VI. Assuming that the Reciprocal Compensation Provisions of the Act are not applicable to ISP Traffic, Do Other Factors Justify Reciprocal Compensation for ISP Traffic?

A. Effects of Reciprocal Compensation Policies on Incentives to Promote Competition and Economic Efficiency

1. Parties' Positions

The ILECs argue that reciprocal compensation for ISP calls is detrimental to competition because it results in asymmetrical windfall profits to CLECs, providing the CLECs with an unfair competitive advantage. Pacific's and Verizon's customers originate several times more traffic destined for ISPs served by CLECs compared with the volume of originating CLEC calls that are destined for ISPs served by Pacific and Verizon. As a result, the ILECs claim they pay out considerably more reciprocal compensation to CLECs than they receive in return for ISP traffic. During 1999, Pacific claims that it sent 833 minutes of ISP-bound traffic to CLECs for every one minute of ISP-bound traffic sent by a CLEC to Pacific. Moreover, Pacific's measurements indicate that 73% of all CLEC traffic during 1999 was attributable to ISP-bound calls. Similarly, Verizon reports that CLECs have billed it for $32 million in ISP-related reciprocal compensation over the most recent 18 month period while Verizon has billed CLECs for only $0.4 million.

The ILECs claim that instead of increasing competitive alternatives to customers, ISP reciprocal compensation actually reduces CLECs' incentive to serve residential customers. The ILECs claim the CLECs instead have simply rushed to serve ISP customers who generate one-way traffic that ensures a steady stream of reciprocal compensation payments, and an opportunity for arbitrage due to the unintended consequences of regulation. Since ISPs originate very little traffic, CLECs pay only very small streams of ISP-related reciprocal compensation payments in the direction of the ILECs. By contrast, regular voice traffic tends to flow more evenly in both directions, creating a more balanced exchange of reciprocal compensation payments between carriers.

Pacific states that paying reciprocal compensation to CLECs for this asymmetrical ISP traffic flow runs contrary to the goal of promoting competition, particularly in the residential market. Pacific claims the current system actually disincents CLECs from serving residential customers, because the CLECs would have to pay reciprocal compensation to other carriers. Residential customers that call the Internet become huge liabilities to originating carriers, retarding the growth of residential competition, according to Pacific. Pacific also points out that CLECs have little incentive to develop new technologies for offering Internet access since doing so would reduce the flow of reciprocal compensation CLECs currently enjoy.

The CLECs do not dispute that a disproportionate share of ISP traffic is terminated by CLECs in contrast to the share terminated by ILECs. The CLECs, however, do not attribute this fact to anticompetitive arbitrage or to improper incentives. Rather, the CLECs say this outcome is a result of positive competitive forces. The CLECs claim that applying reciprocal compensation payments to ISP-bound traffic is conducive to competition, creating a strong incentive for ILECs to become more cost efficient and creating a basis for CLECs to build their business. Conversely, the CLECs argue that eliminating reciprocal compensation would harm local competition.

Focal argues that withholding reciprocal compensation for ISP-bound traffic would penalize CLECs for successfully competing for ISPs by precluding them from recovering the cost of terminating calls to those customers, thus discouraging CLECs from serving ISPs and limiting the competitive choices available to ISPs. Withholding reciprocal compensation for ISP-bound calls could also harm competitive LECs because it would limit their ability to rely on the high call volumes received by ISPs to reduce their per-unit costs and develop the economies of scale and scope currently enjoyed by incumbent LECs and needed to effectively compete with incumbent LECs. The CLECs also say that the Commission should take special note of the possibility that moving to bill-and-keep could have adverse consequences for the Internet, which would have significant consequences for the California economy.

CISPA argues that eliminating ISP reciprocal compensation will only bolster ILEC efforts to assert control over California's ISP market. CISPA argues that ILECs and their internet affiliates have specific designs on the internet services market in California. Patterns of discrimination against independent ISPs have already developed in Pacific Bell's service territory. CISPA claims ISPs in California have experienced service quality or other problems as reported in a national ISP survey, demonstrating serious problems with Pacific Bell's ability to serve ISPs and their end users. The evidence demonstrates, at a minimum, the value which independent ISPs place on competitive choice.

CISPA argues that ISPs do not have sufficient safeguards protecting them from ILEC discrimination or misconduct. As end users of telecommunications services, ISPs do not have the benefit of telecommunications laws and regulations developed to ensure competition among telecommunications carriers. ISPs lack recourse for an ILEC's decision to delay network capacity upgrades. The absence of relief for ISPs means that Pacific (or its affiliate SBC Advanced Solutions, Inc.) can delay installation of facilities such as a Digital Subscriber Line Access Multiplexer ("DSLAM") in a central office until its affiliated ISP has secured a customer base to fill the available ports in that DSLAM. Meanwhile, Pacific (or SBC Advanced Solutions, Inc.) remains free to ignore the pending orders of independent ISPs for DSLAM ports. Additionally, independent ISPs do not know how Pacific shares an ISP's customer proprietary network information ("CPNI") with its affiliates; however, it appears that this information is exchanged with Pacific's internet affiliate for purposes of marketing.

2. Discussion

Reciprocal compensation is a growing and potentially substantial revenue source for CLECs who predominantly serve ISPs. The argument that reciprocal compensation enhances competition implies that this flow of cash would serve as a source of capital infusion for their expansion into other telephone businesses such as local residential service. CLECs claim that the disparity in reciprocal compensation traffic is a normal competitive effect and good for competition because it will force ILECs to become more efficient. The CLECs claim that the elimination of reciprocal compensation will harm local competition. We disagree with the CLECs' fundamental view of the purposes (if any) of reciprocal compensation. We presume that the CLECs' who argue along these lines did not enter the competitive and capital intensive communications market with the concept of creating business models that under a regulatory mandate would siphon off revenues from the incumbent carriers to aid their entry into local market. But even if that business model were true, we do not see its viability for the simple reason that a CLEC who collects a greater amount of reciprocal compensation by serving more ISP customers, as a profit seeking business, would not choose to upset the imbalance of traffic that favors it by adding more residential customers who would be a liability.

Contrary to the CLECs assertions, we believe inter-carrier compensation for ISP traffic poses a serious threat to our local competition goals. It establishes a perverse incentive for CLECs to shun residential customers in favor of ISP customers and to eschew investments in advanced technologies for Internet access so as not to undercut reciprocal compensation collection. The payment requirement also imposes a unfair burden of subsidy on ILECs and their customers.

We start out by noting an undeniable fact that reciprocal compensation for ISP traffic has virtually no reciprocity. Unrefuted evidence in this record shows ISP traffic flows inordinately in the CLECs' direction. The ratio is 833 to 1 minutes of use flowing in the direction of CLECs to ILECs, respectively. Each call and each minute of ISP dial-up access a customer of an ILEC incurs becomes a liability for the ILEC, and vice versa if the CLEC has a local customer. Under the currently in place reciprocal payment arrangement, the longer the dial-up connection with an ISP, the greater the usage charges for reciprocal payment. Customers who access the Internet in this manner tend to stay connected for longer periods of time, accumulating greater usage charges for which -- neither the originating caller nor the ISP but -- the local service provider becomes liable through reciprocal payment requirements. For example, if the customer accesses the Internet twice a day and stays connected for 30 minutes each time, the ILEC is liable for about $3.79 in reciprocal compensation payment to the CLEC.28 In GTEC's assessment of this situation, the LEC serving a residential customer with a similar dial-up access pattern would end up paying between $5 and $12 per month in inter-carrier compensation.29 If we assume that the carrier that provides local service charges the rates Pacific or GTEC charges, it is clear that the intercarrier compensation alone could easily consume over half of the monthly charges it collects from that customer. Under this typical scenario, the disincentive reciprocal compensation introduces to competition in the residential local telephone market is unambiguously adverse. Thus, as far as the effects of reciprocal compensation on local residential service are concerned, not only does it fail to enhance competition, but it has the effect of discouraging CLECs from investing to serve the local residential market, an unintended outcome our current policy appears to have unwittingly abetted.

The examples mentioned above reveal yet another negative externality of inter-carrier compensation for ISP traffic on network utilization efficiency. The payment requirement on ILECs, rather than on the ISP or on the customer sends the wrong price signal to consumers. Effectively, it encourages excessive use of the local exchange network at no cost to the customer. So as matter of fact, the faux veneer of an offer of free access to a dial-up Internet user is in fact false. `Free' in this sense only means that someone that has no control over the use of the network in this set up will absorb the cost of use for the duration of connection decided by the customer and for which the ILEC recovers only a fixed monthly charge. That fixed monthly charge the ILEC has to share with a CLEC as an outcome of regulatory fiat raises questions on economic sustainability and equity.

As far as the CLECs' assertion that reciprocal compensation would aid their expansion into the local telephone market is concerned, we prefer that the free capital market, rather than regulatory actions, reward and penalize business models for their viability. Our duty is to create the environment for fair and robust competition that is genuine and sustainable in the long term. Genuine competition does not rely on cross-subsidies.

We also reject the CLECs' argument that rates for access to the Internet may go up or they may need to curtail their services to ISP and thereby reduce competitive choices for ISPs if reciprocal compensation is eliminated. The CLECs provided no evidence that without the extra profits from reciprocal compensation their service to ISPs would not be profitable. There are no facts in this record that establish that without reciprocal compensation there will be fewer competitive options for obtaining local exchange service, or that ISPs could become more dependent on ILECs for their service. As a matter of fact, the record shows that in states rejecting reciprocal compensation, the cost of Internet did not increase with rejection of reciprocal compensation.30

In sum, we find that inter-carrier reciprocal compensation for ISP traffic, if left unchanged, poses serious adverse consequences to the economy, competition in the telephone market, and ultimately to consumers. It will drive up the cost of local telephone service. It will seriously dampen the investment climate for advanced communications technologies. And it will establish an artificial preferential status for dial-up mode of Internet access over more advanced high-speed access technologies through subsidy.

B. Can ISP Traffic Be Accurately Identified and Segregated from other Traffic ?

1. Parties' Positions

Parties dispute whether ISP-bound traffic can be accurately measured and readily segregated from other local traffic on an ongoing basis for purposes of applying a different compensation method from other traffic. If ISP calls were to be excluded from reciprocal compensation payments, some method would be needed to properly identify and segregate ISP calls from other calls subject to the payment of reciprocal compensation.

The CLECs argue that the lack of any reliable system for accurately segregating ISP-bound traffic from other traffic points up the impracticality of imposing a different compensation method for ISP versus other local traffic. The CLECs say any attempts to ascertain from customers whether they are using a particular line for ISP purposes would intrude on the privacy of callers. The CLECs also argue that denial of reciprocal compensation would be discriminatory and impractical to implement since calls to ISP are functionally identical to voice-grade calls and cannot be separately identified for billing purposes.

Pacific believes that ISP traffic can be reasonably identified, and is currently making efforts to do so. The CLECs have already been ordered by the Commission to keep track of this ISP-bound traffic. Pacific's intent is merely to track ISP-bound calls in the aggregate so that no customer's privacy is compromised. Pacific also notes that in their filings with the Securities & Exchange Commission, various CLECs have been able to specifically identify the number of their ISP customers. For example, Pac-West states that it is "a leading supplier of Internet access and other Internet infrastructure services in California serving 78 Internet service providers."31 ICG states that at the end of 1999 it had "approximately 550 ISP customers."32 Moreover, these CLECs specifically direct their marketing activities at ISPs.33 Thus, Pacific argues that with the exception of a few minor "grey areas," CLECs are readily able to identify ISPs.

Pacific developed independent estimates of the volume of ISP traffic that has been terminated by CLECs for this proceeding. The source for Pacific's figures for an ISP-bound traffic was a study identified as the "Barry Lear Study." The Lear study used a four-step method to identify ISP traffic terminated by CLECs. The four steps are as follows:

Pac-West disputes the reliability of Pacific's figures measuring the volumes of ISP-bound traffic it has sent to CLECs. Pac-West claims each of the four steps creates significant opportunities for errors and misclassification of traffic, both in terms of false positives and false negatives. Pac-West argues that step (1) does not capture all of the telephone numbers that ISPs use to terminate calls. Pacific may miss certain advertised numbers, and new ISP dial-up telephone numbers are being introduced all the time. Moreover, some ISP dial-up telephone numbers may not be publicly advertised in mass-market sources, or the numbers may be grandfathered to existing subscribers and thus no longer advertised. In addition, Pac-West argues that many ISPs employ shared modem pools in which the same telephone numbers are used for ISP and non-ISP purposes, so that attempting to classify such a number as terminating either only ISP-bound traffic or only non-ISP bound traffic will necessarily fail.

Pac-West claims step (2) in the study only creates further problems. By assuming that ISP dial-up numbers will have average call durations exceeding 25 minutes or will receive more than 200 calls per day, Pacific excludes all dial-up calls to ISPs below these thresholds that were not already detected in step (1). Pac-West argues that by filtering in this arbitrary fashion, Pacific guarantees that the sample of ISP calls are non-random and biased toward higher volumes and longer durations. Pacific also includes non-ISP calls that meet the thresholds described in step (2).

Pac-West also criticizes step (3), in which Pacific assumes that hearing a machine tone on a called line means that the line terminates to a modem that will always provide a connection to the Internet. Pac-West states this is clearly not the case.

Verizon has not historically tracked originated or terminated calls that were specifically identified as ISP-related. Verizon witness, Beauvais, claims, however, that if the telephone numbers assigned to ISPs are known, that CLECs should be able to track precisely the amount of delivered traffic that it ISP-bound. In any event, Beauvais believes that useful estimates of ISP-bound traffic by carrier can be developed based upon an algebraic formula utilizing call duration as a defining variable.34 Based on Verizon data from North Carolina and Michigan, observed duration for Verizon to CLEC calls ranged from 15 to 45 minutes while the duration for calls from CLEC to Verizon ranged from only 3 to 4 minutes. Beauvais observed that the available California data yields consistent results with a range from 3.5 minutes to 8.7 minutes for traffic inbound to Verizon customers whereas the duration for outbound traffic to CLECs ranged from 8.5 minutes to 23.2 minutes. Beauvais views the duration differences as being largely attributable to the disproportionate ISP-related business of the CLECs.

Pac-West disputes the reliability of Verizon's claims concerning the ability to accurately measure ISP-bound traffic, arguing that its study relies on two critical assumptions that are not correct. First, the study assumes that duration of two categories of calls--voice and ISP-bound traffic--are known with sufficient precision. The second assumption is that there are only two categories of calls to be distinguished. Pac-West further argues that range of potential outcomes resulting from Beauvais' algebraic formula is too broad to be used to produce a meaningful measure of ISP-bound calls or minutes. Pac-West notes that the range of possible variation in the percentage of ISP-bound minutes in Beauvais' formula is over 20%. The percentage of ISP-bound calls derived from Beauvais' formula could thus range between 39.8% and 60.9% of total minutes at a 99% confidence interval. Applying the Verizon methodology to the total quantity of minutes handled by Pacific, Pac-West computes that the range of possible outcomes for ISP-bound minutes could vary by 5.2 billion minutes. (Explain calculation in footnote. See Pac-West's calculation in Opening Brief)

Verizon argues that although the use of statistical techniques would result in certain individual voice calls being classified as ISP-bound calls and vice versa, that is not in itself a justifiable reason to refrain from using these techniques. The Commission and the CLECs have been willing to use estimation techniques in a variety of circumstances, notwithstanding that the process does not identify each call. For example, existing interconnection agreements between Verizon and CLECs employ a statistical estimation technique to separate local traffic from toll.35

Verizon also argues that parties could conduct traffic studies that sample traffic flowing between ILEC and CLEC to determine a reasonable figure for ISP traffic. Verizon believes parties could readily identify their own ISP customers.

2. Discussion

We address the question concerning the extent to which ISP traffic can be accurately measured. First, we will consider the question from the standpoint of the accuracy of the ILECs' representations concerning the imbalance of ISP traffic between the ILECs and the CLECs. Second, we consider the question from the standpoint of the implications of those measures in terms of the potential financial effects, both on the CLEC and the ILEC. Third, we consider the question from the standpoint of whether a practical method exists to segregate ISP traffic from other traffic for the purpose of applying a bill-and-keep treatment, or some other different treatment in comparison with other types of calls.

With respect to the first question, we acknowledge that there are statistical limitations in the estimation techniques used by Pacific and Verizon in seeking to quantify the magnitude of minutes terminated by CLECs. Yet, the purpose for which these estimates were presented were merely to provide some order of magnitude of the huge asymmetry between ISP calls terminated by CLECs versus ILECs. The ILECs could only infer through indirect means how many terminating minutes of the CLECs involved access to the Internet.

In the case of their own ISP customers, the ILECs had access to more direct and specific record of call termination. Even if we take into account the potential measurement bias and statistical limitations pointed out by the CLECs, the ILECs estimates still provide rough approximations of the differences between CLEC and ILEC terminations of ISP traffic. We still left with the conclusion that there is a very large asymmetry between CLEC and ILEC terminations, even if it cannot be quantified precisely.

With respect to the question of financial impacts of the asymmetrical flow of traffic, we address that question separately in Section VI.D.

With respect to the question of whether ISP traffic could be separately measured and segregated from other traffic for intercarrier billing purposes the record presented shows that it can be done, albeit imprecisely at this time. We conclude, for the purpose of determining whether or not ISP traffic can be segregated and measured, that the results as presented by the ILECs, although not precise enough for CLECs satisfaction, do provide the general approaches that can be employed to segregate ISP traffic for reciprocal compensation billing purposes. We observe that the ILECs approximations were accomplished without the cooperation of the CLECs. Therefore, imprecise input due to CLEC's failure to cooperate may have contributed to the imprecision in output of the ILECs estimates.

But whatever contributed to the imprecision, the range of outcome as described by Pac-West leaves us with unease to adopt any of the proposed methods at this time. As we noted above, the ILECs have demonstrated that it may be possible to achieve some approximation of the amount of ISP traffic that flows on a broad level. For example, the ILECs have provided examples of published financial reports of the CLECs in which specific numbers of ISP customers served are identified. Pac-West, for example, says in its Form 10-K report (filed on March 30, 2000) that it is "a leading supplier of Internet access and other Internet infrastructure services in California serving 78 Internet service providers."36 Similarly, ICG's year-end 1999 Form 10-K shows it had 550 ISP customers. Surely, the CLECs must have some means of identifying the number of their own customers since they are able to state them in their financial reports. What follows from the identification of the CLECs' ISP customers will be the identification of each of the telephone numbers the ISPs provide to the public for dial-up access. We shall order the CLECs and ILECs to put in place the necessary internal tracking systems to identify their customers that are ISPs and the dial-up Internet access numbers they use for the purpose of tracking inter-carrier flows of ISP traffic.

Part of the argument from the CLECs regarding this issue has been the claim that ISP traffic can not be segregated and known with precision and hence it can not be measured and billed. Now that we have resolved the threshold question of whether or not there should be a mandated reciprocal compensation requirement for ISP traffic, we expect the CLECs will be more cooperative as it will be in their best interest to craft an acceptable ISP traffic identification measurement methodology.

C. Are there Fundamental Differences Between Dial-Up ISP-Bound Traffic and Standard Traffic and Between the Network Architectures that Transport and Terminate them?

The Commission asked the parties to compare and contrast various aspects of ISP-bound traffic with standard local traffic including the following: the transport and delivery of traffic; physical configuration of facilities; typical characteristics such as volume, frequency and duration; the nature and characteristics of costs of ISP traffic and standard voice traffic; the financial ramifications of reciprocal payment given that it is largely one-directional; and the impact of new generation technology to transport and deliver traffic. Our purpose in asking these questions is to better understand the characteristics of ISP traffic in considering the applicability and propriety of reciprocal compensation for ISP traffic in comparison with standard voice traffic, for which reciprocal compensation was intended.37

In our review of the record we observe two clear and different positions emerging. The CLECs assert that ISP traffic is "functionally identical" to standard local traffic. They also argue that for the purpose of reciprocal compensation payments, the Commission should continue to apply the TELRIC (Total Element Long Run Incremental Cost) rates of the ILECs to ISP traffic, since, from their view, the Act requires symmetrical inter-carrier compensation rates for local calls. The ILECs argue that ISP traffic is so fundamentally different from standard local traffic both in its characteristics and the architecture of the network CLECs use to transport and terminate it, that the automatic application of TELRIC rates, which were derived for standard voice calls produce "windfall" profits for CLECs.

The ILECs attribute the alleged windfall to network architecture specifically designed to lower traffic sensitive costs below those for standard calls. In support of this assertion, the ILECs point to several factors that they believe have the effect of significantly reducing or eliminating the traffic-sensitive costs of delivering dial-up traffic to ISP modems while on the other hand significantly maximizing reciprocal compensation. The first set of factors are related to the network. They state that CLECs use high-capacity technologies such as ISDN-PRI services, trunk-to-trunk switching, and deploy their facilities so as to avoid transport charges. Their facilities are chosen in order to avoid certain functions that are normally needed to terminate voice traffic and thus reduce fixed as well usage sensitive costs.

CLECs typically use high volume Integrated Services Digital Network-Primary Rate Interface (ISDN-PRI) technology to deliver ISP traffic. ISDN-PRI is a digital technology that provides 24 channels of capacity to an end-user customer. An ISDN-PRI line is typically configured with 23 bearer channels that are used to transmit traffic, and one data channel that is used for signaling. The technology is designed to serve the needs of high-volume customers, such as ISPs.

Pacific claims that CLECs' use of these digital facilities to terminate ISP calls require trunk-to-trunk switching that is different from both a technical and routing perspective, and is less costly, than the trunk-to-line terminating end-office switching used for terminating normal local voice traffic. Equipment vendors have developed switches designed for this type of termination. Pacific claims these switches do not perform all the same functions as a traditional voice switch. Witnesses Hamilton (Exh. 123; pp. 7, 21-23), Scholl (Exh. 106; pp. 16, 19-22), and Harris (Exh. 146; pp. 23-24) on behalf of Pacific, and Jones on behalf of Verizon argue that CLEC's experience lower call termination costs as a direct result of the fact that CLECs are delivering a high volume of traffic to ISPs.

Pacific estimated a TELRIC-based CLEC trunk-to-trunk terminating switching set-up price for ISP-bound traffic by applying the ISP-bound traffic completion rate to the price for a tandem switching setup attempt. The tandem switching function is a trunk-to-trunk switching function that Pacific claims is a reasonable surrogate because it reflects a similar terminating function as that performed by CLECs for ISP-bound traffic.

Verizon claims that trunk-to-trunk switching involves the use of different hardware and software to complete the call, as compared with trunk-to-line switching. For example, a switch used to terminate a trunk-to-line call to a POTS ("plain old telephone service") customer has one line card for each POTS customer served. By contrast, Verizon claims a switch delivering a trunk-to-trunk call to an ISP would not use line cards at all, but would use trunk cards carrying much higher traffic volumes per card.

While Verizon recognizes that the line card/trunk card distinction does not directly affect traffic-sensitive costs, Verizon claims an indirect effect exists insofar as other equipment-based differences are triggered. Specifically, witness Jones testified that the number of switch modules varies directly with the number of line cards or trunk cards, and that the switch modules have some usage-sensitive characteristics that impact reciprocal compensation costs.

The CLECs dispute the ILECs' claims concerning the lower costs of trunk-to-trunk switching. Pac-West argues that the claims of the lower cost of trunk-to-trunk switching are tenuous at best, and in any event, aren't relevant to reciprocal compensation since they are non-traffic sensitive. ICG claims the switching costs of call termination incurred by CLECs is not a function of the type of the customers served. ICG claims it incurs a cost of end office switching that does not vary depending on the identity of the called party whether an ISP or not. ICG disputes the ILECs' claims that trunk-to-trunk switching is less costly than trunk-to-line switching. ICG witness Starkey claims that: the ILECs' "trunk-to-trunk" switching arguments are fundamentally flawed because they depend on cost concepts that are not consistent with a proper TELRIC study. Starkey testified that: "[A]ttempting to derive disparate per-minute-of-use rates for different types of traffic originated by or delivered to a specific subset of customers has no causal validity."38

    (2) Discussion

To put our review into perspective, we should mention at the outset that our interest in this effort is to identify any distinguishing characteristics of the network CLECs use to transport and terminate39 ISP traffic in comparison with voice grade traffic. We chose to start with with identification of the differences in network configurations between the systems needed to perform the necessary functions for two types of traffic: high-speed data and voice-grade. We wished to gather information from CLECs and ILECs to examine the network configurations for ISP traffic and attempt to approximate differences in cost. In doing this we recognize that our inquiry is service specific. We have singled out ISP data traffic because it is this particular type of traffic - flowing disproportionately in the direction of CLECs and a one way flow of reciprocal compensation - that is the subject of the debate. When we compare ISP-bound traffic with voice grade traffic, we do not believe we are comparing apples with oranges since the claim for reciprocal compensation is requested to be paid for both traffics at the same rate. So the question `what makes up the cost behind ISP traffic transport and termination' is a fair one, especially when this usage sensitive reciprocal compensation is a cost to ILECs and does not appear to have a revenue source to match it.

It is neither relevant or within the scope of this proceeding to approximate with any degree of precision the CLECs' TELRIC to transport and terminate ISP traffic. So we will not engage in that exercise in this phase. What we desired was a comparative description of the relevant networks and a qualitative analysis of cost implications. The effort by the parties as described below has taken two paths in different directions. CLECs' have consistently argued that the cost implications of any differences in the network difference are irrelevant. Instead, they argue, the TELRIC rates are to be applied to ISP traffic regardless of the cost differential that may exist between voice and ISP traffic. Having decided that ISP traffic is not local and hence not legally required to receive reciprocal compensation under the mandate of the Act, we reject the argument regarding the automatic applicability of the same reciprocal compensation rates to voice traffic to ISP. Nonetheless, we will examine the cost and network issues in this record for the purpose of identifying any differences that might exist between the two networks so that any policy decision we make on this matter considers the economic and competitive aspects of reciprocal compensation.

To begin with, since our ultimate interest is to distinguish the cost differences, if any, in the transport and termination of ISP-bound traffic and voice traffic, we accept as one of the very few undisputed facts in this case that the current reciprocal compensation rates include only the traffic-sensitive switching and transporting costs. The key question is whether any differences in the characteristics of the two traffics result in either reducing or increasing any of these traffic-sensitive costs.

We find that ISP-bound traffic is primarily delivered as high-speed digital data over facilities appropriate for such traffic. For example, ICG and Pac-West typically use DS-1 or DS-3 facilities, which are digital high-speed switching facilities that can carry the equivalent of 24 or 672 voice-grade circuits, respectively. 40 CLECs' facilities that carry such high-speed data traffic typically use the more suitable trunk-to-trunk type of switching rather than a trunk-to-line type of switching normally used for voice traffic as Pac-West's response to Pacific's data request confirmed.41 None of the CLECs participating in this proceeding denied that trunk-to-trunk switching is used primarily to terminate ISP calls. The cost differences between terminating ISP-bound traffic through a trunk-to-trunk and normal local voice traffic switched through line-side ports are, in part, caused by the different equipment used to process trunk-to-trunk switching than trunk-to-line switching. When trunk-to-line switching is used, the switch uses a line card for each customer served. By contrast, terminating ISP traffic with trunk-to-trunk switching use trunk cards that carry much higher volumes of traffic. The traffic sensitive costs arise not out of the avoidance of line cards but from switching modules whose number varies directly with the number of line and trunk cards deployed within the switch. The switch modules have at least some usage sensitive characteristics that vary with their numbers and consequently affect the per-minute-of-use switching costs of the terminating carrier for reciprocal compensation.42 Since there are greater number of switch modules in the trunk-to-line (or end-office) switching than there are in the trunk-to-trunk switching applying the same switching cost for termination to both would overstate by at slight amount the termination cost of ISP traffic.

The difference in switching costs between trunk-to-trunk and line-to-trunk or line-to-line switching is attributed to the fewer paths the call may travel in the former. If the switch uses less processing resources to determine the appropriate call path, then the cost incurred would be lessened by some amount.

The trunk-to-trunk switching cost would also be less than the trunk-to-line (or line-to-line) switching cost because it avoids the digital to analog conversion normally needed for voice-grade traffic. Unlike a standard voice-grade telephone, the ISP modem that receives dial-up ISP-bound traffic processes digital signals rather than analog signals. Given that the CLECs' network is 100% digital, this means that the terminating carrier can process the call all the way through its switch in digital format and does not have to use switching resources to convert the signals that it receives from digital back to analog format. CLECs do not dispute that ISP-bound traffic is data traffic en route to an ISP modem and does not need digital-to-analog conversion. For at least one type of switch - the Lucent 5ESS that ICG uses - the avoided digital to analog conversion would directly affect traffic-sensitive costs.

Based on the above, we conclude that trunk-to-trunk switching is primarily if not exclusively used to terminate ISP traffic by CLECs. There is a plausible explanation that trunk-to-trunk switching of ISP traffic avoids certain traffic-sensitive termination costs that otherwise may be included in a line-to-trunk or line-to-line switching for voice grade standard traffic.

b) Lack of Line Concentration using ISDN-PRI

    (1) Parties Positions

Verizon states that CLECs' use of ISDN-PRI technology results in a difference in line concentration accommodated by the switch for ISP calls compared to voice-grade calls. For local traffic terminated to a customer over a standard voice-grade line port, there is typically a line concentration ratio of six to one. This means that the number of standard local POTS lines coming into the switch will be six times greater than the available number of paths through the switch for such traffic. Rather than having a dedicated amount of capacity through the switch, the lines share the switch path capacity at a ratio of six lines to one path.

This six-to-one line concentration configuration works well for standard POTS traffic because each POTS line is generally only used for short periods of time, and all lines are not typically in use at the same time. Because the volume of traffic over each POTS line is relatively low, the lines can efficiently share paths through the switch without substantial amounts of call blocking (a call is blocked when it does not make it through terminating switch because there is no available path). For calls to POTS customers, the switch module - a piece of peripheral equipment that is part of the switch - performs the line concentration function. This function allows the larger number of end-user lines to share the smaller number of paths through the switch. Because the paths through the switch are shared among multiple lines, the use of the switch during the peak hour imposes congestion costs on other line-concentrated users in the form of call blocking or rationing. Call blocking or rationing occurs as a result of the available path being in use. These congestion costs are the busy hour line costs, measured in cenum call seconds (CCS).

As explained by Verizon witness Collins, the busy hour line CCS provides a measure of costs that are caused by the line concentration accommodated in the switch. Because these busy hour line CCS congestion costs vary based on the volume of the traffic flowing through the available shared switch pathways at a given time, costing models treat these termination costs as traffic-sensitive.43 Therefore, where reciprocal compensation applies, such costs are included in any reciprocal compensation charge that the originating carrier must pay to the terminating carrier on a per-minute or per-call basis.

For calls to ISPs over ISDN-PRI connections, Verizon states, however, the situation is very different. When ISP-bound traffic is carried over higher-volume ISDN-PRI trunks, the ratio of incoming to outgoing traffic through the switch is one-to-one. That is, each incoming line (or trunk in the case of traffic that has already gone through a separate originating switch) has dedicated capacity (i.e., a guaranteed path) through the switch. Unlike local POTS traffic, the incoming line does not share that capacity with other traffic. This arrangement is used for ISP-bound traffic because such traffic tends to be higher in volume.

Verizon argues that because the switch reserves dedicated capacity for the traffic that flows over that connection, there is no line concentration and no competition with other non-dedicated traffic for available pathways through the switch. Verizon claims because the ISP that is receiving the call over a PRI connection does not have to compete with other customers for switch capacity, the ISP imposes no congestion costs on the switch as a result of the amount of traffic that is carried to it over the connection.44 From the perspective of the terminating carrier, it does not matter how frequently the ISP is constantly using its dedicated capacity. In any case, the number of pathways through the switch available to other customers remains the same.

Verizon asserts that this difference in the manner in which the switch paths are allocated reduces the traffic-sensitive costs incurred by the terminating carrier. That is because the level at which the ISP uses its dedicated capacity - i.e., the amount of traffic received by the ISP through the switch - does not affect the congestion in the switch. As a result, Verizon claims the CLEC does not incur traffic-sensitive busy hour line CCS costs when it terminates ISP-bound traffic.45 Since only traffic-sensitive termination costs are eligible for recovery by the terminating carrier, the line CCS costs that have been included in the reciprocal compensation rate for line-concentration, Verizon claims that the rate must be removed from standard voice traffic when ISP-bound traffic is at issue.46

Verizon argues that the lack of line concentration performed by the switch on ISP-bound traffic delivered using ISDN-PRI technology results in significantly lower traffic-sensitive switching costs being incurred by the CLEC for termination of traffic.

The CLECs dispute Verizon's claims. Focal witness TerKeurst denies that the switching of a dial-up call onto an ISDN-PRI connection is any less expensive than switching a voice call onto a separate voice circuit. TerKeurst testified that many customers utilize ISDN connections for voice traffic without conversion to analog signals, so that this aspect of the switching process is not unique to ISP-bound traffic.47

CISPA witness Montgomery testified that, if anything, the ISDN-PRI service used to terminate some ISP-bound traffic is actually more costly, when compared to the termination cost for analog traffic. Montgomery attributes this to two factors: (i) providing ISDN-PRI service requires that additional software be activated in the central switch processor; (ii) that the functionality of ISDN service is more taxing to the central switch processor.48

As Focal witness Terkeurst similarly noted the fact that circuits are concentrated within a single ISDN-PRI loop does not reduce the switching requirements. ISDN-PRI connections and the ability to switch digital traffic onto such connections without conversion to analog are not unique to ISP-bound traffic, but are available to any business customer wishing to purchase them. In fact, a number of incumbent LEC business customers purchase such connections.49

ICG witness Starkey similarly testified that Verizon's claims of lower cost due to line concentration differences were unfounded and reflected a misperception of the manner in which traffic-sensitive costs are incurred.

    (2) Discussion

The record is clear that ISDN-PRI is a commonly used connection for terminating traffic to ISPs and that the ISPs served by CLECs typically order ISDN-PRI service.50 It is also generally accepted that when ILECs and CLECs terminate voice-grade traffic, they typically use voice-grade ports rather than ISDN-PRI ports.51 We find Verizon's line concentration explanation plausible. Arguments presented by CLECs do not persuasively refute the conclusions reached by Verizon regarding the usage sensitivity of CCS costs and that a PRI configuration is not usage sensitive as far as CCS is concerned and thus it does not impose congestion costs.

ICG merely argues that ISDN circuits share the same finite switching resources (i.e., internal transport links, the switch fabric and the processor), as do other circuits and consume usage sensitive resources.52 It fails to acknowledge that it is not the mere sharing or, for that matter, the presence of usage sensitive costs (in switched services) that distinguishes ISDN-PRI from other circuits, but the absence of usage sensitive congestion related costs that is the source of overcompensation in the switching costs for ISP traffic that uses a PRI architecture. Focal Witness TeKeurst testified that there are "many" customers who use ISDN connections for voice traffic without conversion to analog signal is also unconvincing. The record only reflects that CLECs typically use ISDN PRI to terminate ISP traffic.53

When ISDN PRI is used to switch ISP traffic, pathways are allegedly `dedicated' and thus there exist no line concentration, therefore, no centi call seconds (CCS).54 This implies that the ISP traffic terminating carrier would not incur the traffic sensitive CCS costs. But given that the reciprocal compensation rate applicable to standard voice traffic has a component attributable to CCS, if Verizon's proposition holds, applying the same reciprocal compensation rate to ISP traffic would over-compensate the terminating carrier for a function its switch does not perform.55

Based on the above testimony, we find that CLECs primarily use ISDN-PRI to deliver ISP traffic. The record also demonstrates a plausible explanation that the ILECs' reciprocal compensation rates designed for standard voice traffic may overcompensate usage sensitive terminating costs when applied to traffic switched using ISDN-PRI services, because of alleged differences in concentration ratios. We find there is a probable basis to accept Verizon's assertions that CLECs incur lower traffic-sensitive termination costs as a result of line concentration differences in terminating ISP traffic compared with standard voice traffic.

c) Longer Call Duration of ISP-Bound Traffic

    (1) Parties' Positions

Pacific Witness Scholl testified saying "ISP-bound calls delivered to CLECs" are "typically much longer in duration" than a "traditional" voice call. Pacific states that "ISP-bound traffic on Pacific's network during 1999 averaged 29 minutes in duration." By comparison, Pacific reports that the average duration of a local voice call originated by flat-rate residential service in 1994 (prior to the growth of ISP traffic) was 3.78 minutes.56

In 1994, Pacific reported average local usage per flat-rate residential line of 19 minutes per day. By comparison, America Online (AOL), a major ISP, reported 52 minutes of usage per day by its customers for Internet access. Pacific argues that these comparisons highlight the difference between ISP and other types of calls.

Verizon witness Beauvais testified that ISP-bound calls average between 20 to 30 minutes per call.57 Some of the data supporting this duration were collected from trunks devoted solely to ISPs and thus, include no traffic delivered to local plain old telephone services (POTS) customers.58 Other data come from a study that involved specifically identifying ISP telephone numbers and verifying the traffic as modem traffic by calling the identified numbers.59 Similar studies performed by Pacific and Roseville Telephone Company (Roseville) show average call duration times for ISP-bound calls of 29 and 25 minutes per call.60

Beauvais testified that there are a variety of other sources that reflect average holding times for ISP-bound traffic that are 30 minutes or greater.61 An independent entity - Nielsen/NetRatings -calculated an average ISP-bound call duration of 30 minutes and 27 seconds.62 Traffic data that a CLEC provided to Verizon in Michigan - and that the relevant CLEC confirmed was purely ISP-bound traffic - displayed an average holding time of 42 minutes per call.63

Various CLECs have argued longer hold times are not unique to ISP calls, in that particular local voice calls or types of call traffic - for example, traffic in households with adolescents who make long calls to their friends - potentially overlap with the hold times of ISP-bound calls.64 The ILECs witnesses consistently use the term "voice calls" to describe calls that are not delivered to ISPs. The CLECs claim this is a false dichotomy. A significant volume of non-voice (data) calls exists that is unrelated to, and does not involve, ISPs, (i.e., some calls that are not voice calls are also not ISP-bound calls.) Conversely, not all calls to ISPs are data calls, some are voice calls. As a result, while it may be meaningful to refer to "voice" vs. "data" calls, it is not accurate or appropriate to place all calls to ISPs into either classification. Verizon responds, however, that the arbitrage opportunity presented to CLECs under the existing regulatory regime arises in part from the difference in the average duration of ISP-bound calls in the aggregate as compared to the average duration of voice calls. The longer average duration for ISP-bound calls reduces the per-minute cost of the "call set-up" i.e., the costs that occur on a per-call basis, but do not vary with the length of the call. Since Verizon's reciprocal compensation rate does not separate out this fixed component, Verizon must pay CLECs for every additional minute even though there is no corresponding increase in per-minute costs. Because of the longer duration of ISP calls, Verizon claims that CLECs receive at least five times more for the call set up allowance than the fixed cost of performing the service would merit. Verizon understands that Pacific's default reciprocal compensation rates separate out the costs between a flat per-call set-up fee and a per-minute charge, and thus, apparently the overpayment due to call duration is an issue unique to Verizon.

The CLECs, who take the position that ISP traffic is unknowable, claim that Pacific and Verizon do not know the average duration of an ISP-bound call (whether delivered by a CLEC or Pacific). As described in response to ICG's Data request No. 18, Pacific has attempted to estimate the number and characteristics of calls to ISPs (delivered on its own network or by a CLEC). ICG argues that the process used has been thoroughly discredited in other states as being over-broad and inaccurate.

The CLECs note that Verizon's Beauvais cites to data that "is rather dated and is not California-specific,"65 yet he concludes that the average holding time for voice calls is approximately 4.8 to 4.9 minutes in Illinois. He then compares this to data from a single CLEC in Michigan, and concludes that the average holding time for calls to ISPs is approximately 42 minutes, though "limited data" that Verizon has collected for California suggests an average duration for JSP calls of 20 to 30 minutes.

    (2) Discussion

The ILEC's study of call duration demonstrates that ISP-bound calls delivered to CLECs are typically much longer in duration than traditional voice calls. Clearly the results of the ISP call duration studies show wider variations. The estimated and observed call duration for ISP-bound traffic range from 22 minutes, in a recent GTEC sample data, to 52 minutes, as reported by AOL based on its customers' Internet access observation. The CLECs point to this variation to argue that ISP-bound traffic is unkowable in any meaningful precision. We disagree. As Verizon's Witness Beauvais explains in his testimony, this kind of varation is to be expected given the anecdotal nature of the studies that have been performed. Moreover, as his testimony shows, ISP traffic displays much greater relative variation than standard voice traffic.66

The numerous studies presented in this record show the same trend, at various degrees of difference. Pacifc's study shows an average ISP call duration of 29 minutes, whereas Verizon's study indicates values that range from 20 to 30 minutes. Other studies by Pacific and Roseville indicate a range of hold times from 29 to 25 minutes per call. In contrast, voice traffic is estimated to have a call duration that range from Pacific's 3.78 minutes to Verizon's 4.8 minutes. The CLECs argue that Verizon's 4.8 minutes average for voice traffic is unreliable because it is dated data from another state. We believe the Michigan study is not an unreasonable estimation of call duration for voice traffic in California since a limited California-specific study showed consistent results.67 Based on the studies presented in this case, we find that ISP-bound traffic is typically much longer than voice traffic. We also observe ISP traffic appears to have wider variations and could exceed standard voice traffic in duration by an order of magnitude.

Call duration is an important factor in our review of reciprocal compensation because the usage sensitive portion of inter-carrier compensation is directly dependent upon the hold time of a dial-up access of the Internet. Compared with voice traffic, an ISP-bound call that is ten times longer than voice call would be eligible for reciprocal compensation at ten times the usage based amount for voice traffic in addition to the set up charge, if there is one. In the case of Verizon, because it has a blended rate for call set-up and per-minute rate, the long duration ISP call overstates the total per minute fees and thus overcompensates the terminating carrier.

Duration of call is only one contrasting factor. The record also demonstrates that based on all publicly available data, ISP-bound traffic constitute large minute of use per month or per day than do standard voice calls. The studies conducted generally show a monthly Internet usage of over 1,800 minutes per consumer, about three to six times higher than that for residential and business voice calls.68

CLECs' argument that ISP calls are not distinguishable from calls to any other end-user, "misses the point." We are examining the opportunity presented to CLECs due to a mandated reciprocal compensation which covers a particular type of traffic whose average duration in the aggregate is found to vastly exceed other standard local calls.

We conclude that ISP traffic is significantly different from local traffic in its duration and aggregate minutes of traffic per customer per month. The record before us demonstrates that ISP-bound traffic tends to exhibit a much greater call duration and in the aggregate much greater minutes of use per call than for standard voice traffic.

d) Higher Call Completion Ratio

    (1) Parties' Positions

Pacific also identifies a higher call completion ratio for ISPs as opposed to other calls. Pacific reports that normal voice calls are answered about 75% of the time whereas Internet calls are answered 95% of the time since they are answered by machines. Pacific claims the higher completion ratio reduced the TELRIC of the terminating switch set-up per completed call. Although TELRICs for terminating switching set-up costs are incurred on a per-attempt basis, they are billed only on completed calls. Thus, Pacific calculated a conversion factor to adjust its TELRIC based upon the higher call completion ratio for ISP calls. Using the Commission-adopted TELRIC for terminating switching set up of $0.007 per call, Pacific calculated a 14% minimum rate reduction comparing local voice calls versus ISP-bound calls.

Focal's witness argues that high call completion rates are not necessarily limited to ISP calls, but would apply to any business where a prompt answer of the call is important. Focal argues that because ISP call completion rates are not unique in comparison to completion rates for various other service-oriented businesses, there is no basis to conclude that the ISP call termination costs are unique in this respect.

    (2) Discussion

The relative rate of call completion for ISP calls takes a special import in reciprocal compensation when compared with standard voice call because under the current reciprocal compensation scheme set-up fee is billed when a call is completed. It follows then that the more the calls are completed the greater the bill for set-up fees. So the relevant question is whether or not ISP traffic complete at a higher or lower rate than voice traffic. As the testimonies show because machines answer the ISP calls they have a higher completion rate than voice traffic.

That said, the difference in call completion , as described by Pacific's study, is significant. We note that the higher completion ratio directly affects what CLECs can recover through set up fees. Based on the record before us, we find that ISP traffic will generate a greater amount in set up fees than they will an equal number of attempts to connect in voice traffic.

The CLECs arguments that a higher completion ratio is not unique to call traffic is unconvincing for the same reason mentioned above. Our examination of the characteristics of ISP traffic is intended to test the proposition that there may be exploitable unfair and unintended conditions that coupled with a mandated reciprocal compensation could have created unfair opportunities for CLECs. In this context, we find little value in CLECs' argument that the characteristics identified as unique to ISPs in contrast with voice traffic could apply to fragments of customer types.

e) Other Differences in Network Configurations and Facilities

    (1) Parties' Positions

GTE presented testimony to show that while the ILEC is required to maintain a network that serves all types of customers over a wide geographic area, CLECs may pick and choose which types of customers to serve. As a result CLECs can target ISPs and deploy a network that requires a limited number of facilities to lower the network's costs and functionality. Pacific explains it delivers ISP-bound traffic to the CLECs as high-speed digital traffic (DS0, DS1 and DS3). The CLECs then switch these calls (without having to perform signal conversions from digital to analogue) as would be required for standard voice calls and deliver the traffic to the ISPs as high-speed digital traffic. The processing difference according to GTE directly affects the usage-sensitive costs incurred by the carrier delivering the ISP traffic.

ILECs allege that ISPs are frequently collocated in the CLEC central offices. In those cases no CLEC loop plant and the associated costs are involved in transporting traffic to the ISP. Pacific's witness testified that by collocating ISPs' modems in CLECs' space the CLECs are able to reduce termination costs. Hamilton notes that in this manner CLECs can offer to ISPs a "no mileage or per minute charges" on their service. (Exh. 123, Hamilton, p. 20)

Pacific and Verizon argue that new generation technologies are widening the differences in the cost of transportation and delivery of ISP and standard voce-grade traffic by facilitating the deployment of a network specifically designed to serve ISPs. Pacific's Hamilton described the CLECs' use of new generation routing products that do not use a traditional voice circuit switch to deliver ISP traffic. Described as an "Internet Gateway" it does not originate traffic but receives and routes traffic to an ISP. Hamilton testified that this new technology enables CLECs to replace several pieces of equipment used in the traditional Class 5 switches (such as the Nortel DMS-100 or the Lucent Technologies 5 ESS) required for voice grade circuit switches. These Class 5 switches are fully functional and are designed to carry voice traffic.69 Hamilton states that Internet Gateway eliminates the need for Class 5 switches by assuming a few of the functions needed to deliver ISP traffic such as receiving a data call (from an ISP customer) and converting the call into digital packets to be routed directly to the ISP. The Internet Gateway would primarily route traffic to groups of ISP modems. Pacific draws from this the Internet Gateway will have lower costs than ILECs whose switches must provide all local switching capabilities.

Verizon expresses a similar view on the impact of new technologies. It notes that there are more efficient switching technologies than standard circuit switches. Verizon states that these new generation technologies further widen the gap between how ISP traffic and standard local POTS traffic are transported and delivered; and that, because there are cost differences, it is improper to automatically apply the same reciprocal compensation rates to both ISP-bound calls and traditional POTS calls.

Pacific also describes how a CLEC can aggregate ISP traffic by using a service ICG offers to its ISP customers. Internet Remote Access Service (IRAS) is a service that utilizes ICG's switches and modem banks. This service eliminates the need for ISPs to physically locate their own modems at each of ICG's points of presence (POP) and instead "combines access, transport, and routing services to deliver all Internet Protocol (IP) data packets either directly to the ISP, or directly to the Internet, bypassing the ISP."70 According to ICG's Form 10-K Report for end of year 1999, "65% of all ICG's ISP traffic is routed directly to the Internet."71

Pacific also states that the configuration of the CLECs' facilities forces Pacific to incur additional transport and switching costs in delivering ISP traffic to CLECs' POPs of interconnection, rather than directly to ISPs.72 Pacific incurs the additional costs because CLECs have generally chosen not to establish a point of interconnection in each of the local calling areas where ISPs originate calls. Pacific argues that CLECs often design their networks to have only a few points of interconnection per LATA, thus causing Pacific significant transport costs to haul traffic from the originating point to these locations. Pacific argues that the typical configuration of CLEC networks is actually adding costs to Pacific. Moreover, Pacific claims it is not equitable that when Pacific serves an ISP, it has to fund termination costs from the services ISPs buy or from other customers, while CLECs may look to Pacific to cover their costs.

Various CLECs actively participating in this proceeding provided testimony and written comments on the configuration of their facilities used to transport and terminate ISP traffic. Level 3 states that the principal architectural differences between ILEC and CLEC networks arise largely in the relative mix of the switching and transport components. ILECs generally have a hierarchical network, so that within a given geographical area, multiple end offices subtend on tandem offices. These tandem offices aggregate traffic and network management functions associated with the area served by each of the end offices subtending it. Because the ILECs have millions of subscribers statewide, they can afford to deploy relatively efficient, large-scale switching systems in close geographic proximity to their customers.

Level 3 argues that while many CLEC networks are physically configured differently than ILEC networks, they provide the same functionality for all local communications traffic, including ISP bound traffic. Pac-West witness Selwyn explained that CLEC and ILEC networks are generally comprised of three principal components: subscriber loops, end office switches, and interoffice network, which are trunking and switching facilities that provide interconnections among end offices and between end offices and other carriers. In contrast, a CLEC's customer base is only a small fraction of the size of the ILEC's customer base. As such, in lieu of using tandems and multiple end offices, CLECs typically deploy a small number of large switches which perform both tandem and end office functionalities to serve a comparable geographic area to that of the ILEC. CLECs transport their customers' traffic over relatively large distances. Because transport costs have become far less distance-sensitive with the use of high-capacity fiber optics, enormous amounts of capacity can be deployed at little more than the cost of more conventional transport capacity sizes.

ICG witness Wood acknowledges that ISPs may use a variety of facilities to connect with the serving LECs switch, but denies that the choice of facilities or methods of connection has any impact on the usage sensitive costs which are the only relevant costs recoverable through reciprocal compensation. ICG claims that the characteristics of the particular facility used by a LEC to deliver traffic to its own customers is irrelevant to the rate for reciprocal compensation because the costs of these facilities are non-traffic sensitive, and are recoverable from end users. Moreover, regardless of what type of facilities are used to provide service for a specific type of customer, i.e., ISPs, when a CLEC uses a fully functional switch, it is purchasing the ability to service all line types. At the switch matrix level, which is the basis for costing out reciprocal compensation rate, a call path is assigned at the individual channel level, without reference to the type or capacity of the physical facility connecting the switch to the end user.

ICG says its network is built based on a SONET Ring architecture. These SONET rings are comprised of fiber optic facilities and multiplexing equipment that provides for aggregating, connecting and dispersing an individual customer's traffic to a larger SONET data stream. Witness Starkey testified that ICG employs a common network that is used to service its entire customer base. Both general business customers as well as data customers (primarily ISPs) use the same switches, fiber optic backbone and SONET rings for accessing the network, as well as for originating and terminating calls. Starkey testified that ICG employs fully functional Class 4/5 circuit-based switches (i.e., Lucent Technologies' 5ESS) that are shared by all of its local exchange customers. Focal denies that it uses the new technologies referenced by Pacific in terminating ISP traffic in California. Focal claims that it utilizes Nortel DMS-500 switches in California that provide all the same call origination functionalities offered by the ILECs.73

ICG argues that because of the lumpiness inherent in switching investments and the fact that CLECs began to compete without an embedded customer base, any given CLEC may experience per-minute switching costs that are actually higher than those of the ILEC, including the cost of calls delivered to ISPs. ICG denies that any relevant cost differences exist between ILECs and CLECs that would justify paying an asymmetrical rate for reciprocal compensation.

    (2) Discussion

On the question of whether there are fundamental differences between the network configurations and deployment of facilities between ILECs and CLECs who serve ISP customers, the ILECs have the better of the argument. It is now an uncontested fact that CLECs' networks tend to be configured differently in a meaningful way from those of the ILECs in the manner described above by the ILECs. We are not persuaded by the CLECs' argument that they have a "functionally identical" network.

The relevant inquiry, however, is whether the CLECs' network differences cause significantly lower traffic-sensitive switching and transport costs of the type that are recoverable through reciprocal compensation. We conclude that while the cost differences have not been precisely identified in this record, we are persuaded that the differences in network configurations between ILECs and CLECs can result in meaningful differences in costs. The record does not precisely determine the cost differences that result from CLEC performing primarily trunk-to-trunk switching or using ISDN-PRI, or from ISP traffic's higher call termination rate. For the same reasons, we can not, based on the record before us, tell to what extent new generation technologies will widen the cost differential between CLECs' ISP-focused network design and a network designed to carry standard voice traffic. But we did not set out to identify with any degree of precision the costs of terminating and transporting functions performed by CLECs in their services to ISPs. We wished to gather information to test the proposition that there may be an economic incentive in reciprocal compensation for CLECs to devise a business model that attracts predominantly ISP customers. Clearly there is no inherent evil in business model that targets a niche market. However, in this case, the proposition is predicated upon the possibility that this niche market may very well be a subject of particular interest not because of certain competitive advantages manifest in CLECs' business model that ILECs lack but because an opportunistic loophole in the existing reciprocal compensation scheme.

The testimonies provided by ILECs' witnesses and to some extent the witnesses of the CLECs provide a credible basis that CLECs' costs in the provision of traffic to ISPs are by some measure below the cost of reciprocal compensation they believe they are entitled to, under the Act. This is so because the inter-carrier rates that have been applicable to ISP traffic are the same TELRIC rates that are used for voice traffic termination, which are presumed to be higher than the cost CLECs incur for ISP traffic delivery. ICG's witness correctly points out that due to economies of scale and scope the ILECs may be enjoying better cost advantages than competitive CLECs. His comparison is misplaced because Jones' testimony compares not the long run CLECs' cost advantages with those of ILECs, but whether the switching and transport cost structure of CLECs for ISP traffic approximates the TELRIC based reciprocal rates applicable to standard voice traffic. Put differently, the comparison is between cost structure of ISP traffic with that for all local traffic underlying the TELRIC. It is irrelevant to view this analysis as a comparison between ILECs and CLECs long run costs.

Turning to the specific allegations ILECs make about CLECs' network configurations, we find at least three of the issues identified above by ILECs and CLECs deserve to be addressed. First, on ISPs' collocation of modems in CLECs' spaces, Pacific alleges that the CLEC would avoid loop costs. It refers to an admission by a CLEC that 97% of its ISPs collocate their equipment with the CLEC. The CLECs' provision of collocation and `managed modem services' are innovative arrangements CLECs have apparently been to utilize to create efficiencies in providing access to their ISP customers. Under normal circumstances, this is a laudable cost savings effort that ought to be encouraged. But within the context of the review of reciprocal compensation for ISP traffic, we observe that the CLEC has the ability to control costs at and beyond its switching points, while continuing to recover the same transport and termination charges from the call originating carrier. It intrigues us whether ISPs are paying the true cost of the services they receive and whether their value as customers to CLECs is due to revenue to be generated from those services provided to them or because of the ISPs' ability to generate ISP traffic.

The next issue is whether and if so to what extent CLECs' facilities have fewer functionalities and thus are designed exclusively or primarily for ISP traffic. This record does not show what other CLECs in general use to originate and terminate ISP traffic; however, the three actively participating CLECs in this proceeding (ICG, Focal, and Pac-West) have indicated that they all use high-speed digital facilities such as DS-3 or DS-1 as we have noted above. We have also observed that these CLECs use primarily ISDN-PRI service to switch ISP traffic, a service that is normally used for high-volume data traffic rather than to switch standard voice traffic. Accordingly, as we noted, there are cost savings to be gained by CLECs who use this type of switching.74 We have also noted that many of these switches such as the DS-3 and DS-1 are typically not used to transport and terminate voice traffic. CLECs do not deny these assertions. ICG claims it has fully functional, Class4/5 circuit-based switches that are shared by all of its customers, ISPs and non-ISPs.75 As a matter of fact, neither the network nor the services offered by CLECs are homogenous. Surely, we can not, based on this record, tell the extent of CLECs' network functionality in general and whether or not there is a uniform business model emerging. But the record establishes that the CLECs involved in this case and are debating to maintain the status quo generally appear to be concentrating their resources to serve ISP customers and business customers rather than residential customers generating ISP-bound calls.76 The combination of their target markets and the strategic deployment of specialized equipment leads us to believe that CLECs may be targeting ISPs as a special group of customers and designing their systems to serve their particular needs.

The record also reveals that CLECs will be able to continue to significantly reduce their cost of terminating ISP-bound traffic. The vendors of switches are designing equipment with high-speed data call terminating but not originating capabilities, switches that perform no digital to analog conversions. By design these switches will have limited network functionality that may be suitable for the limited purposes that a CLEC focused on just "terminating" ISP bound calls as its primary service.77 As the trend continues the CLECs' efficiency in providing one-way traffic will grow, reducing costs of ISP traffic as they try to accommodate ISP traffic. This type of market specialization is perhaps to be expected, but we wonder to what extent the CLECs ability to specialize in one-way traffic will impact their ability to provide two-way voice-grade traffic. As Professor Harris's testimony aptly recognizes, the efficiency gains in one-way traffic switching may be at the expense of not being able to provide network functionality for residential customers that generate two-way voice-grade traffic. We are concerned about the plausibility that the current reciprocal compensation may have served as an incentive for the creation of a business model that undermines our long-held goals of opening the local telephone market for competition. We also observe that, if ISP-bound traffic were to be treated as local, and hence reciprocal compensation were due to CLECs, the traffic sensitive as well as the non-traffic sensitive costs of termination would continue to decline. Thus, generating a greater profit margin for the terminating carrier at the TELRIC rates of the originating carrier.

The question of whether or not the ILECs incur higher originating transport costs as a result of differences in network configuration is a legitimate issue for this phase of the proceeding. The relevant issue here is whether CLECs are receiving free transport service from the CLECs as a result of the location of their points of interconnection, chosen by them regardless of where the called party is located. CLECs argue that this is a matter for the next phase.

We have designated a later phase of the proceeding for consideration of issues relating to inter-carrier compensation for transport charges incurred by originating carriers based upon differences between the rating and routing points of calls. Our interest in this issue is limited to evaluating the inequities of the current reciprocal compensation is regime. We make no final determination in this decision concerning the level of transport costs that Pacific incurs in originating and delivering local traffic to CLECs points of interconnection or what forms of inter-carrier compensation may be warranted for such originating costs. However, Pacific's allegation that the CLECs may be generally choosing interconnection arrangements that cause Pacific to provide additional switching and transport costs raises the possibility that these CLECs may be strategically locating their POIs to avoid the relevant costs.

To be sure, CLECs do have the right to choose any feasible point within the LATA for their POIs.78 But the argument that this issue is not unique to ISP traffic obscures the fact that our entire exercise in this case is the examination of vastly one-way ISP traffic's uniqueness within the scheme of reciprocal compensation intended for standard two-way voice-grade traffic. We find a public policy concern in this scheme because reciprocal compensation flows to the CLECs, and because ISP traffic is largely one-way, and because CLECs do not send similar traffic towards the ILEC to offset the cost born by the ILEC in transporting and terminating traffic, and consequently because the CLECs have an incentive to choose POIs that minimize their network costs. Thus the inequity in transport cost to Pacific stems from the one-way nature of ISP-bound traffic.

Therefore, Pacific's arguments concerning its costs of originating transport charges take on a different meaning in this context than in other circumstances where Pacific provides transport services to a CLEC with which Pacific has reciprocal flow of traffic and hence reciprocal payments. In the former, Pacific appears to incur higher originating transport costs to hand off calls to another carrier rather than to terminate the call over its own system with no interoffice transport required and no intermediary switching operations. Unlike the CLECs we do not believe the emergence of this scheme is a purely competitive outcome since we believe mandated reciprocal compensation and the flow of largely one-way of traffic flow could have served as incentives for CLECS. Thus we properly probe the question how carriers choose to establish points of interconnection in this setting to determine inequities that the current reciprocal compensation scheme appears to have, at minimum abetted.

D. Does the Payment of ISP Reciprocal Compensation Result in Unrecoverable Losses to the ILECs?

1. Parties' Positions

Pacific claims that its current retail rate structure precludes recovery of ISP reciprocal compensation payments from its own end use customers at least for those that are billed a fixed monthly rate with unlimited local calling. Pacific argues that the vast majority of its customers calling the Internet have flat rate (1 FR ) service, and do not generate any additional revenue to cover the per-minute of use charges paid by Pacific for ISP reciprocal compensation. Pacific claims the price for flat rate residential service does not cover the cost of the access line, much less the additional costs generated by usage-sensitive reciprocal compensation payments.

Witness Jacobsen testified that when the average Internet user uses a dial-up connection for an hour a day (just over the average usage reported by AOL), the LEC originating calls for that customer must pay about $3.79 per month in reciprocal compensation payments.79 However, Pacific argues, the Commission has set the price of flat-rate residential service below either the direct embedded cost or incremental cost of the line.80 In fact, the Commission set the price of residential flat service (1FR) at only one half of the fully allocated cost less the End User Common Line ("EUCL") charge.81 Thus, Pacific claims that its 1FR service is priced below its forward-looking costs, even without any usage.82

While most customers use residential flat-rate service for dial-up access to the Internet,83 Pacific claims it has receives no additional revenue from 1FR service if that customer uses the service for Internet traffic. Pacific argues that an increase in basic service prices to cover reciprocal compensation payments would unfairly shift the burden of these payments to all customers, whether or not they access the Internet. Pacific claims a rate increase of $0.60 per month would be required to fund ISP reciprocal compensation payments to CLECs in the year 2000, increasing to $1.80 per month in the year 2002 based on its assumed growth rates.

Pacific's witness Jacobsen reports that Pacific paid $173 million in ISP-related reciprocal compensation to CLECs during 1996 through 1999. In the year 2000, Jacobsen reports a drop in such payments to $135 million. Yet, by the year 2002, Jacobsen projected a growth in payments to $450 million, based on an assumed compounded growth rate of 5% per month.84

Verizon likewise claims that it has been incurring massive net losses as a result of the Commission's reciprocal compensation rules. Based upon on billing records for the period of November 1, 1998 through May 24, 2000, CLECs have billed Verizon approximately $32.4 million for reciprocal compensation while Verizon has billed the same CLECs only about $0.4 million.85 Based upon the average hold times for the traffic flowing in each direction, Verizon estimates that approximately $27.1 million of the payments it made to CLECs were for ISP-bound traffic while less than $200,000 of the payments CLECs made to Verizon were for ISP-bound traffic.86 As a result Verizon claims a net loss over that time period of approximately $27 million.87

Verizon claims it cannot recover its reciprocal compensation costs attributable to ISP-bound traffic from the flat rate it charges to the typical residential end-user. Verizon is presently allowed to charge flat rate, one-party residential customers--the customers most likely to access the Internet--$17.25 per month. Verizon claims the reciprocal compensation for ISP traffic can easily consume half of the total monthly revenue from the end user. After deducting the other costs that must be recovered from the end user revenues, Verizon argues that it cannot recover its payments for ISP reciprocal compensation.

Roseville also claims that it will suffer significant financial hardship from the payment of ISP-related reciprocal compensation. Roseville reports it has 5,400 trunks connected with CLECs of which 99% of the traffic is ISP bound. Roseville estimates that its reciprocal compensation payments to CLECs in 1999 would have been approximately $1.2 million if it had to pay all CLECs with which it is interconnected based on the rate of $.002 per minute. Roseville projects growth in this amount to $2 million in 2000 and over $2.6 million in 2001. For a company with 1999 intrastate revenues of only about $94 million, Roseville argues that these amounts are significant. On the other hand, Roseville projects receipts of reciprocal compensation from CLECs of only $11,000, $19,000, and $25,000 for 1999, 2000, and 2001, respectively. While Roseville's monthly service charge is only $18.90, Roseville argues that it would have to pay reciprocal compensation of $21.60 for a customer that accessed the Internet for six hours per day. Roseville also reports it has spent $6.2 million to upgrade its central offices to accommodate the volume of ISP traffic.

The CLECs, CISPA, and TURN discount ILEC claims that they are losing money as a result of ISP reciprocal compensation payments. The CLECs claim that the ILECs derive substantial additional revenue from end user customers placing calls to ISPs through the offering of services such as Caller ID, Call Waiting, and Call Forwarding. ICG argues that Pacific's argument that it is losing money on residential customers is contradicted by its own behavior in providing customers a monetary incentive not to disconnect additional lines.

ICG also argues that the rate of growth in ISP terminated minutes will substantially abate due to (1) growth in DSL lines which are not subject to reciprocal compensation and which are most likely to be ordered by those customers with the heaviest Internet access. Likewise, ICG points to Pacific's and Verizon's aggressive deployment of other service alternatives to ISP dial-up access (such as dial-to-frame, virtual point of presence, and CyberPOP services) that will reduce the volume of dial-up ISP usage. Further, ICG notes that ILECs which own ISP affiliates have the capability to compete for increasingly larger shares of Internet business.

TURN likewise argues that far from being a financial drain to ILECs, the Internet provides enormous potential for the ILECs to tap vast new sources of revenue. Pacific, Verizon and Roseville, either directly or through their affiliates, are all actively marketing Internet service to ISPs and to end user customers.88 Pacific's affiliate, Pacific Bell Internet Service, purchases services from Pacific. From 1996 through 1999, the yearly revenues of Pacific Bell Internet Service have grown almost ninefold and the number of subscribers has grown almost fivefold.89 Pacific's parent SBC is engaged in a comprehensive refurbishment of its network to facilitate the provision of Internet and broadband services, and to achieve a substantial share of broadband market penetration.90 In addition to pursuing significant broadband market share, SBC/Pacific has "conservatively targeted . . . annual savings of about 1.5 billion -- 850 million in cash operating expenses, and 600 million in capital expenditures by 2004" from its broadband initiative.91

The CLECs also dispute the ILECs' cost shortfall claims by arguing that the ILECs would incur the costs of terminating the ISP calls themselves if CLECs did not terminate it. The CLECs argue that the payment of reciprocal compensation is equitable because the ILEC thereby avoids the cost of terminating ISP traffic. Since the TELRIC cost is the same whether the ILEC or the CLEC terminates the call, the CLECs claim the ILEC should be indifferent as to whether termination is done by a CLEC or an ILEC.

The ILECs respond by arguing that they incur additional transport expense when delivering traffic to CLECs, as compared to keeping all traffic on their own network. Specifically, Pacific witness Hamilton asserts that Pacific Bell bears the vast majority of the network burden to support ISP-bound calls, since competitive LECs may have only one or two points of interconnection in a LATA and Pacific must transport a call a significant distance before handing it off to the competitive LEC. Pacific witness Scholl testified similarly and contends, as a result, that ISP-bound calls delivered to competitive LECs cost Pacific more, not less, to deliver than it would cost Pacific to deliver ISP-bound local traffic to ISPs on its own network.92

Focal argues that this argument does not apply to its own network. For example, as indicated by Focal witness Tatak, Focal has at least 45 physical points of interconnection with Pacific in the two LATAs in California where it operates.93 However, even in the case of a CLEC which has fewer points of interconnection, the ILECs offer no evidence that there is something peculiar to ISP traffic that causes a disproportionate burden on the ILECs' transport burden.

Focal further argues that the average per minute rate paid out by ILECs has been decreasing since 1996, and will continue to decrease due to the re-negotiation of interconnection agreements. Focal claims Pacific's two-part compensation rate ensures that the originating carrier only pays for service they are receiving from the terminating carrier, with no over-recovery. Pacific responds that the growth of the Internet market has created a growing burden of payments that is unsustainable at any compensation rate.

2. Discussion

The record in this case unambiguously demonstrates that the ILECs incur significant and growing costs to make reciprocal compensation payments to CLECs. The 833:1 imbalance of ISP traffic is not just an academic issue. The vast majority of the calls that flow from the ILECs to the CLECs cost the ILECs a continuing payment obligation, which is unrecoverable through ILECs' currently effective rates.

The traffic to the Internet is new. Its duration and frequency are high. As we determined above, ISP traffic is significantly different from local voice-grade traffic in its aggregate minutes-of-use traffic per customer per month. Pacific estimates this traffic at more than seven times longer than the average local residential call in 1994.94

When the Commission set rates for local residential service the cost basis did not include Internet-local usage. The residential rates were established in 1994 (D.94-09-065) at a time when there was little residential Internet traffic. And since then this Commission has not adjusted these rates to reflect the increased usage due to Internet traffic. PacWest's assertion that the average duration of all local call has not significantly changed as a result of Internet traffic obscures Internet traffic's extremely long duration. It is like placing one foot on fire and the other on ice and claiming on average the temperature is normal. Calls to the Internet last much longer than standard voice calls. And reciprocal payment claims by CLECs are based not on the average duration of all local calls but on the duration of actual Internet traffic connection time.

Internet traffic is new. Rates for ILECs are old. The current residential rates do not cover the fully allocated cost of serving residential customers much less include costs to cover additional network functions that ILECs perform to deliver ISP-bound traffic and pay for reciprocal compensation to CLECs. In D.94-09-065, we acknowledged that because of our desires to keep basic exchange service affordable, the cost basis for basic residential flat rate would continue to be one-half of the fully allocated cost. In the case of Pacific, the fully allocated cost for residential basic service was $26.00. After reducing this amount by the end user carrier line charge of $3.50 and halving it, the Commission adopted $11.25 for a single line flat charge. Similarly, the Commission adopted residential access rate for GTEC that is priced below the fully allocated cost for the same reason as for Pacific to produce a per line charge of $17.25. These monthly charges were raised from the 1989 rates to be brought closer to cost against the need to keep residential service affordable. In other words, current residential basic service rates are priced deliberately below cost. PacWest argument that the ILECs are authorized to recover above cost for toll and other vertical services so that local flat residential rates could be kept below cost appears to be a "me too" argument. If subsidy is permitted for residential service then the same must be done for ISP traffic. We disagree with the CLECs's proposition because they fail to show any economic or public policy purpose why such a subsidy ought to be put in the first place. Pac-West also argues that the Internet traffic has not materially extended the average local call length. Here again Pac-West misses the point. If we were to continue the status quo, which we do not, the amount of reciprocal compensation would be based on actual ISP traffic length rather than a statewide average of local call holding times. So the average call duration for our purposes is irrelevant.

In any event, the ILECs current residential local rates do not have an allowance for any cost the ILECs may incur to deliver ISP traffic or for reciprocal compensation to be paid to the CLECs. Therefore, even if ISP traffic were local, which it is not, and we were to continue requiring to make payments, which we do not, we must first identify a source for the fund. Clearly there is no excess revenue in residential service charges that can be shared between the ILECs and CLECs at the current rates. Therefore, the fund for reciprocal payment will have to come from one or a combination of three possible sources: we raise local residential service charges as some witnesses suggest in this proceeding,95 or direct the ILECs to tap revenues from other services and products, or pass the cost to shareholders of the ILECs.

Sound pricing policy would militate against imposing on the general body of consumers the burden of subsidy for Internet bound traffic. Such a subsidy will have adverse consequences on competition and consumers. To be sure, a segment of the ILECs residential customers will use dial-up access to connect to the Internet, whether or not we believe this segment is the cost-driver, but a significant portion of the customer base will not use dial-up access or not access the Internet at all. Imposing a charge on this latter segment of customers would be unfair and unreasonable. Moreover, at a time when the Commission attempts to bring about an alignment of price and cost of service to open the local market for competition and do away with implicit cross-subsidies, adding ISP traffic compensation to residential telephone charges will reverse the Commission's efforts to create a sustainable competitive telephone market. Not only will the added cost of reciprocal compensation raise local charges for consumers to an unacceptable level since the Internet will continue at its breakneck growth rate and the minutes-of-use will continue to grow, but it will also introduce unfavorable market distortions into the market it is supposed to help. In sum, residential customers should not be required to pony up the fund for inter-carrier compensation for ISP traffic because it is unjust and unreasonable.

CLECs' other proposal for a source of reciprocal funding points to the ILECs' other revenues including additional revenue resulting from the second lines caused by the growth of the Internet, advanced services such as Pacific's affiliate's Project Pronto, and potential future cost savings. The CLECs miss the point. Essentially, they are asking that we impose both the direct network cost and the inter-carrier compensation payment obligations, if we were to continue the status quo for ISP traffic, which we do not, on to a customer that has no direct relation to this call defying the fundamental principles of cost causation. If we accepted the CLECs' proposal we would be directing the ILECs to generate revenues in competitive segments of the market, from future services and products, and efficiency gains they might realize in their operation, and their affiliates' sales, to fund reciprocal compensation payments to CLECs for ISP traffic. The CLECs' proposal is discriminatory, inequitable, uneconomic, and illogical. Instead of encouraging cost savings and investments in new and advanced services, their proposal would penalize the ILECs for good performance by shifting revenues and profits from other services of their own and their affiliates' to fund reciprocal compensation payments. In a competitive world of communications, such a policy is objectionable from the economic as well as policy perspectives.

Similarly, we reject passing the cost of inter-carrier compensation payment obligations to shareholders because it sends the wrong economic signal to investors. The future of telecommunications and our objectives of creating innovative and universal telephone service in California can only be accomplished in an environment that is conducive for investment and equity growth. A diversion of investors' profit earned in other businesses to finance government mandated business expansion is not a model we want to foster in California. Investors are to be rewarded in a competitive market for the risks they assume in their investment. The same holds true for those who invest in the telecommunications market. A key aspect of our NRF model is, in fact, to encourage and reward cost savings by providing incentives. The current policy on reciprocal compensation payment for ISP traffic, if left unchanged, would continue to undo that model and impose a penalty system for good performance.

28 See Paific's Comments, page 12 where they apply a per call rate of $0.00700, a per minute rate of $0.00187 for a two sessions per day dial-up access for 30 days. 29 See GTEC Opening Comments. Referring to the testimony of Dr.Beauvais, GTEC illustrates a typical situation based on its experience. It relies on a per minute usage charge of $.003/min for 1800 minutes per month (at $5.14 per month) and 3990 minutes per month ($11.97 per month). Page 10 30 Exh. 16 (Pacific/Jacobson), pp.18,19 31 Exh. 14 (Pac-West's Form 10-K, filed Mar. 30, 2000), p. 4. 32 Exh. 8 (ICG Form 10-K), p. 1. 33 See, e.g., Exh. 85 (Focal's "Products & Services" webprint@ www.focal.com); Exh. 156 (Pac-West website printout, "Internet Service Providers"). 34 Exh. 78-Beavais for Verizon at 16. 35 Exh. 79-Beauvais for Verizon at 17. 36 Ex. 14 (Pac-West's Form 10-K), p.4 37 See Assigned Commissioner Neeper's Ruling, Issued ......, p... 38 Exh. 2, (Starkey for ICG) at 33.. 39 We use the term `termination' to describe the function in this context to describe the switching of traffic at the carrier's end office rather than to imply that the traffic is terminating at the location of switching office. 40 Exh. 123 (Pacific/Hamilton) p.20 41 Exh. 108 (Pacific/Scholl) p.9 42 Exh. 138 (Verizon/Jones) p.12 43 Exh. 154 (Verizon/Collins) at 4. 44 Id. at 5. 45 Id.; Exh. 138 (Verizon/Jones) at 15-16. 46 Exh. 154 (Verizon/Collins) at 5. 47 Exh. 61 (Focal/TerKeurst) at 40. 48 Exh. 109 (CISPA/Montgomery) at 36-38. 49 Exh. 61 (Focal/TerKeurst) at 14. 50 Opening Brief of Verizon, p.8; Tr. 37:16-37:22 51 Tr.1373:19-1375:5 (Pac-West/Selwyn) 52 Exh. 2, (ICG/Starky), pp.24,25 53 Reply Comments of Verizon, p.11, Exh. 123, (Pacific/Hamilton), p.20 54 Id. 24 55 Exh. 154 (Verizon/Collins) 56 Exh. 107-C (Pacific/Scholl) at 9-10. 57 Exh. 78 (Verizon/Beauvais) at 12-13; Exh. 106 (Pacific/Scholl) 8-9; Tr. 1833:14-21 (Roseville/Gierczak). 58 Exh. 78 (Verizon/Beauvais) at 12. 59 Id. at 12 and Exh. 80. 60 See, e.g., Exh. 106 (Pacific/Scholl) 8-9; Tr. 1833:14-21 (Roseville/Gierczak). 61 Exh. 78 (Verizon/Beauvais) at 10-13. 62 Id. at 12-13. 63 Id. at 11. 64 Exh. 61 (Focal/TerKeurst) at 23-24. 65 Exh. 78 (Verizon/Beaurais) at 10. 66 Exh. 78, p.11. Witness Beauvais demonstrates based ona Michigan study that the relative variation of ISP traffic by comparing the `coefficient of variation' (which measures the variation across data sample) in relation to voice traffic. Accordingly, he finds that ISP traffic has a coefficient of variation that is approximately twice as large as that for voice traffic. Coefficient of variations: Voice traffic: 2.39; ISP-bound traffic: 4.37. 67 Id. P.10 68 Exh. 78, (Verizon/Beauvais), pp.13,14 69 Exh. 123, Hamilton, p.21-22. According to Hamilton the Class 5 switches provide a wide range of services including voice grade services, all vertical features, private line services, emergency 911 and others. 70 Exh. 123 (Pacific/Hamilton), p.19 71 Id. P.19 72 Exh. 106 (Pacific/Scholl), pp.11-12; Exh. 123 (Pacific/Hamilton) pp. 5-9, 11-13, 18-19. 73 In its reply brief (pp. 9,10), Pacific requested to admit as a late-filed exhibit a press release posted on Focal's website which shows that Focal was replacing its DMS-500 switches with ICS2000 broadband switches at a lower cost. Focal filed an objection on October 6, 2000 on procedural and substantive grounds. We shall admit the evidence, as Focal does not deny the veracity of the statements gleaned from its web site by Pacific. 74 Exh. 124, (Hamilton/Pacific), p.12; Verizon Op. Brief, p.14 75 Exh. 2, (ICG/Starky), p.2 76 Exh. 8, (Verizon/Beauvais), p.8 77 Exh. 106, (Pacific/Pearsons), pp.23,24 78 2 Tr. 165 (Mr. Goldstein for Pac-West) 79 Exh. 15 (Pacific/Jacobsen), pp. 12-13. 80 D.94-09-065, mimeo., pp. 44-46; see also Exh. 110 (CISPA/Montgomery), p. 10. 81 Exh. 106 (Mr. Scholl for Pacific), p. 25. 82 D.94-09-065, mimeo., pp. 44-46; see also Exh. 110 (CISPA/Montgomery), p. 10. 83 Exh. 106 (Pacific/Scholl), p. 27. Focal notes that "[e]xcept for the smallest business customers, non-residential customers presumably do not use dial-up ISP access, but rather a higher capacity service such as T-1." Reply Comments of Focal Communications, p. 7, n.14. 84 Exh. 15 (Pacific/Jacobsen) at 13-14. 85 Exh. 78 (Verizon/Beauvais) at 29-30. 86 Id. 87 Id. at 30. 88 (Tr. 93, l. 6-14, Tr. 140, l. 5-15, Roseville/GierczakTr. 715, l. 1 - 8, Tr. 716, l. 16-19, Verizon/Beauvais) (Tr. 93, l. 6-14, Tr. 140, l. 5-15, Roseville/Gierczak; Tr. 715, l. 1 - 8, Tr. 716, l. 16-19, Verizon/Beauvais). 89 (Exh. 46, Tr. 412, l. 12- 22, Pacific/Jacobsen). 90 (Exh. 50, PBRC 04828; Tr. 442, l. 9-24, Pacific/Jacobsen). 91 (Exh. 50, PBRC 04827; Tr. 439, l. 6-22, Pacific/Jacobsen). 92 E.g., Reply Testimony of Pacific witness Scholl (Exh. 108) at p. 26. 93 Rebuttal Testimony of Focal witness Tatak (Exh. 84) at p. 4. 94 Exh. 106 (Scholl/Pearsons), p.9 95 Exh. 61 (ICG/TerKeurst), pp29, 40-41; Selwyn Direct, pp.13,14

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