FCC to Nix Reciprocal Compensation Within Days

Regulators get set to drop the ax on recip comp for terminating ISP traffic. Agency's 3-year phased plan favoring Baby Bells might be out as early as next week.

by Jim Wagner of internetnews.com [April 14, 2001]

It's hoped, but not expected, that the decision will put an end to the debate between regional telephone companies and competitive local exchange carriers (CLECs) over the issue of providing compensation to the carrier that terminates local phone calls to ISPs.

According to Jonathan Askin, general counsel for the Association for Local Telecommunication Services (ALTS), the telephone companies still need to get the votes from the FCC commissioners. A decision could be made in a few days, but the order will likely come out in one to two weeks.

Cuts both ways
There are two separate issues, both covering compensation between carriers, sitting on the desks of regulators. One deals with fees involved in terminating ISP-bound traffic between local carriers and the other deals with long-distance carrier to local call terminating.

Askin said FCC commissioners have been working for months on these two issues and will likely roll both into one general order.

"(The FCC) is trying to deal with everything, all the pricing concerns, the pricing regime, fairly holistically," Askin said. "They want to deal with the moneys that flows between carriers in one general document. So they're going to issue a notice of proposed rulemaking, probably next Thursday dealing with all the money that flows between carriers. But there could be a lag of a day or two also."

He said the Commission won't get rid of compensation entirely, but make the costs reflect the real market value. According to a report by the Wall Street Journal, the cost for terminating a phone call might be slashed as much as 67 percent over three years.

Root pressure
The path to today's thorny issue of reciprocal compensation finds it's beginning with the Telecommunications Act of 1996 and the FCC's subsequent implementation.

Reciprocal compensation means the carrier originating the phone call on one network must pay the carrier who terminates the call on the other end, since termination incurs a cost on the network.

Originally, CLECs were opposed to the whole idea of reciprocal compensation to keep costs down, calling for a bill-and-keep policy which would mean the costs for terminating calls between the two carriers would cancel each other out.

The powerful incumbents—yesterday's Bell Atlantic, Pac Bell, Ameritech; today's Verizon, Qwest, and SBC Communications—thought they would be terminating more calls, bringing more money into their pockets, and demanded a charge for every terminated call.

The tables were quickly reversed when the clever independents started signing up Internet service providers in droves, putting the onus for compensation on the Baby Bells, who had to pay for every person making a phone call from their end to the ISP for Internet connection.

The Internet explosion exacerbated the situation, with more and more families nationwide connecting to the Internet and putting money in the CLEC's bank account.

Some CLECs built their entire business plan around the compensation received from the Baby Bells, opting to sign up ISPs and collect compensation rather than go out of their way to provide telephony services.

According to Verizon officials, the company paid out more than $1 billion to CLECs for reciprocal compensation charges in 2000 alone, and expect the figure to increase this year, if Internet usage statistics are to be believed.

So the incumbents convinced the FCC last year to close the ISP "loophole," saying calls by computer users to ISPs were more like long distance calls than local calls.

CLECs nationwide threatened that Internet costs would rise, as it would carry the cost of terminating phone calls on to the ISP.

A U.S. Court of Appeals decision in March, 2000, struck down the FCC's decision, stating the Commission hadn't explained why those calls were considered long distance.

Which brings us to the expected ruling next week.

Rule change
Bob Bishop, a Verizon spokesperson, said Verizon has been working with the government for several years and hopes for a favorable decision from the FCC next week.

"We look forward to a decision on it and hope it gets resolved soon," Bishop said. "We feel that in the end it's a pro-competitive move by the FCC to fix this problem. In the case of CLECs, it actually deters investment, and makes it lucrative for them to pocket free cash rather than build a real business that provides real services."

But Askin argues that the issue of who wins or who loses isn't the important issue.

"The FCC isn't picking winners or losers, they're trying to strike the right balance to ensure that the compensation for terminating calls bound for ISPs is proper and consistent with laws and economic structures," Askin said. "They're going to break down the rates to what they perceive is cost-based levels."

—End