The feeling's mutual

CLECs, ILECs blame each other for reciprocal compensation problems

Many competitive local exchange carriers will have to close their doors or drastically alter their business models if a bill to abolish reciprocal compensation payments on Internet traffic becomes law - a scenario most industry observers doubt will happen this year but consider very possible in 2001.

Under the Telecom Act of 1996, every local call that travels between two carriers requires the carrier originating the call to pay the carrier at the call's destination point to terminate the call. Designed to help carriers offset the costs of directing traffic over the network, reciprocal compensation currently is a skewed source of revenue generation because incumbent LECs (ILECs) typically pay considerably more to CLECs, according to proponents of the HR-4445 bill.

Indeed, reciprocal compensation is a misnomer, said Rep. Rick Boucher, D-Va., a co-sponsor of the bill. "The compensation has no reciprocal quality to it whatsoever," he said. "No traffic ever originates from the CLECs.... One large ILEC told me that they send $20 in reciprocal compensation for every $1 that comes back."

Industry observers attribute the imbalance of reciprocal compensation revenues to the fact that CLECs' customer bases typically feature a greater percentage of ISPs, which constantly receive calls but rarely make calls.

Proponents of the bill argue that reciprocal compensation was created to help competitors offset costs for directing voice traffic. Instead, CLECs are not providing consumers with choices in the voice arena but instead are using reciprocal compensation as an ILEC-paid subsidy to drive their data-centric business models.

"It's a total slam," Boucher said.

Such characterizations are overstated attempts by critics to project the misgivings of "a couple of bad apples" onto the entire industry, said Bob Taylor, president and CEO of Focal Communications.

"When they say there's many of them, I only know of one, maybe two, that fall into that category. Why don't we just fix those problems?" said Taylor. "Let's not throw the baby out with the bath water."

If HR-4445 passes, Taylor said consumers will lose because ISPs will be charged more for service by their CLEC providers and subsequently will have to raise Internet access rates - by as much as 35%, according to some reports.

That's not going to happen, Boucher said. "If the CLECs try to raise their rates, the ISPs will go directly to the ILECs," he said.

The FCC has ruled that Internet traffic is inherently interstate - and not subject to reciprocal compensation - because calls do not terminate at the ISP. Instead, the FCC ruled that calls terminate at Web sites' servers, which are located worldwide.

However, the FCC's position - which did not expressly address the reciprocal compensation issue - was overturned by a federal court, which ruled that the commission did not explain its stance clearly, said Mitchell Brecher, a former FCC attorney and a shareholder in the law firm of Greenberg Traurig.

This ruling has led to the push for HR-4445, which primarily would benefit ILECs. "It's special-interest legislation," Taylor said. "It is the Bells trying to game the system and rewrite the rules they helped create."

Indeed, when the Telecom Act of 1996 was being written, the sentiments of ILECs and CLECs on reciprocal compensation were flip-flopped, Brecher said.

At that time, both groups believed CLEC traffic was going to be voice-intensive. The ILECs believed they would always have more customers than the competitive carriers, so they pushed for the current compensation method, Brecher said.

But that method backfired as CLECs scrambled to get ISP customers, Brecher said. "If you're an Ameritech customer using the Internet with an ISP served by a CLEC for three hours, that whole time the meter's running," he said.

Despite the powerful lobby behind HR-4445, most observers believe the lack of time left in the session, the impending November elections and complications regarding reciprocal compensation for Internet telephony will to keep it from passing at this time.

"It's probable that it isn't going to pass because there isn't time," Brecher said. "But... incumbent LECs want this, and that's not going to change. I suspect we'll see it again in the session next year."