The telecommunications act of 1996 and the Internet: reciprocal compensation or irreconcilable compensation?

Journal of High Technology Law, The, July, 2006 by Ross Wecker

Introduction

In 1996 the United States Government passed 47 U.S.C. [section] 251, better known as the Telecommunications Act of 1996. (1) The purpose of this act was to help break up the Bell Telephone monopoly and create a more competitive telecommunications marketplace. (2) This purpose was primarily accomplished by [section] 251(a)(1), which essentially mandated that all telecommunications carriers interconnect with the networks of other telecommunications carriers. (3) Although this act achieved the goal of a more competitive communications industry, several large problems arose with the explosion of the Internet in the late nineties. (4) These problems are rooted in the compensation method mandated by 47 U.S.C. [section] 251 to deal with the constitutional takings issues raised by mandatory interconnection. (5) A veritable horde of litigation has ensued as a result of this compensation mechanism and although steps have been taken to correct this problem the area of law dealing with compensation and internet communications is far from settled. (6)

The compensation method at the core of the litigation resulting from 47 U.S.C. [section] 251 is called reciprocal compensation and in light of the state of technology in the early nineties it was theoretically a good idea. (7) However, like many ideas that are sound in theory, external realities, namely changes in technology, have shown flaws in reciprocal compensation. (8) It is the position of this note that reciprocal compensation is inherently flawed with respect to at least one key technological advancement, internet communications, and should therefore be removed as the unilateral compensation method in 47 U.S.C. [section] 251. (9) The support for this position will come from examining the history and reasoning behind reciprocal compensation, as well as some of the cases and FCC orders arising out of its implementation. (10) Specifically, the Legislative purpose and language of 47 U.S.C. [section] 251, as well as practical implementation problems, will show that reciprocal compensation is the wrong compensation system for a technologically advanced world. (11)

History

When the Bell patent on the telephone expired in 1897 the problem of interconnection grew in its place. (12) Interconnection became a problem because of the need for a competitive telecommunications industry. (13) This necessity eventually gave rise to governmental regulation to assure that a competitive telecommunications industry was achieved. (14) However, as with most governmental regulation, this created problems, specifically, constitutional problems. (15) These problems came from early common carrier law and the takings clause 2006 The Telecommunications Act of 1996 and the Internet 293 of the constitution. (16) Specifically, the early common law rules stated that common carriers do not have to interconnect. (17) Since telecommunications companies are viewed as common carriers constitutional issues arise in the form of the takings clause because with no common law right to interconnection the government is mandating the use of private property when mandating interconnection. (18) Thus, mandatory interconnection creates a situation where the government is taking the property of one telephone company for the use of another. (19)

The constitutional issues raised above came to a head when the government passed the Telecommunications Act of 1996. (20) The goal of that act was to break up the regional monopolies on telecommunications that had been created when Bell Telephone was broken up into regional companies known as Incumbent Local Exchange Carriers ("ILECs"). (21) The Telecommunications Act of 1996 accomplished its goal of creating a more competitive telecommunications industry by mandating that these ILECs interconnect with smaller companies that were at a disadvantage because they had not established a large physical network. (22) Thus, because of the mandatory interconnection agreements the Competing Local Exchange Carriers ("CLECs") could compete with the ILECs because now they were all on a larger interconnected network. (23) The only problem with this mandatory interconnection is that it violates the takings clause of the constitution in that the Government was now taking the private networks of the ILECs and requiring that the CLECs be allowed access to those networks. (24) This governmental action has been viewed as both a regulatory and physical taking because it imposes economic damage and dispossesses the ILECs of their property. (25) The only way that the government could get around this unconstitutional taking is to come up with some sort of compensations system. (26)

The solution to the takings problems raised by the Telecommunications Act of 1996 was addressed in [section] 251(b)(5) of that Act. (27) This section deals with what are referred to as reciprocal compensation agreements. (28) This section simply states that when ILECs and CLECs interconnect they must enter into an agreement by which they will compensate each other. (29) These agreements will be approved by State Telecommunications Commissions and, if a contract dispute arises, the State Commissions will interpret the agreements. (30)