Federal Internet Law & Policy
An Educational Project

Intercarrier Compensation

Dont be a FOOL; The Law is Not DIY

See also Universal Service page

When a customer places a telephone call, and the call goes onto an ILEC (Incumbent Local Exchange Carrier), then onto a CLEC (Competitive Local Exchange Carrier), and then is terminated at an ISP (Internet Service Provider), the ILEC owes the CLEC reciprocal compensation for the termination of the call. Thus, reciprocal compensation is basically a settlement mechanism for telephone traffic transferred between two local networks.  This arrangement is pursuant to the FCC Interconnection Order. The money follows the calls.  But most ISP calls are from users and terminated to ISPs.  This potentially means a lot of money flowing from ILECs to CLECs who have ISPs as customers. The ISPs are considered "end users" pursuant to FCC rules. Therefore the call is a local call. ILECs are claiming, however, that the call to an ISP is a long distance transmission, is not terminated, and therefore reciprocal compensation does not apply. Many ILECs are refusing to pay CLECs the reciprocal compensation. Of course, given that many CLECs are (were) start-ups with thin profit margins, this imposes (imposed) a significant economic harm on the CLECs servicing ISPs.

Historical Background

Derived From: Intercarrier Compensation: One Component of Telecommunications Reform, CRS Report to Congress (April 28, 2005)

"In a "network industry" such as telecommunications, customers benefit the more people (or companies or websites or databases) they can reach over the network to which they subscribe. Thus, if there is more than one network, consumer benefit is maximized when those networks are interconnected. For most of the 20th century, telephone service was provided by government sanctioned monopoly. When public policy changed and competitive provision of service was permitted, the incumbent providers were required to allow the new entrants to interconnect with their networks in a nondiscriminatory fashion to complete calls made to the incumbents' customers. Otherwise, the incumbents could have used their dominant position to refuse to interconnect with the smaller networks of the new entrants, or to impose onerous interconnection terms and conditions on the entrants, and the latter would have been impeded in their ability to attract and serve customers.

"Today, most electronic communications require the use of more than one carrier's network to be completed. For example:

"While sometimes the calling party and called party have the same local or wireless carrier, or sometimes the calling party purchases its local and long distance service from the same carrier, in most cases completion of a call requires the use of more than one carrier's network.

"The calling party only pays the local, long distance, or wireless carrier to which it subscribes; it makes no payments to the called party's carrier. And today only in the case of wireless service does the called party pay anything to its carrier for calls received. As a result, a system is needed to compensate the other carriers whose networks are used to complete the call.

"Prior to MCI's successful legal challenge to the old Bell system's government sanctioned telephone monopoly21 and the consent decree settlement of the federal government's antitrust suit that resulted in the divestiture of AT&T into separate and independent local and long distance companies,22 there was very limited need for intercarrier compensation since there were very few carriers - only monopoly Bell local operating companies, monopoly independent telephone companies, and AT&T (the monopoly Bell long distance company that served both Bell and non-Bell customers). Local service rates were kept low, to foster the goal of universal service, by setting long distance rates far above cost. Sometimes, when an independent telephone company bordered a Bell company service area, "extended area (local) service" ("EAS") was offered in which a local calling area extended beyond the boundary of the independent telephone company into the Bell service area. EAS service was intended to lower rates to subscribers by allowing calls that otherwise would have been high priced long distance calls to be treated as local calls. When the Bell operating companies terminated EAS calls originating on the independent telephone companies' networks, and vice versa, the companies did not charge one another for such termination, even if the traffic between the two carriers was not in balance. Rather, intercarrier compensation followed a system known as "bill-and-keep," in which no payments were made from one carrier to the other, as if traffic were in balance. With respect to compensation from the long distance division of AT&T to the independent telephone companies for originating and terminating long distance calls, these charges were set based on a complex system of cost "separations" and "settlements" that resulted in the AT&T long distance carrier paying intercarrier compensation rates that far exceeded cost in order to subsidize local service. In the internal accounts of the Bell System, too, payments were made from the long distance division to the various local Bell operating companies that resulted in the AT&T long distance carrier paying origination and termination rates that far exceeded cost.

"As competitive provision of telecommunications services has been allowed in a piecemeal fashion over the past 30 years, state and federal regulators have regulated the newly necessary intercarrier compensation rates also on a piecemeal basis, allowing or requiring very high or very low rates in order to foster specific public policy objectives rather than requiring intercarrier compensation rates to be set consistently for all calls. As shown in Figure 1, the resulting rates for performing the same termination functions (transport and switching) vary significantly simply because a particular call is interstate vs. intrastate, or because a service provider has been treated as an end user rather than a carrier, or because a call terminates on a wireless network rather than a wireline network. For example:

"These, and other, inconsistencies in intercarrier compensation requirements are incompatible with competitive telecommunications markets.

Regulatory Activity


Developing an Unified Intercarrier Compensation Regime


CONNECT AMERICA FUND; A NATIONAL BROADBAND PLAN FOR OUR FUTURE; ESTABLISHING JUST AND REASONABLE RATES FOR LOCAL EXCHANGE CARRIERS; HIGH-COST UNIVERSAL SERVICE SUPPORT; DEVELOPING AN UNIFIED INTERCARRIER COMPENSATION REGIME; FEDERAL-STATE JOINT BOARD. Today the Commission comprehensively reforms and modernizes the universal service and intercarrier compensation systems to ensure that robust, affordable voice and broadband service, both fixed and mobile, are available to Americans throughout the nation. (Dkt No. 10-90 01-92 10-208 96-45 05-337 07-135 03-109 09-51 ). Action by: the Commission. Comments Due: 01/18/2012. Reply Comments Due: 02/17/2012. Adopted: 10/27/2011 by R&O. (FCC No. 11-161). WCB WTB   FCC-11-161A1.doc  FCC-11-161A2.doc  FCC-11-161A3.doc  FCC-11-161A4.doc  FCC-11-161A5.doc  FCC-11-161A1.pdf  FCC-11-161A2.pdf  FCC-11-161A3.pdf  FCC-11-161A4.pdf  FCC-11-161A5.pdf  FCC-11-161A1.txt  FCC-11-161A2.txt  FCC-11-161A3.txt  FCC-11-161A4.txt  FCC-11-161A5.txt  

CONNECT AMERICA FUND, A NATIONAL BROADBAND PLAN FOR OUR FUTURE, ET AL.. The FCC proposed to modernize and streamline its universal service and intercarrier compensation policies to bring affordable wired and wireless broadband - and the jobs and investment they spur - to all Americans while combating waste and inefficiency. (Dkt No. 10-90 05-337 07-135 09-51 ). Action by: the Commission. Adopted: 02/08/2011 by NPRM. (FCC No. 11-13). WCB    FCC-11-13A1.doc FCC-11-13A2.doc FCC-11-13A3.doc FCC-11-13A4.doc FCC-11-13A5.doc FCC-11-13A6.doc FCC-11-13A1.pdf FCC-11-13A2.pdf FCC-11-13A3.pdf FCC-11-13A4.pdf FCC-11-13A5.pdf FCC-11-13A6.pdf FCC-11-13A1.txt FCC-11-13A2.txt FCC-11-13A3.txt FCC-11-13A4.txt FCC-11-13A5.txt FCC-11-13A6.txt

Released:  03/30/2011.  FCC ANNOUNCES SECOND WORKSHOP ON INTERCARRIER COMPENSATION/UNIVERSAL SERVICE FUND REFORM. (DA No.  11-581). (Dkt No 10-90 01-92 96-45 05-337 07-135 03-109 09-51 )  FCC Commissioners Seek Public Input Aimed at Helping Shape Reforms.  WCB . Contact:  Patrick Halley at 7550, email:  Patrick.Halley

Released:  08/03/2011.  FURTHER INQUIRY INTO CERTAIN ISSUES IN THE UNIVERSAL SERVICE-INTERCARRIER COMPENSATION TRANSFORMATION PROCEEDING. (DA No.  11-1348). (Dkt No 10-90 01-92 96-45 05-337 07-135 03-109 09-51 ). Comments Due:  08/24/2011. Reply Comments Due:  08/31/2011.  WCB . Contact:  Katie King at 7400 , Daniel Ball at 1520 ,
Sue McNeil at 0660 , 0484 PDF WORD TXT

Unified Intercarrier Compensation Regime Docket 01-92

In re Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Docket No. 96-98, Report and Order, 11 FCC Rcd. 15,499, 16,012-13 (1996) (Local Competition Order), rev’d in part on other grounds, Iowa Utilities Board v. FCC, 120 F.3d 753 (8th Cir. 1997), rev’d, AT&T v. Iowa Utilities Board, 119 S. Ct. 721, 733, 738 (1999) ("Interconnection can be viewed as the means by which nascent competitive networks obtain vital inputs from dominant, incumbent networks.")



In this order, we respond to the D.C. Circuit's remand order in WorldCom v. FCC , and the court's writ of mandamus in Core Communications Inc. Specifically, we hold that although ISP-bound traffic falls within the scope of section 251(b)(5), this interstate, interexchange traffic is to be afforded different treatment from other section 251(b)(5) traffic pursuant to our authority under section 201 and 251(i) of the Act. 

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HIGH-COST UNIVERSAL SERVICE SUPPORT; UNIVERSAL SERVICE CONTRIBUTION METHODOLOGY; DEVELOPING A UNIFIED INTERCARRIER COMPENSATION REGIME; ET AL.   FCC Issues Order Responding to D.C. Circuit Mandamus and Joint Board Recommended Decision, Seeks Further Comment on Comprehensive Reform.  By Report and Order and Further Notice of Proposed Rulemaking. (Dkt No.  96-45, 96-98, 99-200). Action by:  the Commission. Adopted:  11/05/2008 by Order on Remand. (FCC No. 08-262).
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2005 FNPRM

Comments on the further notice are due on or before May 23, 2005. Reply comments are due on or before June 22, 2005.

The Commission began this examination in 2001 by issuing a Notice of Proposed Rulemaking to re-examine intercarrier compensation and develop a more unified regime govering payment flows among telecommunications carriers. Since 2001, the Commission has issued a number of orders addressing issues related to intercarrier compensation for ISP-bound traffic and wireless traffic.

Links to Commission documents and to industry/interest group principles and proposals in the Intercarrier Compensation proceeding are provided below.

Core Petition

Parties wishing to make ex parte presentations regarding the applicability of reciprocal compensation to traffic bound for information service providers should reference the Local Competition proceeding, CC Docket No. 96-98, which includes the record developed in CCB/CPD 97-30. The Local Competition proceeding will continue to be treated as permit-but-disclose for purposes of the Commission's ex parte rules. See generally 47 C.F.R. §§ 1.1200-1.1206.

Federal Activity

State Activity


TelecomAM (June 4, 1998) reports that GCI, an Alaskan CLEC, is suing Anchorage Telephone Utility (ATU) for reciprocal compensation. GCI argues that ATU is refusing to pay reciprocal compensation for local calls terminated to ISPs. The state PUC said that this issue was outside of its jurisdiction and therefore GCI brought the claim to federal court. GCI states that it had originally attempted to set up a bill and keep arrangement with ATU but ATU insisted on reciprocal compensation. ATU is said to owe $550,000 to GCI.



TelecomAM (September 18, 1998) reports that the Florida PSC has become the 21st state to rule that "local calls to Internet service providers (ISP) are subject to local reciprocal terminating compensation." The PSC has ordered BellSouth to pay appropriate charges to Intermedia, Worldcom, MCI, and TCG.


Communications Daily reports that Illinois Court App has upheld ruling that Ameritech must pay Reciprocal Comp to CLECs for ISP traffic.

Title: Ruling: Internet calls are local
Source: Chicago Tribune
Author: Jon Van Issue: Telephone Regulation Description: Judge David Coar of the U.S. District Court for the Northern District of Illinois has ruled that computer dial up calls to the Internet should be classed as regular, local calls for accounting purposes. The case involves a significant amount of money as Ameritech will now need to pay local phone service competitors "reciprocal compensation" for completing the calls. Judge Coar called the reciprocal compensation agreements arcane and stayed his order for 35 days so Ameritech may file an appeal.


Order PUC (pdf) May 16, 2000 (Bell South must comply with its agreement to provide recip comp for ISP Bound traffic)


New York

N.Y. PSC Rules ISP Local Calls Don't Need Special Reciprocal Compensation Rate TelecomAM March 24, 1998

North Carolina

The N.C. Utilities Commission ruled on February 26, 1998 that calls to Internet Service Provider numbers are local calls. Bell South has reportedly appealed that decision on April 27, 1998, to the U.S. District Court for the Western District of North Carolina but is requesting that the court refer the situation to the FCC for resolution. Communications Daily (8/6/98); C|NET Article (8/6/98).


The Ohio PUC has ruled that Ameritech must pay reciprocal compensation for calls placed to ISPs. Communications Daily reports that this makes Ohio the 21st state to rule that calls to ISPs are local. Communications Daily (8/28/98).


Bell Atlantic - Pennsylvania Responds to Coverage of Company's Position on Treatment of Calls to Internet (October 2, 1998).


US Court Upholds Texas Ruling That Calls to ISPs Are Local (June 19, 1998)
Source: Telecom AM
Description: Judge Lucius Bunton of the U.S. District Court for the Western District of Texas has upheld the Texas Public Utility Commission (PUC) ruling that local calls ending at Internet service provider (ISP) numbers are local traffic under PUC jurisdiction and subject to local reciprocal terminating compensation payments. SBC had contended that the calls are interstate and the PUC has no authority to approve reciprocal compensation on such connections. [from Benton Foundation]


Communications Daily (8/6/98) reports that Washington has ruled that calls to ISPs are local calls.


TelecomAM (June 11, 1998) MCI has filed a complaint with the Wisconsin PUC, complaining that Ameritech has failed to pay $1.25 million in reciprocal compensation, pursuant to an Interconnection agreement between the companies. Ameritech has refused to pay the reciprocal compensation for calls terminated to local ISPs.




  • FCC
  • FCC Fact Sheet on Recip Comp and ISP
  • New Factsheet on "No Consumer Per Minute Charges To Access ISP's". 2/26/99
  • ALTS HR 4445 Webpage
  • Make it Fair (USTA Campaign)
  • MCI Intercarrier Compensation
  • National Regulatory Research Institute : Reciprocal Compensation : Selected Materials
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