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). It also discusses the FCC's February 25, 1999 decision relating to dial-up traffic bound for ISPs. The bottom line is that the FCC has no intention of assessing per-minute charges on Internet traffic or changing the way consumers obtain and pay for access to the Internet.

1. What is the source of this misunderstanding?

The FCC has been considering issues relating to certain 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. On February 25, 1999, the FCC adopted a Declaratory Ruling regarding these carrier-to-carrier payments and initiated a new proceeding to consider the matter in light of conclusions reached in the Declaratory Ruling. The following is an example of how the carrier-to-carrier payments at issue work:

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, called reciprocal compensation, may have been negotiated by the two phone companies, or may be 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 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 delivering the call to the ISP. That is the only issue before the Commission with regard to this matter. Thus, the manner in which consumers pay for Internet access is not before the Commission and the Commission repeatedly has stated that it will not change the manner in which consumers obtain and pay for Internet access. Rumors to the contrary persist, however, and the FCC has received hundreds of thousands of e-mails on the subject over the last two years.

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

All 26 state regulatory commissions that have considered the issue have found that the phone company that originates a call to an ISP must pay reciprocal compensation to the competing phone company for delivering that traffic to an ISP, but many companies are withholding payment while pursuing appeals.

Many incumbent local telephone companies 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. Unlike long distance carriers, ISPs do not pay access charges to local telephone companies.

4. What did the FCC conclude in its February 25, 1999 decision?

The Declaratory Ruling concludes that carriers are bound by their existing interconnection agreements, as interpreted by state commissions, and thus are subject to reciprocal compensation obligations to the extent provided by such agreements or as determined by state commissions. The Declaratory Ruling finds that Internet traffic is jurisdictionally mixed and appears to be largely interstate in nature. But, the Declaratory Ruling preserves the rule that exempts the Internet and other information services from interstate access charges. This means that those consumers may continue to access the Internet by dialing a seven-digit number and will not incur long distance charges when they do so. In a notice of proposed rulemaking, the Commission also asked for comment on proposals governing future carrier-to-carrier compensation for handling this traffic.

5. If reciprocal compensation does have to be paid in the case of Internet traffic (either through state or FCC decisions), 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. Moreover, 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.

6. Will the FCC's decision that calls bound for ISPs are interstate require ISPs have to pay access charges to local companies?

No. The FCC has a special exemption for ISPs, under which ISPs are treated as local phone customers and are exempt from interstate access charges paid by carriers. Thus, rather than paying higher access charges, ISPs simply purchase phone lines from the local phone company as any local business would do. Nothing in the FCC's February 25, 1999 decision affects this exemption.

7. Why is it necessary to consider this issue if 26 states have already decided it?

As discussed in the Declaratory Ruling, the FCC has jurisdiction over calls between states, while each state has jurisdiction for calls within its borders. Thus, the FCC has a statutory obligation regarding this traffic. In addition, a uniform national policy regarding inter-carrier compensation for the delivery of ISP traffic will aid the development of Internet, which is not confined by state, or even national, boundaries.