ICC INTERPRETATIONS

FACT SHEET
December 1998

No Consumer Per-Minute Charges to Access ISPs
The following fact sheet provides information in response to erroneous reports that the FCC is planning to impose per-minute usage charges on consumer access to Internet Service Providers (ISPs). The bottom line is that the FCC has no intention of assessing per-minute charges on Internet traffic or of making any changes in the way consumers obtain and pay for access to the Internet.

1. What is the source of this misunderstanding?

The FCC has a proceeding underway concerning carrier-to-carrier payments, so-called "reciprocal compensation." These payments compensate a local telephone company for completing a local call that is placed by one of its competitor's customers.

For example, if a customer of Phone Company A makes a local call to a customer of Phone Company B, Phone Company A must compensate Phone Company B for handling the last leg of the call. This payment structure may have been negotiated by the two phone companies, or may have been based on a decision of the state regulatory authority. The reciprocal compensation payment by Company A to Company B may be based on a per-minute charge for the length of the call, or some other negotiated basis.

Reciprocal compensation is thus paid between telephone companies for use of the local phone network. Reciprocal compensation is not paid by consumers or by Internet service providers. Accordingly, reciprocal compensation does not determine consumer Internet charges. Typically, the companies involved are an incumbent local telephone company (ILEC) currently serving a large number of subscribers, and a competing local telephone company (CLEC) that has only recently entered the market and has fewer subscribers.

2. So why is this suddenly an issue?

There is a dispute in the telephone industry over whether local calls to ISPs are subject to reciprocal compensation, and that is the matter the FCC is considering. In the example above, if the consumer dials up the Internet over the phone lines of Phone Company A, and the ISP is served by Company B, the question is whether Company A must compensate Company B for completing the local portion of the call. That is the only issue before the Commission in this matter. Thus, the manner in which consumers pay for Internet access is not before the Commission and the Commission has repeatedly stated that it is not preparing to change the manner in which consumers obtain and pay for Internet access. Rumor to the contrary persists, however, and the FCC has received hundreds of thousands of e-mails on the subject over the last two years.

Where reciprocal compensation has been established between two local phone companies, and the traffic between the two companies (incoming and outgoing calls) balances out, only a small amount of reciprocal compensation ends up being paid for whatever difference in traffic exists. However, if one of the two companies serves an ISP, the traffic may be very unbalanced, because the consumer always calls the ISP to initiate an Internet session, and the ISP rarely calls anyone. The incoming traffic to the company serving the ISP will be heavier that the outgoing traffic. In addition, calls to ISPs tend to be much longer than other types of calls. These differences in traffic flow can affect the amount of compensation one company pays another particularly if reciprocal compensation is paid on a per minute basis.

3. Are phone companies paying reciprocal compensation for Internet traffic now?

All 23 state regulatory commissions that have considered the issue have found that the phone company that originates a local call to an ISP must pay reciprocal compensation to the competing phone company for terminating that call, but many companies are withholding payment while pursuing appeals.

4. If reciprocal compensation does have to be paid in the case of Internet traffic, won't the phone companies that have to pay that compensation be forced to impose a surcharge on their Internet customers or on ISPs (who will pass is through to consumers)?

No. While the rates consumers pay for local telephone service are regulated by the states, and not the FCC, most states require phone companies to charge a flat rate for unlimited local usage. A local telephone company could not alter these local rates to include an internet surcharge without approval from the state commission. Even today, however, local telephone companies are obtaining increased revenue from internet traffic, because many consumers are installing second lines dedicated to Internet traffic. Consumers pay for these lines just as they would pay for any second phone line.

Similarly, the local phone company cannot impose any charges on the ISP, even if it is forced to pay reciprocal compensation for traffic delivered by a CLEC to that ISP, because the ILEC has no direct billing relationship with the ISP.

5. Why shouldn't Internet traffic be subject to reciprocal compensation?

Some parties argue that Internet traffic is not local, because it often begins in one state and ends in another state, and therefore should not be subject to reciprocal compensation. These parties say that Internet traffic is more like long distance traffic, where the local phone company does not terminate the call locally, but rather hands the call off to a long distance company that carries the call over its interstate network to a distant location. Long distance companies pay access charges to the local phone company. If two local phone companies are involved in carrying the call to the long distance provider, the two local companies share the access charges paid by the long distance company and no reciprocal compensation is due.

6. If the FCC decides that calls to ISPs should be treated as interstate long distance calls won't ISPs have to pay access charges to local companies?

No. The FCC has a special exemption for ISPs, and has dictated that ISPs be treated as local phone customers. Thus, rather than paying higher access charges, ISPs simply purchase phone lines from the local phone company as any local business would do.

7. Why is the FCC considering this issue if 23 states have already decided it?

In general, the FCC has jurisdiction over calls between states, while each state has jurisdiction for calls within its borders. Parties who believe Internet calls are interstate argue that the states had no jurisdiction to consider the issue. A decision by the FCC to treat these calls as interstate would determine whether the FCC, versus a state regulatory body, should have the ultimate authority to decide how compensation for this traffic should be established. The decision might or might not have an impact on the compensation that one telephone company pays to the other. As noted, the FCC already has said that ISP traffic should be exempt from interstate access charges. Regardless of the outcome, the decision will only affect compensation arrangements between local carriers, and will have no direct effect on the consumer who uses ISP services.

For additional information please visit the FCC Web Site at:
http://www.fcc.gov/Bureaus/Common_Carrier/Factsheets