FCC Phases Out Controversial Telecom Fees

By Rory J. O'Connor, Interactive Week
April 19, 2001 4:24 PM ET

In its rules, adopted on a 3-1 vote, the FCC again determined that telephone traffic delivered to Internet Service Providers doesn't fall under the reciprocal compensation provisions of the 1996 Telecommunications Act. But rather than eliminating the fees immediately, the FCC chose to phase them out over three years.

"The Order provides a fair interim transition that balances the conflicting interests of incumbent local exchange carriers, new entrants, and other interested parties, while sharply reducing the potential for regulatory arbitrage and the incentive for uneconomic entry," FCC chairman Michael Powell said in a statement.

The FCC had ruled once before, in 1999, that ISP traffic wasn't subject to the fees. But before it could create a new regulation, a federal court threw out some of the FCC's rule and the Commission had to start anew. But the commissioner who voted against the new rules called the decision a sidestep around the court by an agency bent on "nationwide price regulation."

"The result of the Commission's order will be another round of litigation, and, in all likelihood, this issue will be back at the agency in another couple of years," Commissioner Harold Furchtgott-Roth said in his dissent. "In the meantime, the uncertainty that has clouded the issue of compensation for ISP-bound traffic for the last five years will continue."

The Commission also at the meeting voted to begin a formal inquiry into creating an entirely new structure for the broader issues of inter-carrier compensation. That includes a wide variety of payments made by local wireline carriers, long-distance firms, wireless providers and ISPs to one another for interconnecting voice and data traffic.

Basically, the FCC is proposing scrapping the existing system of payments in favor of a scheme known as "bill-and-keep." Under that system, a telecommunications carrier would recover the costs of interconnection from its own customers, rather than from other carriers. The proposal is open for public comment, which is expected to be extensive, and a final resolution could take several years, officials said.

Both moves are an effort to streamline a byzantine system launched by the Telecommunications Act of 1996. Under current rules, different types of carriers and different types of services fall under different compensation umbrellas that are unrelated to the actual costs of interconnection. That has created a series of "access charges" long-distance carriers pay to local companies and reciprocal compensation for local calls. But exemptions exist in some cases, and even the definition of local and long-distance calls can be debated.

While the reciprocal compensation system was instigated by the regional Bells to ensure they would be paid for completing the calls of rivals, it has wound up in many cases working in reverse. That reversal, however, has been one key to creating several competitive local carriers whose business handles huge volumes of modem calls to ISPs from their users.

The reciprocal compensation system imposes a per-minute charge on a phone company that originates a call, payable to the competing company that completes it. Some CLECs who serve ISPs complete huge numbers of calls, but originate almost none, leading to what critics call a windfall for them, and what FCC commissioner Susan Ness called "regulatory arbitrage."

Currently, the average reciprocal compensation payment is about .3 cents per minute, said Bob Blau, vice president for executive and government affairs at BellSouth. The Bell companies maintain they overpay over $2 billion per year to CLECs in reciprocal compensation. Blau said that, even without a new FCC rule, contracts would have forced that average down to between .2 and .25 cents within the next year.

Under the FCC plan, the fees will drop immediately to .15 cents per minute, with additional cuts in six months to .10 cents, and in two years to .07 cents. The federal rules will apply to ISP-bound traffic only, which the FCC determined to be anything in excess of a 3-1 ratio of incoming calls to outgoing calls between carriers.

An incumbent local phone company would have to agree to offer competitors the same rates for completing any inbound calls. The FCC would also impose a cap on the number of ISP-bound minutes for which a CLEC can collect the fees.

The rates would not apply to some contracts between Bell companies and CLECs that contain definite rates. Many such contracts have been signed in the past months in anticipation of a rate change.

One association of CLECs said the FCC move had been expected and planned for by its members.

"By and large our members have been anticipating this for years now," said Jonathan Askin, general counsel for the Association for Local Telecommunications Services. He said the new rule might cause Congress, especially House Energy and Commerce chairman Billy Tauzin, R-La., to back off threats to legislate the issue. Tauzin sent a letter Wednesday to several CLECs demanding to know how much they have collected in reciprocal compensation.

Blau called the vote "an important first step out of the thicket that has allowed one group of companies to milk cash out of BellSouth and other companies."

Powell called the broader inquiry "a journey worth taking" despite its complexity, because the current "regulatory regime itself risks distorting" the digital marketplace.