III. Intercarrier Compensation

A. IP-Enabled Services Traffic

The most significant issues in this arbitration concern what intercarrier compensation and network interconnection method apply to IP-enabled services traffic between the Internet and the PSTN. The IP-enabled services traffic at issue in this arbitration is communications traffic that undergoes a net protocol conversion from IP format to the data format used by the PSTN,⁸ or vice versa (IP-to-PSTN or PSTN-to-IP).

Level 3 provides net protocol conversion services to Internet service providers on a wholesale basis. Specifically, Level 3 provides phone numbers to Internet service providers, who then assign them to their retail customers. For calls originating on the Internet (IP-to-PSTN), the communication is routed through Level 3's network to the closest point associated with the called party's phone number, at which point Level 3 converts the communication to PSTN format for transmission to the local exchange carrier serving the called party. For calls originating on the PSTN (PSTN-to-IP), after Level 3 receives the communication from the local exchange carrier serving the calling party, Level 3 converts the communication to IP format for routing anywhere over the IP network to the Internet service provider's retail customer. Thus, although the phone numbers on either end of the communication may be in the same LATA, the parties to the communication may be physically located in separate, geographically remote locations.

The issue of what intercarrier compensation should apply to IP-enabled voice services traffic is currently before the FCC, particularly in the IP-Enabled Services NPRM. Once the FCC renders its decisions in these dockets, the parties may need to adopt new contract language to conform to them (using the change of law process). Meanwhile, however, the Commission has the authority and the duty to ensure that the parties' interconnection agreement is consistent with the requirements of federal law.

Level 3 and SBC agree that this Commission should not anticipate what regulatory framework will emerge from the FCC's inquiry, but instead should simply apply the currently applicable intercarrier compensation regime to the exchange of such traffic. Level 3 and SBC fundamentally disagree on what the currently applicable intercarrier compensation regime is.

Level 3 argues that currently there is no intercarrier compensation plan applicable to IP-enabled traffic and proposes therefore that the Commission refrain from adopting any compensation rate for IP-enabled traffic in this proceeding. SBC, on the other hand, argues that current intercarrier compensation rules require the assessment of access charges on IP-enabled traffic between originating and terminating end users that are geographically located in different exchanges.

Contrary to SBC's position, IP-enabled services traffic is not currently subject to access charges. As the Commission notes in its order instituting its investigation into the regulatory framework to apply to voice over Internet protocol (VoIP), VoIP providers do not contribute to the payment of access charges under the current regulatory access charge scheme.⁹ This observation echoes the FCC's acknowledgement that currently IP telephony "is exempt from the access charges that traditional long-distance carriers must pay."¹⁰ It is against this backdrop that the FCC is undertaking to explore "the extent - if any - that application of a particular regulatory requirement [to IP-enabled services] is needed to further critical national policy goals."¹¹

That inquiry will take into account many of the arguments made by Level 3 and SBC in this arbitration. It may be that the FCC will ultimately determine that IP-enabled services traffic will be subject to access charges due to its similarity to interexchange traffic. However, it is inappropriate for this Commission to make that determination here in the face of both commissions' statements that access charges do not currently apply, the FCC's very recent assertion of exclusive economic jurisdiction over certain IP-enabled services,¹² the FCC's steadfast and emphatic refusal to prejudge the applicability of access charges to IP-enabled services traffic,¹³ and the FCC's pending determination on the issue in the IP-Enabled Services NPRM.

SBC argues federal law is clear that IP-enabled services traffic that originates and terminates in different local exchanges is interexchange traffic and thus subject to the same access charge requirements that apply to all other interexchange traffic. SBC points to the language of 47 C.F.R. § 69.5, which imposes access charges on "interexchange carriers that use local exchange switching facilities for the provision of interstate or foreign telecommunications services." SBC's argument begs rather than resolves the applicability of 47 C.F.R. § 69.5: Is IP-enabled service interexchange service? This issue is before the FCC. For now, according to the FCC, such service is not considered to be interexchange service subject to access charges.

SBC argues that IP-to-PSTN and PSTN-to-IP traffic must be characterized as interexchange (e.g., long distance) traffic as a matter of law when the originating end-user and terminating end-user are physically located in geographically different local exchanges. However, the FCC has recently declined to characterize IP-enabled services traffic on a geographic basis:

Indeed, it is the total lack of dependence on any geographically defined location that most distinguishes [IP-enabled services traffic] from other services whose federal or state jurisdiction is determined based on the geographic end points of the communications. (Vonage Order, ¶ 25, emphasis in original.)

The FCC concluded that the concepts of "local" and "long distance" do not apply to IP-enabled services traffic in the way that they do for traditional wireline telephone services. (Id., ¶ 27.) It is therefore inappropriate to determine in this forum that the geographical locations of the originating and terminating end-users are determinative of the applicable compensation scheme.

SBC points to the FCC's policy statement that "any service provider that sends traffic to the PSTN should be subject to similar compensation obligations, irrespective of whether the traffic originates on the PSTN, on an IP network, or on a cable network. We maintain that the cost of the PSTN should be borne equitably among those that use it in similar ways." The Commission supports this policy and has urged the FCC to adopt it going forward.¹⁴ However, as SBC admonishes, it is not the Commission's place, in this arbitration, to resolve the issue before us on policy grounds.

SBC contends that the FCC's AT&T Declaratory Ruling confirms the application of access charges to interexchange traffic to or from the PSTN, regardless of the technology used. However, although the FCC's policy rationale may ultimately apply to the IP-enabled services at issue in this arbitration, the FCC explicitly limits the applicability of the AT&T Declaratory Ruling to AT&T's specific PSTN-IP-PSTN service. (Id., ¶¶ 2, 10, 13, 15, 19.)

On its part, Level 3 appears to argue that IP-enabled services traffic is not subject to access charges on two alternative bases. On the one hand, Level 3 appears to argue that IP-enabled services traffic falls under the enhanced service provider (ESP) exemption. The ESP exemption exempts enhanced service providers and their successors, Internet service providers (ISPs), from carrier access charges; instead, ESPs and ISPs pay end user charges. Level 3 appears to analogize its function as a net protocol converter of telecommunications traffic to that of an ISP for purposes of the ESP exemption. This analogy fails, however. Unlike an ISP, Level 3 is not the end-user of the communication; unlike
ISP-bound traffic, IP-enabled traffic is not between the service provider and its own end user customers.

Level 3 suggests that IP-enabled services traffic is nevertheless exempt from access charges pursuant to the policy underlying the ESP exemption and the FCC's arguable bent, as Level 3 assesses it, toward extending the exemption to IP-enabled services traffic. Level 3 also points to SBC's comments to the FCC in the IP-Enabled Services NPRM that somewhat endorse Level 3's policy position. As the parties have admonished, however, policy arguments and predictions do not govern the Commission's resolution of this dispute.

Alternatively, Level 3 argues that IP-enabled services traffic is subject to Section 251(b)(5)'s reciprocal compensation regime, and has not been "carved out" from that regime under Section 251(g). I concur. Section 251(b)(5) refers to the obligation of local exchange carriers to establish reciprocal compensation arrangements for the transport and termination of "telecommunications." Section 251(b)(5) is limited by Section 251(g), which "carves out" certain types of telecommunications, e.g., "exchange access, information access, and exchange services for such access to interexchange carriers and information service providers." The provision of IP-enabled services is not information service as it is not an end-use function and, at least under the FCC's current interpretation, it is not exchange service for access to interexchange carriers as discussed above. Having not been carved out from the reciprocal compensation regime of Section 251(b)(5), IP-enabled services traffic is subject to it.

Although I adopt the position that access charges do not currently apply to Level 3's IP-enabled services traffic, I reject much of Level 3's proposed language as unnecessary and improper for inclusion in a contract. In addition, I modify Level 3's proposed definition of "IP-enabled services" to capture the type of IP-enabled services at issue in this arbitration, namely the net conversion between IP and Time Division Multiplexing format for communication between end users of the Internet and the PSTN.

Accordingly, I adopt reciprocal compensation for the exchange of Level 3's IP-enabled traffic pursuant to Section 251(b)(5), and resolve the disputed language related to IC-2¹⁵ as follows:

· Level 3's proposed § 3.2 is adopted. This language presents the heading "IP-Enabled Services Traffic."

· Level 3's proposed § 3.2.1 is adopted. This language presents the heading "Definition of IP-enabled Services."

· Level 3's proposed § 3.2.1.1 is rejected, and shall be replaced with the following language: "IP-enabled services" are services and applications that entail net protocol conversion from IP to TDM or vice versa to permit connection between end users of the Internet and the PSTN."

· Level 3's proposed § 3.2.1.1.1 is rejected. This language conditions the subsequent definitions on a judgment regarding the non-geographic nature of IP-enabled services. This language is unnecessary to effect the purpose of this contract, and it is improper to require parties to contractually agree to a policy, factual or legal statement, especially one with which they may disagree.

· Level 3's proposed § 3.2.1.1.1.1 is adopted. This language reasonably clarifies that VoIP is included in the definition of IP-enabled services traffic.

· Level 3's proposed § 3.2.1.2 is rejected. This language presents a legal conclusion regarding jurisdiction over
IP-enabled services. This language is unnecessary to effect the purpose of the contract, and it is improper and unnecessary to require parties to contractually agree to a policy, factual or legal statement.

· Level 3's proposed § 3.2.1.3 is rejected. This language presents a description of the requirements of Level 3's net protocol conversion service. This language is unnecessary to effect the purpose of the contract, and it is improper to require parties to contractually agree to what services Level 3 provides to its customers.

· Level 3's proposed § 3.2.2 is adopted. This language presents the heading "Identification of IP-enabled Services Exchanged Between the Parties."

· Level 3's proposed § 3.2.2.1 is rejected. This language requires both parties to agree that it is not possible to identify the physical location of their customers. This language is unnecessary to effect the purpose of the contract, and it is improper to require parties to contractually agree to a policy, factual or legal statement, especially one with which they may disagree.

· Level 3's proposed § 3.2.2.2 is rejected. Similar to Level 3's proposed IC § 3.2.1.3, this language describes Level 3's net protocol conversion service to its customers, here in terms of the desires of Level 3's customers.

· Level 3's proposed § 3.2.2.3 addresses Signaling System 7 (SS7) call setup, and is addressed at Section III.E.4.

· Level 3's proposed §§ 3.2.2.4 through 3.2.2.5 addresses a percentage approach to identify traffic volumes subject to different compensation, and are addressed at Section IV.A.

· Level 3's proposed §§ 3.2.3 through 3.2.3.1 are rejected. There is no need for a separate provision for "Compensation for IP-enabled Services Traffic," because Section 251(b)(5) traffic is to be defined to include IP-enabled traffic (see discussion of DEF-18, at Section XIII.L). With that definition, IP-enabled services traffic is therefore subject to the Section 251(b)(5) traffic compensation provisions of § 6.

· Level 3's proposed §§ 3.3 through 3.3.3 defines ISP-bound traffic. They are rejected, as the term is defined in the Definitions Appendix, as discussed at Section XIII.H regarding DEF-8.

· Level 3's proposed §§ 3.4 through 3.4.5 are rejected. This language defines "circuit-switched traffic," contrasting it with features of IP-enabled services traffic that parties argue do or do not justify the imposition of different regulatory charges. This language is unnecessary to effect the purpose of the contract, and it is improper to require parties to contractually agree to a policy, factual or legal statement, especially one with which they may disagree. See discussion on IC-1 at Section III.D, and also discussion on DEF-3 at Section XIII.D.

· SBC's proposed § 16 is adopted, except that the phrase beginning "including, without limitation, any traffic that..." through but not including the phrase "provided, however, the following categories..."is deleted, and the phrase, "provided, however, that Switched Access Traffic does not include IP-enabled services traffic" is added in its stead.

B. ISP-Bound Traffic

1. When the ISP is Located in the Local Exchange in Which the Call Originated

Level 3 and SBC appear to agree that the ISP Remand Order's compensation plan's fixed rate of $0.0007 per minute of use applies to ISP-bound traffic when the ISP is located in the same local exchange in which the call originated. I adopt the FCC's fixed rate of $0.0007 per minute of use pursuant to the ISP Remand Order.

Level 3 opposes SBC's proposed terms and conditions to the extent they provide for "bill and keep" arrangements for new markets and for traffic that exceeds growth caps. During the negotiations, these terms were at issue before the FCC. The FCC's recently issued Core Forbearance Order¹⁶ on ISP-bound compensation revokes its prior decision allowing such arrangements.

SBC agrees that the Core Forbearance Order precludes application of the ISP Remand Order's growth caps for compensable ISP-bound traffic and its "new markets" rule, and withdraws its proposed language reflecting those terms.

Level 3 articulates no other objection to SBC's proposed contract language to the extent that it invokes the ISP Remand Order. With the withdrawal of the proposed language regarding growth caps and the "new markets" rule, SBC's proposed language fairly reflects the FCC's compensation plan for ISP-bound traffic. Accordingly, I dispose of the disputed contract language concerning compensation for ISP-bound traffic (IC-5 and IC-13) as follows:

· IC -5: SBC's proposed § 3.3 is adopted, and Level 3's is rejected, as SBC's properly implements the FCC's ISP Remand Order with respect to the rate applied to the exchange of ISP-bound traffic. (The issue of limiting this provision to local ISP-bound traffic is addressed below at Section III.B.2.)

· IC-13: SBC's proposed §§ 6 through 6.6.1 are adopted, except that §§ 6.4 and 6.5 regarding growth caps and new market restrictions are deleted.

2. When the ISP is Located in a Different Exchange from which the Call Originated

Level 3 maintains that the FCC's fixed rate of $0.0007 applies to all ISP-bound traffic, regardless of whether the call to the ISP is local or interexchange. SBC maintains that the FCC's fixed rate applies only to local calls to ISPs, and that access charges apply to ISP-bound calls where the call is interexchange.

I adopt SBC's proposal. Access charges properly apply to ISP-bound calls where the call is interexchange.

In contrast, the ISP Remand Order concerned ISP-bound traffic within a local exchange area. The inquiry arose with respect to "whether reciprocal compensation obligations apply to the delivery of calls from one LEC's end-user customer to an ISP in the same local calling area that is served by a competing LEC." (ISP Remand Order, ¶ 13.) The FCC addressed the concern that in most states, "reciprocal compensation governs the exchange of ISP-bound traffic between local carriers," leading to inaccurate price signals and subsidies to end users and ISP customers. (Id., ¶ 68.) The FCC undertook to correct these market distortions by moving toward bill and keep by implementing an interim regime of decreasing compensation rates capped at $0.0007 per minute of use.
(Id., ¶ 77-78.) No such market distortions exist with respect to interexchange ISP-bound traffic that is properly assessed access charges. Indeed, as SBC notes, the FCC described its ISP Remand Order compensation plan as "an exception to the reciprocal compensation requirements of the Act for calls made to ISPs located within the caller's local calling area." (Core Forbearance Order, n.25, emphasis added.)

Level 3 contends that the FCC rejected any geographic limitation of its compensation plan, noting the FCC's statement that the definition of "information access" "does not further require that the transmission, once handed over to the information service provider, terminate within the same exchange area in which the information service provider first received the access traffic." (ISP Remand Order, fn. 82, emphasis added.) However, this statement leads to the opposite conclusion that the transmission at issue is local as between the caller and the ISP; the FCC merely observes that the geographic destination after it reaches the ISP is irrelevant to a determination of whether the transmission is "information access" or not.

Accordingly, I dispose of the disputed contract language concerning compensation for interexchange ISP-bound traffic (IC-5 and IC-15) as follows:

· IC-5: SBC's proposed § 3.3 is adopted, and Level 3's is rejected, as SBC's language appropriately defines "ISP-bound traffic" for the purposes of the $0.0007 compensation rate for such traffic within the same local exchange.

· IC-15: SBC's proposed §§ 7.4 and 7.5 are adopted, as it clarifies that ISP-bound traffic that is traded outside the local calling areas are not subject to the $0.0007 compensation rate, and defines the appropriate rate categories for such traffic.

3. When the Call is FX or to a Virtual Number Identified with the Local Exchange in which the Call Originated

FX, or virtual NXX (VNXX), service allows a customer physically located in one local calling area to have a telephone number that is associated with a different local calling area. Thus callers to the FX service customer avoid long distance charges, even though the call originates and terminates in different local calling areas.

Level 3 maintains that the FCC's fixed rate of $0.0007 applies to all
ISP-bound traffic, including FX calls to ISPs. For the reasons discussed at Section III.B.2, above, and below at Section III.C, I reject Level 3's proposal to apply the FCC's fixed rate of $0.0007 to FX calls to ISPs. ISP-bound FX calls shall be compensated in the same manner as other FX calls.

C. FX Traffic

Level 3 proposes to treat FX calls as local for intercarrier compensation purposes. SBC maintains that FX calls are subject to access charges, even if the NPA-NXXs of the FX call make the call look local. As a fall-back position, SBC proposes to allow reciprocal compensation conditioned on requiring Level 3 to pay SBC additional "call origination charges" in compensation for SBC bringing the FX call to the point of interconnection in a different local calling area, as the Commission ordered in the Pacific Bell/Pac-West Telecomm, Inc. arbitration.¹⁷

I reject Level 3's proposal to treat FX calls as local for intercarrier compensation purposes. SBC shall pay reciprocal compensation for Level 3's FX calls, provided that Level 3 pays SBC additional compensation for call origination consistent with the Commission's decisions in D.03-12-020 and
D.03-05-031.

Level 3 contends that the Commission has previously determined that VNXX traffic, including ISP-bound VNXX traffic, is subject to reciprocal compensation. For this proposition, Level 3 cites generally to the Commission's decisions D.98-10-057 and D.99-07-047, both issued in its Rulemaking and Investigation into Competition for Local Exchange Service (R.95-04-043 and
I.95-04-044, filed April 26, 1995).¹⁸ However, these decisions do not address the issue before us here. Rather, the focus of both these decisions is whether reciprocal compensation applies to local calls to ISPs; the Commission found "no legal reason for treating calls to ISPs differently than other local calls."
(D.99-07-047, mimeo at 11.) Level 3 also cites to D.02-06-076 for its proposition that a call is deemed local based on the rating points of the calling and called phone numbers. However, D.02-06-076 focused on whether the termination point, for purposes of determining whether a call is local or toll, is the point of interconnection or the rating point of the called party; it is not dispositive of the issue before us here.

Level 3's citations to FCC decisions are likewise not dispositive. Level 3 cites to In re Starpower Commissions, LLC v. Verizon South¹⁹ for the proposition that the FCC has confirmed that reciprocal compensation applies to ISP-bound FX or VNXX traffic. That case and order, however, concerned what compensation was due under the terms of the carriers' interconnection agreement; the FCC explicitly stated that it did not address the legal question of whether sections 251 and 252 apply to VNXX traffic. (Id., ¶¶ 1, 13, 17.) Level 3 cites to the Virginia Arbitration Order²⁰ for the proposition that the FCC has held that traffic, including FX or VNXX calls, shall be rated by comparing the originating and terminating NPA-NXX codes. In reaching this conclusion, however, the decision specifically notes the difference between FX service in which the subscriber obtains a dedicated private line from the subscriber to the end office switch in the desired distant rate center, versus the petitioner's FX service that did not require a dedicated private line in order to give the subscriber an NPA-NXX in the desired rate center. (Id., ¶ 287.) The decision found that, under the latter arrangement, rating calls by their geographical starting and ending points was unworkable. (Id., ¶¶ 288, 301.) Level 3's FX service, however, involves a dedicated FX line paid for separately by the FX subscriber; under these circumstances it is reasonable to expect that Level 3 can determine the geographic termination of its FX service line.

Furthermore, this Commission disposed of this issue in its decisions on the Global NAPs, Inc. and Pac-West Telecomm, Inc. arbitrations.²¹ There, the Commission concluded that VNXX traffic is interexchange traffic not subject to the FCC's reciprocal compensation rules. Although the Commission allowed the calls to be treated as local for the purposes of assessing reciprocal compensation, the Commission ordered the competitive local exchange carrier to pay the additional transport required to get those calls to where they will be considered local calls. I adopt that arrangement here.

In its opening brief, Level 3 contends that the issue of compensation for the transport of FX traffic is not in dispute because both parties have agreed to transport all of their originating traffic to the point of interconnection, and Level 3 has agreed to establish points of interconnection at any tandem at which traffic reaches 24 DS1.²² It may be that the parties' agreement on the establishment of points of interconnection renders this transport compensation requirement moot. The parties are nevertheless directed to provide for the contingency that it is not moot.

On its part, although SBC supports the GNAPs and Pac-West arrangement as a second-best alternative, it urges the Commission to find that FX traffic that travels beyond the local exchange is subject to access charges like other interexchange traffic. In support of this request, SBC points to the FCC's ISP Remand Order and footnote 25 of the Core Forbearance Order in which the FCC clarified that its reciprocal compensation rules apply only to local calls to ISPs.

This is not cause to veer from this Commission's disposition of the issue. The Commission had the benefit of the ISP Remand Order when it adopted the GNAPs and Pac-West Decisions. In addition, the Commission's determination that the FCC's reciprocal compensation rule does not apply to FX calls to ISPs is entirely consistent with the FCC. Accordingly, I dispose of the disputed contract language concerning compensation for FX and FX-like traffic, including
ISP-bound FX traffic (IC-11) as follows:

· SBC's proposed § 7.2 is adopted in part, to the extent that it defines and distinguishes FX traffic from local traffic subject to Section 251(b)(5). The language proposing bill-and-keep as the compensation mechanism is rejected as that language appears not intended to apply in California. The parties are directed to provide language for compensation of FX traffic consistent with the GNAPs and Pac-West Decisions as discussed above.

· The parties' proposed §§ 8.1 through 8.3 are rejected. This language concerns Optional Calling Area traffic, and is inapplicable to California.

D. Reciprocal Compensation Terms and Conditions

This dispute generally concerns (1) the definition and identification of traffic that is subject to reciprocal compensation, and (2) the inclusion of bifurcated rates for the termination of Section 251(b)(5) and ISP-bound traffic.

SBC proposes defining the traffic that is subject to reciprocal compensation as "Section 251(b)(5) Traffic," and describes "Section 251(b)(5) Traffic" on a geographical basis so as to exclude IP-enabled services traffic and FX or VNXX traffic. Level 3 proposes instead to define the traffic subject to reciprocal compensation as "Telecommunications Traffic," and apply reciprocal compensation to traffic that is rated as local based on NPA-NXX codes.

Consistent with the determinations made above, and as discussed fully at Section XIII.L, I adopt SBC's definition of "Section 251(b)(5) Traffic," subject to modification to clarify that it includes IP-enabled services traffic. However, that definition is included in the Definitions Appendix, and need not be repeated here in the Intercarrier Compensation Appendix.

Having defined "Section 251(b)(5) Traffic" to clarify that reciprocal compensation applies to IP-enabled services traffic but not to FX or VNXX traffic, the next question is, what is the reciprocal compensation plan? Under the FCC's interim compensation plan ordered in the ISP Remand Order, if SBC opts into the interim compensation plan, it must offer to exchange Section 251(b)(5) traffic at the same FCC-adopted rate for ISP-bound traffic, i.e., $0.0007 per minute of use.

SBC proposes language indicating that it has offered to exchange Section 251(b)(5) traffic at the ISP-bound traffic rate in California. SBC's proposed language also presents an alternate, bifurcated rate structure in the event that Level 3 does not accept SBC's "mirroring offer," that separates the costs of setting up the call from the costs of keeping the switch port open during the call.

Level 3 objects to SBC's bifurcated rate proposal on the basis that it is inapplicable to ISP-bound traffic under the ISP Remand Order. Level 3's objection is not, apparently, with respect to its agreement with SBC in California. First of all, the proposed language to which Level 3 objects applies by its terms to those states in which SBC has not yet offered to exchange traffic under the FCC's interim ISP terminating compensation plan, and explicitly provides that SBC has made such offer in California. Second, SBC's proposed language setting out the rates, terms and conditions for the exchange of ISP-bound traffic and Section 251(b)(5) traffic directly tracks the FCC's interim plan and provides that ISP-bound traffic is due reciprocal compensation of $0.0007. Thus, to the extent that Level 3 has any objection to SBC's proposed rates, terms and conditions for the exchange of ISP-bound traffic, that objection appears to be irrelevant to California.

Accordingly, I dispose of the disputed contract language in the Intercarrier Compensation Appendix concerning the definition and rates, terms and conditions of reciprocal compensation (IC-1, IC-3, IC-6, IC-10 and IC-14) as follows:

· IC-1: SBC's proposed § 3.1, identifying classifications of telecommunications traffic for purposes of reciprocal compensation under the agreement, is adopted. The definition of "Section 251(b)(5) traffic" in the Definitions Appendix shall be amended to include IP-enabled services traffic. (See discussion of DEF-18 at XIII.L.)

· IC-1: Level 3's proposed § 3.1 is rejected, as it does not distinguish among traffic types for purposes of compensation as directed in this report.

· IC-3: SBC's proposed § 3.2 is rejected. This section defines "Section 251(b)(5) Traffic," and is redundant of the definitional term in the Definition Appendix, which is addressed separately below in the discussion regarding DEF-18.

_ IC-6: SBC's proposed § 3.6 is adopted, and Level 3's proposed language is rejected, except that both parties' proposed language regarding terms applicable to SBC Connecticut and the exchange of traffic in Connecticut is rejected, as it is not applicable in California.

_ IC-10: SBC's proposed §§ 5 through 5.5 are adopted. They properly implements the FCC's ISP Remand Order with respect to mirroring the FCC's ISP-bound traffic compensation rate for purposes of reciprocal compensation.

_ IC-10: Level 3's proposed §§ 5 through 5.23 are rejected. They contemplate commingling of all traffic types over local interconnection trunks, contrary to resolution of that disputed issue, and do not appear to apply the appropriate compensation to each respective traffic type as resolved in this arbitration.

_ IC-14: SBC's proposed §§ 7 through 7.1 are adopted, and Level 3's is rejected. SBC's proposed language clearly identifies the telecommunications traffic types that are subject to reciprocal compensation under the agreement.

E. Other Intercarrier Compensation Issues

4. Routing for IP-to-PSTN and PSTN-IP-PSTN Traffic

SBC proposes to require that IP-enabled services traffic (IP-to-PSTN and PSTN-to-IP) and PSTN-IP-PSTN traffic be routed over feature group trunk groups. Level 3 proposes to commingle all traffic, and specifically IP-enabled services traffic, over local interconnection trunks. As discussed in detail at IV.A below, Level 3 is permitted to transport IP-enabled services traffic over local interconnection trunks. However, PSTN-IP-PSTN is subject to access charges and shall be routed over Feature Group D trunks.

SBC proposes language requiring the parties to work cooperatively to identify and remove switched access traffic that is not permitted over local interconnection groups. SBC's proposed language is accepted.

Level 3 proposes language stating that disputes over the jurisdictional nature or classification of traffic shall be resolved through the agreement's dispute resolution process and applicable law. This language provides added clarity that routing and classification disputes are subject to dispute resolution. However, I reject portions of Level 3's proposed language as unnecessary and improper for inclusion in a contract. In addition, the reference to "applicable law" as an alternative to the agreement's dispute resolution process is rejected, consistent with the discussion at Section V.B.

Accordingly, I dispose of IC-4 as follows:

· Level 3's proposed § 4.7, which states "PARTIES AGREE TO ERECT NO BARRIERS TO IP-ENABLED SERVICES TRAFFIC," is rejected. This language is unnecessary to effect the purpose of ensuring that IP-enabled services traffic is routed over local interconnection trunks, it is reasonably subject to different interpretations, and it improperly requires parties to contractually agree to a policy, factual or legal statement.

· Level 3's proposed § 4.7.1 is rejected. This language presents a description of the requirements of Level 3's net protocol conversion service. This language is unnecessary to effect the purpose of the contract, and it is improper to require parties to contractually agree to what services Level 3 provides to its customers.

· Level 3's proposed § 4.7.2 is adopted. It states that parties will exchange IP-enabled services traffic over local interconnection trunks.

· Level 3's proposed § 4.7.2.1 is adopted, except that the phrase "and according to Applicable Law" is deleted. It provides appropriate clarification that disputes over classification of traffic shall be resolved through the agreement's dispute resolution process.

· SBC's proposed § 16.2 is rejected. It describes a dispute resolution process regarding misrouting of traffic distinct from the agreement's dispute resolution process, which confuses the terms governing such dispute resolution.

5. Compensation for Test Traffic

SBC and Level 3 appear to agree that test calls are not subject to intercarrier compensation, and that intercarrier compensation should begin once Level 3's interconnection is complete. Nevertheless, the parties offer dueling language. Level 3's proposed language is phrased in the negative, and provides that compensation does not apply to test calls. SBC's proposed language is phrased in the affirmative, and provides that the parties' compensation obligations begin when they agree that interconnection is complete, including when Level 3 has established all of its traffic trunks, including ancillary 911 trunks.

Level 3 complains that SBC's language would allow SBC to bill for test calls and to withhold compensation on a unilateral claim that Level 3 has not completed its 911 trunks.

SBC asserts that its language properly exempts test traffic from intercarrier compensation because it allows both parties to define when interconnection is complete. SBC complains that Level 3's language improperly references access charges that are not subject to a Section 252 arbitration agreement.

I adopt SBC's proposed language. To the extent that Level 3 believes that SBC is billing for test calls before interconnection is complete, or not compensating Level 3 for traffic after interconnection is complete, it may pursue dispute resolution under the agreement. Accordingly, with respect to IC-7, SBC's proposed § 3.7 is adopted and Level 3's proposed § 3.7 is rejected.

6. SS7 Call Setup Message and Duty to Provide Call Records

This issue relates to the identification of originating IP-enabled services traffic. SBC proposes that the agreement require the parties to provide Calling Party Number (CPN) information on all traffic, including IP-enabled services traffic. According to SBC, this information is needed to determine whether the calls are local, intraLATA or interLATA so that appropriate charges can be applied and to ensure that exchange traffic is not improperly routed over local interconnection trunks.²³

With respect to IC-8, Level 3 proposes that the agreement not limit the information to CPN, but rather permit the parties to provide "call records" to take into account other means of identifying IP-enabled traffic. Although Level 3's statement of the issue in the Disputed Points List poses the assumption that providing CPN would be unreasonably costly, Level 3's witness admitted at the hearing that it is feasible for Level 3 to deliver CPN for its originating VoIP traffic, and Level 3's cursory discussion of the issue in its briefs suggests that the alleged cost is associated with separating out "intrastate components" of
IP-enabled services traffic, and not with providing CPN itself.

Elsewhere, with respect to IC-2(f), Level 3 proposes, and SBC opposes, language directing Level 3 to insert into the SS7 call setup message an indicator that will allow the parties to identify IP-enabled services traffic that originates on Level 3's network.²⁴ SBC objects to this proposal as there is currently no industry standard for identifying originating IP-enabled services traffic.

As determined elsewhere in this report, IP-enabled services traffic is subject to reciprocal compensation and may be routed over local interconnection trunks. Thus this issue of identifying misrouted traffic boils down to how to distinguish originating IP-enabled services traffic from Level 3 originating traffic that is not IP-enabled and therefore not properly routed over local interconnection trunks.

The only practical approach offered in this record is to require Level 3 to provide CPN on all its originating traffic, including VoIP, and for Level 3 to identify its originating IP-enabled services traffic by inserting a call setup message in the SS7. SBC offers no other suggestion for distinguishing between IP-enabled services traffic that is subject to reciprocal compensation and traffic that is subject to access charges.

Accordingly, I dispose of IC-8 and IC-2(f) as follows:

· IC-8: SBC's proposed § 4.1 is adopted, and Level 3's proposed § 4.1 is rejected.

· IC-2(F): Level 3's proposed § 3.2.2.3 is adopted.

7. Dispute Resolution for ISP-Bound Traffic

Both parties agree that the dispute resolution process for ISP-bound traffic will be the same as for Section 251(b)(5) traffic. Nevertheless, the parties propose dueling language to this effect.

Level 3 proposes language that states that the dispute resolution process applies to "any dispute [...] over the jurisdictional nature or classification of traffic." SBC opposes this language as overbroad because it applies to "all traffic" as opposed to ISP-bound traffic and Section 251(b)(5) traffic.

SBC proposes language stating that all terms and conditions regarding disputed billing and payment terms shall apply to ISP-bound traffic "the same as for Section 251(b)(5) Traffic" and that parties will not block the other's traffic without following the dispute resolution process. Although Level 3 recommends its proposed language over SBC's "in order to avoid creating disparate [dispute resolution] processes," it does not articulate how SBC's might do that.

I dispose of IC-9 by adopting SBC's § 5.6, and rejecting Level 3's § 4.7.2.1.

8. Compensation for Unbundled Local Switching Traffic

Level 3 opposes SBC's proposed language regarding compensation for local switching traffic to the extent that it would supersede the terms and conditions of the Unbundled Network Elements Appendix of the parties' current agreement. As discussed in greater detail at Section VII, Level 3's position that it is entitled to the terms and conditions applicable to declassified UNEs contained in the parties' current UNE appendix is rejected. Accordingly, I dispose of IC-12 by adopting SBC's proposed § 5.7, except that I do not adopt the disputed language of §§ 5.7.1 and 5.7.4, as they do not apply in California.

9. Compensation and Billing Information for intraLATA 800 calls

This issue concerns (1) whether parties should be required to provide Access Detail Usage and Copy Detail Usage for intraLATA 800 calls in Exchange Message Interface format, and (2) what intercarrier compensation applies to intraLATA 8YY traffic that bears translated NPA-NXX codes that are local to the point where traffic is exchanged.

Level 3 proposes language that permits the parties to provide the "equivalent" of Access Detail Usage and Copy Detail Usage, and to provide it in any "other mutually agreeable format." This language is unnecessary. To the extent that the parties wish to exchange other information that may be more useful, they are free to negotiate such arrangements.

Level 3 proposes that the NPA-NXX of the calling parties determine if the call to the 8YY number is local for billing purposes. SBC opposes this language. Consistent with the treatment of FX traffic in this arbitrated agreement, I reject Level 3's proposal. As discussed with respect to FX traffic (at Section III.C, above), NPA-NXX manipulation does not entitle carriers to reciprocal compensation where other compensation otherwise applies.

Accordingly, I dispose of IC-18 by adopting SBC's proposed §§ 11 through 11.2, and rejecting Level 3's proposed language.

10. Compensation and Billing Information for Meet-Point Billing

This issue concerns (1) whether Level 3 must provide records formatted according to the Ordering and Billing Forum's Multiple Exchange Carrier Access Billing (MECAB) standard, (2) whether meet point billing or switched access traffic compensation apply to IP-enabled services traffic, and (3) whether the agreement should limit the parties' ability to bill "to the extent permitted by Applicable Law."

Level 3 proposes that the agreement not limit the format of the records to MECAB, but rather permit the parties to provide "call records" to take into account other means of identifying IP-enabled traffic. This language is unnecessary. To the extent that the parties wish to exchange other information that may be more useful, they are free to negotiate such arrangements.

Level 3 opposes SBC's term "Switched Access Services" and would replace it with the term "Circuit Switched Traffic." Although Level 3 does not separately address Disputed Issue IC-19 in its briefs, its concern appears to be that the term "Switched Access Services" will permit SBC to mistreat IP-enabled services traffic as intraLATA toll. SBC opposes the term "Circuit Switched Traffic" because it improperly encompasses intraLATA toll traffic that is not subject to meet point billing, e.g., where there is no third-party toll carrier in the middle of the call.

The term "Circuit Switched Traffic" does not necessarily, and in any event is not necessary to, define non-IP-enabled services traffic for the purpose of this arbitration agreement. As discussed at Section III.A, this arbitrated agreement will define IP-enabled services traffic by reference to its net conversion between IP and TDM format for communication between Internet and PSTN users. Modifying § 14.1 (discussed at Section III.E.9, below) to clarify that IP-enabled services traffic is not intraLATA toll traffic for purposes of this agreement will sufficiently protect against the misapplication of meet point billing to IP-enabled services traffic. With that modification, SBC's proposed term "Switched Access Service" more accurately reflects the traffic at issue in this section.

Level 3 does not address its reason for proposing the caveat "to the extent permitted by Applicable Law." It goes without saying that this agreement and its terms function only to the extent permitted by law.

Accordingly, I dispose of IC-19 by adopting SBC's proposed §§ 12 through 12.9, and rejecting Level 3's proposed §§ 12 through 12.9, except that Level 3's proposed 90-day period for parties to reconstruct lost data is adopted pursuant to the parties' agreement.

11. IntraLATA Toll Traffic Compensation

This issue concerns (1) the applicability of intraLATA toll traffic compensation to IP-enabled services traffic, (2) capping Level 3's compensation for the exchange of intraLATA toll traffic at the compensation contained in SBC's tariff, and (3) applying transport, tandem switching and end office rates to cases where traffic is terminated to a switch "providing equivalent geographic coverage."

Level 3 proposes to limit the application of intraLATA toll traffic compensation to "Circuit-Switched Traffic," in order to ensure that SBC does not improperly apply intraLATA toll traffic compensation to IP-enabled services traffic. SBC opposes this qualifier. As discussed earlier, modifying § 14.1 to clarify that IP-enabled services traffic is not intraLATA toll traffic for purposes of this agreement will sufficiently protect against the misapplication of meet point billing to IP-enabled services traffic. With that modification, SBC's proposed language more accurately reflects the traffic at issue in this section.

Level 3 does not articulate the reason for its opposition to SBC's proposed language regarding caps on interstate switched access rates. SBC's proposed language appears to be consistent with 47 C.F.R. § 61.26(b)(1).

Level 3 does not address the reason for its proposal to charge tandem rates where a switch providing equivalent geographic coverage is used to terminate traffic. To the extent its proposed language is intended to ensure proper treatment of its IP-enabled services traffic, that concern is adequately addressed elsewhere in the arbitrated agreement.

Accordingly, I dispose of IC-20 by adopting SBC's proposed § 14-14.1, except that a sentence shall be added to § 14.1 specifying that "IntraLATA toll traffic does not include IP-enabled services traffic."

12. Originating Carrier Number Records

Level 3 proposes language that would require SBC to provide Originating Carrier Number (OCn) records to Level 3 when Level 3 is technically incapable of billing the original carrier through the use of terminating records. SBC opposes Level 3's proposed language, charging that CPN is the proper call information to be provided. Because Level 3 does not address this issue or articulate the basis for its proposal in its briefs, I do not require SBC to provide the information.

In accord with the earlier disposition of the issue, I reject Level 3's proposed expression "Circuit Switched" and adopt SBC's proposed expression "Section 251(b)(5)" for purposes of identifying the traffic subject to this contract term. In accord with the earlier disposition of the issue, I reject Level 3's proposed language that would maintain the parties' current rate for the exchange of ISP-bound traffic, and adopt SBC's proposed language that references the FCC's interim ISP compensation plan as the basis for compensation for
ISP-bound traffic.

Accordingly, I resolve IC-21 by adopting SBC's proposed §§ 15 through 15.2, and rejecting Level 3's proposed §§ 15 through 15.2.

13. Reservation of Rights Concerning Compensation for
ISP-Bound Traffic

SBC proposes terms to reserve the parties' rights specifically with regard to ISP-bound traffic. SBC states that, because the FCC's ISP compensation plan is, by definition, interim, and because the FCC has stated its intention to further review and potentially revise intercarrier compensation as a result of the Notice of Proposed Rulemaking (NPRM) to address intercarrier compensation on a more general basis,²⁵ a special reservation of rights and intervening law provision is appropriate to address such forthcoming changes.

Level 3 agrees to the initial portion of SBC's proposed language, but opposes SBC's continuing language because it articulates its own interpretations of legal actions and concerns related to the FCC ISP Remand Order, and imposes them on Level 3 by presenting them as a "joint" acknowledgement of the status of the legal landscape. Level 3 states that SBC's "endless expression" will burden the agreement, and recommends that the Commission adopt its more cogent option which is to expressly reserve the parties' rights, and leave it at that.

I reject the majority of SBC's disputed proposed language, as it is unreasonably protracted and redundant, and will lead to unnecessary confusion. In addition, much of the disputed proposed language is inapplicable to California as it addresses circumstances where SBC has not already elected to offer to exchange traffic pursuant to the FCC's interim ISP compensation plan.

Accordingly, I resolve IC-22 by rejecting SBC's proposed language in §§ 18.1 through 18.6, and adding the following statement to § 18.1:

This includes, but is not limited to, the right to negotiate appropriate amendments to conform to modifications of the ISP Remand Order, and to obtain reimbursements for any prior intercarrier compensation that was paid for under terms that are later found to be null and void and subject to retroactive adjustment.

⁸ Time division multiplexing, or TDM.

⁹ Order Instituting Investigation re Voice over Internet Protocol, I.04-02-07, p. 7.

¹⁰ IP-Enabled Services NPRM, ¶ 30, citing to Intercarrier Compensation NPRM, CC Docket No. 01-92 (released April 27, 2001), ¶ 133.

¹¹ Id., ¶35.

¹² Vonage Order.

¹³ See, e.g., Vonage Order, ¶ 14, fn. 46; Order, Petition for Declaratory Ruling that AT&T's Phone-to-Phone IP Telephony Services are Exempt from Access Charges, WC Docket
No. 02-361, 19 FCC Rcd 7457 (2004) (AT&T Declaratory Order), ¶¶ 2, 10, 13.

¹⁴ Comments of the People of the State of California and the California Public Utilities Commission, May 28, 2004, In the Matter of IP-Enabled Services, WC Docket 04-36, p. 39, citing to IP-Enabled Services NPRM, ¶61.

¹⁵ Issue numbers refer to their designation in the parties' joint Disputed Points List (DPL). The acronyms refer to the respective appendices, i.e., Intercarrier Compensation (IC), Interconnection Trucking Requirements (ITR), Network Interconnection Method (NIM), Physical Collocation (PC), Virtual Collocation (VC), Unbundled Network Elements (UNE), Coordinated Hot Cuts (CHC), Recording (REC), Signaling System 7 (SS7), Out of Exchange Traffic (OET), General Terms and Conditions (GT&C) and Definitions (DEF).

¹⁶ Order, Petition of Core Communications, Inc. for Forbearance, WC Docket No. 03-171, 2004 WL 2341235 (rel. Oct. 18, 2004) (Core Forbearance Order).

¹⁷ Application of Pacific Bell Telephone Company for Arbitration with Pac-West Telecomm, Inc. (A.02-03-059) D.03-12-020 and D.03-05-031.

¹⁸ Presumably by mistake, Level 3 also cites to Decision 99-09-002 in R.97-04-011/
I.97-04-012, the Commission's Rulemaking and Investigation to Establish Standards of Conduct Governing Relationships Between Energy Utilities and Their Affiliates.

¹⁹ In re Starpower Commissions, LLC v. Verizon South, 04-102, EB-00-MD-19 (rel. Nov. 7, 2003).

²⁰ In the Matter of Petition of WorldCom, Inc., CC Docket Nos. 00-218, -249, -251, Memorandum Opinion and Order, 18 FCC Rcd. 17,7222, DA 03-2738 (rel. July 17, 2002) (Virginia Arbitration Order).

²¹ In the Matter of Global NAPs Inc. Petition for Arbitration of an Interconnection Agreement, Opinion Adopting FAR with Modification (GNAPs Decision), D.02-06-076; In the Matter of Application of Pacific Bell Telephone Company for Arbitration with Pac-West Telecomm, Inc. (Pac-West Decision), D.03-05-031, and Order Denying Rehearing of Decision 03-05-031, D.03-12-020.

²² SBC does not respond to Level 3's discussion on this point.

²³ The CPN would only be a proxy for the physical location of the IP originating end user, as the end user could be anywhere in the world. The end user's actual physical location is indeterminable.

²⁴ It appears, and this discussion assumes, that the parties' references to a SS7 call setup message and to a Originating Line Identifier code refer to the same method for identifying originating IP-enabled services traffic.

²⁵ Intercarrier Compensation NPRM, CC Docket No. 01-92, FCC 01-132 (rel. April 27, 2001).