Reports of Recip Comp's Demise Are Greatly Exaggerated - 2

Growth of the Internet is good, and so is easy public access to it. DSL and cable modem deployment are growing, but for the next several years dial-up will be the dominant form of residential connection, and will grow in absolute terms. That means that the local exchange industry is going to have to deploy a lot of switch gear that isn't there today. All those PRIs, after all, have to connect to something. That switch gear will cost money, whether it is an ILEC expanding a Lucent 5E, one CLEC buying a new DMS-500, or another CLEC buying some other spiffy gear that gets the calls to the right ISPs.

What, exactly, is "bad" about a CLEC looking at the telecom market, seeing ISPs as a growing market segment, and focusing on meeting their business needs? Answer: nothing.

I think what's happening here is that Ms. Fusco has taken concerns about the compensation rate and twisted them into concerns about whether compensation should be paid at all.

Under federal rules, an ILEC has to pay the same amount for sending calls to CLECs that CLECs pay for sending calls to the ILEC. Thinking that they would be net receivers of calls, ILECs in 1996 and 1997 pulled out the stops to convince state regulators that it really cost them $0.005, $0.008 or more per minute to terminate calls. This was after the FCC had declared in August 1996—in a ruling that the ILECs scrambled to get legally stayed—that it thought local switching cost the ILECs in the neighborhood of $0.002 per minute. If this is right, then Bell Atlantic in Massachusetts is getting paid four times its "real" cost for the traffic it gets.

Now consider calls going the other way. Even if CLECs are inefficient, and have costs twice as high as Bell's real costs, that $0.008 rate in Massachusetts will be attractive. And CLECs will indeed get paid more than it costs them to terminate the calls they are being sent.

If this is a problem, is the solution to write off reciprocal compensation for ISP-bound calls? No. The solution is to take a good, hard look at the $0.008 rate and set a new, lower one, closer to the ILEC's real costs.

Let's suppose that an ILEC's real cost is $0.003/minute, but some scrappy little CLEC can get the job done for only $0.002/minute. This means that the CLEC is more efficient than the ILEC. In a competitive market—the kind of market that the 1996 Act was trying to create—this business will be drained from the ILEC and increasingly handled by the more efficient CLECs. The ILEC will stop doing what it does badly; the CLECs will do what they do well.

But because ISP-bound calls are paid for by the calling party, the only way this can work—the only way that efficient CLECs can get paid for what they do—is if they get paid by the ILEC, who collects the money from the customers making the calls. In other words, real competition for meeting the needs of ISPs can only exist if reciprocal compensation is in place.

So, what "killed" reciprocal compensation in Massachusetts? The DTE, by making mistakes in its ruling, at the urging of Bell Atlantic. I wish that state regulators (and the FCC, and judges, and legislatures, and lawyers) never made mistakes. But they all do. That's what happened here.

Back to page 1

Read Patricia Fusco's article