Intercarrier Compensation For ISP Traffic: An Update

On March 24, 2000, the United States Court of Appeals for the District of Columbia Circuit vacated the Federal Communications Commission's ("FCC") Declaratory Ruling in In the Matter of the Local Competition Provisions in the Telecommunications Act of 1996, Intercarrier Compensation for ISP-Bound Traffic, 14 FCC Rcd. 3689 (1999) ("Declaratory Ruling"), and remanded the case to the FCC "for want of reasoned decision-making." See Bell Atlantic Telephone Companies v. FCC, ___ F.3d, ___, 2000 U.S. App. LEXIS 4685 (D.C. Cir. March 24, 2000). 

In its Declaratory Ruling, the FCC concluded that ISP traffic was jurisdictionally mixed, but largely interstate. Accordingly, the FCC held that such communications were not "local." However, in the Declaratory Ruling, the FCC did not resolve the critical question regarding how the determination that ISP traffic is interstate in nature traffic would affect the reciprocal compensation debate. See "Reciprocal Compensation for ISP Traffic; A Regulatory Perspective," December 17, 1999. Instead, the FCC commenced a rulemaking proceeding, and permitted states to continue to exercise jurisdiction over the issue and adopt the compensation system deemed appropriate for ISP traffic pending a federal rule.

Is ISP Traffic Local?
The D. C. Circuit Court's decision -- which questions the FCC's determination that ISP traffic is not local -- comes at a time when state regulatory commissions are grappling with the appropriate intercarrier compensation for ISP traffic; parties are negotiating second-generation interconnection agreements; and the industry anxiously was awaiting the FCC's announcement of a federal rule regarding intercarrier compensation for terminating ISP traffic. 

The D.C. Circuit Court decision vacating the Declaratory Ruling restores the status of the law as it existed prior to the Declaratory Ruling and confirms that calls to ISPs are intrastate traffic and, as such, subject to the reciprocal compensation provisions of the Telecommunications Act of 1996 ("Act"). See 47 U.S.C. § 251(b)(5) and 47 C.F.R. § 51.701(a). In other words, the D.C. Circuit Court's decision leaves undisturbed the authority of state commissions to set intercarrier compensation rates for local traffic, including ISP traffic, and validates the decisions of the vast majority of state commissions -- and the federal court decisions affirming the state commission determinations -- that ISP traffic is local and subject to reciprocal compensation. See Illinois Bell Tel. Co. d/b/a Ameritech Illinois v. WorldCom Technologies, Inc., et al., 179 F.3d 566 (7th Cir. 1999), affirming Illinois Bell Tel. Co. v. WorldCom Technologies, No. 98 C 1925, 1998 WL 419493 (N.D. Ill. July 23, 1998); US West Communications, Inc. v. MFS Intelenet, Inc., 193 F.3d 1112 (9th Cir. 1999) aff'g U.S. West Communications, Inc. v. MFS Intelenet, Inc., et al, No. C97-222WD, 1998 WL 350588 (W.D. Wash. Jan. 7, 1998); Southwestern Bell Tel. Co., v. Public Utility Comm'n of Texas, et al., No. 98-50787, 2000 WL 332062 (5th Cir. March 30, 2000) aff'g Southwestern Bell Tel. Co. v. Public Utility Comm'n, No. MO-98-CA-43, 1998 U.S. Dist. LEXIS 12938 (W.D. Tex. June 16, 1998); Southwestern Bell Tel. Co. v. Brooks Fiber Communications, No. 98-CV-468-K(J), Order (N.D. Okla. Oct. 1, 1999); Michigan Bell Tel. Co. v. MFS Intelenet, No. 5:98 CV 18, 1999 U.S. Dist. LEXIS 12093 (W.D. Mich. Aug. 2, 1999); Bell South Telecommunications, Inc. v. ITC DeltaCom Communications, Inc., 62 F.Supp. 2d 1302 (M.D. Ala. Aug. 18, 1999) aff'd on recon. (M.D. Ala. Nov. 15, 1999); U.S. West Communications, Inc. v. WorldCom Technologies, Inc., et al., 31 F.Supp.2d 819 (D. Or. Dec. 10, 1998); Southwestern Bell Tel. Co. v. Public Util. Comm. of Texas, ___ F.3d ___, 2000 WL 332062 (5th Cir. March 30, 2000).

ISPs Are Not Local Traffic Faulty
In its decision, the D.C. Circuit Court found the FCC's reasoning and conclusion that calls to ISPs are not local traffic faulty and inconsistent -- both internally and with other FCC decisions. The D.C. Circuit Court questioned the FCC's application of an "end-to-end" analysis to calls to ISPs. The D.C. Circuit Court noted that the FCC traditionally has used the end-to-end analysis for jurisdictional purposes to determine whether particular traffic is interstate. The D.C. Circuit Court explained that, "[u]nder this method, [the FCC] has focused on 'the end points of the communication and consistently has rejected attempts to divide communications at any intermediate points of switching or exchanges between carriers." The D.C. Circuit Court went on to state that however sound the end-to-end analysis may be for jurisdictional purposes, the FCC failed to explain why viewing ISP traffic as continuous is appropriate for purposes of reciprocal compensation.

Specifically, the D.C. Circuit Court observed that the FCC failed to apply or even mention its definition of "termination." The FCC defines "termination" as "the switching of traffic that is subject to section 251(b)(5) at the terminating carrier's end office switch (or equivalent facility) and delivery of that traffic from that switch to the called party's premises." The D.C. Circuit Court concluded that "[c]alls to ISPs appear to fit this definition: the traffic is switched by the LEC whose customer is the ISP and then delivered to the ISP, which is clearly the 'called party.'"

Continues