Regulatory Watch :ILECs Turn to Congress in Reciprocal Comp Battle

If you're an owner of a CLEC or an ISP, you're probably not going to like this one: The U.S. House Commerce Committee is pushing a bill that would end your compensation for Internet calls that originate on a LEC's network. H.R. 4445 would dump those payments and revert the industry-including the wireless sector-to the bill-and-keep model.

The United States Telecom Association heavily backs the bill and argues that if it doesn't pass, consumers will end up paying per-minute charges to use the Internet. The Association for Local Telecom Services heavily opposes the bill and says consumers will pay more if the bill passes. But one fact is generally agreed upon: at least $2 billion in reciprocal compensation payments are at stake, and smaller ISPs that depend on those payments may be forced out of business.

So far, CLECs are winning

The fight over Internet reciprocal compensation is not new. In fact, ILECs have lost handily in the states over this issue, losing millions of dollars in judgments against them in the past year or so: · BellSouth was ordered to pay US LEC and ESpire $11.2 million and $14.2 million, respectively, for disputed reciprocal compensation payments. · U S West and PacBell were ordered to pay ICG Communications a total of $20 million. · ICG has won disputes in several other states, including Alabama and Ohio. Ameritech was ordered to pay the company $38.6 million in reciprocal compensation. · Electric Lightwave in Vancouver, Wash., won reciprocal comp in five states from U S West.

The FCC put bellows to the fire when Common Carrier Bureau Chief Larry Strickland, while participating on a Legg Mason panel in March, reportedly announced that his bureau was working on a sweeping plan to eliminate the telecom industry's system of intercarrier charges-including reciprocal compensation-and let the carriers pass those costs on to customers. Telcos would have to "go back to a situation where you have to recover your costs from your customer." A few days later, an FCC spokesman tempered Strickland's comments. "To be clear, this isn't a proposal pending before the commission right now," the spokesman said at the time. "It isn't a proposal that is pending or imminent."

Calling on Capitol Hill

Not having much luck in the courts or the state and federal level, the USTA and other telcos apparently decided Congress was the place to win the battle over reciprocal comp. H.R. 4445 was introduced in May.

The bill went through a Sept. 19 markup in the Subcommittee on Telecommunications, Trade and Consumer Protection. The wording still stands, and gained some strengthening amendments that included wireless calls. The core of it frees LECs from any obligation to pay reciprocal compensation to any other LEC for carrying or terminating their telecom or Internet traffic.

Reciprocal compensation "has had a perverse effect … that none of us could have foreseen in 1994 and 1995" during the debates before the passage of the Telecom Act of 1996, Tom Tauke, Bell Atlantic's external affairs vice president, told the subcommittee in June.

The Internet age

The problem, as the USTA sees it, is that the Internet age has made reciprocal compensation impractical, a money drain for which the carriers can't collect. Though the carrier that terminates Internet calls can charge the originating carrier, the originating carrier can't collect from the other carrier because Internet calls aren't reciprocal. They just hit the CLEC or the ISP portal and slip into the ether.

Jonathon Askin, general counsel with the Association for Local Telecommunications Services (ALTS), disagreed with the ILECs' contention that ISP calls aren't reciprocal (see "Intercarrier Billing Faces Uncertain Future," Billing World, May 2000). "The truth is, a call that terminates at an ISP is not really qualitatively different than any other call terminating within a local calling area," he says. "Why shouldn't a CLEC be entitled to compensation for terminating that call the same way it is compensated for terminating any other call?"

Overpaying, or just paying?

Focal Communication's Dick Metzger, vice president of regulatory affairs and public policy for ALTS, says CLECs and ISPs deserve to collect reciprocal compensation. "Obviously, it's a big issue for us. The ILECs contend that their payments overcompensate the CLECs and exceed the costs of providing the service. The reason reciprocal compensation rates are high is because the ILECs set them that high in their initial interconnection agreements, which are now expiring."

Metzger and other CLEC representatives say that when reciprocal compensation rates were set in 1996-1997, the ILECs thought they'd be getting the lion's share of the termination. So they set the rates higher to make more money. But the Internet has changed all that. "As the old initial agreements expire," Metzger says, "they litigate lower costs. At this point it's about 0.2 cents a minute." ALTS would like to see reciprocal compensation rates set in line with the true costs of maintaining the network. "We're trying to get above the fray," he says. "Let's get it right by having cost-based rates for reciprocal comp. In 1996, when the FCC looked at reciprocal comp, they estimated it between 0.2 and 0.4 cents."

Tear up the business plans

The Internet also caught traditional ILEC business plans off balance. Internet traffic-increasingly sophisticated as e-commerce functions such as online banking, video streaming and other IP transactions mature-ties up trunk lines and burdens traditional telephone networks. Business models that worked five or six years ago for the publicly switched telephone network have had to be thrown out the window. Now that consumers spend hours on the phone surfing the Web instead of just minutes for traditional phone calls, ILECs are faced with a fundamental imbalance-one that is growing rapidly.

"Where once we were using five minutes per call to do financial analysis, we now see two- or three-hour calls becoming commonplace," says Kit Mays, partner of telecommunications consulting firm Telecon LLC. "Busy hours used to be lunchtime; now the busy times are 11 at night. It's turned everything upside-down."

Some companies are taking advantage of reciprocal compensation arrangements by creating ISPs simply to collect money from the LECs, says USTA spokesman David Bolger. "Some CLECs are shrouding themselves as an ISP. One company used an open line in a horse barn that connected people to the Internet. It collected charges from BellSouth in North Carolina 24 hours a day, then billed them every month for reciprocal comp," he says.

Who's the victim here?

Whether ILECs or CLECs or ISPs position themselves as victims is moot. What drives a lot of this, of course, is politics. Both sides claim the customer will suffer with higher Internet rates whether the bill passes or not. The ILECs threaten to charge customers a per-minute charge to recover reciprocal compensation, and the CLECs threaten to raise rates on ISPs, who will then have to collect from consumers. "What's unfortunate is raising the line rates to the ISPs, and they would have to raise rates to end users," Metzger says. "If in fact we can't recover our terminating costs from the ILEC, we have to look somewhere. The ISP is really the only candidate." And small ISPs could get hurt, Metzger says: "Unfortunately, it could put some people out of business."

Bill faces long odds

Industry consensus is that H.R. 4445 won't pass, because ILECs haven't had much luck getting legislators to vote for anything that will raise Internet rates. The political climate seemingly won't allow it: witness the four-year moratorium on Internet taxes. Congress was set to wrap up its work in the days after this article was written; but if the bill hasn't passed by the time you read this, it could always come up again later.

"Fortunately, I think this congress will die without this passing," Metzger says. "I don't think there's time. But I'm taking nothing for granted."