VII. Is Bill-And-Keep a Reasonable Alternative for Reciprocal Compensation?

A. Parties' Positions

The ILECs propose that reciprocal compensation be eliminated for ISP traffic and replaced with a "bill-and-keep" approach to compensation. Under bill-and-keep, the ILEC would continue to absorb costs to originate and transport ISP-bound traffic to CLECs, and would receive no compensation from CLECs or its customers for such origination, transport, and switching costs. CLECs would continue to bill ISPs, and CLECs would retain all of these revenues. CLECs would not pay Pacific for the additional switching and transport costs of ISP-bound calls.

The ILECs claim that bill-and-keep provides for an equitable sharing of the burden of the FCC's exemption of ISPs from paying access charges. As a result of this exemption, neither originating nor terminating carriers can levy access charges on ISPs. Pacific argues that if the ISP exemption were not in place, carriers would be compensated by a meet-point-billing arrangement with access charges applying on both the originating and terminating side of the call. Pacific characterizes its proposal as a continuation of the meet-point-billing requirements, but with the exemption of the ISP from access charges, resulting in a "bill-and-keep" arrangement whereby the originating and terminating carrier each shoulders the burden for the portion of the call they carry.⁹⁸

Pacific points to various purported advantages to end users of bill-and-keep. End-user customers would not have to pay toll charges to access the Internet. CLECs would continue to have calls rated as local and at the same time have the calls routed to distant points of interconnection without paying Pacific for transport and tandem switching.

End-user customers would not have to provide additional funding to Pacific, or any other originating carrier, to finance reciprocal compensation payments CLECs.

Pacific also claims a level playing field would be created in the market place for ISP business. All LECs serving ISPs would use ISP revenues to cover their costs. Consistent with the FCC's ESP exemption, LEC costs that are not covered by charges to ISPs would be absorbed. LECs would not view residential customers as potential liabilities.

Pacific's witness, Dr. Harris, characterized bill-and-keep as "a reasonable compromise halfway between the long distance access charge scheme which would flow revenue back to PacBell, the originating carrier, and the current reciprocal compensation scheme which flows charges from PacBell to the CLEC serving an ISP." Dr. Harris testified that bill and keep would reduce the distortion that favors old-fashioned dial-up modems over advanced access technologies. Pacific still believes the adoption of bill and keep for ISP-routed traffic represents a subsidy from Pacific to the ISP because there is no intercarrier compensation, rather than having the ISP compensate the ISP's LEC/CLEC and Pacific Bell. Pacific claims that CLECs can cover (or already are covering) their switching costs by charges already levied on ISPs without reciprocal compensation payments from Pacific.

Pacific believes that under the Act, bill-and-keep arrangements are acceptable outcomes. Pacific argues that because Sections 251 and 252 do not mandate that reciprocal compensation be paid on ISP-bound calls; the Commission has the latitude to adopt a preferred outcome excluding ISP-bound calls from reciprocal compensation requirements. Since the FCC has exempted ISPs from paying carrier access charges, Pacific argues that costs need to be recovered from the users of the respective carrier services - ILECs from their end users and CLECs from their end users, including ISPs. Pacific claims that nothing in the law prohibits CLECs from recovering costs from ISPs through fees other than access charges.

The ILECs argue that the elimination of reciprocal compensation payments will merely eliminate certain CLECs' windfall profits, but deny that there is any evidence that the CLECs' financial viability would be threatened. Pacific points to statements made by ICG and Focal to investors and the financial community to the effect that they will be viable even without the reciprocal compensation they currently receive.

CLECs oppose the bill and keep alternative, arguing that it would prevent recovery of terminating costs from the originating caller that causes the costs to be incurred. CLECs argue that because the originating caller initiates the call to the ISP, the carrier of the originating caller should compensate for the cost of terminating the call to the ISP as a matter of economic fairness. Witness Selwyn argues that all local calls are undertaken on a "sent-paid" basis whereby the originating subscriber has paid to have the call delivered on an end-to-end basis.

The CLECs argue that bill and keep is particularly inappropriate due to the traffic imbalance in ISP-bound calls exchanged between competitive LECs and incumbent LECs. Focal argues that the traffic imbalance is precisely the reason why reciprocal compensation is needed. Adoption of bill-and-keep (the default arrangement if reciprocal compensation payments are eliminated) when traffic is not roughly balanced would preclude the LEC with the greatest volume of terminating traffic from recovering its transport and termination costs. Imposition of a bill-and-keep mechanism when traffic is imbalanced would be inconsistent with the FCC's rules on the matter. Specifically, the FCC concluded that bill-and-keep may only be imposed by state commissions where the traffic terminated on interconnecting LECs' networks is roughly equal and is expected to remain so.

B. Discussion

We do not find the bill-and-keep proposal to provide an equitable alternative to reciprocal compensation. The ILECs propose the bill-and-keep mechanism as a remedy for the perceived imbalance in the flow of services and revenues that they claim currently exists. The bill-and-keep mechanism would relieve the ILECs from paying any reciprocal compensation for any calls their customers make to ISPs that are terminated by CLECs. Yet, the bill-and-keep alternative does nothing to move toward a more balanced flow of services and revenues related to ISP call termination. If anything, the bill-and-keep alternative would result in an equal if not greater asymmetry than that presently alleged by the ILECs. Under present policies, there is a matching of reciprocal compensation revenues with minutes of traffic terminated to ISPs, whether by an ILEC or a CLEC. The bill-and-keep proposal would eliminate this matching.

Verizon argues that bill-and-keep is a competitively fair outcome because it treats both ILECs and CLECs equally by exempting them all LECs from paying any compensation to any other LEC. Verizon's argument is one-sided, however, by failing to consider the imbalance in terms of services rendered. The proposal would not treat ILECs and CLECs equally in relation to the volume of ISP traffic they are required to terminate. To the extent that CLECs terminate disproportionately much greater ISP traffic volumes than do ILECs, the adoption of bill and keep would disproportionately penalize the CLECs. The bill and keep alternative would create a significant asymmetrical distortion between (1) the service rendered in terminating ISP calls, and (2) the payment made for that service.

ILECs argue that the prohibition on using bill and keep when traffic flows are out of balance only applies for "local" traffic. Assuming the Commission chooses to classify ISP traffic as non-local, the ILECs argue, there is no prohibition on applying the bill-and-keep approach. Even assuming the FCC technical prohibition did not apply, the ILECs still fail to justify why the underlying rationale for requiring a rough balance of traffic flows would not apply to ISP traffic to justify bill-and-keep even if the traffic is technically deemed non-local.

Pacific also seeks to justify its proposal on the basis that the ISP and its subscriber are the primary cost causer whenever a customer of the ISP originates a call over an ILEC local phone line to reach the ISP. Pacific witness Harris first argues that from a cost-causation perspective, it is the responsibility of the ISP and its subscriber to ensure that all of the suppliers are paid for in their roles in providing the ISP's service. The subscriber contracts with an ISP that, in supplying that service, uses the PSTN. The fact that the ISP subscriber also is the subscriber to local exchange service from the ILEC is not relevant under Harris' theory. Harris claims that because the ISP is acting on behalf of the subscriber to route the subscriber's traffic to the Internet, the situation is very different from others involving what he calls "true" local end-users.

We find Harris' attempt to define the ISP as the cost causer to be inconsistent with the principles linking payment obligation with cost causation for other types of calls. Harris seeks to justify the inconsistency by claiming a unique relationship exists between the ISP and its subscriber in comparison to other types of "true" local end users. We find that no essential difference between the ISP and its subscriber that justifies an inconsistent application of cost-causation principles compared with other types of calls. As noted by witness Selwyn in rebuttal testimony, there are any number of non-ISP businesses and service providers for which the telephone call placed by the end user is an indispensable aspect of the transaction with the end user. For example, a similar relationship between calling party and service provider can be said to exist in the case of a call answering bureau, a customer service center, or a travel reservation bureau where the ultimate goal is not to speak to the called party as end in itself, but rather to obtain information.

Yet, while the essence of the relationship between the business and its subscriber is similar in such cases, Harris is not proposing to reverse the traditional "sent-paid" linkage of originating caller with cost responsibility for terminating charges. The fact that a customer chooses to be a subscriber to an ISP does not prevent the customer from simultaneously subscribing to the ILEC for local telephone service. Whether the telephone customer is calling a friend, a reservation bureau, or an ISP, the telephone customer is choosing to originate the call. The fact that the called party (whether ISP, reservation bureau, or personal friend) may have actively solicited the calling to make the call doesn't change the underlying relationship between the telephone subscriber and the ILEC providing the service. Thus, where the ILEC originates a call on behalf of its subscriber, whether the purpose of the call is to reach an ISP, a travel reservation bureau, or a personal friend, the cost causation principles should be applied consistently. Therefore, it remains the responsibility of the originating ILEC to pay for the costs of terminating the call, on behalf of the call originator who causes the costs to be incurred. The adoption of bill-and-keep would be inconsistent with this cost-causation principle since it would treat the called party (i.e., the ISP) as the cost causer, rather than the ISP subscriber (i.e., the calling party). We likewise find that the bill and keep option is not justified in order to compensate the ILEC for any claimed "subsidy" to ISPs due to their exemption for federal access charge. Forcing CLECs to recover termination charges from ISPs through end user rates rather than through reciprocal compensation would run counter to the stated intent of the FCC in applying the access charge exemption on ISPs. As the FCC has stated:

"Maintaining the existing pricing structure for these services avoids disrupting the still-evolving information services industry and advances the goals of the 1996 Act to 'preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation." ⁹⁹

For these reasons, we find the bill-and-keep approach to be unacceptable as a compensation alternative for ISP calls.