IV. Overview of the Proceeding

A. Parties' Proposals

The active parties in this proceeding form into two opposing groups. Those parties representing ILECs all seek an immediate end to the existing Commission policy calling for the payment of reciprocal compensation for ISP traffic. The ILECs support an alternative approach, "bill-and-keep," whereby no LEC would compensate any other LEC for delivery of ISP traffic. Instead, each LEC would recover their respective costs from their own customers for delivery of ISP traffic.

The parties representing CLECs and CISPA oppose the "bill-and-keep" proposal, and advocate instead continuation of the Commission's existing policy regarding the payment of reciprocal compensation for the delivery of dial-up ISP traffic. ORA supports the CLECs' and CISPA's position. TURN expressed neutrality on the issue of intercarrier compensation, but opposed the ILECs in claiming that they suffered financial losses from ISP reciprocal compensation warranting any form of retail ratepayer relief.

B. Summary Conclusions and Framework for Approaching the Issues

As a basis for approaching the issue of reciprocal compensation, we first consider the legal requirements of the Act, and whether, as a matter of law, the provisions of the Act prescribing the payment of reciprocal compensation apply to ISP-bound calls. If a call is found to be local as defined under the Act, and the incoming and outgoing flow of traffic is out of balance, then reciprocal compensation must be paid by law. No further inquiry would be necessary as a basis to require such payment.

If, on the other hand, ISP-bound calls are found not to be local, as defined by the Act, then reciprocal compensation is not required by federal law. Nonetheless, the FCC has given this Commission latitude either to impose reciprocal compensation requirements on ISP-bound traffic, or to refrain from doing so, as deemed appropriate based on other relevant factual considerations.⁶

Based on the record before us in this rulemaking and the FCC's determinations in the Declaratory Ruling and the Advanced Services Remand Order, we conclude that calls to ISPs do not meet the criteria for treatment as local calls. On this basis, we conclude that there are no legal grounds to require reciprocal compensation for ISP-bound calls under the Act. In the light of this conclusion, we discard the "two-call" theory adopted by this Commission in D.98-10-057 and D.99-07-047, segmenting a call to an ISP into two divisible parts. The first segment was deemed "local" by virtue of its termination at the ISP's modem and thus eligible for reciprocal compensation, and the second segment was ruled a information service that begins at the ISP's modem and traverses to anywhere in the Internet.

We will go beyond the jurisdictional underpinnings of reciprocal compensation, in part, because the ultimate determination of whether ISP-bound calls should be treated as local or interstate for reciprocal compensation rests with the FCC as that agency is expected to provide further explanation for its end-to-end treatment of these calls. Continuing the currently accepted view that the Commission has authority to order or not order reciprocal compensation, we focus on the policy implications of reciprocal compensation for ISP traffic on ILECs, their customers, CLECs and competition in the telecommunications market. Other factual grounds we examine in this case include the economic, financial and competitive impacts of reciprocal compensation for ISP-bound traffic on ILECs and CLECs and their customers. We consider the potential effects of alternative policies on ISPs and on the public at large.

Based on these policy and factual considerations, we eliminate reciprocal compensation for ISP traffic. In lieu of reciprocal compensation we adopt bill-and-keep as the preferred outcome in interconnection agreements. In adopting this new policy, we do not prohibit reciprocal compensation if parties mutually agree to exchange such compensation for ISP traffic. We adopt this policy effective prospectively applicable to future interconnections agreements executed after the effective date of this order. Currently effective interconnection agreements that require reciprocal compensation for ISP calls will remain in effect until their termination. We will no longer require that LECs pay reciprocal compensation for ISP-bound calls for interconnection executed after the effective date of this order.