FCC Decisions Challenge Local Competitors' Business Plans

More than five years after enactment of the Telecommunications Act of 1996,

the FCC has dramatically changed carrier-to-carrier payment mechanisms that had

spurred Competitive Local Exchange Carriers (CLECS) to enter local telephone

markets previously served almost exclusively by Incumbent Local Exchange

Carriers (ILECs). ILECs and long-distance carriers hail the FCC's decisions as

removing distortions in the competitive marketplace that unfairly favored the

new competitors, while CLECs see the changes as betrayals of the FCC's

commitment to foster competition that eliminate the underpinnings for crucial

business decisions and investments by competitors. In contentious proceedings,

the FCC (1) preempted state decisions that CLECs receive reciprocal compensation

for terminating calls to information service providers (ISPs) and (2)

established benchmarks for reasonable tariffed CLEC access charges for local

handling of interstate long-distance calls from interexchange carriers' (IXCs')

customers. In spite of the FCC's efforts to buffer the blow by gradually

transitioning in the changes, the decisions jeopardize millions of dollars in

revenues for CLECs.

The 1996 Act requires carriers to pay each other "reciprocal

compensation" when one of them hands off a call for the other to transport

and terminate. Previously, ILECs had charged competing carriers regardless of

whether the ILEC was delivering traffic to the competitor for transport and

termination or receiving traffic that the ILEC would terminate. The states

generally ruled that the reciprocal compensation requirement applies to the call

that connects a local customer with an Internet provider in its local calling

area.

Since calls from customers to their Internet providers were almost all in one

direction, the Bell companies found that they had to make huge payments to CLECs

when they delivered their customers Internet access calls to the CLEC - charges

that amounted to hundreds of millions of dollars each year. In contrast, the

CLECs had no comparable "reciprocal" payments to make to the ILEC

because Internet providers did not call the ILECs' customers back. Some CLECs

were even set up solely to collect this one-way flow of money for carrying

traffic between the BOCs and Internet providers. The controversy intensified

when a federal court held that the FCC had not adequately explained its decision

that a customer's call to its dial-up Internet service provider is not a local

call, but...

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