Statement by Larry Strickling (FCC Common Carrier Bureau).
Re: reciprocal compensation for calls to ISPs.
Event: House Telecom Subcommittee hearing on HR 4445 IH.
Date: June 22, 2000.
Source: House Commerce Committee.

See also, Tech Law Journal Summary of Bills Pertaining to Reciprocal Compensation in the 106th Congress.

Good morning, Chairman Tauzin, and members of the Subcommittee, and thank you for the opportunity to appear before you today to testify regarding H.R. 4445, the "Reciprocal Compensation Adjustment Act of 2000." This legislation addresses the applicability of the reciprocal compensation provisions of the Telecommunications Act of 1996 (1996 Act) to dial-up Internet traffic, an issue that has occupied the attention of the state regulatory commissions and numerous courts as well as the Federal Communications Commission. The question of whether to require compensation for delivery of dial-up traffic to the Internet is a difficult and complex issue that admits of no easy solution from either a legal or policy perspective.

In order to put the current controversy in context, I first would like to trace the background of reciprocal compensation in the 1996 Act and how the statute and our rules implementing the law have been applied by state commissions and the courts. As part of the 1996 Act, Congress passed section 251(b)(5), which requires all local exchange carriers (LECs) "to establish reciprocal compensation arrangements for the transport and termination of telecommunications." Congress recognized that a carrier incurs costs when it delivers to one of its customers a local call that originates on the network of another carrier. Thus, the statute provides in section 252(d) that the reciprocal compensation arrangements must compensate carriers for the "additional costs of terminating such calls."

In August 1996, the FCC issued rules implementing section 251(b)(5). The FCC concluded that section 251(b)(5) applies only to "local" telecommunications traffic --traffic that originates and terminates within the same local calling area -- and not to interstate traffic. We reasoned that Congress intended reciprocal compensation to address the situation in which two carriers collaborate to complete a local call, a scenario that would occur with increasing frequency as competition developed in the local exchange market as a result of the 1996 Act. Access charges, not reciprocal compensation, would continue to apply when three carriers -- typically the originating LEC, a long distance carrier, and a terminating LEC -- collaborated to complete a long distance call. In the access charge regime, the caller pays the long distance carrier, which in turn must pay both LECs for originating and terminating access service. Neither our reciprocal compensation rules nor our access charge rules directly addressed the situation where two local carriers collaborate to deliver dial-up traffic to the Internet.

In the course of arbitrating and interpreting local interconnection agreements under sections 251 and 252, state commissions were presented with claims from competitive local carriers (CLECs) that they should receive reciprocal compensation, as defined in section 251(b)(5), for dial-up Internet traffic that they transported from incumbent carriers to Internet service providers (ISPs) served by the competitive carriers. ISPs provide their customers the ability to access the Internet. An ISP subscriber typically will dial a seven-digit number to reach an ISP server in the same local calling area, and the ISP then provides routing and transmission services to enable its subscribers to access Internet content and services throughout the United States and the world.

The competitive carriers have generally contended that traffic bound for ISPs is local telecommunications traffic that terminates at the local ISP server and is thus subject to reciprocal compensation under section 251. Incumbent LECs have asserted that this traffic is interstate traffic and, therefore, beyond the scope of section 251(b)(5). The incumbent carriers have pointed out that the FCC has characterized enhanced service providers (ESPs), a category that includes ISPs, as users of interstate access services and that the FCC explicitly exempts ESPs from the payment of certain interstate access charges. They have argued that our adoption of this "ESP exemption" reflects our understanding that ESPs use interstate access services; otherwise, no exemption from access charges would be necessary.

More than two dozen state commissions concluded that the interconnection agreements that incumbent LECs had entered into with CLECs required the payment of reciprocal compensation for ISP-bound traffic. Many of these states accepted the "two call" argument advanced by the CLECs and concluded that the "telecommunications" in question terminated at the ISP's local server. This "local" call, for which reciprocal compensation was due, was then followed by a second "call" initiated by the ISP server to access the Internet.

In February 1999, in response to requests from both incumbent and competitive LECs, the FCC issued a decision clarifying that ISP-bound calls are not local calls and therefore are not subject to reciprocal compensation under our rules implementing section 251(b)(5). In that decision, we noted that the FCC traditionally has determined the jurisdictional nature of communications by the end points of the communication -- where a call starts and where it ends -- and has rejected attempts to divide communications at intermediate points of switching or exchanges between carriers. Using this "end-to-end" analysis, we concluded that ISP-bound telecommunications traffic does not terminate at the ISP's local server but continues to its ultimate destination, an Internet website that is often located in another state or even in another country. We found, therefore, that ISP-traffic is jurisdictionally mixed, largely interstate, and thus, not subject to our rules on reciprocal compensation for local traffic. We explained that this result is consistent with the statutory definition of "information service," which makes clear that these services, including Internet access services, are provided "via telecommunications," thus rebutting the argument that the telecommunications traffic terminates at the ISP server. It also accords with the ESP exemption and the FCC's historic characterization of ISPs as users of interstate access services. We stressed that the decision in no way altered the ESP exemption. To the contrary, the FCC acted in this instance for the purpose of ensuring that the Internet continues to flourish under our "hands off" regulatory approach.

However, having determined that dial-up Internet traffic was interstate in nature, the FCC emphasized that the jurisdictional finding did not answer the question whether compensation should be paid. The FCC acknowledged that there was no federal rule of compensation and no federal mechanism by which carriers should compensate one another for delivering this traffic. In the absence of a federal rule, we initiated a rulemaking to determine whether to establish a federal intercarrier compensation mechanism for ISP-bound traffic.

In the interim, we stated that parties were bound by their interconnection agreements as interpreted and enforced by state commissions. Accordingly, state commissions have continued to address this issue. Many states have required local exchange carriers to pay reciprocal compensation for these calls, and none of these decisions has been overturned in court. A few commissions have concluded, however, that no compensation is required. Other states have developed innovative compensation schemes that take into account the extent of traffic imbalance. The Massachusetts Department of Telecommunications and Energy, for example, adopted on an interim basis a proposal by the incumbent carrier, Bell Atlantic, that it would not pay reciprocal compensation for traffic that exceeds a 2:1 ratio in favor of the CLEC, unless the CLEC demonstrates that the imbalance is not associated with ISP-bound traffic. The New York Public Service Commission took a similar approach, holding that Bell Atlantic could pay a lower rate to a CLEC for all terminating traffic that exceeds originating traffic by a 3:1 ratio, unless the CLEC could rebut the presumption that the traffic imbalance results in lower costs. Other commissions have imposed a "bill and keep" regime for ISP-bound traffic, which requires each carrier to recover the costs of carrying that traffic from its own end users.

Most significant, perhaps, are the agreements that parties have reached through private negotiation. Many incumbent local exchange carriers insisted on reciprocal compensation rates as high as $.01 per minute in agreements they entered into with competitive entrants in 1996, based on the apparent expectation that they would be the net beneficiaries of these payments. These agreements are expiring, however, and some of these same carriers are now negotiating dramatically lower reciprocal compensation rates for all traffic, including ISP-bound traffic -- as low as $.00175 per minute. Consumers will be better off and local competition will be fostered as parties continue to negotiate rates that more accurately reflect the actual costs of transport and termination.

Before we could complete the rulemaking, on March 24, the Court of Appeals for the D.C. Circuit vacated our decision on the regulatory treatment of dial-up Internet traffic and remanded the matter to the FCC. The Court agreed that the FCC may examine the end points of a call -- whether it originates in one state and terminates in another -- in order to determine the jurisdictional nature of the communication. The Court felt, however, that we had not adequately explained how that jurisdictional analysis is relevant to determining whether ISP-bound traffic is subject to the reciprocal compensation obligations of section 251(b)(5). The Court also struggled to understand whether our conclusion that ISPs use interstate "access service," which is not defined in the Act, is consistent with the statutory definitions of "telephone exchange service" and "exchange access service," neither of which explicitly encompasses Internet access service.

In response to the Court's remand, the Common Carrier Bureau has recommended to the Commission that it issue a notice inviting parties to comment on the court's decision. The notice will also request parties to provide information about any new intercarrier compensation arrangements that they may have entered into, either as a result of private negotiation or at the direction of a state commission. Once these comments are received, we will reexamine our conclusions regarding the jurisdictional nature of ISP-bound traffic and the scope of the reciprocal compensation provisions of section 251(b)(5). While it would be premature now to suggest how the Commission might rule on this matter, we previously have identified broad policy principles to guide our analysis. The mandate of the 1996 Act that we "preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services" underscores the strong federal interest in ensuring that regulation does nothing to impede the growth of the Internet. It is also incumbent upon us to realize Congress' goal of promoting competitive entry into markets for all telecommunications services, including local telephone and Internet access services, in a manner that yields tangible benefits to consumers of those services.

Thank you again for the opportunity to testify. I look forward to working with the Subcommittee as it addresses this important issue.