III. REGULATORY BACKGROUND

In order to place this proceeding in its proper context and to understand the regulatory framework in which these events occurred, a brief examination of the regulatory background is in order. The milieu in which we find ourselves is the Public Switched Telephone Network ("PSTN"), which is comprised of many providers, including local telephone companies, long distance telephone companies, cable telephone providers, and wireless telephone providers. The providers are expected to pay their fair share of costs for using the PSTN.² They use different means of transmitting their traffic, but are all considered to be "telecommunications carriers," as defined by State and Federal law.³

GNAPs and Cox entered into an Interconnection Agreement that provides for a form of inter-carrier compensation. Inter-carrier compensation occurs whenever two or more carriers collaborate to complete a phone call over the PSTN. Section 251(b)(5) of the Telecommunications Act of 1996 (the "1996 Act"), 47 U.S.C. 251, requires interconnecting local exchange carriers ("LECs") to "establish reciprocal compensation arrangements for the transport and termination of telecommunications."⁴ Thus, reciprocal compensation requires carriers to compensate other carriers for transporting and terminating calls to another carrier's network. However, parties are permitted to use an arrangement called "bill and keep," whereby neither party charges the other for terminating traffic that originates on the other network.⁵

The Interconnection Agreement between GNAPs and Cox provides for three types of traffic: "Local Traffic, ISP-bound Traffic and IntraLATA Toll Traffic between the Parties".⁶ The Interconnection Agreement states that "[f]or all Local Traffic and ISP-bound Traffic, the Parties agree to mutual traffic exchange without explicit compensation.⁷ "Local traffic" stays within the boundaries of a local calling area, whose parameters are set by the state public utilities commission. Customers also know local traffic as "IntraLATA" services, which is service within the local access and transport area (LATA). Section 1.25 of the Interconnection Agreement defines "Local Traffic" as "traffic other than ISP-bound Traffic that is originated by a Customer of one Party on that Party's network and terminates to a Customer of the other party on that other Party's network."⁸ The Agreement also contains additional technical specifications to identify local traffic and separate it, for billing purposes, from traffic subject to the termination fee arrangement.

Another type of traffic, "interexchange traffic," crosses the boundaries of local calling areas, but remains within the LATA. "Local toll" calls fall within the category of interexchange traffic.⁹ These calls are also known as "IntraLATA toll" because they are long-distance calls within a single LATA.¹⁰ Under the Interconnection Agreement, toll calls originating and terminating within a single LATA are subject to termination fees.

A. Reciprocal Compensation and Access Charges

Whether a call is "local" or "interexchange" makes a difference in terms of which regime of inter-carrier compensation, i.e., reciprocal compensation or access charges, applies to that call. In the Local Competition Order, the Federal Communications Commission ("FCC") determined that the reciprocal compensation provision of Section 251(b)(5) of the 1996 Act applies only to "local" traffic as defined by state commissions, and not to the transport and termination of interexchange traffic.¹¹ The FCC left with the state commissions the power to define local calling areas "consistent with [their] historical practice of defining local service areas for wireline LECs," and decided that the states should "determine whether intrastate transport and termination of traffic between competing LECs, where a portion of their local service areas are not the same, should be governed by section 251(b)(5)'s reciprocal compensation obligations or whether intrastate access charges should apply to the portions of their local service areas that are different."¹²

B. "ISP-Bound" toll traffic is not subject to reciprocal compensation requirements.

Whether or not intraLATA toll traffic is "ISP-bound" adds another wrinkle to the issue of inter-carrier compensation. Due to opportunities for regulatory arbitrage, the FCC issued the Internet Traffic Order, ruling that ISP-bound traffic was not subject to reciprocal compensation obligations under section 251 of the 1996 Act, 47 U.S.C. Section 251.¹³ The D.C. Circuit Court of Appeals vacated the Internet Traffic Order and remanded it to the FCC after finding the FCC's rationale for treating ISP-bound traffic as interstate traffic for purposes of reciprocal compensation was inadequate.¹⁴ In response to the remand, in 2001, the FCC issued the ISP Remand Order, again declaring that ISP-bound traffic is not subject to the reciprocal compensation obligations of Section 251(b)(5), but rested its decision on a different legal ground.¹⁵ The D.C. Circuit Court of Appeals found the new legal grounds to be inadequate, but it did not vacate the FCC Order.¹⁶ This leaves the ISP Remand Order in place. It also leaves in force the pre-1996 Act access charge regime which provides that "[t]raffic originating or terminating outside of the applicable local area would be subject to interstate and intrastate access charges."¹⁷

C. Toll traffic that is not "ISP-Bound" is subject to inter-carrier compensation.

What is involved in this case is inter-carrier compensation for toll traffic that is not ISP-bound. This distinction is important because, as explained above, with toll traffic that is ISP-bound, carriers are not required to pay compensation under the FCC's reciprocal compensation regime. In contrast, toll calls that are not ISP-bound and terminate on the PSTN are subject to access charges. Contrary to GNAPs' claims, the origin of its ISP calls is irrelevant for purposes of reciprocal compensation.

² See authority cited in footnote 19, below.

³ "Telecommunications carrier" means "any provider of telecommunications services...A telecommunications carrier shall be treated as a common carrier under this chapter only to the extent that it is engaged in providing telecommunications services." (47 U.S.C. §153(44).) On the federal level, "telecommunications" is defined as "the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received." (47 USC §153(43).) "Telecommunications services" is defined as "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used." (47 U.S.C §153(46).) On the state level, see Public Utilities (PU) Code §§ 216, 233-34.

⁴ 47 U.S.C. §251(b)(5).

⁵ Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket Nos. 96-98, 95-185, First Report and Order (1996) 11 FCC Rcd 15499, 16045 ("Local Competition Order").

⁶ Interconnection Agreement, Section 5.7.

⁷ Id., Section 5.7.2. This is sometimes referred to as "bill and keep."

⁸ Interconnection Agreement, Section 1.25.

⁹ See SBC Communs., Inc. v. FCC (D.C. Cir. 2005) 407 F.3d 1223, 1227.

¹⁰ SBC Communs., Inc. v. FCC (5th Cir. 1998) 154 F.3d 226, 231, n. 3.

¹¹ Local Competition Order, supra, at 16013, ¶1034.

¹² Local Competition Order, supra, at 16013, ¶1035.

¹³ Internet Traffic Order (1999)14 FCC Rcd 3689, 3705-06, ¶26, ¶27. Because traffic to an ISP flows exclusively in one direction, it creates an opportunity for regulatory arbitrage because ISPs typically generate large volumes of traffic that is one-way, i.e., delivered to the ISP. Reciprocal compensation flows from the LEC whose customer makes the call to the LEC whose customer receives the call. Some carriers saw the opportunity to sign up ISPs as customers and collect, rather than pay, compensation.

¹⁴ Bell Atl. Tel. Cos v. FCC (D.C. Cir. 2000) 206 F.3d 1. The Court rejected the FCC's use of "end-to-end analysis" (which is traditionally used to determine whether a call is within the FCC's interstate jurisdiction) for purposes of reciprocal compensation. Therefore, the Order was vacated and remanded because the FCC failed to explain why its end-to-end analysis was controlling for determining whether calls to ISPs were local for purposes of reciprocal compensation.

¹⁵ In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Inter-carrier Compensation for ISP-Bound Traffic (2001) Order on Remand and Report and Order, 16 FCC Rcd 9151, 9187 ("ISP Remand Order").

¹⁶ See WorldCom, Inc. v. FCC (D.C. Cir. 2002) 288 F.3d 429, 433-434 (emphasis added).

¹⁷ Local Competition Order, supra, at 16012-13, ¶1033.