V. Should Calls to an ISP Be Treated As Local Calls as Defined by the 1996 Telecommunications Act?

We first consider as a matter of law, whether the legal requirements of the Act warrant an order that a call to an ISP be treated as local traffic subject to reciprocal compensation payments. The Act sets forth the legal framework governing carriers rights and obligations in the context of a competitive local exchange market. Among other things, the local competition provisions (in particular Sections 251 and 252) address the issue of inter-carrier compensation for the termination of local traffic. To make this determination we look at two key factors: the nature of ISP traffic and its termination point.

A. Parties' Positions

The ILECs assert that calls to ISPs are interstate--not local--calls, and thus are not subject to the reciprocal compensation requirements of Sections 251 and 252 of the Act. The ILECs believe that even where callers dial a local number to connect to an ISP, such calls to the ISP modem do not "terminate" at the modem, but continue on to remote Internet websites. Pacific views the local number used by callers to connect to the ISP merely as a routing guide for the first portion of a non-local call. The ILECs rely on the Declaratory Ruling and FCC orders addressing the "Enhanced Service Provider (ESP)⁷ exemption from access charges," which, they argue, establish that calls to ISPs do not terminate in the local calling area and are typically interstate in nature.

In establishing its access charge system in 1983, the FCC decided to treat ESPs as end users, thus continuing their unregulated non-carrier status. See MTS & WATS Market Structure, 97 F.C.C. 2d 682, 711-15 (1983). It reaffirmed this "ESP exemption" in 1991. (Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, 6 FCC Rcd 4524, 4534 (1991). In 1997 it again preserved the status quo. (Access Charge Reform, 12 FCC Rcd 15982 (1997), subsequent history omitted. An ISP, by definition is an ESP and thus comes under the access charge exemption.

If the ISP access charge exemption were not in place, each carrier would be compensated by a meet-point-billing arrangement with access charges applying on both the originating and terminating side of the call. Therefore, Pacific reasons the only equitable arrangement is for carriers to apply the meet-point-bill requirements but `exempt' ISP traffic from charges, which results in a "bill and keep" arrangement.

Pacific also points to the FCC Declaratory Ruling in which the FCC ruled that calls to ISPs are not local. Pacific further argues that nothing in the D.C. Circuit's decision in Bell Atlantic, which remanded the FCC Declaratory Ruling for further clarification, changes the conclusion that Internet traffic is interstate in nature. According to Pacific, the D.C. Circuit remand of the FCC Declaratory Ruling did not reverse the determination by the FCC that ISP traffic is interstate traffic; but rather, found that the FCC did not adequately explain its decision. The D.C. Circuit left the FCC free to reach the same result on remand, something it would not have done if the statute or regulations resolved the question the other way.

Pacific also points to the FCC's Advanced Services Remand Order,⁸ released on December 23, 1999, in which the FCC held that ISPs provision of Internet access service is:

. . . exchange access service because it enables the ISP to transport the communication initiated by the end-user subscriber in one exchange to its ultimate destination in another exchange, using both the services of the local exchange carrier and in the typical case the telephone toll service of the telecommunications carrier responsible for interexchange transport. (Advance Services Remand Order, § 35.)

In view of the FCC's statement in the Advanced Services Remand Order, Pacific asserts it is unlikely that the FCC could determine that ISP-bound traffic is anything other than interstate exchange access traffic.

The ILECs also assert that ISP-bound traffic is similar to other types of non-local traffic. ISP calls, they argue, are different in fundamental respects from local calls to Plain Old Telephone Service (POTS) customers. They identify differences in the equipment used to `terminate' the two type of calls, in how the calls are processed by the equipment, and in the traffic characteristics of the two types of calls. The end result of these differences, according to the ILECs, is that the traffic-sensitive cost of delivering dial-up traffic to an ISP is a small fraction of the cost of delivering local voice traffic to a standard POTS customer. Hence they conclude that ISP traffic should not be treated the same way as voice traffic.

The ILECs also assert that from the technological perspective important differences distinguish ISP-bound calls from POTS calls that renders the concept of call "termination" moot as far as its applicability to ISP-bound calls is concerned. Verizon's cites CLECs' typical use of high volume Integrated Services Digital Network-Primary Rate Interface (ISDN-PRI) technology in their networks to deliver traffic to ISPs but not to POTS customers.

The ILECs point out that the FCC has consistently ruled that Internet calls constitute interstate exchange access service. Pacific notes that starting in its 1983 access charge order, the FCC had maintained that enhanced service providers (ESPs), of which ISPs are a member, obtained local exchange services for the purpose of completing interstate calls. These interstate calls would then be facilitated by ESPs to transit to their destination. Referring to the FCC's order In the Matter of MTS and WATS Market Structure, Pacific states that the FCC had determined as early as 1983 that an ESP might terminate few calls at its own location but that the vast majority of its traffic would be interstate.⁹

Pacific also notes that notwithstanding the D.C. Circuit's vacatur of the FCC's Declaratory Ruling the FCC's conclusion that Internet traffic is interstate in nature remains unaltered. Pacific's view of the D.C.Circuit vacature of the Declaratory Ruling is to give the FCC an opportunity to provide adequate explanation for its decision that ISP-bound traffic is interstate.

Furthermore, Pacific believes that the Advanced Services Remand Order is yet another clear indication that the FCC's historical treatment of ISP traffic as interstate has been upheld. Once again, the FCC stated that the service ISPs provide is "exchange access service" that utilizes the services of LECs and exchange toll services to transport communication from one exchange to another exchange. Pacific notes that the D.C. Circuit Court did not question this determination.¹⁰

The CLECs dispute the ILECs' arguments that ISP calls are not local. The CLECs argue that the switching of a call to an ISP at the end office switch of the carrier serving the ISP and delivery of that call by such serving local carrier to the ISP modem constitutes "termination" of the call as defined by the FCC's regulations. The CLECs view the ISP as the called party to whom the call is terminated, thus qualifying the serving carrier for reciprocal compensation for calls to the ISP originating on another local carrier's network. As such, the CLECs argue, the telecommunications service is terminated upon delivery of the switched call to the ISP.

The CLECs view any subsequent interaction between the ISP's modem to the Internet as being separate and distinct from the call placed by the telephone subscriber to the ISP. When a subscriber to an ISP's services calls the ISP, the ILEC subscriber purchases, and the ILEC provides, a "telecommunications service" within the meaning of the Act. The CLECs contrast this telecommunications service, which is separately rated and separately billed by the ILEC, with the functions the ISP provides as an "information service."

The CLECs argue that calls to ISPs utilizing a local phone number constitute "telephone exchange service" (i.e., local calls) as opposed to "exchange access" service as defined in the Act. Telephone exchange service is defined as "service within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area . . ." 47 USC § 153(47).

The CLECs argue that ISP calls come within the definition of telephone exchange service because the caller's and called party's telephone numbers are both within the same local exchange. Moreover, they argue, such calls cannot constitute "exchange access" under the Act because they do not involve "the origination or termination of telephone toll services." 47 USC § 153(16). Likewise, the ISP does not impose a separate charge apart from the caller's monthly local service charge for "telephone service between stations in different exchanges." (47 USC § 153(48).)

CLECs contend that the D.C. Circuit Court remand of the FCC Declaratory Ruling supports the CPUC existing policy on reciprocal compensation since it vacated the FCC's findings regarding the interstate nature of ISP traffic.

B. Discussion

As we stated in the OIR that started this rulemaking, we do not intend to reexamine the jurisdictional policy of the FCC with respect to ISP traffic. Our inquiry only goes to a reexamination of whether ISP calls should be treated as local for reciprocal compensation purposes. In this review, however, we find it indispensable to take notice of the FCC's historical treatment of such calls and their current status in light of recent developments. We hope to arrive at a policy position that is consonant with federal rules since differences in our policies could create regulatory uncertainty and potential confusion. To that end we note that our findings shall remain subject to any subsequent rulings of the FCC that may contradict or be in conflict with the results reached herein. We act on this matter because under current rules the Commission continues to have the responsibility to determine which calls are "local" for reciprocal compensation purposes and adopt appropriate policies in accordance with binding FCC precedents.¹¹

The question before us is whether ISP traffic should be treated as local or non-local. It appeared that we had resolved this question in D.98-10-057, where we found that ISP communications involved two separate and distinct functions: (1) telecommunications service, and (2) information service. We stated in D.98-10-057 that the telecommunications service terminates at the ISP modem from where "information service" commences with the subsequent processing performed by the ISP beyond the modem. We reached this conclusion by looking at the call to the ISP as a divisible path of communications and focusing on the limited and purely technical nature of an ISP call. Our current holding that ISP traffic is a severable communication, one of which can be treated as a telecommunications service and thus be treated identically to voice traffic and eligible for reciprocal compensation hinges on whether the two-call theory stands in light of the FCC's end-to-end analysis.

For the purpose of determining whether reciprocal compensation should be applicable to ISP-bound calls, we will not revisit the jurisdictional issue in this case with any precision. We recognize that the Commission's two-call theory in D.98-10-057 directly conflicts with the FCC's determination that such calls are interstate. D.98-10-057 solely relied on severablity of the ISP-bound call into two "separate and distinct" parts. Whereas, in its Declaratory Ruling and other decisions, the FCC took the holistic view and observed that under its precedents "communication should be analyzed on an end-to-end basis, rather than by breaking the transmission into component parts."¹² On this basis, the FCC concluded that ISP traffic is non-local interstate traffic. Consequently, reciprocal compensation requirements of Section 251(b)(5) of the Telecommunications Act do not require states to mandate reciprocal compensation for ISP traffic. The CLECs argue that the FCC's finding in its Declaratory Ruling has been vacated by the D.C. Circuit Court and thus the existing Commission two-call theory is intact. We disagree.

In order to reach the CLEC's position we must first find that the call is divisible into two component pieces as we did in D.98-10-057. However, as the ILECs correctly point out the FCC's analysis established over the last 17 years reaches the opposite result by treating ISP traffic as a continuous flow of communication traffic that utilizes the services of the local exchange carriers and the toll exchange services of long distance carriers. (Cite) D.98-10-057's two-call theory can only stand if the FCC reverses itself regarding its end-to-end analysis of ISP-bound calls.

We also disagree with the CLEC's interpretation of the D.C. Circuit's vacatur of the Declaratory Ruling. We need not attempt to second-guess the outcome of the FCC's remand order since it is still pending. There are ample historical and most recent records that indicate where the FCC's position has been on ISP traffic to warrant a suspension of D.98-10-057's two-call theory and consequently the conclusion that ISP-bound calls are "local".

A key question in our review of these issues is what analysis the FCC has historically applied to determine the jurisdictional nature of telecommunications. In its Declaratory Ruling, the FCC stated that it "traditionally has determined the jurisdictional nature of communications by the end points of the communication and consistently has rejected attempts to divide communications at any intermediate points of switching or exchange between carriers."¹³ In the Teleconnect Case where calls made by dialing an 800 number to reach a long distance carrier that then routed the customers' calls to the desired destination, the FCC analyzed these calls as one continuous communication from the caller to the called party.¹⁴ Similarly, the FCC applied the end-to-end analysis to Bell South's voicemail service by looking at the entire communication from the original caller to the end-point at the voicemail device. It rejected considering the function of the voicemail service in forwarding a call from the intended recipient to the voicemail apparatus as a separate telecommunications that was wholly intrastate.¹⁵ These cases demonstrate that the FCC has consistently applied an end-to-end analysis to determine its treatment for jurisdictional purposes. The approach the FCC took in the Declaratory Ruling regarding ISP traffic is similarly an end-to-end analysis; however, the D.C. Circuit apparently found the above cases distinguishable from the ISP traffic because of what the D.C. Circuit called the FCC's failure to provide a satisfactory explanation as to why it characterized ISPs as users of "access service" when the Act defines calls only in terms of "exchange access" service and "telephone exchange service". The D.C. Circuit found the FCC's reference to ISP service providers as users of access service unsatisfactory and required further explanation in its remand. However, the D.C. Circuit did concede that the Telecommunications Act "appears ambiguous as to whether calls to ISPs fit within `exchange access' or `telephone exchange service' and on that view any agency's interpretation would be subject to judicial deference".

The ambiguity the D.C. Circuit spoke of has been clarified by the FCC, albeit prior to the issuance of D.C. Circuit, as the Court noted stating that the FCC did not make the argument in the ruling under review.¹⁶ In this separate order the FCC explained that calls to ISPs constitute "exchange access" and not "telephone exchange service".¹⁷ Thus, we observe that nothing in the D.C. Circuit order forecloses the applicability of the FCC's end-to-end analysis and the conclusion that ISP traffic is interstate.

We note that the obligation of reciprocal compensation does not apply to the transport or termination of interstate or intrastate interexchange traffic. ¹⁸ The question whether, under the Act, termination of ISP traffic requires the payment of reciprocal compensation charges depends, wholly, on whether such traffic is defined as local or interstate by the Act. The requirement for reciprocal compensation for call transport and termination in interconnection agreements under the provisions of the Act only applies to local telephone traffic originating and terminating within the same local calling area.¹⁹ If the call is not local the carrier has no obligation for reciprocal compensation payment under Section 251(b)(5) of the Telecommunications Act of 1996.

The determination of a "local call" is wholly based on the identification of a point at which the communication is terminated in accordance with the Act. "Termination" for purposes of section 251(b)(5), is defined 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."²⁰ When a CLEC's end-office switches a call bound to the Internet, switching is performed because the end-user calls the ISP modem not as its ultimate destination, but to use the modem as a means to reach the Worldwide Web.²¹ The end-user does not communicate with the modem. The purpose of the modem, as ICG states, is to modulate (vary the characteristics of the electrical wave as it is transmitted)²² digital signal data sent from Data Terminal Equipment (such as a computer) to a signal capable of being transmitted over a different frequency phone line.²³ In the case of a dial-up access, the receiving computer of the ISP will typically convert the data from the protocol in which it was transmitted to a packets format (in Transmission Control Protocol/Internet Protocol (TCP/IP) format.)²⁴ The ISP's modem converts the incoming signal to send the communications initiated in one exchange to be transported to its ultimate destination in another exchange.²⁵ Because a call to an ISP may frequently involve accessing multiple Internet destinations or web site located outside of the calling party's local exchange, the end-to-end analogy derived from descriptions of long-distance toll calls is schematically accurate in the context of ISP-bound calls.²⁶ To the extent an ISP requires telecommunications services for transport of its information service, the ISP does not provide such service, but separately obtains such service from an underlying interexchange carrier. It was precisely for these reasons that the FCC concluded that advanced services provided to ISPs are exchange access because they enable the end user to communicate with the ultimate destination in another exchange.²⁷ From this we can only conclude that when a subscriber accesses an ISP the subscriber is establishing a means to send communications to designated destinations on the Internet; his objective is not to communicate with the ISP. The ISP, in its services to the subscriber maintains an active communication path that allows the subscriber to reach multiple destinations through that active link. This open and active path with the modem of the ISP does not mean the call terminates at that point for the simple reasons that that is not the ultimate destination "point specified by the user". The movement of data over the Internet in the case of a call to an ISP is a continuation of the transmission of communications over the public switched telephone network. Thus the call made to the ISP through a dial-up access does not fit the definition of "local" for the purposes of reciprocal compensation under the Act. For these reasons, we rescind the finding adopted D.98-10-057 as modified by D.99-07-047 that calls bound to the ISP are local.

We reverse the current policy adopted by D.98-10-057 that ISP traffic is local and hence eligible for reciprocal compensation because that finding was predicated upon Section 251(b)(5) which requires reciprocal compensation only for local traffic. And as we have discussed, we can only find ISP traffic to be local if we rely on a two-call theory. We are now discarding the two-call theory for the purpose of determining whether an ISP call is local or not because it directly conflicts with the FCC's end-to-end analysis of communication and that agency's finding that ISP traffic is interstate. But we do recognize, although our careful reading of the FCC's track record on this issue reveals a consistent treatment of ISP traffic as interstate, as a matter of compliance, the FCC has yet to release its order following the remand of its Declaratory Ruling. We expect the FCC will provide adequate explanation to support its end-to-end analysis of ISP traffic and hence our finding that ISP traffic is not local will be undisturbed.

But even if a call to an ISP were found local, for reasons discussed in detail later in this order, we find that the adverse economic and competitive impacts of reciprocal compensation on telecommunications market and consumers justify its abolishment.

When we initiated this rulemaking, we wished to explore the policy issues of reciprocal compensation assuming we had jurisdiction to act. At the time, the FCC's Declaratory Ruling, despite finding ISP traffic interstate for jurisdictional purposes, authorized state commission to determine which calls will be defined as "local" for purposes of reciprocal compensation. Based on the belief that this authority is still in place, we asked the parties in this proceeding to respond to specific questions related to the nature of ISP traffic and the financial and competitive effects of reciprocal compensations. In the following sections we will address each of these critical policy issues to determine whether as a policy matter, rather than as a requirement under the Telecommunication Act, there are policy justifications that warrant a requirement of reciprocal compensation payments for ISP traffic.

¹⁹ Local Competition Order, ¶ 1034.