October 9, 2020 – The Federal Communications Commission (FCC) has released a Report And Order which reduces certain intercarrier compensation charges for 8YY (toll free) telephone calls.[1] The FCC’s actions are intended to eliminate 8YY arbitrage and fraud, such as traffic pumping, mileage pumping, and double dipping, by first reducing certain 8YY charges and then moving them to bill-and-keep. The Order makes the following changes to 8YY charges:

• 8YY originating end office access charges are moved to bill-and-keep over approximately three years

• 8YY originating transport and originating tandem switching are combined into a single nationwide tandem switched transport access service rate

• 8YY Database query charges are reduced to $0.0002 over approximately three years

• 8YY Database query charges are limited to a single charge per call to be assessed by only one carrier in the call path

For rate-of-return ILECs, there are a few other important parts of the Order related to cost recovery and determining the network edge. Of course, if you want to read the Order, there’s also some really good information on 8YY costs and revenue, and discussions of the way networks connect and exchange 8YY traffic. Below is a summary of the key 8YY changes in the Order.

The Transition Of Originating 8YY End Office Charges To Bill-And-Keep

Consistent with the FCC’s long-standing goal to make bill-and-keep the end state for all access charges, originating 8YY end office charges will be reduced to bill-and-keep over three steps beginning July 1, 2021 and ending July 1, 2023. Here are the details on the transition:

Step 1 – Initial Step: all intrastate originating 8YY end office rates not previously capped at their current levels are capped as of the effective date of the Order.

Step 2 – Achieving Parity: effective July 1, 2021, all local exchange carriers must bring any intrastate originating 8YY end office access rates that exceed the comparable interstate rates into parity with the comparable interstate rates. (If a price cap carrier’s capped originating intrastate end office rates are above the comparable interstate rates, that carrier is required to reduce its intrastate rates to interstate levels on July 1, 2021.)

Moving To Bill-And-Keep: After reducing or capping intrastate 8YY end office rates, all intrastate and interstate originating 8YY end office charges will be transitioned from their capped amounts to bill-and-keep in two equal reductions.[2]

Step 3 – Halfway To B-A-K: Effective July 1, 2022, all originating 8YY end office rates are reduced to half of their capped levels.

Step 4 – Bill-And-Keep: Effective July 1, 2023, all originating 8YY end office rates are reduced to bill-and-keep.

Nationwide Tariffed Joint Tandem Switched Transport Access Service Rate ($0.001) For Originating 8YY Traffic

The FCC is imposing a single nationwide tariffed joint tandem switched transport access service rate for originating 8YY traffic to reduce incentives for arbitrage. Specifically, starting July 1, 2021, there is a single nationwide tariffed joint tandem switched transport access service rate of $0.001 per minute for originating 8YY traffic.[3]

To prevent gamesmanship, all intrastate and interstate originating toll free tandem switching and transport rates are capped at their current levels as of the effective date of the Order. To reduce administrative burdens, carriers will implement any necessary changes as part of their next set of annual tariff revisions.

Effective Date Of The Order – all intrastate and interstate originating toll free tandem switching and transport rates are capped at their current levels

July 1, 2021 – there is a single nationwide tariffed joint tandem switched transport access service rate cap of $0.001 per minute for originating 8YY traffic

Stated another way, effective July 1, 2021, tandem providers are required to eliminate existing tandem switching charges and transport charges for originating 8YY traffic, and instead subsume charges for both tandem switching and transport into a single joint tandem switched transport access service rate element not to exceed $0.001 per minute. Thus, a tandem provider will be compensated for the use of its facilities whenever it provides either or both elements of a joint tandem switched transport access service.

Originating 8YY tandem switched transport access services include all rate elements as defined under “Tandem-Switched Transport Access Service” in 47 CFR §51.903(j), including transport mileage charges, multiplexing charges, and transport termination charges for originating traffic, and all services related to the transport function, as well as all access charges related to the tandem switching function, regardless of the varying terminology used in tariffs.[4] The $0.001 per minute tariffed rate, like tariffed rates generally, acts as a default rate with carriers being free to mutually agree to different rates.

8YY Database Queries – Charges Transition To Single, Nationwide Rate Cap Of $0.0002

Toll-free calls differ from other calls because the called party pays, instead of the calling party. When someone dials an 8YY number, the originating carrier must first determine how to route the call by querying an industrywide 8YY Database to determine the 8YY provider for the dialed number. These 8YY Database queries cost money. The rates charged for 8YY Database queries vary, reportedly from $0.0015 to $0.015 per query, and often, multiple carriers charge for 8YY Database queries for a single call. The FCC’s action targets this abuse by adopting a nationwide cap of $0.0002 per 8YY Database query.[5] There is a multi-step transition to the nationwide cap:

Step 1: all 8YY Database query charges not previously capped at their current levels are capped as of the effective date of the Order.

Step 2: effective July 1, 2021, 8YY Database query rates for each carrier are capped at the national average query rate of $0.004248. (Capped 8YY Database query rates from step one of the transition that are lower than $0.004248 must remain at those lower capped rates.)

Step 3: effective July 1, 2022, all database query rates will be transitioned half of the way to the final target rate of $0.0002. (If a carrier’s database query rate is capped at $0.004248 in the second step, its cap would be $0.002224 on July 1, 2022. If a carrier’s rate cap is below $0.004248, then it will use its capped rate to arrive at its rate effective July 1, 2022.)

Step 4 – Final Step: effective July 1, 2023, carriers may not charge more than $0.0002 for an 8YY Database query.[6]

8YY Database Queries – One Per Call By One Carrier In The Call Path – Usually The Originating Carrier

In addition to the problem of varying rates for 8YY Database queries, multiple carriers often charge for 8YY Database queries for a single call. This ends with the FCC’s Order – 8YY Database query charges are limited to a single charge per call to be assessed by only one carrier in the call path, generally the carrier that originates the call. However, “[i]f the originating carrier is unable to conduct the 8YY query or transmit the results of the query, the next carrier in the call path that is able to do so may conduct the single query and assess the charge.”[7]

The Network Edge – The Point Of Interconnection – No Change In This Order

As part of the 8YY proceeding, the FCC sought public comment on “whether the network edge requires a distinct approach in the 8YY context, particularly in a scenario where an IXC seeks a direct connection for 8YY originating traffic.”[8] This is a rather important issue for small rural carriers because the location of an interconnection point can dramatically impact costs.

In response to the network edge question, T-Mobile proposed that the FCC require carriers to interconnect at no more than a few dozen points of interconnection (POIs) for the entire country instead of at hundreds, or even thousands of POIs across the country. T-Mobile first proposed this in 2017 as part of what it calls a “Safe Harbor POI Proposal.” To be clear, many other large wireless and wireline providers support a radical reduction in the amount of interconnection points.

Small, rural carriers oppose this plan, arguing it will shift responsibility for considerable costs to them because they would be required to haul their traffic to the distant POIs of larger carriers. This would, as NTCA–The Rural Broadband Association points out, “undermine universal service and the ability to maintain reasonably comparable rates,”[9] and would likely cause confusion and potentially, disruptions.

The FCC declined to set the network edge, at least in this proceeding:

We decline to implement T-Mobile’s proposal in this proceeding. Mandating such fundamental changes to carriers’ interconnection obligations would have unpredictable consequences for a wide range of interconnection arrangements and are best dealt with in a comprehensive fashion in the separate proceedings where the Commission previously sought comment on issues relating to intercarrier compensation and the network edge.[10]

The FCC then addressed NTCA’s “concerns that if larger providers are no longer responsible for 8YY transport costs, they may attempt to ‘leverage such changes to demand rearrangement of existing interconnection arrangements and to move the network edges ... from existing locations in rural areas to points that may be [great distances] from the rural areas where those calls originate or terminate.’”

First, the FCC said the transition of 8YY transport and tandem switching access charges toward bill-and-keep does not alter the fact that interexchange carriers and wireless carriers continue to be responsible for those charges. Then, the FCC stated that nothing in the Order is intended to affect or alter existing network edge arrangements.

Finally, rather than adopt a POI default rule proposed by NTCA, the FCC reminded carriers not to use the 8YY changes to unilaterally require another carrier to haul there traffic to your new desired meet point:

[W]e take this opportunity to remind all stakeholders that a carrier has no legal obligation to agree to unilateral attempts to change network interconnection points. And, on several occasions the Commission has found that unilateral attempts by a carrier to change its interconnection point with another carrier that results in increased costs or inefficient routing of traffic is unjust and unreasonable under section 201(b) of the Act.[11]

Rate-Of-Return ILEC Revenue Recovery – Existing Mechanisms – No New Mechanisms

There will be no new 8YY recovery mechanisms to recover revenues carriers lose as a result of the FCC’s Order. Carriers must utilize existing revenue recovery mechanisms.

Rate-of-return ILECs will use “Eligible Recovery” to recover a portion of the revenues they lose when the FCC moves originating 8YY end office charges to bill-and-keep and sets national rate caps for 8YY joint tandem switched transport service and 8YY Database query charges.[12]

Rate-of-return carriers will continue to use the existing two-step Eligible Recovery process: (1) Access Recovery Charge, subject to the current caps, and (2) Connect America Fund Intercarrier Compensation, pursuant to FCC rules. In other words, rate-of-return carriers will first look to their subscribers for revenue recovery and then CAF-ICC.

Due to the way Eligible Recovery is calculated, the FCC expects that the mechanism “will allow rate-of-return carriers to account for most of their total lost 8YY revenues.” Here’s why:

Because the Eligible Recovery calculation requires rate-of-return carriers to subtract expected interstate switched access revenues from Base Period Revenue, adjusted downward 5% annually, a decline in originating 8YY interstate switched access revenues resulting from the reforms we make today means that less revenue will be subtracted from the adjusted Base Period Revenue. This will increase rate-of-return carriers’ Eligible Recovery. Thus, the Eligible Recovery calculation will reflect rate-of-return carriers’ lost interstate end office and tandem switching and transport access revenues and allow recovery of those revenues.[13]

Rate-of-return Eligible Recovery will consider reductions in originating “interstate revenue” but not any reductions in originating “intrastate revenue” due to the 8YY reforms. The FCC gives a number of reasons for this, including the relatively small amount of lost annual originating intrastate revenue; intrastate rates and intrastate revenue recovery is a state matter; risk of over-recovery of intrastate revenue; and many states have given ILECs flexibility regarding intrastate rates. For what it’s worth, it’s been estimated that the 8YY reforms will result in a $6.5 million annual reduction in originating intrastate revenue for rate-of-return ILECs.[14]

Finally, the FCC notes that if an ILEC believes the existing recovery mechanisms are legally insufficient, it can petition the FCC to go through a Total Cost and Earnings Review and seek additional support. Or file a waiver.

 

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[1] 8YY Access Charge Reform, WC Docket No. 18-156, Report And Order, FCC 20-143 (Oct. 9, 2020) (8YY Order), https://docs.fcc.gov/public/attachments/FCC-20-143A1.pdf.

[2] 8YY Order at ¶ 31. The FCC amends Sections 51.907 and 51.909 of its rules to effectuate the transition for price cap and rate-of-return carriers and rely on the application of the existing benchmark requirements in Sections 51.911(c) and 61.26 of its rules to apply the same transition to tariffed rates charged by competitive local exchange carriers. 8YY Order at Appendix A.

[3] 8YY Order at ¶ 52. To effectuate this, the FCC amends Sections 51.907 and 51.909 of its rules for price cap and rate-of-return carriers, respectively, and relies on the application of the existing benchmark requirements in Sections 51.911(c) and 61.26 of its rules to apply this same transition to tariffed rates charged by competitive local exchange carriers. 8YY Order at Appendix A.

[4] 8YY Order at footnote 183.

[5] 8YY Order at ¶¶ 72-81.

[6] 8YY Order at ¶ 78. Implementation of the database query rate cap and transition will occur through application of amendments to Section 51.907 of the FCC’s rules for price cap carriers, Section 51.909 of the FCC’s rules for rate-of-return carriers, and 51.911 of the FCC’s rules for competitive local exchange carriers. Id. at ¶ 80; Appendix A, Final Rules.

[7] 8YY Order at ¶ 82.

[8] 8YY Access Charge Reform, WC Docket No. 18-156, Further Notice Of Proposed Rulemaking, FCC 18-76, ¶ 85 (June 8, 2018), https://docs.fcc.gov/public/attachments/FCC-18-76A1.pdf.

[9] 8YY Order at ¶ 69 (citing Letter from Michael R. Romano, Senior Vice President –Industry Affairs & Business Development, NTCA–The Rural Broadband Association, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, and 18-156, CC Docket No. 01-92, at 2 (filed Feb. 13,2020)).

[10] 8YY Order at ¶ 69.

[11] 8YY Order at ¶ 71.

[12] 8YY Order at ¶¶ 85-93.

[13] 8YY Order at ¶ 87.

[14] 8YY Order at ¶ 92.