House Telecom Subcommittee Holds Hearing on Reciprocal Compensation

(June 23, 2000) The House Telecom Subcommittee held a hearing on June 22 on HR 4445, a bill to end reciprocal compensation payments made for phone calls to connect to the Internet.

HR 4445 IH, the Reciprocal Compensation Adjustment Act of 2000, provides simply that local phone companies do not have to pay reciprocal compensation for calls made to ISPs, or to otherwise connect to the Internet.

HR 4445 is sponsored by Rep. Billy Tauzin (R-LA), the Chairman of the Telecommunications Subcommittee of the House Commerce Committee. The bill is also cosponsored by Rep. Tom Bliley (R-VA) and Rep. John Dingell (D-MI), the Chairman and Ranking Member of the House Commerce Committee, respectively. It is backed by incumbent local exchange carriers (ILECs), such as Bell Atlantic.

The bill states:

"... no local exchange carrier shall be required to make any payment for the transport or termination of telecommunications to the Internet or any provider of Internet access service."

It also provides that "Such transport or termination shall be considered interstate communications and subject to the exclusive jurisdiction of the Commission."

Section 251(b)(5) of the 1996 Act currently provides that local phone companies compensate each other for handling each other's local calls. One telephone company pays another telephone company for each local call the second company completes to one of its customers.

If one person whose local phone company is the ILEC makes a local phone call to another person whose local phone company is a competitive local exchange carrier (CLEC), the CLEC is entitled to compensation from the ILEC for completing the call. The same is the case if the call originates with the CLEC and completes with the ILEC. Hence, it is "reciprocal compensation."

Tom Tauke, EVP of Bell Atlantic, and a former Member of Congress, testified that that this provision is being abused by competitive local exchange carriers (CLECs) and Internet Service Providers (ISPs) for calls made to connect to the Internet. He argued that ILECs are paying increasing amounts of money to companies that provide little service, and that this may result in the imposition of per minute charges on Internet access.

The problem, according to Tauke, is that their is no reciprocity with calls made for the purpose of connecting to the Internet. ILEC customers who use dial up modems to access the Internet via ISPs whose phone company is not the ILEC place calls "to the Internet", but "the Internet is not going to call you back." So, the compensation flows one way.

Tauke stated that some CLECs are abusing the system by concentrating on serving ISPs, but not residential customers, and making the money off of reciprocal compensation payments.

The ILECs may have increased revenue from customers who purchase a second phone line for the purpose of Internet access. But Tauke argued that the reciprocal compensation charges can exceed the their second line revenues revenues.

Chad Kissinger, from On Ramp Access, testified that ILECs are benefiting from calls to ISPs, and disputed Tauke's figures.

Rep. Bliley, who is not usually as supportive of the ILECs as Rep. Tauzin and Rep. Dingell, stated, "But here we are . . . four years later . . . and the local phone companies now think some forms of inter-carrier compensation may not be such a good idea after all. But what's even more ironic is that I find myself in general agreement with them."

Much of the debate has focused on whether Internet bound calls are local, and hence subject to reciprocal compensation requirements, or long distance, and hence not covered by Section 251(b)(5).

Larry Strickling, from the FCC's Common Carrier Bureau, testified regarding the status of FCC and state regulatory proceedings pertaining to reciprocal compensation. He stated that "In February 1999, in response to requests from both incumbent and competitive LECs, the FCC issued a decision clarifying that ISP-bound calls are not local calls and therefore are not subject to reciprocal compensation under our rules implementing section 251(b)(5)."

However, he added, that this does not constrain state regulatory authorities. "Many states have required local exchange carriers to pay reciprocal compensation for these calls, and none of these decisions has been overturned in court. A few commissions have concluded, however, that no compensation is required. Other states have developed innovative compensation schemes that take into account the extent of traffic imbalance."

Moreover, said Strickland, on "March 24, the Court of Appeals for the D.C. Circuit vacated our decision on the regulatory treatment of dial-up Internet traffic and remanded the matter to the FCC. The Court agreed that the FCC may examine the end points of a call -- whether it originates in one state and terminates in another -- in order to determine the jurisdictional nature of the communication. The Court felt, however, that we had not adequately explained how that jurisdictional analysis is relevant to determining whether ISP-bound traffic is subject to the reciprocal compensation obligations of section 251(b)(5)."

Strickland concluded that "In response to the Court's remand, the Common Carrier Bureau has recommended to the Commission that it issue a notice inviting parties to comment on the court's decision. The notice will also request parties to provide information about any new intercarrier compensation arrangements that they may have entered into, either as a result of private negotiation or at the direction of a state commission. Once these comments are received, we will reexamine our conclusions regarding the jurisdictional nature of ISP-bound traffic and the scope of the reciprocal compensation provisions of section 251(b)(5)."

Strickland stated that "it would be premature now to suggest how the Commission might rule on this matter ..."

Rep. Tauzin and other members of the subcommittee chided the FCC for not moving more quickly on this matter.

Joan Smith, from the Oregon Public Utilities Commission, and the National Association of Regulatory Utility Commissioners (NARUC), argued that "reciprocal compensation is best addressed through the existing statutory and regulatory framework."

The subcommittee also heard from Eric Strumingher, of Paine Webber, who testified about "how the issues you are discussing today are going to affect financial markets." He stated that the "uncertainty is raising the cost of capital" and "hindering the growth of this industry."

He agreed with the ILECs' position that reciprocal compensation "rates are higher than costs." Moreover, he disputed that ending reciprocal compensation would stiffle competition, as some CLECs argue.

He concluded that "we need clear and enforceable rules" and that "the government should empower the FCC to make some decisions."