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FCC to Revise Reciprocal Compensation Rules

Commissioners of the Federal Communications Commission voted unanimously Thursday to "fix" reciprocal compensation rules dating back to the landmark Telecommunications Act of 1996 but the agency's actions open the door to potentially higher monthly fees for Internet users.

Telephone companies for years have been seeking to strike down the requirements that make them pay competitive local exchange carriers (CLECs) for terminating phone calls, mainly for ISP-bound traffic. CLECs have long maintained that reciprocal compensation is necessary, and threatened that an increase would translate into higher monthly fees for Internet users. And the issue is made more convoluted by the fact that it was the telephone companies, and not the CLECs, which demanded the rules be instated in the first place.

FCC Chairman Michael Powell said it's long past the time when the government should be in the reciprocal compensation enforcement business.

"This is an extraordinarily ambitious undertaking, but one I think we can find near universal agreement that the journey is worth taking," Powell said. "We understand more acutely that in a competitive environment in which new, technical innovative services are being provided, that the regulatory regime itself risks distorting the efficient development of that market."

Under the proposed rules, the regional Bell operating companies would no longer be obligated to pay reciprocal compensation for ISP-bound traffic. Once CLECs found out that signing up ISPs could result in big revenues (Verizon officials say they paid out $1 billion last year in fees), the regional Bell operating companies cried foul, accusing them of exploiting the system to make money.

Instead, the FCC would put in its place a bill-and-keep policy. Bill-and-keep was originally proposed by CLECs and scorned by the local telephone companies when the FCC was looking for ways to enforce the 1996 Telecommunications Act. It's essentially a hand-shake business agreement that the cost of terminating phone calls placed by either company offsets the other, thereby incurring no charge.

But CLEC executives have said that eliminating reciprocal compensation would force them to pass the charge for terminating phone calls onto the ISP, forcing the ISP to increase monthly membership fees for Internet service.

As it stands now, FCC regulators are not happy they are being asked to sit in and dictate the pricing for every intercarrier agreement made.

Harold Furchtgott-Roth, FCC commissioner, said the government's role is to deregulate, not add to the current crop of regulations.

"Deregulation is not about the government setting prices, its not about the government setting up mechanisms for specific types of intercarrier compensation arrangements, its not about mandating bill and keep, its not about mandating any sort of price," Furchtgott-Roth said. "It's about getting the government out of the way in transactions between private parties."

According to Jane Jackson, chief of the common carrier's bureau competitive pricing bureau, said the Notice of Proposed Rule Making (NPRM) should be adopted to reduce the government's role in enforcing intercarrier agreements and create one unified compensation rule for all agreements, be it interstate or local.

"This NPRM begins the search for an intercarrier compensation regime that will encourage efficient use of and investment in telecommunications networks and sufficient growth of competition, while at the same time minimizing the need for ongoing regulatory intervention in the form of rate setting," Jackson said.

There remain questions, Jackson said, that should be addressed, such as the extent of the FCC's involvement between carriers and the actual prices set for compensation.

W. Scott McCollough, a telecommunications and Internet lawyer, said that if the NPRM went through as is, the revenues lost from reciprocal compensation and other telephony services would be a huge loss.

"In some respects this is a double whammy for them," McCollough said. "Assuming we go to bill-and-keep and assuming we do it for all the right reasons, you're combining the loss of reciprocal compensation for ISP traffic with the loss of access revenues, and that's just huge."

CLECs gain extra revenue by charging long-distance companies for originating and terminating a long-distance phone call, which is also under review by the FCC.

McCollough said the loss of revenue from those two sources could mean that the cost to do business is passed onto the customer.

"Your basic residential customer who doesn't make a large amount of long-distance phone calls in a month is going to see a significant increase in their total phone costs, if the FCC goes through with the policy as it stands right now," McCollough warned.

The government, forced to dictate the payments between the two parties, is also looking for ways to get out of policies that have created a snarl of regulatory arbitrage.

No date has been set yet on formalizing the proposal as FCC policy.