II. Background

The issues we address in this rulemaking continue our program to promote a competitive telecommunications market within California. In this endeavor, we are guided by both federal and state rules. Relevant federal rules are prescribed by the Act as well as by various orders that have been issued by the FCC. We are also guided by applicable federal court cases. At the state level, we are guided by the Commission's rules that have been adopted in various dockets, including the Local Competition proceeding (R. 95-04-043/I.95-04-044) and the Open Access and Network Architecture Development (OANAD) proceeding (R.93-04-003/I.93-04-002).

The question at issue in this OIR is whether the reciprocal compensation provisions of the Act should continue to apply to calls using the public switched telephone network (PSTN) to access the Internet through an ISP. An ISP provides access to information and services on the Internet over local phone lines leased by the ISP from a local exchange carrier (LEC) connecting their modems with the LEC's switching facility. The ISP enables users to connect to its modem and access the Internet by simply dialing a local phone number with no toll charges.

As a context for resolving the issues presented in this OIR, we review the events that have led to the present dispute. Beginning in the mid-1990s, the local exchange market was opened to competition pursuant to both state and federal law. Under the previous monopoly era, the incumbent local exchange carrier (ILEC) typically handled both call origination and termination functions within a local area since both the calling and called parties were ILEC customers. With the opening of the local market to competition, however, an originating caller may be served by one LEC while the called party may be served by a competing LEC ( CLEC). Consequently, CLECs must interconnect their networks, and negotiate interconnection agreements as to how to compensate each other in the mutual delivery of calls.

The 1996 Act sets forth the federal framework for local competition generally, and particularly for LECs' obligations to compensate each other for the delivery of local calls. Section 252 of the Act imposes upon state commissions the statutory duty to approve voluntarily negotiated interconnection agreements and to arbitrate interconnection disputes in accordance with the provisions of the Act.

Under the Act, different means of intercarrier compensation are authorized depending on whether calls are classified as "local" or interexchange. Section 251(b)(5) of the Act requires LECs "to establish reciprocal compensation arrangements for the transport and termination of telecommunications." (47 U.S.C. § 251(b)(5).) Although § 251(b)(5) purports to extend reciprocal compensation to all telecommunications, the FCC has construed the reciprocal compensation requirement as limited to local traffic. (47 CFR § 51.701(a).) Under standard reciprocal compensation provisions of interconnection contracts, the cost of terminating a local call that originates from LEC's network and terminates on another LEC's network is attributed to the LEC from which the call originated. (47 CFR Sec. 51.701(e), 51.703).

Long distance calls continue to be compensated with "access charges," as they were before the 1996 Act. Access charges are not paid by the originating LEC. Instead, the long-distance carrier pays both the LEC that originates the call and links the caller to the long distance network, and the LEC that terminates the call. (See In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 FCC Rcd 15499, 16013 (p. 1034) (1996) ("Local Competition Order").) Thus, payment of reciprocal compensation for terminating calls is mandatory under the Act for all "local" calls.

Under the 1996 Act, state regulatory commissions have the responsibility to determine: (1) which calls will be defined as or treated as "local" calls for purposes of making reciprocal compensation applicable to such calls when handled by more than one carrier, and (2) the rate levels and rate structure of reciprocal compensation in that state. The FCC has the jurisdictional authority to establish parameters within which state commissions carry out these responsibilities.

In the initial round of interconnection agreements negotiated between ILECs and competitive local exchange carriers (CLECs), no particular controversy was evident concerning whether calls to ISPs were properly included as local calls subject to reciprocal compensation. CLECs included ISP calls in its local traffic for which reciprocal compensation payments were billed. Initially, the ILECs did not express disagreement with this treatment, but paid reciprocal compensation to CLECs for such ISP calls. Beginning in about 1998, however, the ILECs began to take the position that ISP-bound calls did not constitute local calls as defined by the Act, and discontinued payment of reciprocal compensation to CLECs for terminating such calls.