October 2011

The FCC has announced it will adopt a Report and Order and Further Notice of Proposed Rulemaking on Thursday October 27, 2011,  approving significant changes to its Universal Service Fund program and its rules on intercarrier compensation.  In this entry, we project several outcomes for this proceeding.

Broadly speaking, we believe the “ABC Plan” offered by the largest Wireline carriers and the “consensus framework” offered jointly with the rural carrier associations submitting the RLEC Plan will influence most strongly the outcome of the proceeding.  Among those entities most likely to be disappointed will be rural wireless carriers that benefited as exempt telecommunications carriers (“ETCs”) and state regulators.

USF Program Funding.   Based on the Notice of Proposed Rulemaking, the FCC appears committed to maintaining the aggregate USF funding at $4.2 Billion annually, subject to modest increases for inflation.  The suggestion of the Rural LECs that high speed interstate access service be subject to USF assessments likely will not be adopted at this time.

Intercarrier Compensation.  The FCC is expected to adopt a series of steps that, over a number of years and with safeguards, will move interstate switched access, reciprocal compensation and (in conjunction with state regulators) intrastate switched access rates toward a uniform termination rate of $0.0007 per minute.  Verizon, AT&T and Sprint likely will reap substantial cost savings for their Wireless and interexchange Wireline businesses.  In addition, we expect the FCC will require interconnected VoIP service providers to pay terminating access rates or reciprocal compensation, if local, to terminate calls on the PSTN.  Rate increases for heavily discounted residential local Wireline services and increases in subscriber line charges (“SLCs”) are contemplated, as well.

USF Reforms.  The proposals to reform (lower) ETC funding levels, curb phantom traffic abuses, address traffic pumping, and limit recovery of certain expenses and capital investments of rate of return carriers likely will be adopted.  An overarching consideration is the extent to which elements of the current High Cost Support program will be supplanted by the broadband- focused “Connect America Fund.”  Another is which subjects will be “punted” to the Further Notice of Proposed Rulemaking for resolution.

Other major issues include the extent of interim support to rate of return carriers—as intercarrier compensation levels are reduced, monies for the proposed mobility fund, funding levels for near term broadband investment, the revised rules for ETC support, and whether the FCC will implement reverse auctions to grant some USF/CAF funds.   

For those interested, information for online access to the FCC’s October 27 Open Meeting is available at http://www.fcc.gov/live.

Beware of the Tipping Point.  Telecommunications services procurements do not always yield the targeted results.  This typically arises when a non-incumbent carrier concludes the incumbent is going to retain the business.  This can and does occur when the customer signals—intentionally or not—that  the RFP process is just a formality.

It can also arise in connection with a well-executed RFP process.  This can occur after a successful procurement in which substantial business was awarded to an aggressive non-incumbent.  If, in the subsequent procurement cycle, the longstanding provider believes growth or future business is unlikely, the customer may be surprised by the longstanding carrier’s indifferent response to the RFP.  At this juncture, the customer’s business has reached the carrier’s “tipping point.”

These outcomes are going to occur from time to time.  From an economic perspective, the customer can respond by migrating more business from the longstanding provider; sometimes the longstanding carrier controls access at customer locations, preserving a lucrative, albeit smaller, revenue stream.  The ability to migrate traffic also may be trumped by the customer’s interest in the maintaining diversity in carriers.  Diversity has a price.  Anticipating this possible outcome helps set reasonable expectations for upper management.

Seize the Opportunity.  Recent experiences have confirmed the virtue of a practice we have followed over the years: When entering into an agreement with a services provider for the first time, or after a noticeable hiatus, push for as many changes as possible to the carrier’s one-sided standard agreement.  There never will be a better time.

Two reasons underlie this recommendation.  First, the “new” services provider wants the business.  This tempers carrier intransigence to substantive changes to their standard agreements.  Second, carriers are far more inclined to amend existing agreements with new pricing schedules and other changes to the original agreement.  Carrier account teams would rather not re-visit all aspects of a negotiated agreement if at all possible.

Timeliness Makes a Difference:  New or amended services agreements typically implement new services or improved pricing or both.  Realizing these benefits quickly is a central objective for the enterprise.  While “keeping the process moving” is essential throughout the procurement process, as the terms of the deal are set out in the new agreement or amendment,  the customer’s team (enterprise staff, consultants and counsel) should complete their review and provide their inputs as timely as possible.  Providing comprehensive revisions as opposed to piece-meal edits is the only approach.  A timely, comprehensive response motivates effective carrier account representatives to bring together their offer managers, subject matter experts, and counsel to conclude the process quickly.

The privacy implications of the sale of the bankrupt Borders Group’s consumer database to Barnes & Noble have been a focus of the Federal Trade Commission (“FTC”), state Attorneys General, and lawmakers, and the transaction highlights the need for companies to carefully draft and periodically review their privacy notices to consumers.

Privacy notices should not only accurately reflect current practices regarding the collection, use, sharing, and security of personal information, but also cover possible future transactions, such as a dissolution, merger, or sale of assets or the sharing of personal information with service providers.

In an e-mail sent to Borders customers and a notice on the Barnes & Noble website, customers were advised that they can opt-out of having their contact information (which includes names, addresses, and e-mail addresses) and purchasing history shared with Barnes & Noble.  This came about because Borders reportedly had at least three different privacy policies since 2006 that limited how personal information collected from customers could be shared; earlier policies stated that Borders would not share information without express consent, and a later policy indicated that information could be transferred if Borders was sold, merged, or reorganized, but the company would seek appropriate protections in such cases.  The FTC questioned whether the later policy covered dissolution and the sale of assets in bankruptcy, and the later policy only applied to information collected after the date it was adopted, so customers’ consent to the transfer was required.

Recent privacy enforcement actions by the FTC and lawsuits have focused on companies’ deceptive or unfair practices in failing to adhere to their stated privacy policies, applying a material change in a privacy policy to personal information collected under a prior policy without an affected individual’s consent, and failing to adequately secure personal information.  In light of this, it is important to ensure that privacy policies accurately describe the company’s current practices and are comprehensive enough to cover possible future transactions involving personal information.  In addition, personal information collected from consumers should always be appropriately secured from unauthorized acquisition or use.

In an earlier entry, we outlined the importance of counsel understanding the critical elements of the business deal in order “to provide relevant advice” to enterprise customers negotiating telecommunications services agreements. This entry focuses on carriers’ standard services agreements (“Carrier Agreements”), highlighting how these agreements remain highly problematic.

 1.  Above All, Carrier Agreements Are Drafted to Maintain Projected Revenue Streams

Minimum revenue commitments and early termination liability provisions are standard in Carrier Agreements, vestiges of the 20th Century when interexchange (Wireline) services were offered under tariff.  Regulators either required or tolerated revenue shortfall protection for discounted rates.  Today, the economic justification for early termination liability is tenuous, at best, as (1) the services are no longer regulated and the carriers vigorously maintain the markets for their services are competitive;  (2) carriers’ costs consist largely of fixed, sunk network investments; and (3), from the customers’ perspective, the logistics and transaction costs in migrating enterprise- wide data services to successor carriers negates the option of readily switching carriers to optimize rates.

Billing for telecommunications services have been the carriers’ Achilles Heel for decades. A cottage industry of telecom expense management firms thrive because of challenged carrier billing systems.  Despite this reality, standard billing dispute clauses call for payment of disputed amounts after the carrier reaches its conclusion regarding the dispute.

Unrealistically low caps on direct damages is another 20th Century vestige.  While problematic, the more significant concern is that Carrier Agreements do not provide meaningful resolution procedures for chronic service issues, as discussed in an earlier entry.  Site-specific or network-based Service Level Agreements are not adequate as the impact of chronic service issues on the enterprise go far beyond generally accepted notions of direct damages.

Continue Reading The Persistent One-Sidedness of Carrier Agreements