II. The Parties' Positions on the Legal Issues Raised by the ISP Remand Order
A. Elements of the Interim Compensation Plan in the ISP Remand Order
The essential dispute in this case is whether, as AT&T contends, the rule set forth in ¶ 81 of the ISP Remand Order -- which both parties refer to as the New Markets Rule -- can be applied standing alone, or whether, as Pac-West contends, this rule can only be applied as part of an integrated FCC plan for transitioning CLECs that serve ISPs from reciprocal compensation to bill-and-keep (or some other form of intercarrier compensation).
The New Markets Rule is quoted in full in footnote 8 of this decision. However, in order to make the debate between the parties comprehensible, some understanding of the other elements of what the FCC describes in the Remand Order as the "interim compensation plan" is necessary. These other elements are known as the "rate cap," the "growth cap," the "mirroring rule," and the "3-to-1 ratio," and a good description of them appears in ¶ 8 of the Remand Order. In ¶ 8, the FCC described these other elements as follows:
"Beginning on the effective date of this Order, and continuing for six months, intercarrier compensation for ISP-bound traffic will be capped at a rate of $.0015/minute-of-use (mou). Starting in the seventh month, and continuing for eighteen months, the rate will be capped at $.0010/mou. Starting in the twenty-fifth month, and continuing through the thirty-sixth month or until further Commission action (whichever is later), the rate will be capped at $.0007/mou. Any additional costs incurred must be recovered from end-users. These rates reflect the downward trend in intercarrier compensation rates contained in recently negotiated interconnection agreements, suggesting that they are sufficient to provide a reasonable transition from dependence on intercarrier payments while ensuring cost recovery.
- We also impose a cap on total ISP-bound minutes for which a local exchange carrier (LEC) may receive this compensation. For the year 2001, a LEC may receive compensation, pursuant to a particular interconnection agreement, for ISP-bound minutes up to a ceiling equal to, on an annualized basis, the number of ISP-bound minutes for which that LEC was entitled to compensation under that agreement during the first quarter of 2001, plus a ten percent growth factor. For 2002, a LEC may receive compensation for ISP-bound minutes up to a ceiling equal to the minutes for which it was entitled to compensation in 2001, plus another ten percent growth factor. In 2003, a LEC may receive compensation for ISP-bound minutes up to a ceiling equal to the 2002 ceiling. These caps are consistent with projections of the growth of dial-up Internet access for the first two years of the transition and are necessary to ensure that such growth does not undermine our goal of limiting intercarrier compensation and beginning a transition toward bill and keep. Growth above these caps should be based on a carrier's ability to provide efficient service, not on any incentive to collect intercarrier payments.
- Because the transitional rates are caps on intercarrier compensation, they have no effect to the extent that states have ordered LECs to exchange ISP-bound traffic either at rates below the caps or on a bill and keep basis (or otherwise have not required payment of compensation for this traffic). The rate caps are designed to provide a transition toward bill and keep, and no transition is necessary for carriers already exchanging traffic at rates below the caps.
- In order to limit disputes and costly measures to identify ISP-bound traffic, we adopt a rebuttable presumption that traffic exchanged between LECs that exceeds a 3:1 ratio of terminating to originating traffic is ISP-bound traffic subject to the compensation mechanism set forth in this Order. This ratio is consistent with those adopted by state commissions to identify ISP or other convergent traffic that is subject to lower intercarrier compensation rates. Carriers that seek to rebut this presumption, by showing that traffic above the ratio is not ISP-bound traffic or, conversely, that traffic below the ratio is ISP-bound traffic, may seek appropriate relief from their state commissions pursuant to Section 252 of the Act.
- Finally, the rate caps for ISP-bound traffic (or such lower rates as have been imposed by states commissions for the exchange of ISP-bound traffic) apply only if an incumbent LEC offers to exchange all traffic subject to Section 251(b)(5) at the same rate. An incumbent LEC that does not offer to exchange Section 251(b)(5) traffic at these rates must exchange ISP-bound traffic at the state-approved or
state-negotiated reciprocal compensation rates reflected in their contracts. The record fails to demonstrate that there are inherent differences between the costs of delivering a voice call to a local end-user and a data call to an ISP, thus the "mirroring" rule we adopt here requires that incumbent LECs pay the same rates for ISP-bound traffic that they receive for Section 251(b)(5) traffic." (ISP Remand Order ¶ 8; 16 FCC Rcd at 9156-57; boldface emphasis supplied.)B. Pac-West's Position on the ISP Remand Order
The essence of Pac-West's argument in this case is that the interim compensation plan in the ISP Remand Order must be viewed as an integrated whole, and that AT&T is wrong because it seeks to apply only one element of that plan, the New Markets Rule in ¶ 81, thereby taking that element out of context. In its March 11 reply brief on legal issues, Pac-West summarizes its position as follows:
"AT&T's claim that the New Markets Rule supports its refusal to pay Pac-West's tariff-based invoices for termination of AT&T's transit traffic is unfounded and wrong as a matter of law, and must be rejected based upon several independent grounds. For the New Markets Rule to apply, AT&T had to first opt-in to the FCC's Plan in its entirety by making a mirroring offer. It cannot do this as a matter of law because it is not an ILEC, and even if it could do so as a CLEC, it never did." (Pac-West Reply Brief, p. 41.)
Pac-West goes on to argue that because there is no interconnection agreement between itself and AT&T, the ISP Remand Order is simply irrelevant to the issues here. Citing Verizon North Inc. v. Strand, 367 F.3d 577, 586-87
(6th Cir. 2004), Pac-West states:
"[A]ppellate courts have found that the ISP Remand Order is simply irrelevant in the absence of a Section 252 interconnection agreement . . . [T]he ISP Remand Order is crafted specifically to not interfere with the Section 252 agreements between Incumbent and Competitive Carriers and it cannot be implemented in the absence of an interconnection agreement. The Interim FCC Plan requires that the carriers have or be able to negotiate a Section 252 Interconnection agreement. It is clear, however, that AT&T and Pac-West, as Competitive Carriers, cannot satisfy this essential condition. Therefore, the ISP Remand Order is not relevant to traffic which is the subject of this Complaint." (Pac-West Opening Brief, p. 18; footnotes omitted.)
Less radically, Pac-West also argues that FCC itself has declared that where the interrelated provisions of the ISP Remand Order do not apply,
state-approved reciprocal compensation rates are the source one should consult in deciding how much compensation to pay CLECs for terminating ISP-bound calls. Relying upon the FCC's own description in the Core Order11 of the mirroring rule set forth in ¶ 89 of the Remand Order, Pac-West states:
"The ISP Remand Order's ratemaking scope is limited . . . to presumed ISP-bound traffic that is subject to the Interim FCC Plan. The Interim FCC Plan only applies to traffic exchanged between Incumbent and Competitive Carriers when the Incumbent has `opted-in' to the FCC Plan. When the Interim FCC Plan does not apply, carriers are `required to exchange ISP-bound traffic at the state-approved or state-arbitrated reciprocal compensation rates.' With respect to applicable compensation rates, the FCC preemption, therefore, only extends to that traffic which is deemed to be ISP-bound under the presumptive methodology established by the ISP Remand Order. All other traffic, including both traffic exchanged between an Incumbent and Competitive Carrier that is below the 3 to 1 ratio and traffic not subject to the Interim FCC Plan, including any ISP-bound traffic exchanged between AT&T and Pac-West, remains subject to state ratemaking jurisdiction." (Pac-West Opening Brief, p. 22; footnotes omitted.)
Pac-West also notes that since no interconnection agreement is in effect between itself and AT&T, and since Pac-West cannot compel AT&T to enter into an interconnection agreement (because AT&T is a CLEC rather than an ILEC), the applicable "state-approved reciprocal compensation rates" in this case are the call termination rates set forth in Pac-West's intrastate tariff:
"In the absence of an applicable agreement between AT&T and Pac-West the state tariff rates are the most directly applicable lawful rates that Pac-West should charge Competitive Carriers that choose to deliver traffic to Pac-West's customers. It would be both unfair and anticompetitive for the Commission to acknowledge . . . that Pac-West has a legal right to be compensated for the traffic originated by AT&T and then to prevent Pac-West from recovering such compensation. Pac-West's state tariff is the only directly applicable state-approved mechanism available to a Competitive Carrier such as Pac-West that cannot force AT&T to negotiate or arbitrate a Section 252 interconnection agreement and when AT&T refuses to negotiate a voluntary agreement. To conclude that Pac-West cannot include a rate for intercarrier compensation in its state tariff is to deny Pac-West the right to recover revenues to which it is lawfully entitled. Because nothing in the ISP Remand Order indicates an intent to deny compensation to those Competitive Carriers that were exchanging traffic on the effective date of the order, equity and fairness dictate that the state tariff rates control." (Pac-West Opening Brief, pp. 24-25.)
Pac-West also points out that because the Core Order concluded the FCC should forebear from enforcing the New Markets Rule after October 8, 2004, the intercarrier rates in Pac-West's state tariff are the only rates that could be applied after that date, even if the Commission were to agree with AT&T that the New Markets Rule can be invoked without a mirroring offer:
"Even if the Commission concludes that AT&T is correct and the New Markets Rule dictates the intercarrier compensation mechanism for the traffic it delivers to Pac-West [i.e., bill-and-keep], the Commission must find that the rates in Pac-West's California state tariff control after the effective date of the Core Order. As noted earlier, effective October 8, 2004, the FCC forbore from enforcing the New Markets Rule. In its absence, and because the Interim FCC Plan cannot govern in the absence of a Section 252 agreement between AT&T and Pac-West,
Pac-West's California tariff establishes the lawful rates for the traffic delivered to Pac-West by AT&T." (Id. at 25-26.)
Pac-West also argues that the FCC's recent pronouncements in the
T-Mobile Ruling12 support Pac-West's position that the call termination rates set forth in its intrastate tariff govern the compensation to be paid here. Quoting from T-Mobile, Pac-West describes that ruling's applicability to the situation here as follows:
"When carriers interconnect indirectly, as is [the] case in this Complaint, `there is no interconnection agreement or other compensation arrangement between the parties.' The absence of an agreement or arrangement does not, however, preclude intercarrier compensation. Rather, the FCC found [in T-Mobile] that its reciprocal compensation rules do not preclude carriers from accepting alternative compensation arrangements. Tariffs are an appropriate alternative in those circumstances where they have not been expressly prohibited or they don't supersede or negate the federal provisions under Sections 251 and 252 [of the 1996 Telecommunications Act]. Because the termination tariffs at issue in the T-Mobile Ruling applied only in the absence of an agreement, they were valid according to the rules in place prior to the date of [that ruling.]" (Pac-West Reply Brief on Legal Issues, pp. 33-34; footnotes omitted.)
Pac-West concludes that all of the conditions specified in T-Mobile for the applicability of state tariffs are met here:
"Pac-West's intrastate tariff falls squarely within the conditions required for a valid intercarrier compensation tariff established by the T-Mobile Ruling. First, the FCC has not prohibited tariffs for intercarrier compensation between CLECs. Second, Pac-West's intrastate tariff does not conflict with or supersede the provisions of Sections 251 and 252. The purpose of the tariff is clear on its face [since it states that it applies only where no agreement is in place for the completion of local calls.] In addition . . . CLECs are not subject to and cannot invoke the negotiation and arbitration provisions of Section 252 as against another CLEC. Therefore, in the absence of an express prohibition and an alternative procedure for establishing a compensation mechanism, Pac-West's intrastate tariff is lawful." (Id. at 34-35; footnotes omitted.)
C. AT&T's Position on the ISP Remand Order
AT&T's principal argument is that in trying to argue that the Remand Order does not apply to exchanges of ISP-bound traffic between CLECs,
Pac-West is effectively standing the FCC's jurisdictional ruling on its head. In its reply brief on legal issues, AT&T states:
"The more fundamental error in Pac-West's arguments is that the arguments require the Commission to accept the premise that the FCC has bifurcated its jurisdictional holding by predicating its jurisdiction on the type of the carrier carrying the traffic rather than the nature of the traffic itself. Pac-West would have this Commission believe that the FCC's jurisdictional determination that ISP-bound traffic is primarily interstate applied only to ISP-bound traffic that originates on an ILEC network and terminates to a [CLEC] . . . But it is without question that the FCC: (1) found that all ISP-bound traffic is within its jurisdiction as interstate traffic; (2) found it is in the public interest to establish a bill-and-keep reciprocal compensation mechanism for ISP terminating traffic; and (3) precluded state commissions from independently applying a compensation rate that conflicts with the FCC's pricing scheme. There is no exception for ISP-bound traffic that is exchanged between CLECs. . . Pac-West can point to no language that exempts certain types of ISP-bound traffic from the FCC's jurisdiction." (AT&T Reply Brief on Legal Issues, pp. 2-3; emphasis added.)
In support of this jurisdictional argument, AT&T places particular reliance on the Ninth Circuit's decision in Pacific Bell v. Pac-West Telecomm, Inc., 325 F.3d 1114 (9th Cir. 2003). In that case, the Ninth Circuit invalidated two rulemaking decisions of this Commission which had held, on a generic basis, that the reciprocal compensation provisions in all interconnection agreements arbitrated by the Commission applied to ISP-bound traffic. At the same time, however, the Ninth Circuit upheld the Commission's decision that the reciprocal compensation provisions in a specific interconnection agreement, the 1999 agreement between Pacific Bell and Pac-West, applied to ISP-bound traffic. The different outcomes, the Court stated, were based on the fact that under the Telecommunications Act of 1996, "the authority granted to state regulatory commissions is confined to the role described in [47 U.S.C.] § 252 - that of arbitrating, approving and enforcing interconnection agreements . . . The Act did not grant state regulatory commissions additional general rule-making authority over interstate traffic" such as ISP-bound calls. (325 F.3d at 1126-27.)
AT&T asserts that Pac-West's attempt to argue that compensation for
ISP-bound calls should be determined by Pac-West's intrastate tariff rather than ¶ 81 of the Remand Order cannot be reconciled with the jurisdictional precepts of Pacific Bell v. Pac-West. On this issue, AT&T states:
"[W]hat Pac-West is attempting to do . . . is impose a unilateral tariff obligation on AT&T, one that is clearly not `reciprocal,' as a substitute for a contract that [Pac-West] cannot obtain under the law. As stated earlier, the Commission's authority under the Telecom Act is limited to `that of arbitrating, approving and enforcing interconnection agreements.' The U.S. Court of Appeals for the 9th Circuit specifically found that the Commission had no general rule-making authority over interstate traffic. This Commission cannot authorize Pac-West to institute a generic reciprocal compensation `tariff' in lieu of an interconnection agreement for ISP-bound traffic, or indeed any other form of traffic exchanged between CLECs." (AT&T Opening Brief on Legal Issues, p. 9.)
In addition to arguing that the Remand Order's language forecloses the possibility that Pac-West's intrastate tariff could apply here, AT&T argues that the Core Order is less significant than Pac-West claims. After noting that the essence of Core's petition for forbearance at the FCC was that the Remand Order's compensation interim plan could cause discrimination among CLECs (because the effect of the plan was to require only some CLECs to recover their termination costs for ISP-bound traffic from end-users), AT&T argues:
"Core's issue [was] with the scheme for transitioning the reciprocal compensation provisions in the ILEC interconnection agreements to bill-and-keep. Core raised a concern that some CLECs during the transition would still receive reciprocal compensation while others would already be subject to bill-and-keep for traffic originating from ILECs. But generally CLECs have been exchanging traffic on a bill-and-keep basis, and continue to do so today. This is not an issue for Core Communications. Nothing in the Core Order implies that the FCC is requiring CLECs to begin paying each other reciprocal compensation fees for ISP-bound traffic when they have never done so before. The Pac-West interpretation of the Core Order would require the Commission to accept the premise that the FCC in this narrow Order overturned the fundamental policy determination of the FCC in the ISP Remand Order." (AT&T Reply Brief on Legal Issues at 16; underlined emphasis added.)
AT&T's answer to Pac-West's assertion that the Remand Order simply does not address CLEC-CLEC traffic exchanges is that "the FCC did not have to set up a scheme to phase out reciprocal compensation fees for ISP-bound traffic originated by CLECs because there is no evidence that any such compensation is currently being paid." (Id. at 8.) After emphasizing that ¶ 81 of the Remand Order refers to "carriers," AT&T continues that "this language clearly encompasses all local carriers, not merely arrangements between ILECs and CLECs that have failed to enter into interconnection agreements with an ILEC." (Id. at 9; emphasis in original.)
AT&T also dismisses Pac-West's reliance on the mirroring rule set forth in ¶ 89 of the ISP Remand Order. In response to Pac-West's claim that ¶ 89 indicates state tariffs should be applicable where two CLECs have not entered into an interconnection agreement, AT&T says:
"This paragraph is not, as Pac-West argues, a statement of general applicability. It is very specifically aimed at insuring that ILECs with interconnection agreements arbitrated by state commissions do not obtain an unintended competitive advantage from the FCC's pricing scheme for ISP-bound traffic. ¶ 89 states that `we order them [ILECs] to exchange ISP-bound traffic at the state approved or state-arbitrated reciprocal compensation rates reflected in their contracts (citation omitted).' (emphasis added.) This is very different from Pac-West's claim in its Opening Brief that [s]tates may assert jurisdiction over ISP-bound traffic and may set rates in instances where the traffic is not subject to an interconnection agreement . . . ¶ 89 does not order the Commission to apply the Pac-West state tariff in terminating ISP traffic." (Id. at 13; citation omitted, emphasis in original.)
11 Petition of Core Communications, Inc. for Forbearance Under 47 U.S.C. § 160(c) from Application of the ISP Remand Order, Order, WC Docket No. 03-171, FCC 04-241, 19 FCC Rcd 20179 (released October 18, 2004). Hereinafter, this decision will be referred to as the Core Order.
12 Developing a Unified Intercarrier Compensation Regime; T-Mobile Petition for Declaratory Ruling Regarding Incumbent LEC Wireless Termination Tariffs, Declaratory Ruling and Report and Order, CC Docket No. 01-92, FCC 05-42, 20 FCC Rcd 4855 (released February 24, 2005). Hereinafter, this decision will be referred to as either the T-Mobile Ruling or T-Mobile.
