Patrick DeGraba Federal Trade Commission* Why Bill and Keep? Hotel Konigswinter, Germany 3 April 2006

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1 Patrick DeGraba Federal Trade Commission* Why Bill and Keep? Hotel Konigswinter, Germany 3 April 2006 *Any opinions expressed herein do not necessarily reflect those of the FTC or any Commissioner.

2 Why Rethink Inter-carrier Compensation? In U.S. Creates Problematic Incentives Leads to Anomalous Payment Rules Based on Faulty Reasoning 2

3 Faulty Reasoning Calling party network pays regimes dominate Erroneous belief that originator is the cost causer Implies caller should bear all costs. Problems with this belief Called party can hang up. If he doesn t he is as responsible for continuing the call as the caller. If I call your voice mail and ask you to call, and you call and talk for 1 hour, who is the cost causer? 800 numbers provide market evidence that the receiver gets benefits from receiving a call. 3

4 Anomalous Payments Reciprocal Compensation Originating local network pays terminating local network a per minute fee If I call you on another network, and talk for 1 hour, my network pays your network 1 hour of termination If I get your voic and in response you call me 1 minute later and we talk for 1 hour, your network pays my network for 1 hour of termination, even though the resource utilization is identical for both calls If I receive a local call from an on net caller, my network receives no payments. If I receive a local call from an off net customer, my network receives a payment even though he uses fewer resources than in the on net call. 4

5 Problematic Incentives Current U.S. Interconnection Regime Local Calls Reciprocal Compensation Calling party s network pays transport and termination charges to called party s network Long Distance Calls Access Inter-exchange Carrier (IXC) pays per minute charges for both originating and terminating access Dial Up Internet Calls Separate Rules (ongoing) Enhanced Service Provider (ESP) exemption ISPs pay no access charges Termination to ISP treated as interstate local traffic 5

6 Problematic Incentives Current U.S. Interconnection Regime Regulatory arbitrage Internet Service Provider (ISP) reciprocal compensation problem Voice Over Internet Protocol (VOIP) access charge arbitrage Terminating access monopoly problem Competing Local Exchange Carrier (CLEC) access charges A need for regulatory decision making Regulators must determine termination costs of each network Regulators must classify traffic Pressure on retail rates Per minute Interconnection Charge (IC) could cause per minute usage rates Likely inefficient 6

7 Central Office Bill and Keep (COBAK) Networks have two pieces Local access Loop customer premise to the central office Central Office (CO) switches traffic to transport Inter-office transport Trunks and tandems connecting central offices 7

8 Central Office Bill and Keep (COBAK) Origination Termination Transport Calling party s loop and CO Called party s loop and CO Facilities that connect COs 8

9 Central Office Bill and Keep (COBAK) COBAK is a default interconnection regime 9 To be implemented only if carriers cannot reach a negotiated solution. Does not prohibit retail relationships such as 800 or 900 service The Basic Intuition The called party does not charge termination for his own phone. COBAK pushes this idea to the Central Office Implications Each party is responsible for the cost of its local access The calling party is responsible for the cost of transport The default does not mandate equal cost sharing

10 Central Office Bill and Keep (COBAK) Interconnection for a two-network call Calling party s network is responsible for origination costs and the cost of transport to the called party s CO The called party s network is responsible for the costs of termination Thus, once the calling party s network gets the call to the called party s CO, traffic is exchanged on a bill and keep basis 10

11 Central Office Bill and Keep (COBAK) Extension to three-network calls If the calling party has a retail relationship with two networks, the calling party s Local Exchange Carrier (LEC) incurs the cost of origination and transport to the interconnection point with the second network (e.g. IXC) The second network incurs the remaining transport cost to the CO of the called party The called party s LEC is responsible for the costs of termination Each network recovers its costs from its end users 11

12 Current Interconnection Local Call Loop Central Office Central Office Loop Long Distance Call POP IXC POP Central Office Internet Call CLEC CO ISP 12

13 Implementation of COBAK Local Call Loop Central Office Central Office Loop Long Distance Call POP IXC POP Central Office Internet Call CLEC CO ISP 13

14 Implementation of COBAK COBAK eliminates some existing interconnection charges and introduces no new ones Local Eliminates terminating CO switching charges Maintains current transport and tandem charges Long Distance Eliminates all originating access Eliminates terminating switching and CCL Maintains terminating transport 14

15 Implementation of COBAK Are the Four Problems Solved? Eliminates arbitrage problems Local access has one cost recovery method There is no termination charge for dial up ISPs Reduces terminating access monopoly problem There is no terminating switching charge Reduces regulatory intervention No need to determine termination costs No need to classify traffic (but you can if you want to) More efficient end-user prices Eliminates non-cost-based per minute costs More efficiently divides costs between parties 15

16 Implementation of COBAK New Problems Identifying central offices 16 Is the Remote Terminal (RT) or the 5ESS at the CO? Is the MTSO the wireless network s CO? What is the IXC s CO? Can accommodate interconnection with multiple networks Originating network should be responsible only for local transport Packet switches Remotely located central offices Who bears the cost of transport to an out-of-state switch? Network with one switch may have to provide local point of interconnection

17 Implementation of COBAK New Problems (continued) Unwanted calls Must people pay termination for calls they don t want? First minute free (wireless) Hang up Unlikely to be per minute charges for termination Cost recovery of lost access revenue Will there be a need for new cost recovery methods? There is already a method for Incumbent Local Exchange Carriers (ILECs) to recover local costs 17

18 Conclusion Why Bill and Keep? Eliminates problematic incentives For usage rates For new investments Eliminates terminating monopoly problem Simplifies regulation 18

Bill and Keep as the Efficient Interconnection Regime?: A Reply. Abstract

Bill and Keep as the Efficient Interconnection Regime?: A Reply PATRICK DEGRABA * Charles River Associates Abstract In a critique of my paper outlining the Central Office Bill and Keep (COBAK) proposal,