Effect of FCC Ruling Unclear for States.

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 reciprocal compensation.

The FCC commissioners adopted rules to clarify proper intercarrier compensation for telecommunications traffic delivered to Internet service providers. Their order reduced compensation payment amounts from 0.2 cents per minute to .0015 cents per minute initially and down to .0007 cents per minute in two years.

California and several other state public utility commissions had been considering reciprocal compensation issues, and it is unclear to many experts if this FCC ruling alters state utility authority. However, FCC Commissioner Harold Furchtgott Roth, in dissent, noted "the commission shows little respect for states, their lawmakers, their regulators, federal law or the Congress that enacted the 1996 act."

The commission stated it believed this ruling met concerns of the U.S. Appeals Court, Washington, D.C. The court had put on hold the agency's previous 1999 order.