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The new Federal Communications Commission has made its first major policy change. It won’t change things much. Last week, the commission, now headed by Republican President Bush appointee Michael Powell, threw a bone to the Baby Bells. The FCC said it would chop fees on an arcane practice known as reciprocal compensation, or reimbursement for phone traffic exchanged between carriers. Without reciprocal compensation, the smaller competitive local exchange carriers (CLECs) that move their traffic onto the Baby Bells’ networks, will lose a huge chunk of revenue. It likely won’t make much of a difference. Reciprocal compensation was supposed to be little more than theoretical accounting. Since the amount of traffic swapped between carriers was expected to roughly equal out, no one was expected to exchange a significant amount of cash. The CLECs, however, quickly realized that they could dump Internet traffic onto the networks of the large local phone companies. Since the bigger companies didn’t have enough local traffic to balance the amount of Web surfing, the Baby Bells ended up paying the CLECs. Under the FCC’s revision, reciprocal compensation for calls to ISPs will be cut to 15 cents a minute and later to 7 cents. The Baby Bells — Verizon, Bell South, SBC and Qwest — have long complained that at best reciprocal compensation amounted to a subsidy. At its worst, CLECs were abusing the practice to pad revenues. Reciprocal compensation has prompted shady business practices, say those who have been involved. “I’ve had a couple of CLECs ask me to keep what’s left of my network up and running,” said Chris Jenkins, who was president of a now-defunct teleco called ZipLink. “Since I was already out of business, there was no other reason except so that they could keep dumping traffic and collecting reciprocal comp.” Companies like ICG Communications, which filed for bankruptcy protection, last year depended on millions of dollars in reciprocal compensation to cover losses it made in other businesses, according to a source inside the company. The company only ran into trouble in September 1999, when the California Public Utilities Commission ruled that phone companies could not charge reciprocal compensation rates for one piece of the phone call, a practice known as tandem switching. The result: ICG had to write off $45.2 million in accounts receivable during the quarter, pressuring it to seek bankruptcy protection. The abuses are rampant. Verizon claims it pays as much as $2 billion a year. “There are decent CLECs trying to do a good job,” said Verizon CEO Ivan Seidenberg. “Others have no sense of right or wrong. This is an industry problem, not just Bell versus CLEC.” The CLECs, however, are unfazed by the change. Most just want the money owed to them and are happy that the compensation wasn’t killed entirely. Those that became dependent on “recip comp,” as it is known in the industry, are dead or dying. “The whole industry will be a lot healthier once this gets done,” said Dick Metzger, chief legal counsel for Focal Communications, a Chicago-based CLEC. Although the issue seems more or less solved, Washington politicians aren’t above beating a dead horse. The Bells had tried to get legislation passed 11 months ago that would’ve outlawed reciprocal compensation altogether, and no one has ruled out reviving that bill. “We would have preferred to see the payments phased out earlier,” said Ken Johnson, a spokesman for Rep. Billy Tauzin, R-La., a staunch supporter of the Baby Bells and chairman of the influential House Energy and Commerce Committee. “While [the new order] looks good, we are not ruling out intervening legislatively; we want to take a closer look.” Congress and the new FCC are clearly not as favorably disposed toward telecom startups as the last regime. While more meddling will undoubtedly come, it’s unclear that it will make any difference. Related Articles from The Industry Standard: SBC Reports Lower Profits, Warns on 2001 Dawn of the Big Bells Calling on Washington Copyright � 2001 The Industry Standard

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