FCC Comes Full Circle On
Reciprocal Compensation

On April 19, 1951, Gen. Douglas MacArthur, relieved of his Far East command by President Truman, bid farewell to Congress, quoting a line from a ballad: "Old soldiers never die; they just fade away.''

by Jim Wagner and Patricia Fusco [April 20, 2001]

Perhaps it's only fitting that fifty years later, the Federal Communications Commission unanimously voted to make reciprocal compensation go away, turning the lights down low to allow the different layers of complex intercarrier compensation rules to simply fade away.

By adopting a proposal to begin a fundamental examination of each form of intercarrier compensation—the payments among telecom carriers resulting from their interconnecting networks, the FCC believes it will "fix" the system.

Let's make a deal
Intercarrier arrangements between phone companies are currently governed by a complex system of regulations. In a nutshell, intercarrier compensation rules can be separated into two distinct categories:

1) reciprocal compensation rules that apply to local calls and
2) access charge rules that apply to long distance calls

ISPs are exempt from access charges, but calls placed to ISPs from computer modems play a big part of the reciprocal compensation fees phone companies pay to terminate these calls. For years, incumbent local exchange carriers (ILECs) have worked to strike down the system that made them pay competitive local exchange carriers (CLECs) for terminating local phone calls, especially for Internet bound traffic.

However, CLECs have long maintained that reciprocal compensation payments are necessary, and that any increase in operating costs as a result of lost revenue would have to be passed on to consumers, which would in turn translate into higher monthly fees if not metered access, for dialup users, too.

The basic structure of the interim, transitional recovery scheme for reciprocal compensation is as follows:

• For the first six months following the effective date of this Order, intercarrier compensation of ISP-bound traffic will be capped at a rate of $.0015/minute-of-use. For the 18 months thereafter, the rate will be capped at $.0010/mou. Thereafter, the rate will be capped at $.0007/mou.
• The rate caps for ISP-bound traffic apply only if an ILEC offers to exchange all local traffic at the same rate. A cap will be imposed on total ISP-bound minutes for which a CLEC may receive this compensation equal to the number of ISP-bound minutes for which that ILEC was previously entitled to compensation, plus a ten percent growth factor.
• To identify ISP-bound traffic, the Commission adopted a rebuttable presumption that traffic exchanged between carriers that exceeds a 3:1 ratio of terminating to originating traffic is ISP-bound traffic subject to the compensation mechanism set forth in this Order.

If we plug this into actual ISP calling data—like America Online's 29 million subscribers that average 70-minutes of access time each day, then AOL's traffic accounts for 2,030,000,000 minutes of use daily. So 2.03 billion multiplied by the capped $.0015/minute-of-use rate totals $3,045,000 a day in reciprocal compensation fees that would exchange hands during the first phase of the new rate plan.

The problem is that this once appealing CLEC-moneymaker model for reciprocal compensation only generates $1,421,000 a day, in a little over two years—and that's a lot of lost moola.

Revenue lost
W. Scott McCollough, a telecommunications and Internet lawyer, said that if the NPRM is approved as is, the revenues lost from reciprocal compensation and other telephony services would be extensive for CLECs.

"In some respects this is a double whammy for them," McCollough said. "Assuming we go to bill-and-keep and even assuming we do it for all the right reasons, you're still combining the loss of reciprocal compensation for ISP traffic with the loss of access revenues, and that's just huge."

CLECs gain extra revenue by charging long-distance companies for originating and terminating a long-distance phone call, which is also under review by the FCC.

McCollough said the loss of revenue from those two sources could mean that the cost to do business is passed onto the customer.

"Your basic residential customer who doesn't make a large amount of long-distance phone calls in a month is going to see a significant increase in their total phone costs, if the FCC goes through with the policy as it stands right now," McCollough warned.

But the government, forced to dictate the payments between the two parties, is also looking for a way to get out of policies that have created a snarl of regulatory arbitrage.

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