The Tao of Intercarrier Compensation
[Note: I want to clarify from the outset what I mean by "intercarrier compensation." Used generically, the term "intercarrier compensation" can refer to any charges between carriers for handling traffic. Accepting another carrier's traffic can (but doesn't need to) involve two functions: 1) the charge to transport traffic from the point of interconnection to the last aggregation/switching point in the terminating carrier's network, and 2) the cost to "terminate" (switch and deliver) that traffic to its destination. In the world of exchange access, there are many carriers and carrier combinations that can usually transport traffic to the terminating carrier's last point of aggregation. Said differently, there is a vibrant and competitive market for wholesale transport, so in our context "intercarrier compensation" will only be used to refer to the "pure" terminating function--from the last point of switching on the terminating carrier's network."]
Intercarrier compensation is, perhaps, the most un-understood (not mis-understood), and urgent, telecom policy issue requiring the Commission's attention. But, I've kind of done it to death, so I'll try to make this my last "pure" post on this subject. Nonetheless, the Commission's persistent refusal to solve the obvious problems with the design of the intercarrier compensation system make this an issue that pervades, pollutes, and corrupts almost every subsequent telecommunications policy initiative; and, unless corrected, the National Broadband Plan will be no exception.
The subject of intercarrier compensation is devilishly complicated to understand, but the correct policy--the answer, the "way", the "tao"--is beautiful in its intellectual simplicity. The "tao"--as always--is comprised of the "yin" and the "yang." So, rather than skipping (or Skype-ing) to the tao, it is more enlightening to work backwards, and introduce the yin and the yang of intercarrier compensation, why they must exist in proportion, what can happen when they go out of proportion, and then come to the policy solution that will best promote harmony. In the last post, we discussed the internal tension between certain "free" services. These "free" services are all the result of attempts to exploit quirks in the intercarrier compensation system--a system that places different prices on the same function (traffic termination) based entirely on how that traffic is classified. What was not discussed was how these internal tensions can coexist within one carrier.
In intercarrier compensation terms, the yin and the yang might be best considered as conflicting temptations to terminate high volumes of traffic at high prices, and, conversely, to "hand off" high volumes of traffic to terminating carriers at artificially low prices. The classic example of the imbalance would be your basic ISP VoIP provider, like certain cable companies. The traffic that is destined for the cable end-user gets billed to the "delivering" IXC at the access rate prescribed by the phone number of the calling party. On the other hand, outbound voice traffic leaves via the same exact "pipes" but is handed off to the delivering IXC as "data" or "information service" traffic.
The point is that every access "avoider" is a potential (and likely) "access pumper" (a carrier that attracts "relay" providers--like free conference calling services--to locates "relay" equipment in a high access termination area in exchange for a portion of the "stimulated" access caused by the "free" conference calls. The Iowa Utilities Board declared "traffic pumping" schemes illegal in a final order released Tuesday, September 22nd. However, the best explanation that I've seen of the many instances in which this internal conflict exists is in this ex parte filed earlier this week in the FCC's own "traffic pumping" docket. I strongly encourage anyone who wants to understand this issue to read this ex parte presentation.
The author, David Frankel, CEO of ZipDX LLC, explains the internal contradictions of the current system elegantly and insightfully. Using the example of the "protected" Google Voice service, Mr. Frankel explains not only Google Voice's conflict with the rural "traffic pumpers" that originate "free" conference calling services, but also how Google Voice's own "free" service stimulates access for its CLEC partner delivering calls to Google's call management platform. The call management platform, he explains, is nothing more than an urban equivalent of the rural conference calling platforms. The second "leg" of the call leaves the platform over Google's CLEC partner's line as a "VoIP" or data application, for which it does not believe compensation is owed. Hence, the "free" Google Voice service is probably transported over cheaper CLEC lines, than a comparable service with no intercarrier compensation effects.
Here is a complete list of the ex partes filed by David Frankel in FCC Docket No. 07-135. They all have some of the same parts, but each notice expounds on a different technique demonstrating a failure of the system. Reading these would be my recommendation for the best way to become comfortable with the "yin" and the "yang" of intercarrier compensation. These "real world" examples compellingly demonstrate that the current compensation system contains incentives for some carriers to generate large traffic imbalances which ineluctably lead to reduced consumer welfare.
What policy, then, would create the proper incentives to restore harmony and balance between the yin and yang of intercarrier compensation? Well, the remedy is the symptom of the disease. The incremental cost of terminating any additional call is less than the cost of metering, and accurately billing, the calls.
The "tao" of intercarrier compensation? Set the intercarrier price of termination for all calls at the same rate: free. Next, for those rural carriers that really do have additional loop costs, change existing policies to allow all carriers to recover "efficient" incremental terminating costs from their own end-users. Restoring harmony in the intercarrier compensation system will lead to more economically rational, more efficient behavior, and will remove barriers to broadband deployment (more on this later).