ALJ/TRP/tcg DRAFT Item 1

12/7/2000

Decision PROPOSED DECISION OF ALJ PULSIFER (Mailed 11/3/2000)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Own Motion into Reciprocal Compensation for Telephone Traffic Transmitted to Internet Services Providers Modems.

Rulemaking 00-02-005 (Filed February 3, 2000)

(See Appendix A for List of Appearances.)

TABLE OF CONTENTS

Title Page

OPINION 2

I. Introduction 2

II. Background 3

III. Procedural History and Scope of this Proceeding 6

IV. Overview of the Proceeding 10

A. Parties' Proposals 10

B. Summary Conclusions and Framework for Approaching the Issues 11

V. Should Calls to an ISP Be Treated As Local Calls as Defined by the 1996 Telecommunications Act? 12

A. Parties' Positions 13

B. Discussion 17

VI. Assuming that the Reciprocal Compensation Provisions of the Act are not applicable to ISP Traffic, Do Other Factors Justify Reciprocal Compensation for ISP Traffic? 29

A. Effects of Reciprocal Compensation Policies on Incentives to Promote Competition and Economic Efficiency 29

1. Parties' Positions 29

2. Discussion 32

B. Can ISP Traffic Be Accurately Identified and Segregated from other Traffic ? 34

1. Parties' Positions 34

2. Discussion 41

C. Does the payment of Reciprocal Compensation to CLECs for Terminating ISP Traffic Constitute a "Windfall"? 45

1. Overview of Parties' Positions 45

2. Discussion 47

3. Specific Factors Claimed to Result in Lower CLEC Costs for Terminating ISP Calls 54

a) Differences in Network Configurations and Facilities Used 54

(1) Parties' Positions 54

(2) Discussion 58

b) Longer Call Duration of ISP-Bound Traffic 61

(1) Parties' Positions 61

(2) Discussion 64

c) Higher Call Completion Ratio 66

(1) Parties' Positions 66

(2) Discussion 67

d) Lower CLEC Switching Costs Due to Use of Trunk-to-Trunk Switching for ISP Calls 67

(1) Parties' Positions 67

(2) Discussion 70

e) Lack of Line Concentration using ISDN-PRI 73

(1) Parties Positions 73

(2) Discussion 78

D. Does the Payment of ISP Reciprocal Compensation Result in Unrecoverable Losses to the ILECs? 79

1. Parties' Positions 79

2. Discussion 86

VII. Is Bill-And-Keep a Reasonable Alternative for Reciprocal Compensation? 93

A. Parties' Positions 93

B. Discussion 96

VIII. Comments on Proposed Decision 100

Findings of Fact 100

Conclusions of Law 109

ORDER 110

OPINION

I. Introduction

By this decision, we address the question as to whether "reciprocal compensation" should be paid for telephone calls terminated to Internet Service Providers (ISPs). "Reciprocal compensation" as defined by the Telecommunications Act of 1996 (Act) provides recovery of the costs incurred by carriers to terminate local telephone calls.¹ In opening this rulemaking, we stated we would examine, among other things:

1. the nature of ISP traffic,

2. the basis and justification for reciprocal compensation and consideration of revenues competitive local exchange carriers generate in providing access service to ISPs,

3. the impact of the Federal Communications Commission's (FCC) February 25, 1999 Declaratory Ruling on Decision (D.) 98-10-057, as modified by D.99-07-047,

4. alternative compensation arrangements, and

5. if warranted and proper, the level and make up of a proper reciprocal compensation rate(s) for ISP-bound traffic.

Based on the record before us, we conclude that ISP calls meet the criteria for treatment as local calls subject to reciprocal compensation. We therefore adopt as a preferred outcome in interconnection agreements that carriers treat locally rated calls to ISPs in the same manner as other local traffic. Where parties agree to reciprocal compensation for other local traffic, our preferred outcome is that ISP-bound calls likewise be subject to reciprocal compensation on the same basis.