FCC Revisits Reciprocal Compensation for ISP-bound Traffic and Establishes a New Interim Compensation Mechanism

The Federal Communications Commission ("FCC") recently released an order on reciprocal compensation for ISP-bound traffic that carries enormous consequences for CLECs, ISPs, and individual consumers of dial-up Internet services.

In its April 27, 2001 Order on Remand and Report and Order, In the Matter of Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Intercarrier Compensation for ISP-Bound Traffic, CC Docket No. 96-98 ("ISP Remand Order"), the FCC took yet another stab at trying to explain why, in its opinion, the reciprocal compensation requirements of Section 251(b)(5) of the Federal Telecommunications Act, 47 U.S.C. § 251(b)(5) ("FTA96"), do not apply to ISP-bound traffic.

The FCC's ISP Remand Order is the result of a decision by the U.S. Court of Appeals for the D.C. Circuit in which the Court vacated and remanded for "want of reasoned decision making" the FCC's previous attempt to reach a similar result in its Order on ISP-Bound Traffic, In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Intercarrier Compensation for ISP-Bound Traffic, 14 FCC Rcd 3689 (1999).

To provide some background, in the Order on ISP-Bound Traffic the FCC had determined that calls to ISPs, within a caller's local calling area, were non-local. To support this conclusion, the FCC applied its so-called "end-to-end" analysis and found that calls to ISPs are predominately interstate in nature because the calls ultimately extend beyond the ISP to websites around the world. However, in Bell Atlantic v. FCC, 206 F.3d 1 (D.C. Cir. 2000), the D.C. Circuit rejected the FCC's analysis and found that the "mere fact that the ISP originates further telecommunications does not imply that the original telecommunication does not ‘terminate' at the ISP." The D.C. Circuit went on to state that:

an ISP appears . . . no different from many businesses, such as ‘pizza delivery firms, travel reservation agencies, credit card verification firms, or taxicab companies,' which use a variety of communication services to provide their goods or services to their customers . . . . The Commission has not satisfactorily explained why an ISP is not, for purposes of reciprocal compensation, ‘simply a communications-intensive business end-user selling a product to other consumer and business end-users.' (citations omitted).

Accordingly, the D.C. Circuit vacated and remanded the FCC's ISP-Bound Traffic Order.

On remand, the D.C. Circuit posed a number of questions. As FCC Commissioner Harold Furchtgott-Roth stated in his dissenting statement accompanying the ISP Remand Order, the Court asked the FCC:

(1) why ISPs are not like other local businesses;

(2) why calls do not terminate at ISPs;

(3) how its treatment of ISP-bound traffic is consistent with its treatment of Enhanced Service Providers (ESPs); and

(4) whether ISP-bound traffic is ‘Exchange Access' or ‘Telephone Exchange Service?'

Nonetheless, as Commissioner Furchtgott-Roth noted, the FCC failed to "answer any of the court's questions." Instead, the FCC took a completely different and unexpected approach to the issue by concluding that FTA96 § 251(b)(5) is not limited solely to local traffic (as it had maintained in the past), but rather applies to all "telecommunications" traffic, except the categories specifically enumerated in FTA96 § 251(g). Then the FCC concluded that ISP-bound traffic falls within one of the § 251(g) exceptions - "information access" - and is thus exempt from the § 251(b)(5) reciprocal compensation requirements. In order to retain jurisdiction over ISP-bound traffic, the FCC also found that such traffic is interstate in nature.

Not content to simply issue conclusions, the FCC went on in its ISP Remand Order to establish a new "hybrid" interim mechanism for intercarrier compensation of ISP-bound traffic that, at least in the FCC's opinion, "serves to limit, if not end, the opportunity for regulatory arbitrage, while avoiding a market-disruptive ‘flash-cut' to a pure bill and keep regime." The basic structure of the FCC's interim compensation mechanism consists of the following:

(1) an intercarrier compensation rate cap for ISP-bound traffic that starts at $0.0015/MOU for the first six months, falls to $0.0010/MOU for months seven through twenty-five, and falls again to $0.0007/MOU for months twenty-five through thirty-six or until further Commission action (whichever occurs later);

(2) a cap on the total number of ISP-bound minutes for which a LEC may receive compensation, with a limited annual growth factor;

(3) a rebuttable presumption that traffic exchanged between LECs that exceeds a 3:1 ratio of terminating to originating traffic is ISP-bound traffic subject to the interim compensation mechanism; and

(4) the rate caps for ISP-bound traffic apply only if an incumbent LEC offers to exchange all traffic subject to section 251(b)(5) [FTA96] at the same rate.

The FCC also held that in cases where carriers are not exchanging traffic pursuant to interconnection agreements prior to the adoption of the ISP Remand Order (e.g., a new carrier enters the market or an existing carrier expands into a market it previously had not served) such carriers will be required to exchange ISP-bound traffic on a bill and keep basis during the "interim period." However, the FCC clearly stated that the ISP Remand Order "does not alter existing contractual obligations, except to the extent that parties are entitled to invoke contractual change-of-law provisions." Additionally, the FCC held that state commissions "will no longer have authority to address this issue [ISP-bound traffic]."

To the extent that any questions remain about the FCC's current plans for reciprocal compensation and the cost of dial-up Internet services, they were answered when the FCC stated its hope that CLECs will begin to, "look only to their ISP customers, rather than to other carriers, for cost recovery. As a result, the rates paid by ISPs and, consequently, their customers should better reflect the costs of services to which they subscribe."

The FCC further held that:

[a]lthough we do not reach any firm conclusions about bill and keep as a permanent mechanism for this or any other traffic, our evaluation of the record evidence to date strongly suggests that bill and keep is likely to provide a viable solution to the market distortions cause by the application of reciprocal compensation to ISP-bound traffic.

In remarkably sharp contrast to the views expressed by the majority in the ISP Remand Order, Commissioner Furchtgott-Roth issued a powerful dissent, declaring that:

[t]oday's order is the product of a flawed decision making process that occurs all too frequently in this agency. It goes like this. First, the Commission settles on a desired outcome, based on what it thinks is good ‘policy' and without giving a second thought to whether that outcome is legally supportable. It then slaps together a statutory analysis. The result is an order like this one, inconsistent with the Commission's precedent and fraught with legal difficulties.

Commissioner Furchtgott-Roth went on to state that the "media might be spun by this campaign. The public might be spun. But it will be far more difficult to convince the courts that the current action is lawful." Just how difficult it will be remains to be seen, as a new battle to appeal the ISP Remand Order has already begun.

In short, if any conclusion can be drawn from the ISP Remand Order, it is that the issue of reciprocal compensation for ISP-bound traffic is nowhere near full and final resolution. As Commissioner Furchtgott-Roth lamented, "[t]he end result of today's decision is clear. There will be continued litigation over the status of ISP-bound traffic, prolonging the uncertainty that has plagued this issue for years."

The discussion in this article of the ISP Remand Order and its interim compensation mechanism is intended to provide only a brief overview of the relevant facts and rulings. The details and overall implications for various CLECs, ISPs, and end-users are obviously immense and do not lend themselves to full examination in this forum. If you have any questions regarding the subject matter of this article you may contact the author, Elliott S. Cappuccio, through the link provided below.

Elliott S. Cappuccio is an associate in the San Antonio office of Stumpf Craddock Massey & Pulman, P.C. (SCM&P). Mr. Cappuccio practices primarily in the fields of telecommunications law, commercial litigation, and consumer law.

SCM&P is a full-service law firm with practice areas that include, among others: Telecommunications; Internet; Corporate & Venture Structuring; IP Protection; Banking & Bankruptcy; Real Estate; and Commercial & Civil Litigation. In these areas, SCM&P represents CLECs, IXCs, ISPs, ESPs, ASPs, and many other providers and users of telecommunications services, equipment, and bandwidth.

SCM&P offers its clients a unique advantage over other law firms: we do not, have not, and will not represent the incumbent telecom monopolies. We are Counsel To The Competition.™