FCC action could ring in higher Net fees

The Federal Communications Commission finds itself under intense pressure from a federal court, Congress and Bell companies to change the way phone companies bill each other for transferring calls. Chairman William Kennard's top aide said Monday that the agency by the end of the year will approve a three-year phaseout of reciprocal compensation, whereby a company receiving a call gets paid for taking it.

How could this lead to higher Internet fees? The Association for Local Telephone Companies (ALTS), which represents phone companies competing with Baby Bells, says many of its clients handle calls for Internet service providers, which tend to receive a lot of calls but not make many. These telephone companies--known as CLECs--have come to rely on this income from calls sent from Bell customers to ISPs, and they say that if they're forced to give up this income, they'll raise the fees they charge ISPs, which then might raise monthly fees for consumers.

"The chairman recognizes that carriers cannot cut immediately to this system" of no payments, an FCC representative said Tuesday. "Therefore, one of Kennard's top criteria for this transition plan is that it must be fair."

Kennard's chief of staff, Kathryn Brown, emphasized that point at an ALTS conference Monday in Hilton Head, S.C., saying that the FCC plans to phase out the fee over three years to give CLECs time to adjust. Brown also said that the commission doesn't want to harm the growing CLEC market or lower the companies' standing on Wall Street.

The threat to Internet fees comes at a time when some free ISPs are closing up shop.

Competing pressures
Other than noting the three-year phaseout ending with no payments back and forth, no one at the FCC would offer further details of the plan, which is said to be circulating among the agency's five commissioners.

ALTS president John Windhausen, according to reports, did acknowledge that the FCC's plan sounds more palatable than a bill in Congress that would have eliminated the fee almost immediately. That plan, sponsored by Reps. Billy Tauzin, R-La., and John Dingell, D-Mich., was co-sponsored this year by a majority of the House of Representatives.

Tauzin and Dingell have compared the billions of dollars that CLECs receive in reciprocal compensation each year to theft, and Capitol Hill sources said that new legislation would be introduced early next year to trump the FCC's phaseout.

The congressmen are not alone in their assessment. Reciprocal compensation "has been a scam from day one," said analyst Scott Cleland of the Precursor Group. "It was a clever behind-the-scenes way" to have incumbents fund competition, he said.

The threat of higher Internet fees is a scare tactic, Cleland said. "Do you think those ISPs aren't going to go someplace else for phone service if they're facing a 30 percent rate hike?"

While eyeing the unease in Congress, the FCC also is operating under the mandate of the U.S. Court of Appeals for Washington, D.C., which ordered the agency in March to either justify reciprocal compensation or change it.

The FCC had sought to avoid having such fees go to ISPs by classifying a call to an Internet provider as a long-distance call, but the court didn't buy that.

Even when the FCC's five commissioners vote on the new rule--which is likely to be behind closed doors, as the last public meeting of the year is Thursday and sources said there wasn't time to get the item on the agenda--a lack of certainty will remain about exactly what responsibility phone companies will have to pay other carriers.

This is because the FCC plans to grant state governments the right to set their own compensation rules, Brown told the ALTS convention. However, that may not mean much to phone companies, because most states have been waiting for guidance from the FCC on this issue and are expected to adopt its findings.

Cleland said that the FCC's passage of new rules is "doable" before the end of the year but "no slam dunk," because in the absence of a formal agenda, any commissioner can hold up the item by not signing it.