, it is hard to predict what an efficient model would look like. Therefore, regulators need to be careful about replacing one distortionary price scheme (access charges) with another distortionary scheme (mandatory bill-and-keep). There is no elegant plan to fix this. If I think of one, I'll let you know.

posted by Ray Gifford @ 1:00 AM | General