TCS Daily

Jim Glassman talks with Richard Metzger

By James K. Glassman - September 18, 2000 12:00 AM

Is your Internet service bill due for an increase? TCS host Jim Glassman spoke recently to Richard Metzger, Vice President of Regulatory Affairs and Public Policy for Focal Communications, about a growing controversy in the local telephone market. Focal is a Competitive Local Exchange Carrier (CLEC) - so it competes with the Bell companies in the local telephone business. The law says that when Focal completes a call from a Bell customer, the Bell company must pay a fee to Focal. Similarly, if the Bell companies complete a call made by a Focal customer, then Focal must pay the Bells. It's called reciprocal compensation. But Metzger and other CLEC's say that the Bells are trying to change the rules, and the CLEC's claim the end result will be higher prices for Internet service.

Jim Glassman: Dick Metzger, what exactly is "reciprocal compensation"? And why would it mean higher higher rates for consumers?

Richard Metzger: Multiple carriers are needed to provide the service but only one carrier collects revenues for performing the service. The other carrier has to have some mechanism for gaining its fair share of that revenue. And if in fact there were no way for it to be compensated for its share of the cost, it would not really have a proper economic incentive to participate in the service. And that would mean degrading the overall quality of service.

Glassman: Now, weren't the local Bell monopolies the original supporters of this whole concept of reciprocal compensation?

Metzger: Well, sure. When the [Telecommunications Act] was adopted back in `96 and being implemented by the FCC, the Bells spoke out strongly in favor of reciprocal compensation. Back then, they got a lot more calls from the wire line world than they sent to, from the wireless world than they sent to the wireless world. And consequently, they wanted to make money out of receiving the balance of wireless calls. And they thought the same pattern would be reproduced in the incumbent-to-competitive world and wanted to make money out of those calls as well.

Glassman: So the idea behind reciprocal comp as far as the Bells originally sought was that if somebody is making a call from a wireless phone, which service they might not be providing and it goes to a land line phone, then they want to get paid for their role on land.

Metzger: That's right.

Glassman: And because there's lots more of that traffic they saw than going from land to wireless -- but it has not worked out that way exactly.

Metzger: Well, we had no choice except to change the assumption. We weren't going to make money, say, by going out and getting pay phones where pay phones originate a lot of calls but don't receive a lot of calls. Given that the incumbent set the recip comp rates quite high, almost a penny a minute. So we had to go out with customers where the traffic tended to go the other way, the obvious example being the high-speed.

Glassman: Internet service providers.

Metzger: Exactly. And we proved to be fairly successful in doing that.

Glassman: So, you have gotten, so you provide service to Internet service providers, so if there's somebody who calls in from their home computer to an ISP to get on to the Internet, that call might originate at home from the Bell operating system, but it goes to you, and so you should be getting reciprocal compensation, correct?

Metzger: Exactly right.

Glassman: Okay, now, we're in a situation where you are currently owed reciprocal comp from telecom companies?

Metzger: That's right.

Glassman: Your company is?

Metzger: Yes.

Glassman: How much are you owed?

Metzger: Well, actually, if you're talking about back payment, we're fairly good among the CLEC's. We have litigated the issue with many of our incumbents and in fact, I don't think there is any significant back payments that we are owed. I think we are current.

Glassman: Are other companies owed back payments?

Metzger: Yes. Companies dealing with BellSouth and some of the SBC companies that had serious problems, to my understanding.

Glassman: Do you know how much they are owed or which companies they are?

Metzger: The good folks at Intermedia have big problems with BellSouth and I am sure they'd be happy to tell you. I believe it's many millions of dollars.

Glassman: Should consumers be concerned about what is going on with reciprocal comp?

Metzger: Well, absolutely. I mean, basically when an ordinary Bell subscriber calls the Internet from his or her home, they are using the phone line at the phone rate they pay monthly, and those rates are based on monopoly rate bases. They include the cost of making the phone calls and since those prices were set in monopoly days, the prices are predicated on both the cost of originating and terminating the phone call. The user of the Internet from their home has already paid all the costs involved. So if in fact the Bells were relieved of any obligation to pay recip comp to the competitive providers that have now taken on the terminating end... the poor consumer would be left holding the bag.

Glassman: Congress right now is considering ending reciprocal compensation, is that correct?

Metzger: That's absolutely correct.

Glassman: And would that end recip comp simply in the case of calls to ISPs or in the case of these other calls, which will go from different wireless phones to a land Bell phone?

Metzger: Well, that's a fluid situation. On Wednesday, when [Congressman] Dingell was talking about the bill of which he is a co-sponsor, he was talking about just ending the $2 billion a year that the Bells claimed they pay on calls to Internet service providers. But my understanding is, that when the telecom subcommittee takes it up again... the committee Chairman, may in fact, run the bill to ban recip comp, not just for calls to ISPs but for all local calls.

Glassman: Now, do you have a sense of how much money is involved comparatively between these two different kinds of calls?

Metzger: Basically, we CLEC's generally do not yet generate an awful lot of traffic from ourselves to the Bells...So that's a relatively small amount, probably in the order of less than the $2 billion we received for terminating calls--

Glassman: So, this bill would not be a terrific deal for you?

Metzger: No, it's not.

Glassman: Okay. So, why is it that Congress is considering ending reciprocal compensation, which at the very least it would seem to me, is fair. At any rate, that's the reason it was adopted in the first place. And second, it appears anyway that it would keep down the cost of getting on to the Internet.

Metzger: Well, unfortunately, this is one of those technical issues where Congressional offices simply aren't very familiar with what is happening. And the Bells certainly have so many more lobbyists than their competitors do and they simplify the issue. They point out instances where the rate is set too high, ignoring the fact, of course, that they were the ones who set those rates that high.

Glassman: Okay. So would you be willing to reduce the rate, or are you negotiating to reduce the comp rates?

Metzger: Absolutely. And in fact, every new agreement we've negotiated so far has provided for much lower rates. We've been willing to do that all along and yet the Bells keep - once they realized they didn't want higher rates, they want lower rates, zero has been their consistent response. So, there are very few instances in which CLEC's have been able to negotiate. Now, a couple of companies have struck deals; ICG just recently announced a deal with SBC in several states... But most of the competitive industry still has not been able to work out an arrangement with the incumbent.

Glassman: Now, why is it that you have been able to collect what you are owed from these incumbent local exchange carriers and other companies apparently have not?

Metzger: Well, we love to pretend that we're smarter than other people. I think actually we're just fortunate enough to deal in jurisdictions that have strong independent state regulatory agencies, places like Illinois, New York, California.

Glassman: Okay. Now, I read recently that your CEO, Robert Taylor, predicts that Internet rates could go up as much as 18 percent, 35 percent even, if this bill on reciprocal comp, HR 4455 becomes law. How did he come up with that figure?

Metzger: Sure, let me give you the math. It's pretty simple. The proponents of the bill state that it's going to stop payments of $2 billion this year. Well, we know there are 45 million households, that's a decent estimate of the number of American households that dial access to the Internet. And out of those 45 million, we believe and I'm pretty confident that about 31 million gets service over competitive facilities. So, if you divided 31 million into $2 billion and 12 months in a year, you get about $5.36 a month.

Glassman: So this is going to mean higher rates for getting onto the Internet for consumers?

Metzger: We think it is unavoidable.

Glassman: So, that is the worst consequence as far as consumers are concerned, if this bill passes?

Metzger: That's right.

Glassman: And what would it mean to you if the bill passed?

Metzger: We at the CLEC's, we obviously can change business strategies. We can, for example, increase the line rates we charge to ISPs. We would not welcome that; that's one of the reasons we are working to oppose the bill. But we do have business options.

Glassman: Of course, if you did that, you would make yourself open to competition from, for example, the ILECs [incumbent local phone companies].

Metzger: Well, exactly. Sadly, a lot of ISPs may not be able to pay those rates and they would go back to the incumbent role. Of course, we all saw several years ago what happened when AOL went to flat rate and how poorly the incumbents were able to handle the new increased line demand and to think of 31 million or even a chunk of those 31 million households being shifted back to the incumbent. Man, I would think that it would be real meltdown.

Glassman: And just one question, one last question on that. The CLEC's really seemed to get in on the ISP business very early on that the incumbents just seemed to ignore. Is that correct?

Metzger: Well, yes, and that is one of the puzzling things about those - the incumbents are much older, much better financed. And none of this is rocket science. We're talking about basic local service and some co-location for the ISPs. I have to believe that the incumbents are capable of doing that, they simply have declined to do it. And the ISPs have really come to us very vigorously.

Glassman: Just one question from the side of the ILEC's. I imagine that one of the arguments that they are making is, look, people are on-line for a long time during the day. I know I am. And when I dial up my ISP, I may be on for hours and hours and it's simply one connection. It's not costing you that much more, you CLEC's and meanwhile, the cash register is cranking out the pennies. Is that a valid argument?

Metzger: It's an absolute valid argument unless the rate actually reflects the cost per minute of use... We've never asked for anything more than the cost of per minute. So, it should not depend on how long you're on. Those are real costs that we need to recover.

Glassman: Well, thank you so much, Dick Metzger.

Metzger: Hey, I appreciate it.

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