Reciprocal Compensation

Things were a lot simpler back in the old days of telephony,less than 20 years ago, when the US had one telephone company -- Ma Bell. Backthen, the party that placed a phone call paid for it, plain and simple. Withthe one and only phone company in place on both ends of the line, all the moneywent into one pocket anyway. And, when the main use of the phone was voicecommunication, the probability of placing vs. receiving phone calls was prettymuch evenly distributed across all the customers.

Two big things have changed since then: The Phone Companywas broken up into lots of smaller, competing phone companies; and data,particularly via the Internet, is rapidly overtaking voice as telephony’sprincipal application. In this new world, the old originator-pays billingsystem breaks down. If, say, phone company A’s subscribers place calls to thecustomers of phone company B, company A would get all the revenue while Bcovers half of the costs.

Enter Reciprocal Compensation (RC), a key provision ofcommercial telephone deregulation. Under RC, revenue is distributed among acall’s originator -- through an Incumbent Local Exchange Carrier, or ILEC --and local exchange handler at the other end -- via a Competitive Local ExchangeCarrier, or CLEC, which may or may not be a different company. Thus, RC offersa settlement mechanism for telephone traffic transferred between two localnetworks and provides the commercial basis for competitive local telephoneservice. The resulting competition, in turn, should lower everyone’s localphone service costs, right?

The competition fostered by RC has, indeed, lowered theaverage cost paid by a customer for a locally placed voice phone call toanother subscriber. These days, however, the ultimate termination of a hugenumber of telephone calls is an ISP, which receives telephone calls, butdoesn't place them. Because CLECs can offer ISPs cheap, RC-subsidized rates,ISPs are generally choosing CLECs over ILECs as local providers. CLECs,therefore, enjoy an economic edge over ILECs when competing for servicecontracts with ISPs, which leave ILECs wondering why CLECs should be entitledto RC for calls to ISPs at all. In fact, some ILECs have unilaterally stoppedmaking RC payments to CLECs, hoping to force a settlement of the matter incourt.

Why should you care about the Byzantine inner workings ofphone companies, and about its consequent blizzard of acronyms? Because, as wespeak, the Federal Communications Commission and the US House ofRepresentatives is considering legislation that could drastically change, orperhaps abolish, Reciprocal Compensation. If you’re a telephone company,particularly a CLEC, these changes can pack a wallop for your business plan. Ifyou’re a customer, whether you’re an ISP or an Internet user, this couldultimately mean more money out of your pocket. No matter how this thorny issueis resolved, one or both sides of the debate could use the resolution as anexcuse to raise rates. Isn’t deregulation great?

It isn'ttoo late to get involved. To learn more about RC, visit You'll find a summary of the debate with some linksfor e-mailing legislators to express your point of view. --Al Cini is a senior consultant with Computer Methods Corp. (Marlton,N.J.) specializing in systems and network integration. Contact him at

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