Who Needs the Money?

The former Bell companies complain that reciprocal compensation is costing them billions of dollars per year. Some DLECs were designed to take advantage of reciprocal compensation rules. There's no right or wrong, just different ends of a copper wire.

by Patricia Fusco
Associate Editor, ISP-Planet
[September 20, 2000]

In February of 1999 the Federal Communication Commission adjusted its thinking and declared that calls made to the Internet are not local. Since then, reciprocal compensation has been at the heart of controversies between incumbent and competitive local exchanges.

By deeming that Internet communication is Interstate in nature, the Commission's policy shift set the stage for AT&T Corp., SBC Communications, Inc., and Verizon Corp. to challenge the payment of reciprocal compensation fees.

Incumbents' legal teams quickly moved to dispute the validity of the fees. When the FCC ruled that local call termination fees should not be paid, the ruling was thrown out in Federal Court. While the issue was remanded back to the FCC, state authorities were inundated complaints and counterclaims. Currently the FCC has scheduled a proceeding to resolve the matter once and for all.

Whose data?
On Monday, September 18, the House Telecommunications Subcommittee officially stepped into the fracas and voted to approve the markup language of H.R. 4445 — legislation that would exempt data based traffic from reciprocal compensation requirements.

The bipartisan bill, introduced by Reps. Tom Bliley (R-VA), Billy Tauzin (R-LA), John Dingell (D-MI), and Rick Boucher (D-VA), affirms the conclusion made by the FCC — that Internet traffic is largely Interstate.

The "Reciprocal Compensation Adjustment Act of 2000" states that future contracts for interconnection among carriers do not have to include reciprocal compensation for Internet-bound traffic.

While the bill does not alter existing reciprocal compensation contracts, the majority of interconnection agreements CLECs have struck with incumbents are set to expire soon, and it's a sure bet that firms with new contracts already in place would end up in court to secure payments.

A spokesperson from Rep. Tauzin's office said that even though the bill has a lot of support, it's not likely that HR 4445 would pass before Congress concludes business on Oct. 6.

"We have our backs up against the wall in trying to get the bill approved this year," the spokesman said. "But that's not going to stop us from trying."

Save the dinosaurs
The U.S. House panel believes that approving measure that could eliminate billions of dollars in fees large regional telephone companies pay annually to carry consumer Internet traffic. But reaction to the bill is mixed, depending on which side of the line Internet traffic terminates.

Verizon holds that its reciprocal compensation payments in a state as small as Massachusetts would balloon to more than $150 million a year to cover increasing Internet traffic. The carrier would be forced to hike prices $2.80 a month per customer, whether they use the Internet or not, to subsidize reciprocal compensation payments.

Verizon further contends that Internet service providers would not bear the brunt of the legislation because the East Coast telecom giant could not increase its fees for Primary Rate Interfaces. Because providing circuits is a competitive service, Verizon said few ISPs would be impacted as their business plans were built to ignore reciprocal compensation revenues.

The US Internet Industry Association concurs with Verizon. The non-profit group founded in 1994 acts as an advocate for ISPs on industry-related issues like open access, privacy, taxation, and e-commerce.

Leigh Kurtz, USIIA attorney spoke before the FCC early in August on the issue of reciprocal compensation and its impact on ISPs. In a statement before the Commission, Kurtz said that calls terminating at an ISP were not a major revenue source for ISPs.

"It is the belief of the USIIA that the payment of reciprocal compensation for the termination of calls to Internet service providers are inconsistent with the realities of the marketplace, and that such payments are detrimental to the growth and integrity of the Internet industry," Kurtz said.

Who knew?
Steve Mossbrook, Wyoming.com president and USISPA member, said action taken by the Telecommunications Subcommittee showed once again that members are deeply divided on the issue of reciprocal compensation.

"They and their staffs need more facts to understand better the proposals on which they are voting," Mossbrook said. "There is no consensus in Congress about the urgency of the so-called problem and the need for a vote before Congress adjourns."

Whose bill?
But reciprocal compensation fees are a substantial burden for large regional telephone networks like SBC, which spends approximately $4 billion a year on fees that are not reciprocated. The United States Telecom Association naturally supported incumbents' attempts to kill reciprocal compensation, even though the group also represents smaller carriers.

USTA is a formidable lobbying force to reckon with. In business for more than 100 years, the group knows its way around Capitol Hill. The association represents more than 1,200 companies worldwide providing local exchange, long distance, wireless, Internet, and cable services.

Gary Lytle, USTA interim president and chief executive, said the subcommittee's vote is a tremendous victory for consumers everywhere.

"The Reciprocal Compensation Adjustment Act of 2000 corrects an unintended consequence of the 1996 Telecom Act that harms consumers by placing a tollbooth to the Internet and reduces competition in the local exchange market," Lytle said.

"This legislation will correct a longstanding roadblock to real competition in the telecommunications marketplace," Lytle added. "We look forward to solving this problem once and for all. The members of USTA want to promote real competition in telecommunications."

Corporate welfare taxes the poor
But consumer groups argue that eliminating reciprocal compensation payments would in effect raise costs incurred by new competitive phone companies that facilitate Internet dial-up calls.

The Consumers Union, the Consumer Federation of America, and Hands Off The Internet believe that the legislation would result in per-minute charges for Internet access and increased fees for consumers.

Peter Arnold, HOTI director, said the bill would permit a few large companies to reap hundreds of millions of dollars in undeserved profits at the expense of millions of Internet users nationwide.

"Any member who supports this bill is going to have some serious explaining to do once constituents start seeing their Internet access bills climb," Arnold said.

Rhetoric aside, the measure's immediate future remains uncertain because Congress is set to adjourn soon. In order for the bill to become law, it must still be considered by the full Commerce Committee, the House, the Senate and obtain the President's seal of approval.

To do so in just three short weeks would surpass the performance any Olympic hurdler could hope to achieve in a lifetime. This bill does not have "gold medal winner" written all over it in an election year, so the legislation will mostly likely die as an epitaph to the 106th Congress.

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