FCC Completes Long-Awaited Review of Intercarrier Compensation

Posted 06/01/2001

FCC Completes Long-Awaited Review of Intercarrier Compensation

By Jon E. Canis

In mid-April, the FCC (www.fcc.gov) adopted three major orders that will revolutionize the way all carriers--ILECs, CLECs, IXCs, wireless carriers, and even ISPs--deal with each other. At the time of this writing, the actual texts of the orders had not been released, but the FCC made clear what actions it had taken, and the direction in which it wants to take the industry.

First, the FCC prescribed dramatic reductions in reciprocal compensation--the amounts ILECs and CLECs pay each other for transporting and terminating the other's traffic over their networks. In cases where traffic between ILECs and CLECs is out of balance by more than 3-to-1, the FCC's order will reduce the average reciprocal compensation rate by about 50 percent or more this year, and phase it down another 50 percent over the next three years.

The theory: major traffic imbalances are caused by large amounts of dial-up modem calls to ISPs. Since the FCC has claimed exclusive jurisdiction over such traffic, the FCC can effectively impose rates for reciprocal compensation for all local traffic.

Second, the FCC will, for the first time, prescribe the access rates that CLECs charge IXCs for originating and terminating traffic. The FCC will cut the average CLEC's access charges in half, and will require further reductions of as much as 80 percent over three years.

Finally, the FCC will initiate a proceeding to conduct a plenary review of all forms of payment between all carriers. The goal is to establish a uniform compensation structure that will eliminate regulatory arbitrage, and force all carriers to compete on a single basis: who can provide the best service to end user customers at the best price. The FCC has made clear that it prefers a "bill and keep" model, in which carriers trade traffic without payment.

All three of these efforts present radical new regulatory concepts, and create new laws. Appeals are inevitable, and we'll have to wait and see if they bring certainty, or simply generate more litigation and a series of judicial reversals that leaves a regulatory void.

I have considerable respect for what the FCC is trying to do. Currently, different pricing rules apply depending on whether traffic is local, long distance, interstate, or intrastate, or bound for ISPs, IXCs, CLECs/ILECs, cellular/PCS carriers, or paging carriers. Vastly different rates apply to such traffic, even though it is carried over the same local networks of ILECs and CLECs.

While eradicating these nonsensical differences is a laudable goal, implementing true reform will require some hard choices. In this regard, the FCC has a terrible track record. The two major "access reform" initiatives it has implemented over the last four years have protected ILEC access revenues by creating huge subsidy "slush funds," while offering no similar protection to CLECs. It will take real courage for the FCC to implement true reform that truly treats all local competitors equally.

Jon E. Canis writes a monthly column on regulatory issues. He is an attorney at law with Kelley Drye & Warren LLP, and can be reached at canis@kelleydrye.com.