CARRIERS BATTLE OVER FUTURE OF RECIPROCAL COMPENSATION

FCC Chief of Staff Kathryn Brown announced last month that agency was considering plan to phase out reciprocal compensation and replace it with bill-&-keep, system in which carriers don’t pay each other. Although she didn’t elaborate on plan, agency at that time was looking at 3-year phase-out that would cap payments based on ratio of traffic each carrier handled, possibly starting with 12-1 ratio in first year. That meant reciprocal compensation wouldn’t be paid on calls above that ratio.

Bells circulated ex parte letter Wed. that warned of need for swifter reduction in payments. Companies said dial-up ISP traffic was growing so fast that market would continue to be skewed unless FCC went further to limit number of calls that qualified for reciprocal compensation. Bell companies told FCC in ex parte letter, originally sent Dec. 22, that dial-up Internet traffic was growing at annual rate of almost 50% despite deployment of broadband services such as DSL and cable modems. (Only dial-up traffic is eligible for reciprocal compensation.) Group said current ratio of outbound to inbound traffic was 18-1, resulting in payments of $2.4 billion to CLECs. Lowering ratio to 12-1 wouldn’t make much difference because of growth rate, group said: “Imposing a cap of 12:1 beginning this January… would leave reciprocal compensation payments in 2001 much where they were in 2000 -- at roughly $2.4 billion.”

Bells’ letter recommended more drastic phase-out by setting cap at 5-1 this year, lowering it to 2-1 in 2002 and going to complete bill-&-keep system in 2003. Even with those lower caps, CLECs would continue to receive $1.2 billion this year, letter said.

At joint news briefing Wed., ALTS and CompTel questioned accuracy of Bell growth figures, saying they conflicted with studies showing dial-up Internet traffic was expected to peak next year and then drop as users moved to broadband services. Focal Vp Richard Metzger said he would make ex parte filing at FCC today (Jan. 4) on behalf of ALTS that would question those Bell growth figures.

CLECs bolstered their case with study by U. of Cal., Berkeley, that found 86% of ISPs in Cal. would have to raise rates they charge customers by average of 20% if reciprocal compensation were eliminated. Their comments were based on assumption that CLECs would pass their higher costs on to ISPs. Study also reported that 45% of ISPs said they might discontinue service to rural areas because of higher costs to provide service there.

Two CLEC organizations said one of their biggest concerns was FCC’s proposal to move to bill-&-keep because they thought carriers should get some compensation for costs of carrying calls. “It’s not necessary to move to bill-&-keep because the marketplace is solving the problem,” CompTel Pres. Russell Frisby said. ALTS Pres. John Windhausen said best approach would be cost-based system. Current reciprocal compensation rates are “probably too high, higher than cost,” he said, but “solution isn’t to cut the rate to zero.” Asked whether they also would fight this battle on Hill, Frisby and Windhausen said they would urge Congress to let FCC handle issue and would oppose any ILEC-sponsored legislation to institute bill-&-keep. “We hope to convince lawmakers they don’t have to weigh in,” said Windhausen.

CLECs warned that bill-&-keep would distort market, just as reciprocal compensation does. While reciprocal compensation encouraged CLECs to offer inbound services, bill-&-keep would encourage outbound services such as telemarketing centers and payphones, they said. That’s problem with “one-sided approach” such as bill-&-keep, Windhausen said. “You simply substitute a different type of incentive” to distort, he said. “It creates just as much of a problem.”

USTA Interim Pres. Gary Lytle said that was like saying CLECs “will just figure out a new way to stiff us.” He said Bells were becoming “frustrated” because “we've been talking about this problem forever” and CLECs keep “throwing in all sorts of ringers.”