Reciprocal compensation gets a soft landing

(Telephony) Many competitive carriers breathed a sigh of relief yesterday, when the FCC ordered that reciprocal-compensation payments--a critical revenue source for many CLECs--will continue for three years as part of a plan to phase out the controversial payment method.

Established as part of the Telecom Act of 1996, reciprocal compensation is the method by which carriers reimburse each other for terminating local calls. While this generally is a break-even proposition for voice calls, incumbent carriers have complained that it is a one-way money stream--from ILECs to data-focused CLECs--when calls are made to Internet service providers, which make few outgoing calls but terminate numerous lengthy Web-surfing sessions daily.

These objections have been manifested by ILECs lobbying for the payments to be stopped and, in some cases, incumbent carriers refusing to pay reciprocal compensation. Both actions have created revenue uncertainties that have hampered CLECs in the financial markets. With the FCC order, CLECs can proceed with their business plans with a degree of price certainty, said Bob Taylor, CEO of Focal Communications, a CLEC that historically has counted reciprocal compensation for about a third of its revenue.

“This is nothing but good news for us,” Taylor said. “This has been the best news for Focal since the Telecom Act itself.”

Although ILECs were proponents of reciprocal compensation when the Telecom Act was passed, they have claimed it amounts to ILECs subsidizing CLECs that cater to ISPs. With this in mind, the FCC order says ISP-bound traffic should not be subject to reciprocal compensation because it involves “information access.”

The possibility of reciprocal compensation eventually ending is important to ILECs, which pay as much as $2 billion annually via the intercarrier payments.

“We’re pleased with the action taken by the FCC today,” said Steve Davis, Qwest Communications’ senior vice president for policy and law, in a statement. “This is the beginning of the end of a costly loophole that benefited a few companies at the expense of millions of consumers.”

However, to provide a transition to eliminating reciprocal compensation, the FCC said it would cap reciprocal-compensation payment rates when traffic exceeds a 3:1 ratio at staggered levels for the next 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,” said FCC Chairman Michael Powell in a prepared statement.

The FCC order was issued as a response to an appeals court ruling last year that the Commission clarify its 1999 ruling, in which ISP traffic was deemed exempt from reciprocal compensation because it was interstate in nature, not local. But Commissioner Harold Furchtgott-Roth said in his dissenting opinion that the FCC ruling will not resolve the legal issues, calling the Commission’s logic “convoluted” and in conflict with other recent FCC actions.

“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. In the meantime, the uncertainty that has clouded the issue of compensation for ISP-bound traffic for the last five years will continue.”