FCC ORDERS REDUCTION IN RECIPROCAL COMPENSATION FOR ISP CALLS

Under new plan, payment scale for Internet traffic starts at 0.15 cents per min. for first 6 months; for next 18 months, it drops to 0.10 cents per min., then falls to .07 cents. To identify ISP-bound traffic, FCC adopted “rebuttable presumption” that traffic exchanged between carriers that exceeded 3-1 ratio of terminating to originating traffic was ISP-bound and subject to this new payment system. Traffic below that ratio is considered voice traffic subject to current reciprocal compensation agreements. Ratio of 3-1 appears to be victory for Bell companies because FCC originally was considering 12-1 cutoff, which would have required much more disparate ratio of traffic before lower rates kicked in. Ratio compares how much traffic goes from ILEC to CLEC and vice versa. Although industry expected FCC to set 3-year transition period for new rates, news release indicated that .07 cent rate would remain indefinitely.

Decision raised jurisdictional issues that landed FCC in court when it first tried to address problem of ISP-bound reciprocal compensation in 1999. FCC must assert jurisdiction over those calls in order to set limits on their payment. Otherwise they are considered local calls under jurisdiction of state regulators who oversee reciprocal compensation agreements among carriers. Latest FCC order concluded that telecom traffic delivered to ISP was “interstate access traffic” or, more specifically, “information access” and therefore under FCC jurisdiction. Agency made distinction between those type of calls and “telecommunications” traffic that it said was subject to reciprocal compensation. Thus, FCC didn’t refer to new ISP-bound payment scale as reciprocal compensation in news release issued Thurs.

Commission said “reciprocal compensation has inherent shortcomings” for recovering costs of delivering traffic to ISPs. It said it believed that conclusion met concerns of U.S. Appeals Court, D.C., which remanded agency’s 1999 reciprocal compensation order because it questioned FCC’s logic for asserting jurisdiction. Chmn. Powell said decision “rests on solid legal analysis” and he was confident it met questions raised by court. However, Furchtgott-Roth said he dissented because he didn’t think order would meet court’s concerns and instead would lead to “another round of litigation.” He said decision that ISP-bound traffic was “information access” was “tortured analysis.” NARUC Gen. Counsel Brad Ramsay also questioned jurisdictional analysis, saying FCC might create more uncertainty for state regulators and probably more litigation.

USTA heralded decision as “encouraging first step toward ending the single greatest opportunity for regulatory arbitrage in the telecommunications industry.” BellSouth Vp Robert Blau said order “is only a partial solution” to situation “that has allowed one group of companies to milk cash from BellSouth.” He said he hoped FCC would “move to a bill-and-keep regime as quickly as possible” in next round of debate -- on broader intercarrier compensation proposal -- that also was teed up Thurs. ALTS Gen. Counsel Jonathan Askin said that although his members had business plans based on old system, order at least offered regulatory certainty, which he said was paramount for ALTS carriers. ALTS Pres. John Windhausen said Assn. was concerned about one thing, however -- 10% growth ceiling FCC imposed on total ISP-bound minutes for which carrier could be compensated.

CompTel called decision “reasonable compromise” while Focal Communications said it “legitimizes reciprocal compensation” and offers certainty. On ILEC side, Verizon Senior Vp Ed Young said while company was disappointed that FCC didn’t “eliminate completely these unjustified subsidies,” it should be “commended for stepping up to the plate and making a decision on a tough issue.” SBC said it was pleased FCC “is taking steps to begin closing a loophole increasingly used by competitors solely to reap multimillion-dollar windfall subsidies.”

House Commerce Committee staffers were reviewing order, but initial reaction of Chmn. Tauzin (R-La.) generally was positive, spokesman Ken Johnson said. “The FCC order by and large appears to be a fair one,” he said, “but we want to complete our review before making final judgment.”

Commission’s latest action won’t stop Tauzin’s parallel inquiry into issue, Johnson said. Tauzin this week (CD April 19 p4) set May 1 deadline for CLECs to supply committee with specific information on “actual costs” related to intercarrier payments, follow-up to Feb. request for data. Tauzin expanded inquiry by bringing 4 additional CLECs into fray, demanding by May 1 service agreement documents between CLECs and ISPs to determine whether payments corresponded with real cost of “maintaining and servicing” those companies. “All we're saying is ’show us,'” Johnson said.

U.S. Internet Industry Assn. CEO David McClure said he breathed sigh of relief that Tauzin would continue seeking such details from CLECs, move he described as “major step forward” in resolving “endless stream of charges and counter-charges” hurled by competing industry interests. Technology industry has “fallen into trap” of providing manufactured numbers, often through phony grass-roots organizations, to regulators and general public, he charged. One side claims that changes in reciprocal compensation policy will lead to significantly higher Internet service charges, competing factions says existing policy is “gravy train” for CLECs. Meanwhile, both sides avoid providing specifics on actual costs, he said. “We're looking at a Congress that wants to see facts, not opinions,” McClure said. “Factual information allows Congress to make better policy, and better policy is better for industry,” he said.

FCC announced adoption of order at agenda meeting Thurs. morning but didn’t release details until issuing news release later in day. Order hadn’t been released at our deadline. However, at meeting, agency opened Notice of Proposed Rulemaking (NPRM) to consider related item -- whether one form of compensation could replace patchwork of regulations that now existed for intercarrier compensation. New regime, which probably wouldn’t take hold for several years, would apply to reciprocal compensation, access charges and other carrier-to-carrier payments. Item takes long-term look at fact that numerous carrier compensations schemes all use different methods for determining payment. FCC staff has been working on issue since last fall but Commission reportedly was holding it up until reciprocal compensation item was cleared.

Jane Jackson, chief of Common Carrier Bureau’s Competitive Pricing Div., said intercarrier compensation proposal didn’t take stand on how to replace current disparate payment schemes but did place great deal of focus on bill-and-keep as replacement. Under bill-and-keep “networks don’t charge each other but charge end users,” she said. Jackson said NPRM would ask for comment on wide range of issues such as: (1) Feasibility of bill-and-keep as overall scheme. (2) Alternative reform measures that build on current cost-based regimes. (3) How payments for wireless traffic fit into scheme. (4) Whether Total Element Long-Run Incremental Cost (TELRIC) formula still would fit into intercarrier compensation regime. (5) Impact on separations, end users prices, universal service. Goal of rulemaking is to search for compensation scheme that “minimizes regulatory intervention, particularly rate setting.”

Comr. Ness said NPRM was “long overdue” because complexity of current system was invitation for inequities. She said payments now varied depending upon whether carrier routed traffic to local, long distance, Internet, wireless or paging provider. “In an era of convergence of markets and technologies, this patchwork of regimes no longer makes sense,” Ness said. Powell called rulemaking “extraordinarily ambitious undertaking” and explained that agency hoped to act on rulemaking as part of “trilogy” that also included reciprocal compensation order and action on CLEC access charges. He said there were “a few loose ends to tie up” on CLEC access charge issue but he hoped it would be completed in “the next few days.” Access charge item is expected to address concern of long distance carriers paying CLEC access charges that often are much higher than regulated ILEC charges.

“This is the broadest thing I've ever worked on,” Jackson said in news conference after meeting. “We don’t know what the best end is” so agency is hoping for “serious” suggestions, she said.