The telecommunications act of 1996 and the Internet: reciprocal compensation or irreconcilable compensation?

• Author: Wecker, Ross

Introduction

In 1996 the United States Government passed 47 U.S.C. [section] 251, better known as the Telecommunications Act of 1996. (1) The purpose of this act was to help break up the Bell Telephone monopoly and create a more competitive telecommunications marketplace. (2) This purpose was primarily accomplished by [section] 251(a)(1), which essentially mandated that all telecommunications carriers interconnect with the networks of other telecommunications carriers. (3) Although this act achieved the goal of a more competitive communications industry, several large problems arose with the explosion of the Internet in the late nineties. (4) These problems are rooted in the compensation method mandated by 47 U.S.C. [section] 251 to deal with the constitutional takings issues raised by mandatory interconnection. (5) A veritable horde of litigation has ensued as a result of this compensation mechanism and although steps have been taken to correct this problem the area of law dealing with compensation and internet communications is far from settled. (6)

The compensation method at the core of the litigation resulting from 47 U.S.C. [section] 251 is called reciprocal compensation and in light of the state of technology in the early nineties it was theoretically a good idea. (7) However, like many ideas that are sound in theory, external realities, namely changes in technology, have shown flaws in reciprocal compensation. (8) It is the position of this note that reciprocal compensation is inherently flawed with respect to at least one key technological advancement, internet communications, and should therefore be removed as the unilateral compensation method in 47 U.S.C. [section] 251. (9) The support for this position will come from examining the history and reasoning behind reciprocal compensation, as well as some of the cases and FCC orders arising out of its implementation. (10) Specifically, the Legislative purpose and language of 47 U.S.C. [section] 251, as well as practical implementation problems, will show that reciprocal compensation is the wrong compensation system for a technologically advanced world. (11)

History

When the Bell patent on the telephone expired in 1897 the problem of interconnection grew in its place. (12) Interconnection became a problem because of the need for a competitive telecommunications industry. (13) This necessity eventually gave rise to governmental regulation to assure that a competitive telecommunications industry was achieved. (14) However, as with most governmental regulation, this created problems, specifically, constitutional problems. (15) These problems came from early common carrier law and the takings clause 2006 The Telecommunications Act of 1996 and the Internet 293 of the constitution. (16) Specifically, the early common law rules stated that common carriers do not have to interconnect. (17) Since telecommunications companies are viewed as common carriers constitutional issues arise in the form of the takings clause because with no common law right to interconnection the government is mandating the use of private property when mandating interconnection. (18) Thus, mandatory interconnection creates a situation where the government is taking the property of one telephone company for the use of another. (19)

The constitutional issues raised above came to a head when the government passed the Telecommunications Act of 1996. (20) The goal of that act was to break up the regional monopolies on telecommunications that had been created when Bell Telephone was broken up into regional companies known as Incumbent Local Exchange Carriers ("ILECs"). (21) The Telecommunications Act of 1996 accomplished its goal of creating a more competitive telecommunications industry by mandating that these ILECs interconnect with smaller companies that were at a disadvantage because they had not established a large physical network. (22) Thus, because of the mandatory interconnection agreements the Competing Local Exchange Carriers ("CLECs") could compete with the ILECs because now they were all on a larger interconnected network. (23) The only problem with this mandatory interconnection is that it violates the takings clause of the constitution in that the Government was now taking the private networks of the ILECs and requiring that the CLECs be allowed access to those networks. (24) This governmental action has been viewed as both a regulatory and physical taking because it imposes economic damage and dispossesses the ILECs of their property. (25) The only way that the government could get around this unconstitutional taking is to come up with some sort of compensations system. (26)

The solution to the takings problems raised by the Telecommunications Act of 1996 was addressed in [section] 251(b)(5) of that Act. (27) This section deals with what are referred to as reciprocal compensation agreements. (28) This section simply states that when ILECs and CLECs interconnect they must enter into an agreement by which they will compensate each other. (29) These agreements will be approved by State Telecommunications Commissions and, if a contract dispute arises, the State Commissions will interpret the agreements. (30)

It is common knowledge that when a phone call is made only the customer that placed the call is charged. (31) Thus, if a Verizon customer calls an MCI customer only Verizon makes any money even though MCI incurred some cost because its customer and corresponding network had to be used to complete the call. (32) The way the compensation agreements under [section] 251(b)(5) were designed to work was that they recognized the costs incurred by one provider in terminating a call which that provider could not charge to its customer. (33) Under reciprocal compensation these termination costs would be paid by the provider that originated the call after that provider had billed its customer. (34) Thus, in our previous example Verizon would actually pay MCI the cost that MCI had incurred in completing the call after the Verizon customer had been billed. (35) In theory these payments would eventually even out as customers called each other back and forth, thus alternating which network was the originating provider. (36) The agreements set a flat per minute rate that the originating provider would pay for using the terminating providers network and thus, these reciprocal compensation agreements seemed like the perfect solution to the takings problems. (37)

The reciprocal compensation agreements seemed to be the perfect solution to the interconnection problem until the Internet exploded on to the scene in the late 1990's. (38) With the explosion of the Internet, many of these new CLECs started soliciting Internet Service Providers (ISP) as their customers. (39) The problem that arose is that ISPs did not fit into the reciprocal compensation model. (40) The model now consisted of the customers of ILECs calling the ISP customers of the CLECs. (41) This created a problem because the ISPs/CLECs did not call anybody back. (42) Thus the ILECs were left with extremely long, one sided calls to the CLECs and huge reciprocal compensation bills while the CLECs had virtually no reciprocal compensation bill because their ISP customers were not calling anybody. (43) The ILECs naturally did not think this was fair and started challenging the reciprocal compensation agreements on the basis that calls to an ISP are not similar to local telephone calls and thus should not be governed by reciprocal compensation which only applies to local telecommunications traffic. (44)

When the above problems started to play out, the FCC was called upon to decide whether calls to an ISP are local for the purposes of reciprocal compensation or fall outside reciprocal compensation because they are interstate. (45) Originally a two-call analysis was used to categorize calls to an ISP. (46) Under this analysis the call from the ILEC to the ISP/CLEC was viewed as one local call and then the call from the ISP to points unknown over the internet was viewed as a second interstate call. (47) Under this analysis it was clear that calls to ISPs were local and thus were subject to reciprocal compensation. (48) However, in 1999 the FCC issued the Internet Traffic Order which changed the analysis from the two call analysis to an end to end analysis. (49) Under this new analysis the call to the ISP was not viewed as terminating at the ISP, but rather merely being rerouted over the internet as one continuous phone call. (50) Under the "end to end analysis" it was decided that calls to ISPs were inherently interstate in nature and thus were not subject to reciprocal compensation at all. (51)

The FCC's Internet Traffic Order would have seemingly ended the controversy, but shortly after inception it was challenged in the case of Bell Atlantic Telephone Companies v. F.C.C. (52). In Bell Atlantic a United States Court of Appeals vacated and remanded the Internet Traffic Order holding that the FCC had not adequately explained why the two call analysis no longer applied, nor why the end to end analysis was more appropriate. (53) On remand the FCC again found that calls to ISPs are inherently interstate. (54) This time the FCC did not apply the end to end analysis, but rather determined that the Telecommunications Act of 1996 and reciprocal compensation did not apply to calls to an ISP whether in state or out of state because ISP traffic was "information access" traffic under 47 U.S.C. [section] 251(g) and thus exempt from reciprocal compensation. (55) This order was again remanded by the United States Court of Appeals for the District of Columbia Circuit because of deficiencies in the FCC's reasoning; however, this time the order was not vacated. (56) This means that while FCC proceedings are still ongoing, the FCC order declaring that reciprocal compensation does not apply to calls to an ISP is still in effect. (57)

While this...