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Breaking Down the FCC Order: Recovery Mechanism

The FCC is adopting a transitional recovery mechanism for incumbent Local Exchange Carriers (LECs) to facilitate the gradual transition away from intercarrier compensation (ICC) revenues that will be reduced by the Order.  This recovery mechanism is not 100 percent revenue-neutral to today’s revenues.

The rate-of-return incumbent LECs’ baseline for recovery will be based on:

• 2011 interstate switched access revenue requirement (recovered today through interstate access revenues and Local Switching Support)
• plus FY2011 intrastate terminating switched access revenues
• plus FY2011 net reciprocal compensation revenue

Rate-of-return carriers will receive each year’s baseline revenue amount from three sources:

1. They will continue to have an opportunity to receive ICC revenues, pursuant to the ICC rate reforms.  All LECs will continue to collect ICC revenues for originating access and dedicated transport.
2. They will have an opportunity to collect a new federal Access Recovery Charge (ARC) from their subscribers, subject to consumer protection limitations described below.  ARC is a new charge to the subscribers in addition to the existing federal Subscriber Line Charge (SLC).
3. They will have an opportunity to collect any remaining baseline revenue from the new Connect America Fund (CAF).

The revenue incumbent LECs are eligible to recover is defined as “Eligible Recovery”.  Together, the second and third sources above comprise the Eligible Recovery.  Rate-of-return Eligible Recovery will be the difference between:

1. The rate-of-return baseline, subject to 5 percent annual reductions
2. The revenues from the reformed ICC rates in that year, based on actual minutes of use multiplied by the associated default rate for that year

Carriers are permitted to recover a limited portion of their Eligible Recovery from their end users through a monthly fixed charge called the ARC which is limited to an annual increase of $0.50 (lifeline customers may not be charged an ARC).  A residential rate ceiling prohibits imposing an ARC on any consumer paying a local monthly phone rate of $30 or more.  This ceiling is based on:

• ARC
• Federal Subscriber Line Charge (SLC)
• State basic local residential service rate (flat rate for residential local service, mandatory extended area service charges, state SLC (per-line state high cost and/or access replacement universal service contributions), state E911 charges and state Telecommunications Relay Service (TRS) charges)

Rate-of-return LECs are permitted to implement monthly end user ARCs with six annual increases of no more than $0.50 (per month) for residential/single-line business consumers, for a total ARC of no more than $3.00 in the sixth year.  For multi-line businesses ARCs are limited to six annual increases of no more than $1.00 (per month) per line but the federal SLC plus the ARC cannot exceed $12.20 per line.

Competitive Local Exchange Carriers (CLECs) will not fair so well.  Here are specific CLEC comments in the Recovery Mechanism section:

• Competitive LECs, which are not subject to the Commission’s end-user rate regulations today, may recover reduced intercarrier revenues through end-user charges
• Competitive LECs, which have greater freedom in setting rates and determining which customers they wish to serve, will not be eligible for CAF support to replace reductions in ICC revenues
• The FCC declines to provide an explicit recovery mechanism for competitive LECs