V. Should Calls to an ISP Be Treated As Local Calls as Defined by the 1996 Telecommunications Act?

We first consider as a matter of law, whether the legal requirements of the Act warrant an order that a call to an ISP be treated as local traffic subject to reciprocal compensation payments. The Act sets forth the legal framework governing carriers rights and obligations in the context of a competitive local exchange market. Among other things, the local competition provisions (in particular Sections 251 and 252) address the issue of inter-carrier compensation for the termination of local traffic.

A. Parties' Positions

The ILECs argue that calls to ISPs are interstate--not local--calls, and thus are not subject to the reciprocal compensation requirements of Sections 251 and 252 of the Act. The ILECs believe that even where callers dial a local number to connect to an ISP, such calls to the ISP modem do not "terminate" at the modem, but continue on to remote Internet websites. Pacific views the local number used by callers to connect to the ISP merely as a routing guide for the first portion of a non-local call. The ILECs rely on the Declaratory Ruling and FCC orders addressing the "Enhanced Service Provider (ESP)⁷ exemption from access charges," which, they argue, establish that calls to ISPs do not terminate in the local calling area and are typically interstate in nature.

In establishing its access charge system in 1983, the FCC decided to treat ESPs as end users, thus continuing their unregulated non-carrier status. See MTS & WATS Market Structure, 97 F.C.C. 2d 682, 711-15 (1983). It reaffirmed this "ESP exemption" in 1991. (Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, 6 FCC Rcd 4524, 4534 (1991). In 1997 it again preserved the status quo. (Access Charge Reform, 12 FCC Rcd 15982 (1997), subsequent history omitted. An ISP, by definition is an ESP and thus comes under the access charge exemption.

If the ISP access charge exemption were not in place, each carrier would be compensated by a meet-point-billing arrangement with access charges applying on both the originating and terminating side of the call. Therefore, Pacific reasons the only equitable arrangement is for carriers to apply the meet-point-bill requirements but `exempt' ISP traffic from charges, which results in a "bill and keep" arrangement.

Pacific also points to the FCC Declaratory Ruling in which the FCC ruled that calls to ISPs are not local. Pacific further argues that nothing in the D.C. Circuit's decision in Bell Atlantic, which remanded the FCC Declaratory Ruling for further clarification, changes the conclusion that Internet traffic is interstate in nature. The D.C. Circuit remand of the FCC Declaratory Ruling did not reverse the determination by the FCC that ISP traffic is interstate traffic; but rather, found that the FCC did not adequately explain its decision. The D.C. Circuit left the FCC free to reach the same result on remand, something it would not have done if the statute or regulations resolved the question the other way.

Pacific also points to the FCC's Advanced Services Remand Order,⁸ released on December 23, 1999, in which the FCC held that ISPs provision of Internet access service is:

. . . exchange access service because it enables the ISP to transport the communication initiated by the end-user subscriber in one exchange to its ultimate destination in another exchange, using both the services of the local exchange carrier and in the typical case the telephone toll service of the telecommunications carrier responsible for interexchange transport. (Advance Services Remand Order, § 35.)

In view of the FCC's statement in the Advanced Services Remand Order, Pacific claims it is unlikely that the FCC could determine that ISP-bound traffic is anything other than interstate exchange access traffic.

The CLECs dispute the ILECs' arguments that ISP calls are not local. The CLECs argue that the switching of a call to an ISP at the end office switch of the carrier serving the ISP and delivery of that call by such serving local carrier to the ISP modem constitutes "termination" of the call as defined by the FCC's regulations. ICG Witness Wood testified that the method of transport and delivery of ISP-bound calls occur in the same manner as other local calls.⁹ When an ILEC calling party dials the number of an ISP served by a CLEC using a local number, the call travels from the originating customer's premises to the ILEC central office switch, which then routes the call (either directly or through a tandem) to the ILEC/CLEC point of interconnection and ultimately on to the CLEC switch. From the CLEC switch, the call is then directed to the end user based on the local number dialed.

The CLECs view the ISP as the called party to whom the call is terminated, thus qualifying the serving carrier for reciprocal compensation for calls to the ISP originating on another local carrier's network. As such, the CLECs argue, the telecommunications service is terminated upon delivery of the switched call to the ISP.

The CLECs view any subsequent interaction between the ISP's modem to the Internet as being separate and distinct from the call placed by the telephone subscriber to the ISP. When a subscriber to an ISP's services calls the ISP, the ILEC subscriber purchases, and the ILEC provides, a "telecommunications service" within the meaning of the Act. The CLECs contrast this telecommunications service, which is separately rated and separately billed by the ILEC, with the functions the ISP provides as an "information service."

The CLECs argue that calls to ISPs utilizing a local phone number constitute "telephone exchange service" (i.e., local calls) as opposed to "exchange access" service as defined in the Act. Telephone exchange service is defined as "service within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area . . ." 47 USC § 153(47).

The CLECs argue that ISP calls come within the definition of telephone exchange service because the caller's and called party's telephone numbers are both within the same local exchange. Moreover, they argue, such calls cannot constitute "exchange access" under the Act because they do not involve "the origination or termination of telephone toll services." 47 USC § 153(16). Likewise, the ISP does not impose a separate charge apart from the caller's monthly local service charge for "telephone service between stations in different exchanges." (47 USC § 153(48).)

CLECs contend that the D.C. Circuit Court remand of the FCC Declaratory Ruling supports the CPUC existing policy on reciprocal compensation since it vacated the FCC's findings regarding the interstate nature of ISP traffic.

B. Discussion

As a beginning point for addressing whether ISP traffic should be treated as local for purposes of applying the reciprocal compensation, we note that the FCC has yet to issue any further ruling in response to the D.C. Circuit remand. The D.C. Circuit reversed the Declaratory Ruling on two separate grounds: (1) the FCC's failure to explain how its "end-to-end" jurisdictional analysis works in the context of determining whether an ISP-bound call is "terminated" at the ISP's premises and thus subject to reciprocal compensation, and (2) the failure to explain how the FCC's approach is consistent with the "telephone exchange service"/"exchange access" dichotomy. Given that the FCC Declaratory Ruling has been vacated and remanded, this Commission is not bound by those vacated findings. Federal rules do not dictate how ISP calls are to be handled by state commissions. We have the discretion to make our independent findings as to whether such calls should be treated as local or as nonlocal for purposes of applying reciprocal compensation.

This determination is independent of the FCC's findings that ISP calls are interstate for jurisdictional purposes. As the D.C. Circuit Court stated: "However sound the end-to-end analysis may be for jurisdictional purposes, the [FCC] has not explained why viewing these linked communications as continuous works for purposes of reciprocal compensation." (206 F. 3d at 6.) As we stated in the OIR, we do not intend to reexamine the jurisdictional policy of the FCC with respect to ISP traffic. Our inquiry only goes to a reexamination of whether ISP calls should be treated as local for reciprocal compensation purposes. Our findings, however, remain subject to any subsequent rulings of the FCC that may contradict or be in conflict with the results reached herein.

We recognize that the Internet is an international network of computers, and that the transmission of data over the Internet certainly may pass beyond local exchange boundaries before it reaches an ultimate web site destination that may be located in another state or another country. The question before us, however, involves a determination of whether the various types of processing and transmission of information by an ISP over the Internet constitutes a continuation of the telephone call initiated by a local telephone customer in accessing the modem of an ISP. The answer to this question shall inform us as to whether the call to an ISP is "local" or not.

The underlying concept of "local" calls is grounded in the structure of the telecommunications network and predicted upon measurement of geographical distances between the rate centers of the telephone numbers of the calling and called parties as prescribed by the North American Numbering Plan (NANP). Under NANP rules, each telephone number is assigned to a unique rate center, identified by vertical and horizontal coordinates, and calls are rated as local if the rate centers of the calling and called parties are within the same local calling area.

The question of whether ISP calls are local or not requires an examination of the nature of the communication and identifying the underlying means by which dial-up Internet access is accomplished and what happens after the ISP receives the call. More specifically, we seek to determine the point at which the path of the underlying telecommunications service ends. As defined by the Act, "termination" is "the switching of traffic that is subject to Section 251(b)(5) at the terminating carrier's end office switch (or equivalent facilty) and delivery of that traffic from that switch to the called party's premises." (Local Competition Order at § 1040; see 47 CFR § 51.701(d).)

Testimony by technical witnesses established that ISP-bound calls are, in fact, terminated by the switch at the ISP's modem bank. Pac-West Witness Goldstein testified that the telephone circuit literally terminates at the ISP's Remote Access Server (RAS), a device which combines the ISP modem bank and router functions with a bulk digital interface.¹⁰ Pacific Witness Hamilton did not dispute that the circuit ends at the RAS, but contended that the circuit is not the "call" itself, but only the path the call travels.¹¹ Although the circuit may literally not be "the call," it certainly embodies the switch-related functionalities that define the call.

Pacific's witness Hamilton described the basic physical configuration used in the transport and delivery of local voice calls. Hamilton testified that a local call originates from an end user in a local exchange and terminates to an end user in the same local calling area. Hamilton testified that the basic configuration is the same whether the two end users are served by different LECs or by the same LEC, as long as they are both within the same local calling area. Hamilton also testified that if the end user dials a local number that is assigned to an ISP that is physically located within the local calling area, the call is transmitted to an end office in the same manner as for a local voice call. An originating end user executes a command to his or her computer modem to dial the local phone number of the ISP. This originating call is sent from the end user's modem to the local ILEC switch which hands the call off to the CLEC's point of interconnection. The call is then carried over trunks to the CLEC equipment and then on to the ISP's equipment which is often collocated with the CLEC equipment.¹²

In this phase of the proceeding, we are not addressing issues relating the use of disparate rating and routing points, since those issues have been deferred to a subsequent phase of this proceeding. Accordingly, we do not address here the implications of an ISP using a locally rated number to receive calls while having the call physically routed to the ISP at a distant point located outside of the local calling area. The implications of those sorts of arrangements will be addressed in a subsequent phase. Rather, we are concerned here with the question of what is the appropriate end point for determining whether a call is local, either the modem of the ISP or the ultimate Internet web site destination accessed by the end user.

Hamilton claimed in written testimony that the call "ends" only at the ultimate website destination.¹³ Under cross-examination, however, Hamilton, gave conflicting and uncertain testimony regarding exactly where a call terminates. At one point during cross-examination by ISP, Hamilton answered that the call terminated at the ISP modem. At another point, he said he wasn't sure where it terminates.¹⁴ Thus, we do not find a strong convincing showing on the ILECs' part regarding the point of termination occurring somewhere out on the Internet. Instead, the overwhelming body of technical evidence supports the finding that termination occurs upon delivery of the call to the ISP.

The "termination" point of telephone call has a specific legal and technical meaning that is linked to functions performed on the PSTN. In order to conclude that ISP calls "terminate" at Internet web sites, we would have to find that the telecommunications service continues beyond the PSTN as telecommunications transmissions over the Internet, itself. Yet, the evidence indicates that PSTN and the Internet are two fundamentally different and mutually exclusive mediums of transmission, each offering two distinctly different categories of service as defined under the Act. "Telecommunications Service" is defined by the Act 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).) By contrast, the transmissions over the Internet can and do involve changes in the form or content of the information sent and received. The functions performed over the Internet more properly comprise what the Act defines as an "information service." Specifically, the Act defines an "information service" as "the offering of a capability for generating, acquiring, storing, transforming, processing retrieving, utilizing, or making available information via telecommunications [.]" (47 U.S.C. § 153(20).) Thus, while an information service provider may make use of a telecommunications service, the two services remain mutually exclusive.

In the FCC's Report and Order In Re Federal-State Joint Board on Universal Service, 12 F.C.C.R. 8776 (Released May 8, 1997) ("Report and Order"), the FCC concluded that "Internet access consists of more than one component." (Id. at ¶ 83.) The FCC reasoned that "Internet access includes a network transmission component, which is the connection over a [local exchange] network from a subscriber to an Internet Service Provider, in addition to the underlying information service." (Id.)

The FCC has found that "Internet access services are appropriately classified as information, rather than telecommunications, services." Report to Congress in re Federal-State Joint Bd. On Universal Service, FCC 98-67 at ¶ 73 (Released April 10, 1998). The FCC affirmed that the categories of "telecommunications service" and "information service" are mutually exclusive. The FCC further concluded that: "Internet access providers do not offer a pure transmission path; they combine computer processing, information provision, and other computer-mediated offerings with data transport." (Id.)

We conclude that ISP communications thus involve two separate functions: (1) a telecommunications service, and (2) an information service. The telecommunications function terminates at the ISP modem while the subsequent processing performed by the ISP beyond the modem is an "information service." The telecommunications service provided over the PSTN and the information service provided over the Internet are thus separate and mutually exclusive entities, and are not jointly two parts of the same "call."

The PSTN and the Internet are also separate and distinct in terms of differences in how the underlying transmissions are processed and delivered. The PSTN involves discrete single circuit switched transmissions. The definition of call termination as used under the Act is inextricably linked to the switching of traffic at an end office. The end office switching is not an intermediate step, but signifies that termination has occurred upon delivery of the traffic to the called party's premises.

As we previously noted in D.98-10-057, however, in contrast to a telecommunications service, "[t]he Internet is a distributed packet-switched network . . . [where the] information is split up into small chunks or 'packets' that are individually routed through the most efficient path to their destination." (D.98-10-057 at 10.) Thus, the circuit-switched telecommunications signal initiated by the calling party does not continue on beyond the ISP. Instead, the ISP initiates a second packet-switched transmission to the Internet. The packet-switched transmission is not simply a continued "routing" of the telephone call delivered to the ISP, nor is it even a single "call" over the Internet or other packet-switched network. Packets may be sent (continuously or sporadically) from the ISP to a website or server, and received by the ISP from a website or server, over many different routes and reassembled before delivery to the subscriber.

The caller's modem and the ISP's modem communicate with each other via the local telephone connection, and the ISP validates the connection with a password or other authentication option. Depending upon when, if at all, the end user chooses during the course of the local connection to the ISP to access the Internet, any transmission by the ISP to the Internet backbone may be initiated long after the subscriber's local call is delivered to the ISP's modem.

The end user that has called the ISP, on the other hand, may not necessarily seek access to any remote web site, but may simply desire access to a local e-mail server or the "home page" or other information that has been stored or "cached" locally by the ISP.¹⁵ If the end user does wish to communicate with a different website, the ISP provides for communications from its router over the Internet backbone, which entails further protocol conversions and interaction with and retrieval of locally stored or "live" information accessible through the other website. However, as testified by witness Terkeurst, such communications are independent of the calling party's use of telecommunications, and are not on the PSTN. Thus, on this basis we find that the ISP's information processing over the Internet is separate and distinct from the basic telecommunications service that the ILEC subscriber uses to call the ISP.¹⁶

Another relevant factor identifying the terminating point of the call is that the ISP is the "called party." This finding agrees with the D.C. Circuit Court which found that "the traffic is switched by the LEC whose customer is the ISP and then delivered to the ISP, which is clearly the 'called party'" (206 F.3d at 6.) Just because subscribers use the ISP to gain access to the Internet, the ISP does not cease to be the called party. The D.C. Circuit court noted that an ISP is no different from a variety of communication service businesses that use various communications services to provide goods and services. The Court explained that although the ISP may be an intensive user of communications services in providing Internet access, the ISP still has originated a communication that is separate and distinct from the ILEC subscriber's call to the ISP.

Specifically, the D.C. court stated:

The [FCC] has not satisfactorily explained why an ISP is not, for purposes of reciprocal compensation, "simply a communications-intensive business end user selling a product to other consumer and business end-users."

. . . [T]he mere fact that the ISP originates further telecommunications does not imply that the original telecommunication does not "terminate" at the ISP. However sound the end-to-end analysis may be for jurisdictional purposes, the [FCC] has not explained why viewing these linked telecommunications as continuous works for purposes of reciprocal compensation.¹⁷

In addition, the singular identity of the "called party" only makes sense if the ISP is identified as the called party. If, on the other hand, multiple web sites are deemed to be the called party(ies) to whom the call is delivered, there is no unique party, and thus no coherent way to ascertain a single termination point for purposes of evaluating calling distance, or whether the call is local or not. The typical Internet "call" frequently involves interactions with multiple points.¹⁸ Some may exist locally in the ISP server while some may be in another country. Thus, the single end-to-end call analogy derived from descriptions of standard long distance voice calls is not schematically accurate nor workable in the context of ISP-bound local calls from either a technical or legal perspective. The called number belongs to the ISP, not to any of the web sites that may be visited during an Internet session. While each web site has its own unique web address, the web site has no identification with the telephone number dialed to access the ISP. Logic therefore dictates that upon completion of the end office switching function and delivery of the traffic to the ISP, the "called party" has received the call, and call termination has occurred. In the case of an ISP call, we thus find that the ISP is the "called party."

The ILECs have failed to show that the telecommunications services used to access ISPs continue over the Internet. The ILECs' reliance on the FCC Declaratory Ruling provide no basis upon which to support the claim that ISP calls do not terminate upon delivery to the ISP. While the D.C. Circuit left open the opportunity for the FCC to provide a rationale as to why its end-to-end analysis used for jurisdictional purposes was relevant in the context of reciprocal compensation, the FCC has not provided such a rationale to date. Absent such a further showing, the FCC's previous determination on this point remain vacated, and do not justify treatment of ISP calls as interstate for purposes of intercarrier compensation.

The FCC Advanced Services Remand Order, as cited by Pacific, also fails to provide a convincing basis upon which to conclude that ISP calls should not be treated as local. The FCC Advanced Services Remand Order stated that "to the extent that the LEC-provided portion of such traffic may not fall within the definition of 'exchange access,' the predominantly inter-exchange end-to-end nature of such traffic nevertheless renders it largely non-local for purposes of reciprocal compensation obligations of Section 251(b)(5)."

While making this assertion, however, nothing in the Advanced Services Order addresses the unanswered questions raised by the D.C. Circuit Court which vacated the FCC's previous findings regarding the rationale for treating ISP calls as nonlocal for reciprocal compensation purposes. The D.C. Circuit Court had found that the cases relied on by the FCC in the Declaratory Ruling seeking to draw an analogy between interexchange telephone service and ISP Internet packet-switched transmissions to web sites were "not on point."¹⁹ Correspondingly, the Advanced Services Order merely repeats similar assertions without any new rationale responsive to the D.C. Court inquiry. Thus, until or unless the FCC provides a rationale for applying its end-to-end analysis to reciprocal compensation requirements as directed by the DC Circuit Court, we find no basis to rely on the FCC Advanced Services Order statement that Internet traffic is "predominantly interexchange."

We thus find that calls to ISPs meet the criteria for treatment as local calls when the called number is rated as local based on the proximity of rate centers serving the calling and called party. The Act mandates reciprocal compensation for all calls that are classified as local. Since ISP calls are deemed local as defined by the Act, then such calls are subject to reciprocal compensation. We thus find that reciprocal compensation is warranted for ISP-bound calls to a local number by virtue of the requirements of the Act. In the interests of a complete record, however, we independently consider whether other factual grounds support the reciprocal compensation policy.