Effect of FCC Ruling Unclear for States.

• Position: Brief Article

The Federal Communications Commission (FCC) voted 3-1 this spring to reduce the payments large telephone companies must pay smaller rival companies to connect customers to the Internet.

Under the reciprocal compensation rule, established in the Telecommunications Act of 1996, telecommunications companies must pay each other every time they connect a call from one system to another. For example, when customers of A (an Internet service provider) want to connect to the Internet, their calls are carried from their home telephones via B (a Bell telephone company) to C's system (a "competitive local exchange carrier"), where they are then routed to A's servers. B must pay C for every minute those calls are connected.

Because Internet connections typically last longer than voice calls, the compensation quickly adds up and, by some estimates, has reached as much as $2 billion a year. Companies like B argued that the rule is unfair since companies like C rarely send calls to B, thus undermining the intent of "reciprocal" compensation.

In some cases, Internet service providers like A have changed into competitive local exchange carriers like C to receive the financial rewards of...