II. Background

The issues we address in this rulemaking will align and correct the Commission's existing policy for Internet-bound calls and related reciprocal compensation rules with our long-held objectives of creating a vibrant telecommunications market through the deployment of advanced communications networks and fair competition in all sectors of the telecommunications market. In this endeavor, we are guided by both federal and state rules. Relevant federal rules are prescribed by the Act as well as by various orders that have been issued by the FCC. We are also guided by applicable federal court cases.

The record before us in this rulemaking allows us to re-examine our current policy on reciprocal compensation which requires that carriers treat calls to the Internet (referred herein variably as ISP-bound calls and Internet-bound calls) the same as local traffic for purposes of reciprocal compensation. We will assess the legal standing of this issue as the matter has come before several jurisdictions. We will also evaluate the impact of the Commission's existing policy on reciprocal compensation for Internet-bound calls within the context of our overarching goals for local competition.

The threshold question at issue in this OIR is whether the reciprocal compensation provisions of the Act should continue to apply to calls using the public switched telephone network (PSTN) to access the Internet through an ISP. An ISP provides access to information and services on the Internet over local phone lines leased by the ISP from a local exchange carrier (LEC) connecting their modems with the LEC's switching facility. The ISP enables users to connect to its modem and access the Internet by simply dialing a local phone number with no toll charges.

As a context for resolving the issues presented in this OIR, we review the events that have led to the present dispute. Beginning in the mid-1990s, the local exchange market was opened to competition pursuant to both state and federal law. Under the previous monopoly era, the incumbent local exchange carrier (ILEC) typically handled both call origination and termination functions within a local area since both the calling and called parties were ILEC customers. With the opening of the local market to competition, however, an originating caller may be served by one LEC while the called party may be served by a competing LEC ( CLEC). Consequently, ILECs and CLECs must interconnect their networks, and negotiate interconnection agreements as to how to compensate each other in the mutual delivery of calls.

The 1996 Act sets forth the federal framework for local competition generally, and particularly for LECs' obligations to compensate each other for the delivery of local calls. Section 252 of the Act imposes upon state commissions the statutory duty to approve voluntarily negotiated interconnection agreements and to arbitrate interconnection disputes in accordance with the provisions of the Act.

Under the Act, different means of intercarrier compensation are authorized depending on whether calls are classified as "local" or interexchange. Section 251(b)(5) of the Act requires LECs "to establish reciprocal compensation arrangements for the transport and termination of telecommunications." (47 U.S.C. § 251(b)(5).) Although § 251(b)(5) purports to extend reciprocal compensation to all telecommunications, the FCC has construed the reciprocal compensation requirement as limited to local traffic. (47 CFR § 51.701(a).) Under standard reciprocal compensation provisions of interconnection contracts, the cost of terminating a local call that originates from LEC's network and terminates on another LEC's network is attributed to the LEC from which the call originated. (47 CFR Sec. 51.701(e), 51.703).

Long distance calls continue to be compensated with "access charges," as they were before the 1996 Act. Access charges are not paid by the originating LEC. Instead, the long-distance carrier pays both the LEC that originates the call and links the caller to the long distance network, and the LEC that terminates the call. (See In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 FCC Rcd 15499, 16013 (p. 1034) (1996) ("Local Competition Order").) Thus, payment of reciprocal compensation for terminating calls is mandatory under the Act as long as the call is deemed "local".

Under the 1996 Act, state regulatory commissions have the responsibility to determine: (1) which calls will be defined as or treated as "local" calls for purposes of making reciprocal compensation applicable to such calls when handled by more than one carrier, and (2) the rate levels and rate structure of reciprocal compensation in that state. The FCC has the jurisdictional authority to establish parameters within which state commissions carry out these responsibilities.