Interconnection in a Liberalized Network: California’s ISPs View Reciprocal Compensation Yale M. Braunstein School of Information Management & Systems University of California Berkeley, CA (U.S.A.) September 2001

Introduction  As new entrants enter a telecommunications market the problem of interconnection has two dimensions: technical and economic. This survey’s focus is on the latter.  ISPs can choose which local telephone company provides their service. The calls on these lines are almost all inbound.  Key acronyms:  ILEC: “incumbent local exchange carrier” (generally the 4 “Baby bells” or RBOCs)  CLEC: “competitive …”

The dimensions of interconnection-1  B.C. (before competition) it was common to see some or all of the following: Local tariffs were averaged across customers. In addition, the non-traffic-sensitive portion of the tariff was often kept artificially low. The tariffs for long distance (trunk) calls were sufficiently higher than costs so as to enable the costs of local service to be kept low. International rates were many times the cost of service.

The dimensions of interconnection -2  A.C. (after competition) it is common to see some or all of the following: “Rebalancing” of local tariffs, increasing the the non-traffic-sensitive portion of the tariff. The tariffs for long distance (trunk) calls decreased to near costs as this market became VERY competitive. The subsidy to local rates has disappeared. International rates are changing. (This is another lecture!)

The dimensions of interconnection -3  And, most importantly for today’s topic, new entrants have emerged to provide new services and services to particular market segments.  There is disagreement over the extent to which this entry is “economic” (justified by new technologies and markets) or “uneconomic” (the result of opportunities that are driven by regulation).

Additional concerns  Equal treatment and symmetry requirements  Whose costs?  Possible difference in technologies  Legacy customers  Preferences for corporate relatives

An illustration of the lack of symmetry Although these diagrams show connections to inter- exchange carriers, they could also be to network access points.

Calls to the Internet in the U.S.

Example of Press Coverage FCC Poised to Close Loophole on Internet Traffic Fees November 30, (Reuters) - Federal regulators will next month likely close a loophole that has allowed some companies to set up telephone centers to carry Internet traffic and reap millions of dollars in fees from regional telephone companies, industry sources said Tuesday. Under the present system, known as reciprocal compensation, established local phone companies like BellSouth Corp. and Verizon Communications have been paying fees to competing telephone carriers for connecting calls, but have not seen a dime in return. And with the rise in consumers connecting to the Internet from home, some competing carriers have been signing up Internet service providers (ISPs) to be the routing carrier of choice to cash in on receiving compensation from the incumbent carriers. But since the Internet does not return calls, the established phone companies end up paying about $2 billion in compensation this year to the rivals without seeing reciprocal fees.

The Survey  Purpose: The California ISP Association wanted to have its views heard as the battle was being fought on three fronts (CPUC, FCC, Congress).  They needed a public interest “hook” on which to base their arguments (rural service).  They wanted “unbiased outside experts” to “bless” the survey.  We agreed with the following conditions: –We were involved in design & administration –We would do all the analysis & interpretation –We had final editorial control  Report is at:

Dealing with the Client  They impose deadlines (and change them)  They have prior arrangements with survey companies, etc., for administration, not all of which were trouble-free  Possible battles over final edits  In this case there was a middleman, which was both good (focus, isolation from some issues) and bad (another layer of management)  Big positives: their professional experience, their past experience, they wrote the press release.

SURVEY OF CALIFORNIA ISPs PREDICTS THAT FCC PLAN WOULD LEAD TO HIGHER INTERNET RATES: U.C. Berkeley Professor Examines Reciprocal Compensation WASHINGTON, D.C., December 6, 2000 – A representative survey conducted by a U.C. Berkeley professor and released today shows that California consumers would have to pay significantly more to access the Web if state and federal regulators accept a proposal to change the way Internet calls are handled. The survey results come on the heels of a report yesterday by the Wall Street Journal that the Federal Communications Commission (FCC) is moving closer to adopting a proposal to eliminate reciprocal compensation – a reimbursement paid by local carriers for completing calls by each other’s customers.