ALJ/TRP/avs Mailed 2/20/2007

Decision 07-02-031 February 15, 2007

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Own Motion into Competition
for Local Exchange Service.

Rulemaking 95-04-043
(Filed April 26, 1995)

Order Instituting Investigation on the Commission's Own Motion into Competition
for Local Exchange Service.

Investigation 95-04-044
(Filed April 26, 1995)

OPINION REGARDING TREATMENT OF VIRTUAL NXX CALLS
WITH RESPECT TO SMALL LOCAL EXCHANGE CARRIERS

TABLE OF CONTENTS

Title Page

OPINION REGARDING TREATMENT OF VIRTUAL NXX CALLS WITH RESPECT TO SMALL LOCAL EXCHANGE CARRIERS 2 2

1. Introduction 2 2

2. Procedural Background 5 5

3. Disposition of Issues 9 9

A. Obligations of Small LECs to Route VNXX Traffic 9 9

1. Parties' Positions 9 9

2. Discussion 10 10

B. Intercarrier Compensation of Transport and
Termination Costs for VNXX traffic over Small LEC Facilities 10 10

1. Parties' Positions 10 10

2. Discussion 14 14

a. General Principles of Cost Responsibility 14 14

b. Intercarrier Compensation Treatment
in Major ILEC Arbitrations 15 15

c. Distinctions Between Small LECs and Large ILECs 19 19

d. Adopted Intercarrier Compensation
Arrangements for Small LECs 22 22

e. Alternative Options to the Small LECs 29 29

f. Effects of Intercarrier Compensation
Arrangements on Competition 32 32

C. Use of Tariffs Covering Reciprocal Compensation
Should Govern in the Absence of an Interconnection Agreement 33 33

1. Parties' Position 33 33

2. Discussion 35 35

D. Intercarrier Compensation for VNXX Traffic
in Extended Area Service Arrangements 37 37

1. Parties' Positions 37 37

2. Discussion 38 38

4. Assignment of Proceeding 38 38

5. Comments on Proposed Decision 38 38

Findings of Fact 38 38

Conclusions of Law 42 42

ORDER 44 44

Appendix

OPINION REGARDING TREATMENT OF VIRTUAL NXX CALLS
WITH RESPECT TO SMALL LOCAL EXCHANGE CARRIERS

1. Introduction

This decision resolves issues regarding intercarrier compensation for traffic transported over the networks of "Small" Local Exchange Carriers (LECs)¹ utilizing disparate rating and routing points. We use the term "virtual" NXX² (VNXX) traffic to describe this calling arrangement.³ We address these issues pursuant to the directives in Decision (D.) 03-09-005.

While we acknowledge that the Small LECs are subject to different economic, technical, and regulatory constraints compared with the major Incumbent ILECs (ILECs), we conclude that the Small LECs have not demonstrated that such differences justify inconsistent intercarrier compensation treatment for VNXX traffic as previously applied to the major ILECs. We therefore conclude that intercarrier compensation for VNXX calls routed over facilities of the Small LECs should be consistent with the principles previously applied to the major ILECs, as outlined below.

Unlike the major ILECs, however, the Small LECs interconnect on an indirect basis with CLECs. As a result, VNXX traffic must transit from the Small LEC meet point to the ILEC tandem located outside of the local calling area. As discussed below, we conclude that the CLEC shall bear responsibility for any costs of transit between the meet point and the ILEC tandem.

Although provisions of federal and state statutes, as well as Commission decisions, address the issue of intercarrier compensation, the parties disagree as to how to interpret those provisions as applied to VNXX traffic transported over the facilities of the Small LECs.⁴ Under traditional practices, a call is rated according to the routing points designated in the Local Exchange Routing Guide (LERG), and retail toll charges are incurred unless both the calling and receiving party reside within the same local exchange. The VNXX arrangement, however, enables a calling party to avoid per-minute toll charges even though the call is routed to a foreign exchange. The VNXX arrangement provides retail subscribers with a "virtual" presence in a local exchange without physically residing within it. Even though the NXX prefix is associated with a rate center in a designated local exchange, the retail subscriber's terminal equipment is physically located in a separate foreign exchange. Absent the VNXX arrangement, a long distance carrier would pay access charges to compensate both the originating and terminating carriers for the use of their networks to complete the customer's call.

Pac-West disagrees with the use of the term "VNXX" to describe the calling arrangements as addressed in this proceeding. Pac-West uses the term "disparately rated and routed locally dialed" to characterize the calls in question. Pac-West claims that VNXX arrangements are no different than traditional FX service offerings. Pac-West indicates that not all disparately rated and routed locally dialed calls are analogous to traditional foreign exchange calls, but that a material number of them are terminated in the same local calling area where originated. Pac-West believes that all Small LEC calls to Pac-West are likely to be disparately rated and routed because the ILEC tandem where Pac-West's point of interconnection is located is likely not to be located in the same local calling area as the Small LEC end office. Even if a disparately rated and routed call terminates in the same local calling area as it originates, the originating carrier will need to route the call to the Point of Interconnection of the terminating carrier.

The small LECs believe that VNXX is an appropriate designation, however, claiming that although the rating of VNXX calls may be similar to traditional FX arrangements, the routing is completely different.

We agree with the Small LECs that traditional FX arrangements are different from VNXX arrangements. Under the traditional FX arrangement, carriers rely on dedicated facilities to transport the FX traffic to the customer's location. The FX customer pays its service provider for the cost of transporting the traffic. By contrast, with the VNXX arrangement, the end user to whom traffic is routed does not pay for any dedicated facilities. Instead, the responsibility for transporting the traffic is shifted to the carriers whose customer originates the call.

We shall generally use the term VNXX to designate the calls at issue in this order. As appropriate in the discussion below, however, we shall distinguish between VNXX calls that terminate outside of the originating calling area versus those that terminate in the same local calling area.

¹ The term "Small LEC" refers to carriers of last resort providing telecommunications service in outlying rural areas of California outside of the large and midsized ILEC service territories.

² "NXX" refers to the three-digit prefix used to identify blocks of telephone numbers assigned to a central office "rate center." A rate center is used to measure distances for purposes of rating calls as local or interexchange (subject to per-minute toll charges). The NXX determines how a call is rated based on the distance between the rate centers from which the originating and terminating phone numbers are assigned.

³ "Virtual NXX" refers to codes that are assigned throughout a Local Access and Transport Area (LATA) without regard to the location of the end-use customer. As a result, a customer in one rate center may use a local call to call the end-use customer physically located in another rate center. This arrangement has been particularly popular with internet service providers (ISPs). In this way, the ISP gains local access throughout large geographic areas with all calls delivered to one (or a few) interconnection location(s) as if all calls are local.

⁴ The FCC is addressing inter-carrier compensation issues in its own federal rulemaking with an aim of replacing the existing inter-carrier compensation regimes with a unified approach designed for a market characterized by increasing competition and new technologies. This order is not intended to prejudge the outcome of that proceeding.