Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | CC Docket No. 96-98          |
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| Implementation of the Local      | ) | CC Docket No. 99-68          |
| Competition                      | * |                              |
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| Telecommunications Act           | * |                              |
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| Intercarrier Compensation        | * |                              |
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# ORDER oN REMAND AND REPORT AND ORDER  {#order-on-remand-and-report-and-order .unnumbered}

**Adopted:** April 18, 2001 **Released:** April 27, 2001

By the Commission: Chairman Powell issuing a statement; Commissioner
Furchtgott-Roth dissenting and issuing a statement.

**[Table of Contents]{.smallcaps}**

[Paragraph No.]{.underline}

[I. INTRODUCTION 1]{.smallcaps}

II\. EXECUTIVE SUMMARY 3

III\. BACKGROUND 9

IV\. DISCUSSION 18

A. Background 18

B. Statutory Analysis 23

1\. Introduction 24

2\. Section 251(g) Excludes Certain Categories of Traffic from

the Scope of "Telecommunications" Subject to Section 251(b)(5) 31

3\. ISP-Bound Traffic Falls within the

Categories Enumerated in Section 251(g) 42

4\. Section 251(i) Preserves the Commission's

Authority to Regulate Interstate Access Services 48

5\. ISP-Bound Traffic Falls Within the

Purview of the Commission's Section 201 Authority 52

C. Efficient Intercarrier Compensation Rates and Rate Structures 66

1\. CPNP Regimes Have Distorted the

Development of Competitive Markets 67

2\. Intercarrier Compensation for ISP-bound Traffic 77

3\. Relationship to Section 251(b)(5) 89

D. Conclusion 95

V. Procedural Matters 96

A. Final Regulatory Flexibility Analysis 96

1\. Need for, and Objectives of, this Order on Remand and

Report and Order 97

2\. Summary of Significant Issues Raised by the

Public Comments in Response to the IRFA 99

3\. Description and Estimate of the Number of Small Entities to

Which Rules Will Apply 103

4\. Description of Projected Reporting, Recordkeeping, and

Other Compliance Requirements 109

5\. Steps Taken to Minimize Significant Economic Impact on

Small Entities, and Significant Alternatives Considered 110

VI\. Ordering Clauses 112

#  {#section .Appendix-Heading}

# INTRODUCTION

1.  In this Order, we reconsider the proper treatment for purposes of
    intercarrier compensation of telecommunications traffic delivered to
    Internet service providers (ISPs). We previously found in the
    *Declaratory Ruling*[^1] that such traffic is interstate traffic
    subject to the jurisdiction of the Commission under section 201 of
    the Act[^2] and is not, therefore, subject to the reciprocal
    compensation provisions of section 251(b)(5).[^3] The Court of
    Appeals for the District of Columbia Circuit held on appeal,
    however, that the *Declaratory Ruling* failed adequately to explain
    why our jurisdictional conclusion was relevant to the applicability
    of section 251(b)(5) and remanded the issue for further
    consideration.[^4] As explained in more detail below, we modify the
    analysis that led to our determination that ISP-bound traffic falls
    outside the scope of section 251(b)(5) and conclude that Congress
    excluded from the "telecommunications" traffic subject to reciprocal
    compensation the traffic identified in section 251(g), including
    traffic destined for ISPs. Having found, although for different
    reasons than before, that the provisions of section 251(b)(5) do not
    extend to ISP-bound traffic, we reaffirm our previous conclusion
    that traffic delivered to an ISP is predominantly interstate access
    traffic subject to section 201 of the Act, and we establish an
    appropriate cost recovery mechanism for the exchange of such
    traffic.

2.  We recognize that the existing intercarrier compensation mechanism
    for the delivery of this traffic, in which the originating carrier
    pays the carrier that serves the ISP, has created opportunities for
    regulatory arbitrage and distorted the economic incentives related
    to competitive entry into the local exchange and exchange access
    markets. As we discuss in the *Unified Intercarrier Compensation
    NPRM,*[^5] released in tandem with this Order, such market
    distortions relate not only to ISP-bound traffic, but may result
    from any intercarrier compensation regime that allows a service
    provider to recover some of its costs from other carriers rather
    than from its end-users. Thus, the *NPRM* initiates a proceeding to
    consider, among other things, whether the Commission should replace
    existing intercarrier compensation schemes with some form of what
    has come to be known as "bill and keep."[^6] The *NPRM* also
    considers modifications to existing payment regimes, in which the
    calling party's network pays the terminating network, that might
    limit the potential for market distortion. The regulatory arbitrage
    opportunities associated with intercarrier payments are particularly
    apparent with respect to ISP-bound traffic, however, because ISPs
    typically generate large volumes of traffic that is virtually all
    one-way \-- that is, delivered to the ISP. Indeed, there is
    convincing evidence in the record that at least some carriers have
    targeted ISPs as customers merely to take advantage of these
    intercarrier payments. Accordingly, in this Order we also take
    interim steps to limit the regulatory arbitrage opportunity
    presented by ISP-bound traffic while we consider the broader issues
    of intercarrier compensation in the *NPRM* proceeding.

# executive summary

3.  As presaged above, we must wrestle with two difficult issues in this
    Order: first, whether intercarrier compensation for ISP-bound
    traffic is governed by section 251 or section 201; and, if the
    latter, what sort of compensation mechanism should apply. The first
    question is difficult because we do not believe it is resolved by
    the plain language of section 251(b)(5) but, instead, requires us to
    consider the relationship of that section to other provisions of the
    statute. Moreover, we recognize the legitimate questions raised by
    the court with respect to the rationales underlying our regulatory
    treatment of ISPs and ISP traffic. We seek to respond to those
    questions in this Order. Ultimately, however, we conclude that
    Congress, through section 251(g),[^7] expressly limited the reach of
    section 251(b)(5) to exclude ISP-bound traffic. Accordingly, we
    affirm our conclusion in the *Declaratory Ruling* that ISP-bound
    traffic is not subject to the reciprocal compensation obligations of
    section 251(b)(5).

4.  Because we determine that intercarrier compensation for ISP-bound
    traffic is within the jurisdiction of this Commission under section
    201 of the Act, it is incumbent upon us to establish an appropriate
    cost recovery mechanism for delivery of this traffic. Based upon the
    record before us, it appears that the most efficient recovery
    mechanism for ISP-bound traffic may be bill and keep, whereby each
    carrier recovers costs from its own end-users. As we recognize in
    the *NPRM*, intercarrier compensation regimes that require
    carrier-to-carrier payments are likely to distort the development of
    competitive markets by divorcing cost recovery from the ultimate
    consumer of services. In a monopoly environment, permitting carriers
    to recover some of their costs from interconnecting carriers might
    serve certain public policy goals. In order to promote universal
    service, for example, this Commission historically has capped
    end-user common line charges and required local exchange carriers to
    recover any shortfall through per-minute charges assessed on
    interexchange carriers.[^8] These sorts of implicit subsidies cannot
    be sustained, however, in the competitive markets for
    telecommunications services envisioned by the 1996 Act. In the
    *NPRM*, we suggest that, given the opportunity, carriers always will
    prefer to recover their costs from other carriers rather than their
    own end-users in order to gain competitive advantage. Thus carriers
    have every incentive to compete, not on basis of quality and
    efficiency, but on the basis of their ability to shift costs to
    other carriers, a troubling distortion that prevents market forces
    from distributing limited investment resources to their most
    efficient uses.

5.  We believe that this situation is particularly acute in the case of
    carriers delivering traffic to ISPs because these customers generate
    extremely high traffic volumes that are entirely one-directional.
    Indeed, the weight of the evidence in the current record indicates
    that precisely the types of market distortions identified above are
    taking place with respect to this traffic. For example, comments in
    the record indicate that competitive local exchange carriers
    (CLECs), on average, terminate eighteen times more traffic than they
    originate, resulting in annual CLEC reciprocal compensation billings
    of approximately two billion dollars, ninety percent of which is for
    ISP-bound traffic.[^9] Moreover, the traffic imbalances for some
    competitive carriers are in fact much greater, with several carriers
    terminating more than forty times more traffic than they
    originate.[^10] There is nothing inherently wrong with carriers
    having substantial traffic imbalances arising from a business
    decision to target specific types of customers. In this case,
    however, we believe that such decisions are driven by regulatory
    opportunities that disconnect costs from end-user market decisions.
    Thus, under the current carrier-to-carrier recovery mechanism, it is
    conceivable that a carrier could serve an ISP free of charge and
    recover all of its costs from originating carriers. This result
    distorts competition by subsidizing one type of service at the
    expense of others.

6.  Although we believe this arbitrage opportunity is particularly
    manifest with respect to ISP-bound traffic, we suggest in the *NPRM*
    that any compensation regime based on carrier-to-carrier payments
    may create similar market distortions. Accordingly, we initiate an
    inquiry as to whether bill and keep is a more economically efficient
    compensation scheme than the existing carrier-to-carrier payment
    mechanisms. Alternatively, the record developed in that proceeding
    may suggest modifications to carrier-to-carrier cost recovery
    mechanisms that address the competitive concerns identified above.
    Based upon the current record, however, bill and keep appears the
    preferable cost recovery mechanism for ISP-bound traffic because it
    eliminates a substantial opportunity for regulatory arbitrage. We do
    not fully adopt a bill and keep regime in this Order, however,
    because there are specific questions regarding bill and keep that
    require further inquiry, and we believe that a more complete record
    on these issues is desirable before requiring carriers to recover
    most of their costs from end-users. Because these questions are
    equally relevant to our evaluation of a bill and keep approach for
    other types of traffic, we will consider them in the context of the
    *NPRM*. Moreover, we believe that there are significant advantages
    to a global evaluation of the intercarrier compensation mechanisms
    applicable to different types of traffic to ensure a more
    systematic, symmetrical treatment of these issues.

7.  Because the record indicates a need for immediate action with
    respect to ISP-bound traffic, however, in this Order we will
    implement an interim recovery scheme that: (i) moves aggressively to
    eliminate arbitrage opportunities presented by the existing recovery
    mechanism for ISP-bound by lowering payments and capping growth;
    and (ii) initiates a 36-month transition towards a complete bill and
    keep recovery mechanism while retaining the ability to adopt an
    alternative mechanism based upon a more extensive evaluation in the
    *NPRM* proceeding. Specifically, we adopt a gradually declining cap
    on the amount that carriers may recover from other carriers for
    delivering ISP-bound traffic. We also cap the amount of traffic for
    which any such compensation is owed, in order to eliminate
    incentives to pursue new arbitrage opportunities. In sum, our goal
    in this Order is decreased reliance by carriers upon
    carrier-to-carrier payments and an increased reliance upon recovery
    of costs from end-users, consistent with the tentative conclusion in
    the *NPRM* that bill and keep is the appropriate intercarrier
    compensation mechanism for ISP-bound traffic. In this regard, we
    emphasize that the rate caps we impose are not intended to reflect
    the costs incurred by each carrier that delivers ISP traffic. Some
    carriers' costs may be higher; some are probably lower. Rather, we
    conclude, based upon all of the evidence in this record, that these
    rates are appropriate limits on the amounts recovered from other
    carriers and provide a reasonable transition from rates that have
    (at least until recently) typically been much higher. Carriers whose
    costs exceed these rates are (and will continue to be) able to
    collect additional amounts from their ISP customers. As we note
    above, and explain in more detail below, we believe that such
    end-user recovery likely is the most efficient mechanism.

8.  The basic structure of this transition is as follows:

> \* Beginning on the effective date of this Order, and continuing for
> six months, intercarrier compensation for ISP-bound traffic will be
> capped at a rate of \$.0015/minute-of-use (mou). Starting in the
> seventh month, and continuing for eighteen months, the rate will be
> capped at \$.0010/mou. Starting in the twenty-fifth month, and
> continuing through the thirty-sixth month or until further Commission
> action (whichever is later), the rate will be capped at \$.0007/mou.
> Any additional costs incurred must be recovered from end-users. These
> rates reflect the downward trend in intercarrier compensation rates
> contained in recently negotiated interconnection agreements,
> suggesting that they are sufficient to provide a reasonable transition
> from dependence on intercarrier payments while ensuring cost recovery.
>
> \* We also impose a cap on total ISP-bound minutes for which a local
> exchange carrier (LEC) may receive this compensation. For the year
> 2001, a LEC may receive compensation, pursuant to a particular
> interconnection agreement, for ISP-bound minutes up to a ceiling equal
> to, on an annualized basis, the number of ISP-bound minutes for which
> that LEC was entitled to compensation under that agreement during the
> first quarter of 2001, plus a ten percent growth factor. For 2002, a
> LEC may receive compensation for ISP-bound minutes up to a ceiling
> equal to the minutes for which it was entitled to compensation in
> 2001, plus another ten percent growth factor. In 2003, a LEC may
> receive compensation for ISP-bound minutes up to a ceiling equal to
> the 2002 ceiling. These caps are consistent with projections of the
> growth of dial-up Internet access for the first two years of the
> transition and are necessary to ensure that such growth does not
> undermine our goal of limiting intercarrier compensation and beginning
> a transition toward bill and keep. Growth above these caps should be
> based on a carrier's ability to provide efficient service, not on any
> incentive to collect intercarrier payments.
>
> \* Because the transitional rates are *caps* on intercarrier
> compensation, they have no effect to the extent that states have
> ordered LECs to exchange ISP-bound traffic either at rates below the
> caps or on a bill and keep basis (or otherwise have not required
> payment of compensation for this traffic). The rate caps are designed
> to provide a transition toward bill and keep, and no transition is
> necessary for carriers already exchanging traffic at rates below the
> caps.
>
> \* In order to limit disputes and costly measures to identify
> ISP-bound traffic, we adopt a rebuttable presumption that traffic
> exchanged between LECs that exceeds a 3:1 ratio of terminating to
> originating traffic is ISP-bound traffic subject to the compensation
> mechanism set forth in this Order. This ratio is consistent with those
> adopted by state commissions to identify ISP or other convergent
> traffic that is subject to lower intercarrier compensation rates.
> Carriers that seek to rebut this presumption, by showing that traffic
> above the ratio is not ISP-bound traffic or, conversely, that traffic
> below the ratio is ISP-bound traffic, may seek appropriate relief from
> their state commissions pursuant to section 252 of the Act.
>
> \* Finally, the rate caps for ISP-bound traffic (or such lower rates
> as have been imposed by states commissions for the exchange of
> ISP-bound traffic) apply only if an incumbent LEC offers to exchange
> all traffic subject to section 251(b)(5) at the same rate. An
> incumbent LEC that does not offer to exchange section 251(b)(5)
> traffic at these rates must exchange ISP-bound traffic at the
> state-approved or state-negotiated reciprocal compensation rates
> reflected in their contracts. The record fails to demonstrate that
> there are inherent differences between the costs of delivering a voice
> call to a local end-user and a data call to an ISP, thus the
> "mirroring" rule we adopt here requires that incumbent LECs pay the
> same rates for ISP-bound traffic that they receive for section
> 251(b)(5) traffic.

# BACKGROUND

9.  In the *Declaratory Ruling* released on February 26, 1999, we
    addressed the regulatory treatment of ISP-bound traffic. In that
    order, we reached several conclusions regarding the jurisdictional
    nature of this traffic, and we proposed several approaches to
    intercarrier compensation for ISP-bound traffic in an accompanying
    *Intercarrier Compensation NPRM*. The order, however, was vacated
    and remanded on appeal.[^11] This Order, therefore, again focuses on
    the regulatory treatment of ISP-bound traffic and the appropriate
    intercarrier compensation regime for carriers that collaborate to
    deliver traffic to ISPs.

10. As we noted in the *Declaratory Ruling*, an ISP's end-user customers
    typically access the Internet through an ISP server located in the
    same local calling area.[^12] Customers generally pay their LEC a
    flat monthly fee for use of the local exchange network, including
    connections to their local ISP.[^13] They also generally pay their
    ISP a flat monthly fee for access to the Internet.[^14] ISPs then
    combine "computer processing, information storage, protocol
    conversion, and routing with transmission to enable users to access
    Internet content and services."[^15]

11. ISPs, one class of enhanced service providers (ESPs),[^16] also may
    utilize LEC services to provide their customers with access to the
    Internet. In the *MTS/WATS Market Structure Order*, the Commission
    acknowledged that ESPs were among a variety of users of LEC
    interstate access services.[^17] Since 1983, however, the Commission
    has exempted ESPs from the payment of certain interstate access
    charges.[^18] Consequently ESPs, including ISPs, are treated as
    end-users for the purpose of applying access charges and are,
    therefore, entitled to pay local business rates for their
    connections to LEC central offices and the public switched telephone
    network (PSTN).[^19] Thus, despite the Commission's understanding
    that ISPs use *interstate* access services, pursuant to the ESP
    exemption, the Commission has permitted ISPs to take service under
    *local* tariffs.

12. The 1996 Act set standards for the introduction of competition into
    the market for local telephone service, including requirements for
    interconnection of competing telecommunications carriers.[^20] As a
    result of interconnection and growing local competition, more than
    one LEC may be involved in the delivery of telecommunications within
    a local service area. Section 251(b)(5) of the Act addresses the
    need for LECs to agree to terms for the mutual exchange of traffic
    over their interconnecting networks. It specifically provides that
    LECs have the duty to "establish reciprocal compensation
    arrangements for the transport and termination of
    telecommunications."[^21] The Commission determined, in the *Local
    Competition Order,* that section 251(b)(5) reciprocal compensation
    obligations "apply only to traffic that originates and terminates
    within a local area," as defined by state commissions.[^22]

13. As a result of this determination, the question arose 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.[^23] The Commission
    determined at that time that resolution of this question turned on
    whether ISP-bound traffic "originates and terminates within a local
    area," as set forth in our rule.[^24] Many competitive LECs argued
    that ISP-bound traffic is local traffic that terminates at the ISP's
    local server, where a second, packet-switched "call" then
    begins.[^25] Thus, they argued, the reciprocal compensation
    obligations of section 251(b)(5) apply to this traffic. Incumbent
    LECs, on the other hand, argued that no reciprocal compensation is
    due because ISP-bound traffic is interstate telecommunications
    traffic that continues through the ISP server and terminates at the
    remote Internet sites accessed by ISP customers.[^26]

14. The Commission concluded in the *Declaratory Ruling* that the
    jurisdictional nature of ISP-bound traffic should be determined,
    consistent with Commission precedent, by the end points of the
    communication.[^27] Applying this "end-to-end" analysis, the
    Commission determined that Internet communications originate with
    the ISP's end-user customer and continue beyond the local ISP server
    to websites or other servers and routers that are often located
    outside of the state.[^28] The Commission found, therefore, that
    ISP-bound traffic is not local because it does not "originate\[\]
    and terminate\[\] within a local area."[^29] Instead, it is
    jurisdictionally mixed and largely interstate, and, for that reason,
    the Commission found that the reciprocal compensation obligations of
    section 251(b)(5) do not apply to this traffic.[^30]

15. Despite finding that ISP-bound traffic is largely interstate, the
    Commission concluded that it had not yet established a federal rule
    to govern intercarrier compensation for this traffic.[^31] The
    Commission found that, in the absence of conflicting federal law,
    parties could voluntarily include ISP-bound traffic in their
    interconnection agreements under sections 251 and 252 of the
    Act.[^32] It also found that, even though section 251(b)(5) does not
    *require* reciprocal compensation for ISP-bound traffic, nothing in
    the statute or our rules prohibits state commissions from
    determining in their arbitrations that reciprocal compensation for
    this traffic is appropriate, so long as there is no conflict with
    governing federal law.[^33] Pending adoption of a federal rule,
    therefore, state commissions exercising their authority under
    section 252 to arbitrate, interpret, and enforce interconnection
    agreements would determine whether and how interconnecting carriers
    should be compensated for carrying ISP-bound traffic.[^34] In the
    *Intercarrier Compensation NPRM* accompanying the *Declaratory
    Ruling*, the Commission requested comment on the most appropriate
    intercarrier compensation mechanism for ISP-bound traffic.[^35]

16. On March 24, 2000, prior to release of a decision addressing these
    issues, the court of appeals vacated certain provisions of the
    *Declaratory Ruling* and remanded the matter to the Commission.[^36]
    The court observed that, although "\[t\]here is no dispute that the
    Commission has historically been justified in relying on this
    \[end-to-end\] method when determining whether a particular
    communication is jurisdictionally interstate,"[^37] the Commission
    had not adequately explained why the jurisdictional analysis was
    dispositive of, or indeed relevant to, the question whether a call
    to an ISP is subject to the reciprocal compensation requirements of
    section 251(b)(5).[^38] The court noted that the Commission had not
    applied its definition of "termination" to its analysis of the scope
    of section 251(b)(5),[^39] and the court distinguished cases upon
    which the Commission relied in its end-to-end analysis because they
    involve continuous communications switched by interexchange carriers
    (IXCs), as opposed to ISPs, the latter of which are not
    telecommunications providers.[^40] As an "independent reason" to
    vacate, the court also held that the Commission had failed to
    address how its conclusions "fit . . . within the governing
    statute."[^41] In particular, the court found that the Commission
    had failed to explain why ISP-bound traffic was not "telephone
    exchange service," as defined in the Act.[^42]

17. In a public notice released June 23, 2000, the Commission sought
    comment on the issues raised by the court's remand.[^43] The *Public
    Notice* specifically requested that parties comment on the
    jurisdictional nature of ISP-bound traffic, the scope of the
    reciprocal compensation requirement of section 251(b)(5), and the
    relevance of the concepts of "termination," "telephone exchange
    service," "exchange access service," and "information access."[^44]
    It invited parties to update the record by responding to any *ex
    parte* presentations filed after the close of the reply period on
    April 27, 1999. It also sought comment on any new or innovative
    intercarrier compensation arrangements for ISP-bound traffic that
    parties may have considered or entered into during the pendency of
    the proceeding.

# DISCUSSIoN

## Background

18. The nature and character of communications change over time. Over
    the last decade communications services have been radically altered
    by the advent of the Internet and the nature of Internet
    communications. Indeed, the Internet has given rise to new forms of
    communications such as e-mail, instant messaging, and other forms of
    digital, IP-based services. Many of these new services and formats
    have been layered over and integrated with the existing public
    telephone systems. Most notably, Internet service providers have
    come into existence in order to facilitate mass market access to the
    Internet. A consumer with access to a standard phone line is able to
    communicate with the Internet, because an ISP converts the analog
    signal to digital and converts the communication to the IP protocol.
    This allows the user to access the global Internet infrastructure
    and communicate with users and websites throughout the world. In a
    narrowband context, the ISP facilitates access to this global
    network.

19. The Commission has struggled with how to treat Internet traffic for
    regulatory purposes, given the bevy of its rules premised on the
    architecture and characteristics of the mature public switched
    telephone network. For example, Internet consumers may stay on the
    network much longer than the design expectations of a network
    engineered primarily for voice communications. Additionally, the
    "bursty" nature of packet-switched communications skews the
    traditional assumptions of per minute pricing to which we are all
    accustomed. The regulatory challenges have become more acute as
    Internet usage has exploded.[^45]

20. The issue of intercarrier compensation for Internet-bound traffic
    with which we are presently wrestling is a manifestation of this
    growing challenge. Traditionally, telephone carriers would
    interconnect with each other to deliver calls to each other's
    customers. It was generally assumed that traffic back and forth on
    these interconnected networks would be relatively balanced.
    Consequently, to compensate interconnecting carriers, mechanisms
    like reciprocal compensation were employed, whereby the carrier
    whose customer initiated the call would pay the other carrier the
    costs of using its network.

21. Internet usage has distorted the traditional assumptions because
    traffic to an ISP flows exclusively in one direction, creating an
    opportunity for regulatory arbitrage and leading to uneconomical
    results. Because traffic to ISPs flows one way, so does money in a
    reciprocal compensation regime. It was not long before some LECs saw
    the opportunity to sign up ISPs as customers and collect, rather
    than pay, compensation because ISP modems do not generally call
    anyone in the exchange. In some instances, this led to classic
    regulatory arbitrage that had two troubling effects: (1) it created
    incentives for inefficient entry of LECs intent on serving ISPs
    exclusively and not offering viable local telephone competition, as
    Congress had intended to facilitate with the 1996 Act; (2) the large
    one-way flows of cash made it possible for LECs serving ISPs to
    afford to pay their own customers to use their services, potentially
    driving ISP rates to consumers to uneconomical levels. These effects
    prompted the Commission to consider the nature of ISP-bound traffic
    and to examine whether there was any flexibility under the statute
    to modify and address the pricing mechanisms for this traffic, given
    that there is a federal statutory provision authorizing reciprocal
    compensation.[^46] In the *Declaratory Ruling,* the Commission
    concluded that Internet-bound traffic was jurisdictionally
    interstate and, thus, not subject to section 251(b)(5).

22. In *Bell Atlantic*, the court of appeals vacated the *Declaratory
    Ruling* and remanded the case to the Commission to determine whether
    ISP-bound traffic is subject to statutory reciprocal compensation
    requirements. The court held that the Commission failed to explain
    adequately why LECs did not have a duty to pay reciprocal
    compensation under section 251(b)(5) of the Act and remanded the
    case to the Commission.

## Statutory Analysis

23. In this section, we reexamine our findings in the *Declaratory
    Ruling* and conclude that ISP-bound traffic is not subject to the
    reciprocal compensation requirement in section 251(b) because of the
    carve-out provision in section 251(g), which excludes several
    enumerated categories of traffic from the universe of
    "telecommunications" referred to in section 251(b)(5). We explain
    our rationale and the interrelationship between these two statutory
    provisions in more detail below. We further conclude that section
    251(i) affirms the Commission's role in continuing to develop
    appropriate pricing and compensation mechanisms for traffic \-- such
    as Internet-bound traffic \-- that travels over convergent, mixed,
    and new types of network architectures.

### Introduction

24. In the *Local Competition Order*, the Commission determined that the
    reciprocal compensation provisions of section 251(b)(5) applied only
    to what it termed "local" traffic rather than to the transport and
    termination of interexchange traffic.[^47] In the subsequent
    *Declaratory Ruling,* the Commission focused its discussion on
    whether ISP-bound traffic terminated within a local calling area
    such as to be properly considered "local" traffic. To resolve that
    issue, the Commission focused predominantly on an end-to-end
    jurisdictional analysis.

25. On review, the court accepted (without necessarily endorsing) the
    Commission's view that traffic was either "local" or "long distance"
    but faulted the Commission for failing to explain adequately why
    ISP-bound traffic was more properly categorized as long distance,
    rather than local. The Commission had attempted to do so by
    employing an end-to-end jurisdictional analysis of ISP traffic,
    rather than by evaluating the traffic under the statutory
    definitions of "telephone exchange service" and "exchange access."
    After acknowledging that the Commission "has historically been
    justified in relying on" end-to-end analysis for determining whether
    a communication is jurisdictionally interstate, the court stated:
    "But \[the Commission\] has yet to provide an explanation of why
    this inquiry is relevant to discerning whether a call to an ISP
    should fit within the local call model of two collaborating LECs or
    the long-distance model of a long-distance carrier collaborating
    with two LECs."[^48] After reviewing the manner in which the
    Commission analyzed the parameters of section 251(b)(5) traffic in
    the *Declaratory Ruling*, the court found that the central issue was
    "whether a call to an ISP is local or long distance."[^49] The court
    noted further that "\[n\]either category fits clearly."[^50]

26. Upon further review, we find that the Commission erred in focusing
    on the nature of the service (*i.e.*, local or long distance) and in
    stating that there were only two forms of telecommunications
    services \-- telephone exchange service and exchange access \-- for
    purposes of interpreting the relevant scope of section
    251(b)(5).[^51] Those services are the only two expressly defined by
    the statute. The court found fault in the Commission's failure to
    analyze communications delivered by a LEC to an ISP in terms of
    these definitions.[^52] Moreover, it cited the Commission's own
    confusing treatment of ISP-bound traffic as local under the ESP
    exemption and interstate for jurisdictional purposes.[^53]

27. Part of the ambiguity identified by the court appears to arise from
    the ESP exemption, a long-standing Commission policy that affords
    one class of entities using interstate access \-- information
    service providers \-- *the option* of purchasing interstate access
    services on a flat-rated basis from intrastate local business
    tariffs, rather than from interstate access tariffs used by IXCs.
    Typically, information service providers have used this exemption to
    their advantage by choosing to pay local business rates, rather than
    the tariffed interstate access charges that other users of
    interstate access are required to pay.[^54] In fending off
    challenges from those who argued that information service providers
    must be subject to access charges because they provide interexchange
    service, the Commission has often tried to walk the subtle line of
    arguing that the service provided by the LEC to the information
    service provider is an access service, but can justifiably be
    treated as akin to local telephone exchange service for purposes of
    the rates the LEC may charge. This balancing act reflected the
    historical view that there were only two kinds of intercarrier
    compensation: one for local telephone exchange service, and a second
    (access charges) for long distance services. Attempting to describe
    a hybrid service (the nature being an access service, but subject to
    a compensation mechanism historically limited to local service) was
    always a bit of mental gymnastics.

28. The court opinion underscores a tension between the jurisdictional
    nature of ISP-bound traffic, which the Commission has long held to
    be interstate, and the alternative compensation mechanism that the
    ESP exemption has permitted for this traffic. The court seems to
    recognize that, if an end-to-end analysis were properly applied to
    this traffic, this traffic would be predominantly interstate, and
    consequently "long distance." Yet it also questions whether this
    traffic should be considered "local" for purposes of section
    251(b)(5) in light of the ESP exemption, by which the Commission has
    allowed information service providers at their option to be treated
    for compensation purposes (but *not* for jurisdictional purposes) as
    end-users.

29. The court also expresses consternation over what it perceives as an
    inconsistency in the Commission's reasoning. On the one hand, the
    court observes, the Commission has argued that calls to ISPs are
    predominantly interstate for jurisdictional purposes because they
    terminate at the ultimate destination of the traffic in a distant
    website or e-mail server (*i.e.,* the "one call theory"). On the
    other hand, the court notes, the Commission has defended the ESP
    exemption by analogizing an ISP to a high-volume business user, such
    as a pizza parlor or travel agent, that has different usage patterns
    and longer call holding times than the average customer.[^55] The
    court questioned whether any such differences should not, as some
    commenters argued, lend support to treating this traffic as "local"
    for purposes of section 251(b)(5). As discussed in further detail
    below, while we continue to believe that retaining the ESP exemption
    is important in order to facilitate growth of Internet services, we
    conclude in section IV.C.1, *infra*, that reciprocal compensation
    for ISP-bound traffic distorts the development of competitive
    markets.

30. We respond to the court's concerns, and seek to resolve these
    tensions, by reexamining the grounds for our conclusion that
    ISP-bound traffic falls outside the scope of section 251(b)(5). A
    more comprehensive review of the statute reveals that Congress
    intended to exempt certain enumerated categories of service from
    section 251(b)(5) when the service was provided to interexchange
    carriers or information service providers. The exemption focuses not
    only on the nature of the service, but on to whom the service is
    provided. For services that qualify, compensation is based on rules,
    regulations, and policies that preceded the 1996 Act and not on
    section 251(b)(5), which was minted by the Act. As we explain more
    fully below, the service provided by LECs to deliver traffic to an
    ISP constitutes, at a minimum, "information access" under section
    251(g) and, thus, compensation for this service is not governed by
    section 251(b)(5), but instead by the Commission's policies for this
    traffic and the rules adopted under its section 201 authority.[^56]

### Section 251(g) Excludes Certain Categories of Traffic from the Scope of "Telecommunications" Subject to Section 251(b)(5)

#### Background

31. Section 251(b)(5) imposes a duty on all local exchange carriers to
    "establish reciprocal compensation arrangements for the transport
    and termination of telecommunications."[^57] On its face, local
    exchange carriers are required to establish reciprocal compensation
    arrangements for the transport and termination of *all*
    "telecommunications" they exchange with another telecommunications
    carrier, without exception. The Act separately defines
    "telecommunications" 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."[^58]

32. Unless subject to further limitation, section 251(b)(5) would
    require reciprocal compensation for transport and termination of
    *all* telecommunications traffic, \-- *i.e.*, whenever a local
    exchange carrier exchanges telecommunications traffic with another
    carrier. Farther down in section 251, however, Congress explicitly
    exempts certain telecommunications services from the reciprocal
    compensation obligations. Section 251(g) provides:

> On or after the date of enactment of the Telecommunications Act of
> 1996, each local exchange carrier . . . shall provide exchange access,
> *information access*, and exchange services for such access to
> interexchange carriers and information service providers in accordance
> with the same equal access and nondiscriminatory interconnection
> restrictions and obligations (including receipt of compensation) that
> apply to such carrier on the date immediately preceding the date of
> enactment of the Telecommunications Act of 1996 under any court order,
> consent decree, or regulation, order, or policy of the \[Federal
> Communications\] Commission, until such restrictions and obligations
> are explicitly superseded by regulations prescribed by the Commission
> after such date of enactment.[^59]

33. The meaning of section 251(g) is admittedly not transparent. Indeed,
    section 251(g) clouds any plain reading of section 251(b)(5).
    Nevertheless, the Commission believes the two provisions can be read
    together consistently and in a manner faithful to Congress's
    intent.[^60]

#### Discussion

34. We conclude that a reasonable reading of the statute is that
    Congress intended to exclude the traffic listed in subsection (g)
    from the reciprocal compensation requirements of subsection
    (b)(5).[^61] Thus, the statute does not mandate reciprocal
    compensation for "exchange access, information access, and exchange
    services for such access" provided to IXCs and information service
    providers. Because we interpret subsection (g) as a carve-out
    provision, the focus of our inquiry is on the universe of traffic
    that falls within subsection (g) and *not* the universe of traffic
    that falls within subsection (b)(5). This analysis differs from our
    analysis in the *Local Competition Order*, in which we attempted to
    describe the universe of traffic that falls within subsection (b)(5)
    as all "local" traffic. We also refrain from generically describing
    traffic as "local" traffic because the term "local," not being a
    statutorily defined category, is particularly susceptible to varying
    meanings and, significantly, is not a term used in section 251(b)(5)
    or section 251(g).

35. We agree with the court that the issue before us requires more than
    just a jurisdictional analysis. Indeed, as the court recognized, the
    1996 Act changed the historic relationship between the states and
    the federal government with respect to pricing matters.[^62]
    Instead, we focus upon the statutory language of section 251(b) as
    limited by 251(g). We believe this approach is not only consistent
    with the statute, but that it resolves the concerns expressed by the
    court in reviewing our previous analysis. Central to our modified
    analysis is the recognition that 251(g) is properly viewed as a
    limitation on the scope of section 251(b)(5) and that ISP-bound
    traffic falls under one or more of the categories set forth in
    section 251(g). For that reason, we conclude that ISP-bound traffic
    is not subject to the reciprocal compensation provisions of section
    251(b)(5). We reach that conclusion regardless of the compensation
    mechanism that may be in place for such traffic under the ESP
    exemption.

36. We believe that the specific provisions of section 251(g)
    demonstrate that Congress did not intend to interfere with the
    Commission's pre-Act authority over "nondiscriminatory
    interconnection . . . obligations (including receipt of
    compensation)"[^63] with respect to "exchange access, information
    access, and exchange services for such access" provided to IXCs or
    information service providers. We conclude that Congress
    specifically exempted the services enumerated under section 251(g)
    from the newly imposed reciprocal compensation requirement in order
    to ensure that section 251(b)(5) is not interpreted to override
    either existing or future regulations prescribed by the
    Commission.[^64] We also find that ISP-bound traffic falls within at
    least one of the three enumerated categories in subsection (g).

37. This limitation in section 251(g) makes sense when viewed in the
    overall context of the statute. All of the services specified in
    section 251(g) have one thing in common: they are all access
    services or services associated with access.[^65] Before Congress
    enacted the 1996 Act, LECs provided access services to IXCs and to
    information service providers in order to connect calls that travel
    to points -- both interstate and intrastate -- beyond the local
    exchange. In turn, both the Commission and the states had in place
    access regimes applicable to this traffic, which they have continued
    to modify over time. It makes sense that Congress did not intend to
    disrupt these pre-existing relationships.[^66] Accordingly, Congress
    excluded all such access traffic from the purview of section
    251(b)(5).

38. At least one court has already affirmed the principle that the
    standards and obligations set forth in section 251 are not intended
    automatically to supersede the Commission's authority over the
    services enumerated under section 251(g). This question arose in the
    Eighth Circuit Court of Appeals with respect to the access that LECs
    provide to IXCs to originate and terminate interstate long-distance
    calls. Citing section 251(g), the court concluded that the Act
    contemplates that "LECs will continue to provide exchange access to
    IXCs for long-distance service, and continue to receive payment,
    under the *pre-Act* regulations and rates."[^67] In *CompTel,* the
    IXCs had argued that the interstate access services that LECs
    provide properly fell within the scope of "interconnection" under
    section 251(c)(2), and that, notwithstanding the carve-out of
    section 251(g), access charges therefore should be governed by the
    cost-based standard of section 252(d)(1), rather than determined
    under the Commission's section 201 authority. The Eighth Circuit
    rejected that argument, holding that access service does not fall
    within the scope of section 251(c)(2), and observing that "it is
    clear from the Act that Congress did *not* intend all access charges
    to move to cost-based pricing, at least not immediately."[^68]
    Neither the court nor the parties in *CompTel* distinguished between
    the situation in which *one LEC* provides access service (directly
    linking the end-user to the IXC) and the situation here in which
    *two LECs* collaborate to provide access to either an information
    service provider or IXC. In both circumstances, by its underlying
    rationale, *CompTel* serves as precedent for establishing that
    pre-existing regulatory treatment of the services enumerated under
    section 251(g) are carved out from the purview of section 251(b).

39. Accordingly, unless and until the Commission by regulation should
    determine otherwise, Congress preserved the pre-Act regulatory
    treatment of all the access services enumerated under section
    251(g). These services thus remain subject to Commission
    jurisdiction under section 201 (or, to the extent they are
    *intra*state services, they remain subject to the jurisdiction of
    state commissions), whether those obligations implicate pricing
    policies as in *CompTel* or reciprocal compensation. [^69] This
    analysis properly applies to the access services that incumbent LECs
    provide (either individually or jointly with other local carriers)
    to connect subscribers with ISPs for Internet-bound traffic. Section
    251(g) expressly preserves the Commission's rules and policies
    governing "access . . . to information service providers" in the
    same manner as rules and policies governing access to IXCs.[^70] As
    we discuss in more detail below, ISP-bound traffic falls under the
    rubric of "information access," a legacy term carried over from the
    MFJ.[^71]

40. By its express terms, of course, section 251(g) permits the
    Commission to supersede pre-Act requirements for interstate access
    services. Therefore the Commission may make an affirmative
    determination to adopt rules that subject such traffic to
    obligations different than those that existed pre-Act. For example,
    consistent with that authority, the Commission has previously made
    the affirmative determination that certain categories of interstate
    access traffic should be subject to section 251(c)(4).[^72]
    Similarly, in implementing section 251(c)(3), the Commission has
    required incumbent LECs to unbundle certain network elements used in
    the provision of xDSL-based services.[^73] In this instance,
    however, for the reasons set forth below,[^74] we decline to modify
    the restraints imposed by section 251(g) and instead continue to
    regulate ISP-bound traffic under section 201.

41. Some may argue that, although the Commission did not analyze
    subsection (g) in the *Declaratory Ruling,* a passing reference to
    section 251(g) in one paragraph of the Commission's brief filed with
    the court in that proceeding suggests that the argument we make here
    has been specifically rejected by the court. We disagree. Because
    our analysis of subsection (g) was not raised in the order, the
    court, under established precedent, probably did not consider the
    argument when rendering its decision.[^75] Indeed, subsection (g) is
    not mentioned in the court's opinion.

### ISP-Bound Traffic Falls within the Categories Enumerated in Section 251(g)

42. Having determined that section 251(g) serves as a limitation on the
    scope of "telecommunications" embraced by section 251(b)(5), the
    next step in our inquiry is to determine whether ISP-bound traffic
    falls within one or more of the categories specified in section
    251(g): exchange access, information access, and exchange services
    for such access provided to IXCs and information service providers.
    Regardless of whether this traffic falls under the category of
    "exchange access" \-- an issue pending before the D.C. Circuit in a
    separate proceeding[^76] - - we conclude that this traffic, at a
    minimum, falls under the rubric of "information access," a legacy
    term imported into the 1996 Act from the MFJ, but not expressly
    defined in the Communications Act.

#### Background

43. Section 251(g) by its terms indicates that, in the provision of
    exchange access, information access, and exchange services for such
    access to IXCs and information service providers, various
    pre-existing requirements and obligations "including receipt of
    compensation" are preserved, whether these obligations stem from
    "any court order, *consent decree*, or regulation, order or policy
    of the Commission." (Emphasis added.) Similarly, in discussing this
    provision, the Joint Explanatory Statement of the Committee of
    Conference explicitly refers to preserving the obligations under the
    "AT&T Consent Decree."[^77]

#### Discussion

44. We conclude that Congress's reference to "information access" in
    section 251(g) was intended to incorporate the meaning of the phrase
    "information access" as used in the AT&T Consent Decree.[^78] The
    ISP-bound traffic at issue here falls within that category because
    it is traffic destined for an information service provider.[^79]
    Under the consent decree, "information access" was purchased by
    "information service providers" and was defined as "the provision of
    specialized exchange telecommunications services . . . in connection
    with the origination, termination, transmission, switching,
    forwarding or routing of telecommunications traffic to or from the
    facilities of a provider of information services."[^80] We conclude
    that this definition of "information access" was meant to include
    all access traffic that was routed by a LEC "to or from" providers
    of information services, of which ISPs are a subset.[^81] The record
    in this proceeding also supports our interpretation.[^82] When
    Congress passed the 1996 Act, it adopted new terminology. The term
    "information access" is not, therefore, part of the new statutory
    framework. Because the legacy term "information access" in section
    251(g) encompasses ISP-bound traffic, however, this traffic is
    excepted from the scope of the "telecommunications" subject to
    reciprocal compensation under section 251(b)(5).

45. We recognize, as noted earlier, that based on the rationale of the
    *Declaratory Ruling*, the court indicated that the question whether
    this traffic was "local or interstate" was critical to a
    determination of whether ISP-bound traffic should be subject to
    reciprocal compensation.[^83] We believe that the court's assessment
    was a result of our statement in paragraph nine of the *Declaratory
    Ruling* that "when two carriers collaborate to complete a *local
    call*, the originating carrier is compensated by its end user and
    the terminating carrier is entitled to reciprocal compensation
    pursuant to section 251(b)(5) of the Act."[^84] We were mistaken to
    have characterized the issue in that manner, rather than properly
    (and more naturally) interpreting the scope of "telecommunications"
    within section 251(b)(5) as being limited by section 251(g). By
    indicating that all "local calls," however defined, would be subject
    to reciprocal compensation obligations under the Act, we overlooked
    the interplay between these two inter-related provisions of section
    251 \-- subsections (b) and (g). Further, we created unnecessary
    ambiguity for ourselves, and the court, because the statute does not
    define the term "local call," and thus that term could be
    interpreted as meaning either traffic subject to local *rates* or
    traffic that is *jurisdictionally* intrastate. In the context of
    ISP-bound traffic, as the court observed, our use of the term
    "local" created a tension that undermined the prior order because
    the ESP exemption permitted ISPs to purchase access through local
    business tariffs,[^85] yet the jurisdictional nature of this traffic
    has long been recognized as interstate.

46. For similar reasons, we modify our analysis and conclusion in the
    *Local Competition Order*.[^86] There we held that \"\[t\]ransport
    and termination of *local* traffic for purposes of reciprocal
    compensation are governed by sections 251(b)(5) and 251(d)(2).\" We
    now hold that the telecommunications subject to those provisions are
    all such telecommunications not excluded by section 251(g). In the
    *Local Competition Order*, as in the subsequent *Declaratory
    Ruling*, use of the phrase \"local traffic\" created unnecessary
    ambiguities, and we correct that mistake here.

47. We note that the exchange of traffic between LECs and commercial
    mobile radio service (CMRS) providers is subject to a slightly
    different analysis. In the *Local Competition Order,* the Commission
    noted its jurisdiction to regulate LEC-CMRS interconnection under
    section 332 of the Act[^87] but decided, at its option, to apply
    sections 251 and 252 to LEC-CMRS interconnection.[^88] At that time,
    the Commission declined to delineate the precise contours of or the
    relationship between its jurisdiction over LEC-CMRS interconnection
    under sections 251 and 332,[^89] but it made clear that it was not
    rejecting section 332 as an independent basis for jurisdiction.[^90]
    The Commission went on to conclude that section 251(b)(5)
    obligations extend to traffic transmitted between LECs and CMRS
    providers, because the latter are telecommunications carriers.[^91]
    The Commission also held that reciprocal compensation, rather than
    interstate or intrastate access charges, applies to LEC-CMRS traffic
    that originates and terminates within the same Major Trading Area
    (MTA).[^92] In so holding, the Commission expressly relied on its
    "authority under section 251(g) to preserve the current interstate
    access charge regime" to ensure that interstate access charges would
    be assessed only for traffic "currently subject to interstate access
    charges," [^93] although the Commission's section 332 jurisdiction
    could serve as an alternative basis to reach this result. Thus the
    analysis we adopt in this Order, that section 251(g) limits the
    scope of section 251(b)(5), does not affect either the application
    of the latter section to LEC-CMRS interconnection or our
    jurisdiction over LEC-CMRS interconnection under section 332.

### Section 251(i) Preserves the Commission's Authority to Regulate Interstate Access Services

48. Congress also included a "savings provision" -- subpart (i) -- in
    section 251, which provides that "\[n\]othing in this section shall
    be construed to limit or otherwise affect the Commission's authority
    under section 201."[^94] Under section 201, the Commission has the
    authority to regulate the *interstate* access services that LECs
    provide to connect end-users with IXCs or information service
    providers to originate and terminate calls that travel across state
    lines.

49. We conclude that subpart (i) provides additional support for our
    finding that Congress has granted us the authority on a
    going-forward basis to establish a compensation regime for ISP-bound
    traffic.[^95] When read as a whole, the most natural reading of
    section 251 is as follows: subsection (b) sets forth reciprocal
    compensation requirements for the transport and termination of
    "telecommunications"; subsection (g) excludes certain access
    services (including ISP-bound traffic) from that requirement; and
    subsection (i) ensures that, on a going-forward basis, the
    Commission has the authority to establish pricing for, and otherwise
    to regulate, interstate access services.

50. When viewed in the overall context of section 251, subsections (g)
    and (i) serve compatible, but different, purposes. Subsection (g)
    preserves rules and regulations that existed at the time Congress
    passed the 1996 Act, and thus functions primarily as a
    "backward-looking" provision (although it does grant the Commission
    the authority to supersede existing regulations). In contrast, we
    interpret section 251(i) to be a "forward-looking" provision. Thus,
    subsection (i) expressly affirms the Commission's role in an
    evolving telecommunications marketplace, in which Congress
    anticipates that the Commission will continue to develop appropriate
    pricing and compensation mechanisms for traffic that falls within
    the purview of section 201. This reading of section 251 is
    consistent with the notion that section 251 generally broadens the
    Commission's duties, particularly in the pricing context.[^96]

51. We expect that, as new network architectures emerge, the nature of
    telecommunications traffic will continue to evolve. As we have
    already observed, since Congress passed the 1996 Act, customer usage
    patterns have changed dramatically; carriers are sending traffic
    over networks in new and different formats; and manufacturers are
    adding creative features and developing innovative network
    architectures. Although we cannot anticipate the direction that new
    technology will take us, we do expect the dramatic pace of change to
    continue. Congress clearly did not expect the dynamic, digital
    broadband driven telecommunications marketplace to be hindered by
    rules premised on legacy networks and technological assumptions that
    are no longer valid. Section 251(i), together with section 201,
    equips the Commission with the tools to ensure that the regulatory
    environment keeps pace with innovation.

### ISP-Bound Traffic Falls Within the Purview of the Commission's Section 201 Authority

52. Having found that ISP-bound traffic is excluded from section
    251(b)(5) by section 251(g), we find that the Commission has the
    authority pursuant to section 201 to establish rules governing
    intercarrier compensation for such traffic. Under section 201, the
    Commission has long exercised its *jurisdictional* authority to
    regulate the interstate access services that LECs provide to connect
    callers with IXCs or ISPs to originate or terminate calls that
    travel across state lines. Access services to ISPs for
    Internet-bound traffic are no exception. The Commission has held,
    and the Eighth Circuit has recently concurred, that traffic bound
    for information service providers (including Internet access
    traffic) often has an interstate component. [^97] Indeed, that court
    observed that, although some traffic destined for information
    service providers (including ISPs) may be intrastate, the interstate
    and intrastate components cannot be reliably separated.[^98] Thus,
    ISP traffic is properly classified as interstate, [^99] and it falls
    under the Commission's section 201 jurisdiction.[^100]

53. In its opinion remanding this proceeding, the court appeared to
    acknowledge that the end-to-end analysis was appropriate for
    determining the scope of the Commission's jurisdiction under section
    201, stating that "\[t\]here is no dispute that the Commission has
    historically been justified in relying on this method when
    determining whether a particular communication is jurisdictionally
    interstate."[^101] The court nevertheless found that we had not
    supplied a logical nexus between the jurisdictional end-to-end
    analysis (which delineates the contours of our section 201
    authority) and our interpretation of the scope of section 251(b)(5).
    In that regard, the court appeared not to question the Commission's
    longstanding assertion of jurisdiction over ESP traffic, of which
    Internet-bound traffic is a subset.[^102] It did, however,
    unambiguously question whether, for purposes of interpreting section
    251(b)(5), the jurisdictional end-to-end analysis was dispositive.
    Accordingly, the court explained its basis for remand as follows:
    "Because the Commission has not supplied a real explanation for its
    decision to treat end-to-end analysis as controlling \[in
    interpreting the scope of section 251(b)(5)\] . . . we must vacate
    the ruling and remand the case."[^103]

54. As explained above, we no longer construe section 251(b)(5) using
    the dichotomy set forth in the *Declaratory Ruling* between "local"
    traffic and interstate traffic. Rather, we have clarified that the
    proper analysis hinges on section 251(g), which limits the reach of
    the reciprocal compensation regime mandated in section 251(b). Thus
    our discussion no longer centers on the jurisdictional inquiry set
    forth in the underlying order. Nonetheless, we take this opportunity
    to respond to questions raised by the court regarding the
    differences between ISP-bound traffic (which we have always held to
    be predominantly interstate for jurisdictional purposes) and
    intrastate calls to "communications-intensive business end
    user\[s\],"[^104] such as travel agencies and pizza parlors.

55. Contrary to the arguments made by some IXCs, the Commission has been
    consistent in its jurisdictional treatment of ISP-bound traffic. For
    compensation purposes, in order to create a regulatory environment
    that will allow new and innovative services to flourish, the
    Commission has exempted enhanced service providers (including ISPs)
    from paying for interstate access service at the usage-based rates
    charged to IXCs.[^105] The ESP exemption was and remains an
    affirmative *exercise* of federal regulatory authority over
    interstate access service under section 201, and, in affirming
    pricing under that exemption, the D.C. Circuit expressly recognized
    that ESPs use *interstate* access service.[^106] Moreover,
    notwithstanding the ESP exemption, the Commission has always
    *permitted* enhanced service providers, including ISPs, to purchase
    their interstate access out of interstate tariffs \-- thus
    underscoring the Commission's consistent view that the link LECs
    provide to connect subscribers with ESPs is an interstate access
    service.[^107]

56. We do not believe that the court\'s decision to remand the
    *Declaratory Ruling* reflects a finding that such traffic
    constitutes two calls, rather than a single end-to-end call, for
    jurisdictional purposes. The court expressly acknowledged that \"the
    end-to-end analysis applied by the Commission here is one that it
    has traditionally used to determine whether a call is within its
    interstate jurisdiction.\"[^108] The court also said that
    \"\[t\]here is no dispute that the Commission has historically been
    justified in relying on this method when determining whether a
    particular communication is jurisdictionally interstate.\"[^109] And
    the court appeared to suggest, at least for the sake of argument,
    that the Commission had not misapplied that analysis *as a
    jurisdictional matter* in finding that ISP-bound traffic was
    interstate.[^110] We do recognize, however, that the court was
    concerned by how one would categorize this traffic under our *prior*
    interpretation of section 251(b)(5), which focused on whether or not
    ISP-bound calls were "local." That inquiry arguably implicated the
    compensation mechanism for the traffic (which included a local
    component), as well as the meaning of the term "termination" in the
    specific context of section 251(b); but neither of these issues is
    germane to our assertion of jurisdiction here under our section 201
    authority.

57. For jurisdictional purposes, the Commission views LEC-provided
    access to enhanced services providers, including ISPs, on the basis
    of the end points of the communication, rather than intermediate
    points of switching or exchanges between carriers (or other
    providers).[^111] Thus, in the *ONA Plans Order*, the Commission
    emphasized that "when an enhanced service is interstate (that is,
    when it involves communications or transmissions between points in
    different states on an end-to-end basis), the underlying basic
    services are subject to \[our jurisdiction\]."[^112] Consistent with
    that view, when end-to-end communications involving enhanced service
    providers cross state lines, the Commission has categorized the link
    that the LEC provides to connect the end-user with an enhanced
    service provider as interstate access service.[^113] Internet
    service providers are a class of ESPs. Accordingly, the LEC-provided
    link between an end-user and an ISP is properly characterized as
    *interstate* access.[^114]

58. Most Internet-bound traffic traveling between a LEC's subscriber and
    an ISP is indisputably interstate in nature when viewed on an
    end-to-end basis. Users on the Internet are interacting with a
    global network of connected computers. The consumer contracts with
    an ISP to provide access to the Internet. Typically, when the
    customer wishes to interact with a person, content, or computer, the
    customer's computer calls a number provided by the ISP that is
    assigned to an ISP modem bank. The ISP modem answers the call (the
    familiar squelch of computers handshaking). The user initiates a
    communication over the Internet by transmitting a command. In the
    case of the web, the user requests a webpage. This request may be
    sent to the computer that hosts the webpage. In real time, the web
    host may request that different pieces of that webpage, which can be
    stored on different servers across the Internet, be sent, also in
    real time, to the user. For example, on a sports page, only the
    format of the webpage may be stored at the host computer in Chicago.
    The advertisement may come from a computer in California (and it may
    be a different advertisement each time the page is requested), the
    sports scores may come from a computer in New York City, and a part
    of the webpage that measures Internet traffic and records the user's
    visit may involve a computer in Virginia. If the user decides to buy
    something from this webpage, say a sports jersey, the user clicks on
    the purchase page and may be transferred to a secure web server in
    Maryland for the transaction. A single web address frequently
    results in the return of information from multiple computers in
    various locations globally. These different pieces of the webpage
    will be sent to the user over different network paths and assembled
    on the user's display.[^115]

59. The "communication" taking place is between the dial-up customer and
    the global computer network of web content, e-mail authors, game
    room participants, databases, or bulletin board contributors.
    Consumers would be perplexed to learn regulators believe they are
    communicating with ISP modems, rather than the buddies on their
    e-mail lists. The proper focus for identifying a communication needs
    to be the user interacting with a desired webpage, friend, game, or
    chat room, not on the increasingly mystifying technical and
    mechanical activity in the middle that makes the communication
    possible.[^116] ISPs, in most cases, provide services that permit
    the dial-up Internet user to communicate directly with some distant
    site or party (other than the ISP) that the caller has specified.

60. ISP service is analogous, though not identical, to long distance
    calling service. An AT&T long distance customer contracts with AT&T
    to facilitate communications to out-of-state locations. The customer
    uses the local network to reach AT&T's facilities (its point of
    presence). By dialing "1" and an area code, the customer is in
    essence addressing his call to an out of state party and is
    instructing his LEC to deliver the call to his long distance
    carrier, and instructing the long distance carrier to pick up and
    carry that call to his intended destination. The caller on the other
    end will pick up the phone and respond to the caller. The
    communication will be between these two end-users. This analogy is
    not meant to prove that ISP service is identical to long distance
    service, but is used merely to bolster, by analogy, the
    reasonableness of not characterizing an ISP as the destination of a
    call, but as a facilitator of communication.

61. Moreover, as the local exchange carriers have correctly observed,
    the technical configurations for establishing dial-up Internet
    connections are quite similar to certain network configurations
    employed to initiate more traditional long-distance calls.[^117] In
    most cases, an ISP\'s customer first dials a seven-digit number to
    connect to the ISP server before connecting to a website.
    Long-distance service in some network configurations is initiated in
    a substantially similar manner. In particular, under \"Feature Group
    A\" access, the caller first dials a seven-digit number to reach the
    IXC, and then dials a password and the called party\'s area code and
    number to complete the call. Notwithstanding this dialing sequence,
    the service the LEC provides is considered *interstate* access
    service, not a separate local call.[^118] Internet calls operate in
    a similar manner: after reaching the ISP\'s server by dialing a
    seven-digit number, the caller selects a website (which is
    identified by a 12-digit Internet address, but which often is, in
    effect, \"speed dialed\" by clicking an icon) and the ISP connects
    the caller to the selected website. Such calling should yield the
    same jurisdictional result as the analogous calls to IXCs using
    \"Feature Group A\" access.

62. Commission precedent also rejects the two-call theory in the context
    of calls involving enhanced services. In *BellSouth MemoryCall*, the
    Commission preempted a state commission order that had prohibited
    BellSouth from expanding its voice mail service \-- an enhanced
    service \-- beyond its existing customers.[^119] In doing so, it
    rejected claims by the state that the Commission lacked jurisdiction
    to preempt because, allegedly, out-of-state calls to the voice mail
    service really constituted two calls: an *inter*state call from the
    out-of-state caller to the telephone company switch that routes the
    call to the intended recipient\'s location, and a separate
    *intra*state call that forwards the communication from the switch to
    the voice mail apparatus in the event that the called party did not
    answer.[^120] The Commission explained that, whether a basic
    telecommunications service is at issue, or whether an enhanced
    service rides on the telephone company\'s telecommunications
    service, the Commission's jurisdiction does not end at the local
    switchboard, but continues to the ultimate destination of the
    call.[^121]

63. The Internet communication is not analogous to traditional telephone
    exchange services. Local calls set up communication between two
    parties that reside in the same local calling area. Prior to the
    introduction of local competition, that call would never leave the
    network of the incumbent LEC. As other carriers were permitted to
    enter the local market, a call might cross two or more carriers'
    networks simply because the two parties to the communication
    subscribed to two different local carriers. The two parties
    intending to communicate, however, remained squarely in the same
    local calling area. An Internet communication is not simply a local
    call from a consumer to a machine that is lopsided, that is, a local
    call where one party does most of the calling, or most of the
    talking. ISPs are service providers that technically modify and
    translate communication, so that their customers will be able to
    interact with computers across the global Internet.[^122]

64. The court in *Bell Atlantic* noted that FCC litigation counsel had
    differentiated ISP-bound traffic from ordinary long-distance calls
    by stating that the former \"is really like a call to a local
    business\" \-- such as a pizza delivery firm, a travel reservation
    agency, a credit card verification firm, or a taxicab company \--
    \"that then uses the telephone to order wares to meet the
    need.\"[^123] We find, however, that this citation to a former
    litigation position does not require us to alter our analysis.
    First, the Commission itself has never analogized ISP-bound traffic
    in the manner cited in the agency\'s brief in *Southwestern Bell*.
    Indeed, in the particular order that the Commission was defending in
    *Southwestern Bell*, the Commission distinguished ISP-bound traffic
    from other access traffic on *other* grounds \-- *e.g.*, call
    direction and call holding times[^124] \-- which have no arguable
    bearing on whether the traffic is one interstate call (as the
    Commission has always held) or two separate calls (one of which
    allegedly is intrastate) as some parties have contended. Second, the
    cited portion of the Commission\'s brief was not addressing
    jurisdiction at all. Rather, the brief was responding to a claim
    that the ESP exemption *discriminated* against IXCs and in favor of
    ISPs.[^125] Finally, in the very case in which litigation counsel
    made the cited analogy, the Eighth Circuit affirmed the
    Commission\'s consistent view that ISP-bound traffic is, as a
    *jurisdictional* matter, predominantly interstate.[^126] In any
    event, to the extent that our prior briefs could be read to
    conceptualize the nature of ISP service as local, akin to intense
    users of local service, we now embrace a different conceptualization
    that we believe more accurately reflects the nature of ISP service.

65. For the foregoing reasons, consistent with our longstanding
    precedent, we find that we continue to have jurisdiction under
    section 201, as preserved by section 251(i), to provide a
    compensation mechanism for ISP-bound traffic.

## Efficient Intercarrier Compensation Rates and Rate Structures

66. Carriers currently recover the costs of call transport and
    termination through some combination of carrier access charges,
    reciprocal compensation, and end-user charges, depending upon the
    applicable regulatory regime. Having concluded that ISP-bound
    traffic is not subject to the reciprocal compensation obligations of
    section 251(b)(5), we must now determine, pursuant to our section
    201 authority, what compensation mechanism is appropriate when
    carriers collaborate to deliver calls to ISPs. In the companion
    *NPRM*, we consider the desirability of adopting a uniform
    intercarrier compensation mechanism, applicable to all traffic
    exchanged among telecommunications carriers, and, in that context,
    we intend to examine the merits of a bill and keep regime for all
    types of traffic, including ISP-bound traffic. In the meantime,
    however, we must adopt an interim intercarrier compensation rule to
    govern the exchange of ISP-bound traffic, pending the outcome of the
    *NPRM*. In particular, we must decide whether to impose (i) a
    "calling-party's-network-pays" (CPNP) regime, like reciprocal
    compensation, in which the calling party's network pays the network
    serving the ISP; (ii) a bill and keep regime in which all networks
    recover costs from their end-user customers and are obligated to
    deliver calls that originate on the networks of interconnecting
    carriers; or (iii) some other cost recovery mechanism. As set forth
    more fully below, our immediate goal in adopting an interim
    compensation mechanism is to address the market distortions created
    by the prevailing intercarrier compensation regime, even as we
    evaluate in a parallel proceeding what longer-term intercarrier
    compensation mechanisms are appropriate for this and other types of
    traffic.

### CPNP Regimes Have Distorted the Development of Competitive Markets

67. For the reasons detailed below, we believe that a bill and keep
    approach to recovering the costs of delivering ISP-bound traffic is
    likely to be more economically efficient than recovering these costs
    from originating carriers. In particular, requiring carriers to
    recover the costs of delivering traffic to ISP customers directly
    from those customers is likely to send appropriate market signals
    and substantially eliminate existing opportunities for regulatory
    arbitrage. As noted above, we consider issues related to the broader
    application of bill and keep as an intercarrier compensation regime
    in conjunction with the *NPRM* that we are adopting concurrently
    with this Order. In this Order, however, we adopt an interim
    compensation mechanism for the delivery of ISP-bound traffic that
    addresses the regulatory arbitrage opportunities present in the
    existing carrier-to-carrier payments by limiting carriers'
    opportunity to recover costs from other carriers and requiring them
    to recover a greater share of their costs from their ISP customers.

68. In most states, reciprocal compensation governs the exchange of
    ISP-bound traffic between local carriers.[^127] Reciprocal
    compensation is a CPNP regime in which the originating carrier pays
    an interconnecting carrier for "transport and termination," *i.e.,*
    for transport from the networks' point of interconnection and for
    any tandem and end-office switching.[^128] The central problem with
    any CPNP regime is that carriers recover their costs not only from
    their end-user customers, but also from *other carriers*.[^129]
    Because intercarrier compensation rates do not reflect the degree to
    which the carrier can recover costs from its end-users, payments
    from other carriers may enable a carrier to offer service to its
    customers at rates that bear little relationship to its actual
    costs, thereby gaining an advantage over its competitors. Carriers
    thus have the incentive to seek out customers, including but not
    limited to ISPs, with high volumes of incoming traffic that will
    generate high reciprocal compensation payments.[^130] To the extent
    that carriers offer these customers below cost retail rates
    subsidized by intercarrier compensation, these customers do not
    receive accurate price signals**.** Moreover, because the
    originating LEC typically charges its customers averaged rates, the
    originating end-user receives inaccurate price signals as the costs
    associated with the intercarrier payments are recovered through
    rates averaged across all of the originating carrier's end-users.
    Thus no subscriber faces a price that fully reflects the
    intercarrier payments. An ISP subscriber with extensive Internet
    usage may, for example, cause her LEC to incur substantial
    reciprocal compensation obligations to the LEC that serves her ISP,
    but that subscriber receives no price signals reflecting those costs
    because they are spread over all of her LEC's customers.

69. The resulting market distortions are most apparent in the case of
    ISP-bound traffic due primarily to the one-way nature of this
    traffic, and to the tremendous growth in dial-up Internet access
    since passage of the 1996 Act. Competitive carriers, regardless of
    the nature of their customer base, exchange traffic with the
    incumbent LECs at rates based on the incumbents' costs. [^131] To
    the extent the traffic exchange is roughly balanced, as is typically
    the case when LECs exchange voice traffic, it matters little if
    rates reflect costs because payments in one direction are largely
    offset by payments in the other direction. The rapid growth in
    dial-up Internet use, however, created the opportunity to serve
    customers with large volumes of exclusively *incoming* traffic. And,
    for the reasons discussed above, the reciprocal compensation regime
    created an incentive to target those customers with little regard to
    the costs of serving them -- because a carrier would be able to
    collect some or all of those costs from *other* carriers that would
    themselves be unable to flow these costs through to their own
    customers in a cost-causative manner.

70. The record is replete with evidence that reciprocal compensation
    provides enormous incentive for CLECs to target ISP customers. The
    four largest ILECs indicate that CLECs, on average, terminate
    eighteen times more traffic than they originate, resulting in annual
    CLEC reciprocal compensation billings of approximately two billion
    dollars, ninety percent of which is for ISP-bound traffic.[^132]
    Verizon states that it sends CLECs, on average, twenty-one times
    more traffic than it receives, and some CLECs receive more than
    forty times more traffic than they originate.[^133] Although there
    may be sound business reasons for a CLEC's decision to serve a
    particular niche market, the record strongly suggests that CLECs
    target ISPs in large part because of the availability of reciprocal
    compensation payments.[^134] Indeed, some ISPs even seek to become
    CLECs in order to share in the reciprocal compensation windfall,
    and, for a small number of entities, this revenue stream provided an
    inducement to fraudulent schemes to generate dial-up minutes.[^135]

71. For these reasons, we believe that the application of a CPNP regime,
    such as reciprocal compensation, to ISP-bound traffic undermines the
    operation of competitive markets.[^136] ISPs do not receive accurate
    price signals from carriers that compete, not on the basis of the
    quality and efficiency of the services they provide, but on the
    basis of their ability to shift costs to other carriers. Efficient
    prices result when carriers offer the lowest possible rates based on
    the costs of the service they provide to ISPs, not when they can
    price their services without regard to cost. We are concerned that
    viable, long-term competition among efficient providers of local
    exchange and exchange access services cannot be sustained where the
    intercarrier compensation regime does not reward efficiency and may
    produce retail rates that do not reflect the costs of the services
    provided. As we explain in greater detail in the companion *NPRM*,
    we believe that a compensation regime, such as bill and keep, that
    requires carriers to recover more of their costs from end-users may
    avoid these problems.

72. We acknowledge that we did not always hold this view. In the *Local
    Competition Order*, the Commission concluded that state commissions
    may impose bill and keep arrangements for traffic subject to section
    251(b)(5) *only* when the flow of traffic between interconnected
    carriers is roughly balanced and is expected to remain so.[^137] The
    Commission reasoned that "bill-and-keep arrangements are not
    economically efficient because they distort carriers' incentives,
    encouraging them to overuse competing carriers' *termination*
    facilities by seeking customers that primarily *originate*
    traffic."[^138] The concerns about the opportunity for cost recovery
    and economic efficiency are not present, however, to the extent that
    traffic between carriers is balanced and payments from one carrier
    will be offset by payments from the other carrier. In these
    circumstances, the Commission found that bill and keep arrangements
    may minimize administrative burdens and transaction costs.[^139]

73. Since that time, we have observed the development of competition in
    the local exchange market, and we now believe that the Commission's
    concerns about economic inefficiencies associated with bill and keep
    missed the mark, particularly as applied to ISP-bound traffic. The
    Commission appears to have assumed, at least implicitly, that the
    calling party was the sole cost causer of the call, and it may have
    overstated any incentives that a bill and keep regime creates to
    target customers that primarily originate traffic. A carrier must
    provide originating switching functions and must recover the costs
    of those functions from the originating end-user, not from other
    carriers. Originating traffic thus lacks the same opportunity for
    cost-shifting that reciprocal compensation provides with respect to
    serving customers with disproportionately incoming traffic. Indeed,
    it has become apparent that the obligation to pay reciprocal
    compensation to interconnecting carriers may give rise to uneconomic
    incentives. As the current controversy about ISP-bound traffic
    demonstrates, reciprocal compensation encourages carriers to overuse
    competing carriers' *origination* facilities by seeking customers
    that *receive* high volumes of traffic.

74. We believe that a bill and keep regime for ISP-bound traffic may
    eliminate these incentives and concomitant opportunity for
    regulatory arbitrage by forcing carriers to look only to their ISP
    customers, rather than to other carriers, for cost recovery. As a
    result, the rates paid by ISPs and, consequently, their customers
    should better reflect the costs of services to which they subscribe.
    Potential subscribers should receive more accurate price signals,
    and the market should reward efficient providers.[^140] Although we
    do not reach any firm conclusions about bill and keep as a permanent
    mechanism for this or any other traffic, our evaluation of the
    record evidence to date strongly suggests that bill and keep is
    likely to provide a viable solution to the market distortions caused
    by the application of reciprocal compensation to ISP-bound traffic.
    We take that observation into account, below, as we fashion an
    interim compensation mechanism for this traffic.

75. Bill and keep also may address the problem regulators face in
    setting intercarrier compensation rates that correlate to the costs
    carriers incur to carry traffic that originates on other networks.
    The record suggests that market distortions appear to have been
    exacerbated by the prevalence of excessively high reciprocal
    compensation rates. Many CLECs argue that the current traffic
    imbalances between CLECs and ILECs are the product of greediness on
    the part of ILECs that insisted on above-cost reciprocal
    compensation rates in the course of negotiating or arbitrating
    initial interconnection agreements.[^141] CLECs argue that, because
    these rates were artificially high, they naturally responded by
    seeking customers with large volumes of incoming traffic. If the
    parties or regulatory bodies merely set cost-based rates and rate
    structures, they argue, arbitrage opportunities and the resulting
    windfalls would disappear.[^142] They note that reciprocal
    compensation rates have fallen dramatically as initial agreements
    expire and the parties negotiate new agreements.[^143]

76. We do not believe that the solution to the current problem is as
    simple as the CLECs suggest.[^144] We seek comment in the
    accompanying *NPRM* on the potential for a modified CPNP regime,
    such as the CLECs advocate, to solve some of the problems we
    identify here. We are convinced, however, that intercarrier payments
    for ISP-bound traffic have created severe market distortions.
    Although it would be premature to institute a full bill and keep
    regime before resolving the questions presented in the *NPRM*,[^145]
    in seeking to remedy an exigent market problem, we cannot ignore the
    evidence we have accumulated to date that suggests that a bill and
    keep regime has very fundamental advantages over a CPNP regime for
    ISP-bound traffic. Contrary to the view espoused by CLECs, we are
    concerned that the market distortions caused by applying a CPNP
    regime to ISP-bound traffic cannot be cured by regulators or
    carriers simply attempting to "get the rate right." A few examples
    may illustrate the vexing problems regulators face. Reciprocal
    compensation rates have been determined on the basis of the ILEC's
    average costs of transport and termination. These rates do not,
    therefore, reflect the costs incurred by any particular carrier for
    providing service to a particular customer. This encourages carriers
    to target customers that are, on average, less costly to serve, and
    reap a reciprocal compensation windfall. Conversely, new entrants
    lack incentive to serve customers that are, on average, more costly
    to serve, even if the new entrant is the most efficient provider. It
    is not evident that this problem can be remedied by setting
    reciprocal compensation rates on the basis of the costs of carrier
    serving the called party (or, in the case of ISP-bound traffic, the
    CLEC that serves the ISP).[^146] Apart from our reluctance to
    require new entrants to perform cost studies, it is entirely
    impracticable, if not impossible, for regulators to set different
    intercarrier compensation rates for each individual carrier, and
    those rates still might fail to reflect a carrier's costs as, for
    example, the nature of its customer base evolves. Furthermore, most
    states have adopted per minute reciprocal compensation rate
    structures. It is unlikely that any minute-of-use rate that is based
    on average costs and depends upon demand projections will reflect
    the costs of any given carrier to serve any particular customer. To
    the extent that transport and termination costs are capacity-driven,
    moreover, virtually any minute-of-use rate will overestimate the
    cost of handling an additional call whenever a carrier is operating
    below peak capacity.[^147] Regulators and carriers have long
    struggled with problems associated with peak-load pricing.[^148]
    Finally, and most important, the fundamental problem with
    application of reciprocal compensation to ISP-bound traffic is that
    the intercarrier payments fail altogether to account for a carrier's
    opportunity to recover costs from its ISP customers. Modifications
    to intercarrier rate levels or rate structures suggested by CLECs do
    not address carriers' ability to shift costs from their own
    customers onto other carriers and their customers.

### Intercarrier Compensation for ISP-bound Traffic 

77. We believe that a hybrid mechanism that establishes relatively low
    per minute rates, with a cap on the total volume of traffic entitled
    to such compensation, is the most appropriate interim approach over
    the near term to resolve the problems associated with the current
    intercarrier compensation regime for ISP-bound traffic. Our primary
    goal at this time is to address the market distortions under the
    current intercarrier compensation regimes for ISP-bound traffic. At
    the same time, we believe it prudent to avoid a "flash cut" to a new
    compensation regime that would upset the legitimate business
    expectations of carriers and their customers. Subsequent to the
    Commission's *Declaratory Ruling*, many states have required the
    payment of reciprocal compensation for ISP-bound traffic, and CLECs
    may have entered into contracts with vendors or with their ISP
    customers that reflect the expectation that the CLECs would continue
    to receive reciprocal compensation revenue. We believe it
    appropriate, in tailoring an interim compensation mechanism, to take
    those expectations into account while simultaneously establishing
    rates that will produce more accurate price signals and
    substantially reduce current market distortions. Therefore, pending
    our consideration of broader intercarrier compensation issues in the
    *NPRM*, we impose an interim intercarrier compensation regime for
    ISP-bound traffic that serves to limit, if not end, the opportunity
    for regulatory arbitrage, while avoiding a market-disruptive "flash
    cut" to a pure bill and keep regime. The interim regime we establish
    here will govern intercarrier compensation for ISP-bound traffic
    until we have resolved the issues raised in the intercarrier
    compensation *NPRM*.

78. Beginning on the effective date of this Order, and continuing for
    six months, intercarrier compensation for ISP-bound traffic will be
    capped at a rate of \$.0015/minute-of-use (mou). Starting in the
    seventh month, and continuing for eighteen months, the rate will be
    capped at \$.0010/mou. Starting in the twenty-fifth month, and
    continuing through the thirty-sixth month or until further
    Commission action (whichever is later), the rate will be capped at
    \$.0007/mou. In addition to the rate caps, we will impose a cap on
    total ISP-bound minutes for which a LEC may receive this
    compensation. For the year 2001, a LEC may receive compensation,
    pursuant to a particular interconnection agreement, for ISP-bound
    minutes up to a ceiling equal to, on an annualized basis, the number
    of ISP-bound minutes for which that LEC was entitled to compensation
    under that agreement during the first quarter of 2001, plus a ten
    percent growth factor. For 2002, a LEC may receive compensation,
    pursuant to a particular interconnection agreement, for ISP-bound
    minutes up to a ceiling equal to the minutes for which it was
    entitled to compensation under that agreement in 2001, plus another
    ten percent growth factor. In 2003, a LEC may receive compensation,
    pursuant to a particular interconnection agreement, for ISP-bound
    minutes up to a ceiling equal to the 2002 ceiling applicable to that
    agreement**.**[^149]

79. We understand that some carriers are unable to identify ISP-bound
    traffic. In order to limit disputes and avoid costly efforts to
    identify this traffic, we adopt a rebuttable presumption that
    traffic delivered to a carrier, pursuant to a particular contract,
    that exceeds a 3:1 ratio of terminating to originating traffic is
    ISP-bound traffic that is subject to the compensation mechanism set
    forth in this Order. Using a rebuttable presumption in this context
    is consistent with the approach that numerous states have adopted to
    identify ISP-bound traffic or "convergent" traffic (including ISP
    traffic) that is subject to a lower reciprocal compensation rate.
    [^150] A carrier may rebut the presumption, for example, by
    demonstrating to the appropriate state commission that traffic above
    the 3:1 ratio is in fact local traffic delivered to non-ISP
    customers. In that case, the state commission will order payment of
    the state-approved or state-arbitrated reciprocal compensation rates
    for that traffic. Conversely, if a carrier can demonstrate to the
    state commission that traffic it delivers to another carrier is
    ISP-bound traffic, even though it does not exceed the 3:1 ratio, the
    state commission will relieve the originating carrier of reciprocal
    compensation payments for that traffic, which is subject instead to
    the compensation regime set forth in this Order. During the pendency
    of any such proceedings, LECs remain obligated to pay the
    presumptive rates (reciprocal compensation rates for traffic below a
    3:1 ratio, the rates set forth in this Order for traffic above the
    ratio), subject to true-up upon the conclusion of state commission
    proceedings.

80. We acknowledge that carriers incur costs in delivering traffic to
    ISPs, and it may be that in some instances those costs exceed the
    rate caps we adopt here. To the extent a LEC's costs of transporting
    and terminating this traffic exceed the applicable rate caps,
    however, it may recover those amounts from its own end-users.[^151]
    We also clarify that, because the rates set forth above are *caps*
    on intercarrier compensation, they have no effect to the extent that
    states have ordered LECs to exchange ISP-bound traffic either at
    rates below the caps we adopt here or on a bill and keep basis (or
    otherwise have not required payment of compensation for this
    traffic).[^152] The rate caps are designed to provide a transition
    toward bill and keep or such other cost recovery mechanism that the
    Commission may adopt to minimize uneconomic incentives, and no such
    transition is necessary for carriers already exchanging traffic at
    rates below the caps. Moreover, those state commissions have
    concluded that, at least in their states, LECs receive adequate
    compensation from their own end-users for the transport and
    termination of ISP-bound traffic and need not rely on intercarrier
    compensation.

81. Finally, a different rule applies in the case where carriers are not
    exchanging traffic pursuant to interconnection agreements prior to
    adoption of this Order (where, for example, a new carrier enters the
    market or an existing carrier expands into a market it previously
    had not served). In such a case, as of the effective date of this
    Order, carriers shall exchange ISP-bound traffic on a bill-and-keep
    basis during this interim period. We adopt this rule for several
    reasons. First, our goal here is to address and curtail a pressing
    problem that has created opportunities for regulatory arbitrage and
    distorted the operation of competitive markets. In so doing, we seek
    to confine these market problems to the maximum extent while seeking
    an appropriate long-term resolution in the proceeding initiated by
    the companion *NPRM*. Allowing carriers in the interim to expand
    into new markets using the very intercarrier compensation mechanisms
    that have led to the existing problems would exacerbate the market
    problems we seek to ameliorate. For this reason, we believe that a
    standstill on any expansion of the old compensation regime into new
    markets is the more appropriate interim answer.[^153] Second, unlike
    those carriers that are presently serving ISP customers under
    existing interconnection agreements, carriers entering new markets
    to serve ISPs have not acted in reliance on reciprocal compensation
    revenues and thus have no need of a transition during which to make
    adjustments to their prior business plans.

82. The interim compensation regime we establish here applies as
    carriers re-negotiate expired or expiring interconnection
    agreements. It does not alter existing contractual obligations,
    except to the extent that parties are entitled to invoke contractual
    change-of-law provisions. This Order does not preempt any state
    commission decision regarding compensation for ISP-bound traffic for
    the period prior to the effective date of the interim regime we
    adopt here. Because we now exercise our authority under section 201
    to determine the appropriate intercarrier compensation for ISP-bound
    traffic, however, state commissions will no longer have authority to
    address this issue. For this same reason, as of the date this Order
    is published in the Federal Register, carriers may no longer invoke
    section 252(i) to opt into an existing interconnection agreement
    with regard to the rates paid for the exchange of ISP-bound
    traffic.[^154] Section 252(i) applies only to agreements arbitrated
    or approved by state commissions pursuant to section 252; it has no
    application in the context of an intercarrier compensation regime
    set by this Commission pursuant to section 201.[^155]

83. This interim regime satisfies the twin goals of compensating LECs
    for the costs of delivering ISP-bound traffic while limiting
    regulatory arbitrage. The interim compensation regime, as a whole,
    begins a transition toward what we have tentatively concluded, in
    the companion *NPRM*, to be a more rational cost recovery mechanism
    under which LECs recover more of their costs from their own
    customers. This compensation mechanism is fully consistent with the
    manner in which the Commission has directed incumbent LECs to
    recover the costs of serving ESPs, including ISPs.[^156] The
    three-year transition we adopt here ensures that carriers have
    sufficient time to re-order their business plans and customer
    relationships, should they so choose, in light of our tentative
    conclusions in the companion *NPRM* that bill and keep is the
    appropriate long-term intercarrier compensation regime. It also
    affords the Commission adequate time to consider comprehensive
    reform of all intercarrier compensation regimes in the *NPRM* and
    any resulting rulemaking proceedings. Both the rate caps and the
    volume limitations reflect our view that LECs should begin to
    formulate business plans that reflect decreased reliance on revenues
    from intercarrier compensation, given the trend toward substantially
    lower rates and the strong possibility that the *NPRM* may result in
    the adoption of a full bill and keep regime for ISP-bound traffic.

84. We acknowledge that there is no exact science to setting rate caps
    to limit carriers' ability to draw revenue from other carriers,
    rather than from their own end-users. Our adoption of the caps here
    is based on a number of considerations. First, rates that produce
    meaningful reductions in intercarrier payments for ISP-bound traffic
    must be at least as low as rates in existing interconnection
    agreements. Second, although we make no finding here regarding the
    actual costs incurred in the delivery of ISP-bound traffic, there is
    evidence in the record to suggest that technological developments
    are reducing the costs incurred by carriers in handling all sorts of
    traffic, including ISP-bound traffic.[^157] Third, although the
    process has proceeded too slowly to address the market distortions
    discussed above, we note that negotiated reciprocal compensation
    rates continue to decline as ILECs and CLECs negotiate new
    interconnection agreements. Finally, CLECs have been on notice since
    the 1999 *Declaratory Ruling* that it might be unwise to rely on the
    continued receipt of reciprocal compensation for ISP-bound traffic,
    thus many have begun the process of weaning themselves from these
    revenues.

85. The rate caps adopted herein reflect all these considerations. The
    caps we have selected approximate the downward trend in intercarrier
    compensation rates reflected in recently negotiated interconnection
    agreements. In these agreements, carriers have agreed to rates, like
    those we adopt here, that decline each year of a three-year contract
    term, and at least one agreement reflects different rates for
    balanced and unbalanced traffic.[^158] For example, the initial rate
    cap of \$.0015/mou approximates the rates applicable this year in
    agreements Level 3 has negotiated with Verizon and SBC.[^159] The
    \$.0010/mou rate that applies during most of the three-year interim
    period reflects a proposal by ALTS, the trade association
    representing CLECs, for a transition plan pursuant to which
    intercarrier compensation payments for ISP-bound traffic would
    decline to \$.0010/mou.[^160] Similarly, the \$.0007/mou rate
    reflects the average rate applicable in 2002 under Level 3's
    agreement with SBC.[^161] We conclude, therefore, that the rate caps
    constitute a reasonable transition toward the recovery of costs from
    end-users.

86. We impose an overall cap on ISP-bound minutes for which compensation
    is due in order to ensure that growth in dial-up Internet access
    does not undermine our efforts to limit intercarrier compensation
    for this traffic and to begin, subject to the conclusion of the
    *NPRM* proceedings, a smooth transition toward a bill and keep
    regime. A ten percent growth cap, for the first two years, seems
    reasonable in light of CLEC projections that the growth of dial-up
    Internet minutes will fall in the range of seven to ten percent per
    year.[^162] We are unpersuaded by the ILECs' projections that
    dial-up minutes will grow in the range of forty percent per
    year,[^163] but adoption of a cap on growth largely moots this
    debate. If CLECs have projected growth in the range of ten percent,
    then limiting intercarrier compensation at that level should not
    disrupt their customer relationships or their business planning.
    Nothing in this Order prevents any carrier from serving or indeed
    expanding service to ISPs, so long as they recover the costs of
    additional minutes from their ISP customers. The caps merely ensure
    that growth in minutes above the caps is based on a given carrier's
    ability to provide efficient and quality service to ISPs, rather
    than on a carrier's desire to reap an intercarrier compensation
    windfall.

87. We are not persuaded by arguments proffered by CLECs that requiring
    them to recover more of their costs from their ISP customers will
    render it impossible for CLECs profitably to serve ISPs or will lead
    to higher rates for Internet access.[^164] First, as noted above,
    this compensation mechanism is fully consistent with the manner in
    which this Commission has directed ILECs to recover the costs of
    serving ISPs.[^165] Moreover, the evidence in the record does not
    demonstrate that CLECs cannot compete for ISP customers in the
    growing number of states that have adopted bill and keep for
    ISP-bound traffic or that the cost of Internet access has increased
    in those states. Second, next-generation switching and other
    technological developments appear to be contributing to a decline in
    the costs of serving ISPs (and other customers).[^166] Third, if
    reciprocal compensation merely enabled CLECs to recover the costs of
    serving ISPs, CLECs should be indifferent between serving ISPs and
    other customers. Instead, CLECs have not contradicted ILEC
    assertions that more than ninety percent of CLEC reciprocal
    compensation billings are for ISP-bound traffic,[^167] suggesting
    that there may be a considerable margin between current reciprocal
    compensation rates and the actual costs of transport and
    termination.[^168] Finally, there is reason to believe that our
    failure to act, rather than the actions we take here, would lead to
    higher rates for Internet access, as ILECs seek to recover their
    reciprocal compensation liability, which they incur on a
    minute-of-use basis, from their customers who call ISPs.[^169]
    Alternatively, ILECs might recover these costs from all of their
    local customers, including those who do not call ISPs.[^170] There
    is no public policy rationale to support a subsidy running from all
    users of basic telephone service to those end-users who employ
    dial-up Internet access.[^171]

88. We also are not convinced by the claim of CLECs that limiting
    intercarrier compensation for ISP-bound traffic will result in a
    windfall for the incumbent LECs.[^172] The CLECs argue that the
    incumbents' local rates are set to recover the costs of originating
    and terminating calls and that the ILECs avoid termination costs
    when their end-users call ISP customers served by CLECs. The record
    does not establish that ILECs necessarily avoid costs when they
    deliver calls to CLECs,[^173] and CLECs have not demonstrated that
    ILEC end-user rates are designed to recover from the originating
    end-user the costs of delivering calls to ISPs. The ILECs point out
    that, in response to their complaints about the costs associated
    with delivering traffic to ISPs, the Commission has directed them to
    seek permission from state regulators to raise the rates they charge
    *the ISPs*, an implicit acknowledgement that ILECs may not recover
    all of their costs from the originating end-user.[^174]

### Relationship to Section 251(b)(5)

89. It would be unwise as a policy matter, and patently unfair, to allow
    incumbent LECs to benefit from reduced intercarrier compensation
    rates for ISP-bound traffic, with respect to which they are net
    payors,[^175] while permitting them to exchange traffic at state
    reciprocal compensation rates, which are much higher than the caps
    we adopt here, when the traffic imbalance is reversed.[^176] Because
    we are concerned about the superior bargaining power of incumbent
    LECs, we will not allow them to "pick and choose" intercarrier
    compensation regimes, depending on the nature of the traffic
    exchanged with another carrier. The rate caps for ISP-bound traffic
    that we adopt here apply, therefore, *only* if an incumbent LEC
    offers to exchange all traffic subject to section 251(b)(5)[^177] at
    the same rate. Thus, if the applicable rate cap is \$.0010/mou, the
    ILEC must offer to exchange section 251(b)(5) traffic at that same
    rate. Similarly, if an ILEC wishes to continue to exchange ISP-bound
    traffic on a bill and keep basis in a state that has ordered bill
    and keep, it must offer to exchange all section 251(b)(5) traffic on
    a bill and keep basis.[^178] For those incumbent LECs that choose
    *not* to offer to exchange section 251(b)(5) traffic subject to the
    same rate caps we adopt for ISP-bound traffic, we order them to
    exchange ISP-bound traffic at the state-approved or state-arbitrated
    reciprocal compensation rates reflected in their contracts.[^179]
    This "mirroring" rule ensures that incumbent LECs will pay the same
    rates for ISP-bound traffic that they receive for section 251(b)(5)
    traffic.

90. This is the correct policy result because we see no reason to impose
    different rates for ISP-bound and voice traffic. The record
    developed in response to the *Intercarrier Compensation NPRM* and
    the *Public Notice* fails to establish any inherent differences
    between the costs on any one network of delivering a voice call to a
    local end-user and a data call to an ISP.[^180] Assuming the two
    calls have otherwise identical characteristics (*e.g.*, duration and
    time of day), a LEC generally will incur the same costs when
    delivering a call to a local end-user as it does delivering a call
    to an ISP.[^181] We therefore are unwilling to take any action that
    results in the establishment of separate intercarrier compensation
    rates, terms, and conditions for local voice and ISP-bound
    traffic.[^182] To the extent that the record indicates that per
    minute reciprocal compensation rate levels and rate structures
    produce inefficient results, we conclude that the problems lie with
    this recovery mechanism in general and are not limited to any
    particular type of traffic.

91. We are not persuaded by commenters' claims that the rates for
    delivery of ISP-bound traffic and local voice traffic should differ
    because delivering a data call to an ISP is inherently less costly
    than delivering a voice call to a local end-user. In an attached
    declaration to Verizon's comments, William Taylor argues that
    reciprocal compensation rates may reflect switching costs associated
    with both originating and terminating functions, despite the fact
    that ISP traffic generally flows in only one direction.[^183] If
    correct, however, this observation suggests a need to develop rates
    or rate structures for the transport and termination of *all*
    traffic that exclude costs associated solely with originating
    switching.[^184] Mr. Taylor similarly argues that ISP-bound calls
    generally are longer in duration than voice calls, and that a
    per-minute rate structure applied to calls of longer duration will
    spread the fixed costs of these calls over more minutes, resulting
    in lower per-minute costs, and possible over recovery of the fixed
    costs incurred.[^185] Any possibility of over recovery associated
    with calls (to ISPs or otherwise) of longer than average duration
    can be eliminated through adoption of rate structures that provide
    for recovery of per-call costs on a per-call basis, and
    minute-of-use costs on a minute-of-use basis.[^186] We also are not
    convinced that ISP-bound calls have a lower load distribution
    (*i.e.,* number and duration of calls in the busy hour as a percent
    of total traffic), and that these calls therefore impose lower
    additional costs on a network.[^187] It is not clear from the record
    that there is any "basis to speculate that the busy hour for calls
    to ISPs will be different than the CLEC switch busy hour,"[^188]
    especially when the busy hour is determined by the flow of both
    voice and data traffic.

92. Nor does the record demonstrate that CLECs and ILECs incur different
    costs in delivering traffic that would justify disparate treatment
    of ISP-bound traffic and local voice traffic under section
    251(b)(5). Ameritech maintains that it costs CLECs less to deliver
    ISP-bound traffic than it costs incumbent LECs to deliver local
    traffic because CLECs can reduce transmission costs by locating
    their switches close to ISPs.[^189] The proximity of the ISP or
    other end-user to the delivering carrier's switch, however, is
    irrelevant to reciprocal compensation rates.[^190] The Commission
    concluded in the *Local Competition Order* that the non-traffic
    sensitive cost of the local loop is not an "additional" cost of
    terminating traffic that a LEC is entitled to recover through
    reciprocal compensation.[^191]

93. SBC argues that CLECs should not be entitled to symmetrical
    reciprocal compensation rates for the delivery of ISP-bound traffic,
    because CLECs do not provide end office switching functionality to
    their ISP customers and therefore do not incur the same costs that
    ILECs incur when delivering local voice traffic. Specifically, SBC
    claims that the switching functionality that CLECs provide to ISPs
    is more like a trunk-to-trunk connection than the switching
    functionality normally provided at end offices.[^192] SBC also
    claims that CLECs are able to reduce the costs of delivering
    ISP-bound traffic by using new, less expensive switches that do not
    perform the functions necessary for both the origination and
    delivery of two-way voice traffic.[^193] Similarly, GTE asserts that
    new technologies and system architectures make it possible for some
    CLECs to reduce costs by entirely avoiding circuit-switching on
    calls "to selected telephone numbers."[^194] CLECs respond, however,
    that they are in fact using the same circuit switching technology
    used by ILECs to terminate the vast portion of Internet
    traffic.[^195] In any event, it is not evident from any of the
    comments in the record that the apparent efficiencies associated
    with new system architectures apply exclusively to data traffic, and
    not to voice traffic as well. ILECs and CLECs alike are free to
    deploy new technologies that provide more efficient solutions to the
    delivery of certain types of traffic,[^196] and these more efficient
    technologies will, over time, be reflected in cost-based reciprocal
    compensation rates. The overall record in this proceeding does not
    lead us to conclude that any system architectures or technologies
    widely used by LECs result in material differences between the cost
    of delivering ISP-bound traffic and the cost of delivering local
    voice traffic, and we see no reason, therefore, to distinguish
    between voice and ISP traffic with respect to intercarrier
    compensation.

94. Some CLECs take this argument one step further. Whatever the merits
    of bill and keep or other reforms to intercarrier compensation, they
    say, any such reform should be undertaken only in the context of a
    comprehensive review of *all* intercarrier compensation regimes,
    including the interstate access charge regime.[^197] First, we
    reject the notion that it is inappropriate to remedy some troubling
    aspects of intercarrier compensation until we are ready to solve all
    such problems. In the most recent of our access charge reform
    orders, we recognized that it is "preferable and more reasonable to
    take several steps in the right direction, even if incomplete, than
    to remain frozen" pending "a perfect, ultimate solution."[^198]
    Moreover, it may make sense to begin reform by rationalizing
    intercarrier compensation between competing providers of
    telecommunications services, to encourage efficient entry and the
    development of robust competition, rather than waiting to complete
    reform of the interstate access charge regime that applies to
    incumbent LECs, which was created in a monopoly environment for
    quite different purposes. Second, the interim compensation scheme we
    adopt here is fully consistent with the course the Commission has
    pursued with respect to access charge reform. A primary feature of
    the *CALLS Order* is the phased elimination of the PICC and CCL,
    [^199] two intercarrier payments we found to be inefficient, in
    favor of greater recovery from end-users through an increased SLC,
    an end-user charge.[^200] Finally, like the *CALLS Order*, the
    interim regime we adopt here "provides relative certainty in the
    marketplace" pending further Commission action, thereby allowing
    carriers to develop business plans, attract capital, and make
    intelligent investments.[^201]

## Conclusion

95. In this Order, we strive to balance the need to rationalize an
    intercarrier compensation scheme that has hindered the development
    of efficient competition in the local exchange and exchange access
    markets with the need to provide a fair and reasonable transition
    for CLECs that have come to depend on intercarrier compensation
    revenues. We believe that the interim compensation regime we adopt
    herein responds to both concerns. The regime should reduce carriers'
    reliance on carrier-to-carrier payments as they recover more of
    their costs from end-users, while avoiding a "flash cut" to bill and
    keep which might upset legitimate business expectations. The interim
    regime also provides certainty to the industry during the time that
    the Commission considers broader reform of intercarrier compensation
    mechanisms in the *NPRM* proceeding. Finally, we hope this Order
    brings an end to the legal confusion resulting from the Commission's
    historical treatment of ISP-bound traffic, for purposes of
    jurisdiction and compensation, and the statutory obligations and
    classifications adopted by Congress in 1996 to promote the
    development of competition for all telecommunications services. We
    believe the analysis set forth above amply responds to the court's
    mandate that we explain how our conclusions regarding ISP-bound
    traffic fit within the governing statute.[^202]

# Procedural Matters

## Final Regulatory Flexibility Analysis

96. As required by the Regulatory Flexibility Act (RFA),[^203] an
    Initial Regulatory Flexibility Analysis (IRFA) was incorporated in
    the *Declaratory Ruling and NPRM*.[^204] The Commission sought and
    received written comments on the IRFA. The Final Regulatory
    Flexibility Analysis (FRFA) in this Order on Remand and Report and
    Order conforms to the RFA, as amended.[^205] To the extent that any
    statement contained in this FRFA is perceived as creating ambiguity
    with respect to our rules, or statements made in preceding sections
    of this Order on Remand and Report and Order, the rules and
    statements set forth in those preceding sections shall be
    controlling.

### Need for, and Objectives of, this Order on Remand and Report and Order

97. In the *Declaratory Ruling*, we found that we did not have an
    adequate record upon which to adopt a rule regarding intercarrier
    compensation for ISP-bound traffic, but we indicated that adoption
    of a rule would serve the public interest.[^206] We sought comment
    on two alternative proposals, and stated that we might issue new
    rules or alter existing rules in light of the comments
    received.[^207] Prior to the release of a decision, the Court of
    Appeals for the District of Columbia Circuit vacated certain
    provisions of the *Declaratory Ruling* and remanded the matter to
    the Commission.[^208]

98. This Order on Remand and Report and Order addresses the concerns of
    various parties to this proceeding and responds to the court's
    remand. The Commission exercises jurisdiction over ISP-bound traffic
    pursuant to section 201, and establishes a three-year interim
    intercarrier compensation mechanism for the exchange of ISP-bound
    traffic that applies if incumbent LECs offer to exchange section
    251(b)(5) traffic at the same rates. During this interim period,
    intercarrier compensation for ISP-bound traffic is subject to a rate
    cap that declines over the three-year period, from \$.0015/mou to
    \$.0007/mou. The Commission also imposes a cap on the total
    ISP-bound minutes for which a LEC may receive this compensation
    under a particular interconnection agreement equal to, on an
    annualized basis, the number of ISP-bound minutes for which that LEC
    was entitled to receive compensation during the first quarter of
    2001, increased by ten percent in each of the first two years of the
    transition. If an incumbent LEC does not offer to exchange all
    section 251(b)(5) traffic subject to the rate caps set forth herein,
    the exchange of ISP-bound traffic will be governed by the reciprocal
    compensation rates approved or arbitrated by state commissions.

### Summary of Significant Issues Raised by the Public Comments in Response to the IRFA

99. The Office of Advocacy, U.S. Small Business Administration (Office
    of Advocacy) submitted two filings in response to the IRFA.[^209] In
    these filings, the Office of Advocacy raises significant issues
    regarding our description, in the IRFA, of small entities to which
    our rules will apply, and the discussion of significant alternatives
    considered and rejected. Specifically, the Office of Advocacy argues
    that the Commission has failed accurately to identify all small
    entities affected by the rulemaking by refusing to characterize
    small incumbent local exchange carriers (LECs), and failing to
    identify small ISPs, as small entities.[^210] We note that, in the
    IRFA, we stated that we excluded small incumbent LECs from the
    definitions of "small entity" and "small business concern" because
    such companies are either dominant in their field of operations or
    are not independently owned and operated.[^211] We also stated,
    however, that we would nonetheless, out of an abundance of caution,
    include small incumbent LECs in the IRFA, and did so.[^212] Small
    incumbent LECs and other relevant small entities are included in our
    present analysis as described below.

100. The Office of Advocacy also states that Internet service providers
     (ISPs) are directly affected by our actions, and therefore should
     be included in our regulatory flexibility analysis. We find,
     however, that rates charged to ISPs are only indirectly affected by
     our actions. We have, nonetheless, briefly discussed the effect on
     ISPs in the primary text of this Order.[^213]

101. Last, the Office of Advocacy also argues that the Commission has
     failed to adequately address significant alternatives that
     accomplish our stated objective and minimize any significant
     economic impact on small entities.[^214] We note that, in the IRFA,
     we described the nature and effect of our proposed actions, and
     encouraged small entities to comment (including giving comment on
     possible alternatives). We also specifically sought comment on the
     two alternative proposals for implementing intercarrier
     compensation -- one that resolved intercarrier compensation
     pursuant to the negotiation and arbitration process set forth in
     Section 252, and another that would have had us adopt a set of
     federal rules to govern such intercarrier compensation.[^215] We
     believe, therefore, that small entities had a sufficient
     opportunity to comment on alternative proposals.

102. NTCA also filed comments, not directly in response to the IRFA,
     urging the Commission to fulfill its obligation to consider small
     telephone companies.[^216] Some commenters also raised the issue of
     small entity concerns over increasing Internet traffic and the use
     of Extended Area Service (EAS) arrangements. [^217] We are
     especially sensitive to the needs of rural and small LECs that
     handle ISP-bound traffic, but we find that the costs that LECs
     incur in *originating* this traffic extends beyond the scope of the
     present proceeding and should not dictate the appropriate approach
     to compensation for *delivery* of ISP-bound traffic.

### Description and Estimate of the Number of Small Entities to Which Rules Will Apply

103. The rules we are adopting apply to local exchange carriers. To
     estimate the number of small entities that would be affected by
     this economic impact, we first consider the statutory definition of
     \"small entity\" under the RFA. The RFA generally defines \"small
     entity\" as having the same meaning as the term \"small business,\"
     \"small organization,\" and \"small governmental
     jurisdiction.\"[^218] In addition, the term \"small business\" has
     the same meaning as the term \"small business concern\" under the
     Small Business Act, unless the Commission has developed one or more
     definitions that are appropriate to its activities.[^219] Under the
     Small Business Act, a \"small business concern\" is one that: (1)
     is independently owned and operated; (2) is not dominant in its
     field of operation; and (3) meets any additional criteria
     established by the SBA.[^220] The SBA has defined a small business
     for Standard Industrial Classification (SIC) categories 4812
     (Radiotelephone Communications) and 4813 (Telephone Communications,
     Except Radiotelephone) to be small entities when they have no more
     than 1,500 employees.[^221]

104. The most reliable source of information regarding the total numbers
     of certain common carrier and related providers nationwide, as well
     as the numbers of commercial wireless entities, appears to be data
     the Commission publishes annually in its Carrier Locator report,
     derived from filings made in connection with the Telecommunications
     Relay Service (TRS).[^222] According to data in the most recent
     report, there are 4,144 interstate carriers.[^223] These carriers
     include, *inter alia*, incumbent local exchange carriers,
     competitive local exchange carriers, competitive access providers,
     interexchange carriers, other wireline carriers and service
     providers (including shared-tenant service providers and private
     carriers), operator service providers, pay telephone operators,
     providers of telephone toll service, wireless carriers and services
     providers, and resellers.

105. We have included small incumbent local exchange carriers (LECs) in
     this regulatory flexibility analysis. As noted above, a \"small
     business\" under the RFA is one that, *inter alia*, meets the
     pertinent small business size standard (*e.g.*, a telephone
     communications business having 1,500 or fewer employees), and \"is
     not dominant in its field of operation.\"[^224] The SBA\'s Office
     of Advocacy contends that, for RFA purposes, small incumbent LECs
     are not dominant in their field of operation because any such
     dominance is not \"national\" in scope.[^225] We have therefore
     included small incumbent LECs in this regulatory flexibility
     analysis, although we emphasize that this action has no effect on
     the Commission's analyses and determinations in other, non-RFA
     contexts.

106. Total Number of Telephone Companies Affected. The United States
     Bureau of the Census (the Census Bureau) reports that, at the end
     of 1992, there were 3,497 firms engaged in providing telephone
     services, as defined therein, for at least one year.[^226] This
     number contains a variety of different categories of carriers,
     including local exchange carriers, interexchange carriers,
     competitive access providers, cellular carriers, mobile service
     carriers, operator service providers, pay telephone operators, PCS
     providers, covered SMR providers, and resellers. It seems certain
     that some of those 3,497 telephone service firms may not qualify as
     small entities or small incumbent LECs because they are not
     \"independently owned and operated.\"[^227] For example, a PCS
     provider that is affiliated with an interexchange carrier having
     more than 1,500 employees would not meet the definition of a small
     business. It seems reasonable to conclude, therefore, that fewer
     than 3,497 telephone service firms are small entity telephone
     service firms or small incumbent LECs that may be affected by the
     decisions and rule changes adopted in this proceeding.

107. *Wireline Carriers and Service Providers*. The SBA has developed a
     definition of small entities for telephone communications companies
     other than radiotelephone companies. The Census Bureau reports that
     there were 2,321 such telephone companies in operation for at least
     one year at the end of 1992.[^228] According to the SBA\'s
     definition, a small business telephone company other than a
     radiotelephone company is one employing no more than 1,500
     persons.[^229] All but 26 of the 2,321 non-radiotelephone companies
     listed by the Census Bureau were reported to have fewer than 1,000
     employees. Thus, even if all 26 of those companies had more than
     1,500 employees, there would still be 2,295 non-radiotelephone
     companies that might qualify as small entities or small incumbent
     LECs. Although it seems certain that some of these carriers are not
     independently owned and operated, we are unable at this time to
     estimate with greater precision the number of wireline carriers and
     service providers that would qualify as small business concerns
     under the SBA\'s definition. Consequently, we estimate that there
     are fewer than 2,295 small entity telephone communications
     companies other than radiotelephone companies that may be affected
     by the decisions and rule changes adopted in this proceeding.

108. *Local Exchange Carriers, Interexchange Carriers, Competitive
     Access Providers, Operator Service Providers, and Resellers*.
     Neither the Commission nor the SBA has developed a definition
     particular to small LECs, interexchange carriers (IXCs),
     competitive access providers (CAPs), operator service providers
     (OSPs), or resellers. The closest applicable definition for these
     carrier-types under the SBA rules is for telephone communications
     companies other than radiotelephone (wireless) companies.[^230]
     According to our most recent TRS data, there are 1,348 incumbent
     LECs and 212 CAPs and competitive LECs.[^231] Although it seems
     certain that some of these carriers are not independently owned and
     operated, or have more than 1,500 employees, we are unable at this
     time to estimate with greater precision the number of these
     carriers that would qualify as small business concerns under the
     SBA\'s definition. Consequently, we estimate that there are fewer
     than 1,348 incumbent LECs and fewer than 212 CAPs and competitive
     LECs that may be affected by the decisions and rule changes adopted
     in this proceeding.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements

109. The rule we are adopting imposes direct compliance requirements on
     interconnected incumbent and competitive LECs, including small
     LECs. In order to comply with this rule, these entities will be
     required to exchange their ISP-bound traffic subject to the rules
     we are adopting above.

### Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered

110. In the *Declaratory Ruling and Intercarrier Compensation NPRM* the
     Commission proposed various approaches to intercarrier compensation
     for ISP-bound traffic.[^232] During the course of this proceeding
     the Commission considered and rejected several alternatives.[^233]
     None of the significant alternatives considered would appear to
     succeed as much as our present rule in balancing our desire to
     minimize any significant economic impact on relevant small
     entities, with our desire to deal with the undesirable incentives
     created under the current reciprocal compensation regime that
     governs the exchange of ISP-bound traffic in most instances. We
     also find that for small ILECs and CLECs the administrative burdens
     and transaction costs of intercarrier compensation will be
     minimized to the extent that LECs begin a transition toward
     recovery of costs from end-users, rather than other carriers.

111. Although a longer transition period was considered by the
     Commission, it was rejected because a three-year period was
     considered sufficient to accomplish our policy objectives with
     respect to all LECs.[^234] Differing compliance requirements for
     small LECs or exemption from all or part of this rule is
     inconsistent with our policy goal of addressing the market
     distortions attributable to the prevailing intercarrier
     compensation mechanism for ISP-bound traffic and beginning a smooth
     transition to bill-and-keep.

     *Report to Congress*: The Commission will send a copy of this Order
     on Remand and Report and Order, including this FRFA, in a report to
     be sent to Congress pursuant to the Congressional Review Act.[^235]
     In addition, the Commission will send a copy of this Order on
     Remand and Report and Order, including the FRFA, to the Chief
     Counsel for Advocacy of the Small Business Administration. A copy
     of this Order on Remand and Report and Order and FRFA (or summaries
     thereof) will also be published in the Federal Register.[^236]

# ordering clauses

112. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i) and (j),
     201-209, 251, 252, 332, and 403 of the Communications Act, as
     amended, 47 U.S.C. §§ 151, 154(i), 154(j), 201-209, 251, 252, 332,
     and 403, and Section 553 of Title 5, United States Code, 5 U.S.C. §
     553, that this Order on Remand and Report and Order and revisions
     to Part 51 of the Commission's rules, 47 C.F.R. Part 51, ARE
     ADOPTED. This Order on Remand and Report and Order and the rule
     revisions adopted herein will be effective 30 days after
     publication in the Federal Register except that, for good cause
     shown, as set forth in paragraph 82 of this Order, the provision of
     this Order prohibiting carriers from invoking section 252(i) of the
     Act to opt into an existing interconnection agreement as it applies
     to rates paid for the exchange of ISP-bound traffic will be
     effective immediately upon publication of this Order in the Federal
     Register.

113. IT IS FURTHER ORDERED that the Commission's Consumer Information
     Bureau, Reference Information Center, SHALL SEND a copy of this
     Order on Remand and Report and Order, including the Final
     Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy
     of the Small Business Administration.

FEDERAL COMMUNICATIONS COMMISSION

Magalie Roman Salas

Secretary

**Appendix A**

**List of Commenters in CC Docket Nos. 96-98, 99-68**

[Comments Filed in Response to the June 23, 2000 Public
Notice]{.underline}

Advanced TelCom Group, Inc.; e.spire Communications, Inc.; Intermedia
Communications, Inc.; KMC Telecom, Inc.; Nextlink Communications, Inc.;
The Competitive Telecommunications Association

Alliance for Public Technology

Association of Communications Enterprises

Association for Local Telecommunications Services

AT&T Corp. (AT&T)

BellSouth Corporation

Cablevision Lightpath, Inc.

California State and California Public Utilities Commission

Centennial Communications Corp. (Centennial)

Florida Public Service Commission

Focal Communications Corporation, Allegiance Telecom, Inc., and Adelphia
Business Solutions, Inc.

General Services Administration

Global NAPs, Inc.

ICG Telecom Group, Inc.

Keep America Connected; National Association of the Deaf; National
Association of Development Organizations; National Black Chamber of
Commerce; New York Institute of Technology; Ocean of Know;
Telecommunications for the Deaf, Inc.; United States Hispanic Chamber of
Commerce

Massachusetts Department of Telecommunications & Energy

Missouri Public Service Commission

National Consumers League

National Exchange Carrier Association, Inc.

New York Department of Public Service

Pac-West Telecomm, Inc.

Pennsylvania Office of Consumer Advocate

Prism Communications Services, Inc.

Qwest Corporation

RCN Telecom Services, Inc. and Connect Communications Corporation

RNK, Inc.

Rural Independent Competitive Alliance

SBC Communications, Inc. (SBC)

Sprint Corporation (Sprint)

Texas Public Utility Commission

Time Warner Telecom Inc. (Time Warner)

United States Telecom Association

Verizon Communications (Verizon)

Western Telephone Integrated Communications, Inc.

WorldCom, Inc.

[Reply Comments Filed in Response to the June 23, 2000 Public
Notice]{.underline}

Adelphia Business Solutions, Inc.; Allegiance TeleCom, Inc., Focal
Communications Corporation, and RCN Telcom Services, Inc.

AT&T Corp.

BellSouth Corporation

Cablevision Lightpath, Inc.

Cincinnati Bell Telephone Company

Commercial Internet Exchange Association

Converscent Communications, LLC

Covad Communication Company

Duckenfield, Pace

e.spire Communications, Inc., Intermedia Communications Inc., KMC
Telecom, Inc., NEXTLINK Communications, Inc., The Association for Local
Telecommunications Services, and The Competitive Telecommunications
Association

General Services Administration

Global NAPs, Inc.

ICG Telecom Group, Inc.

Keep America Connected; National Association of Development
Organizations; National Black Chamber of Commerce; New York Institute of
Technology; United States Hispanic Chamber of Commerce

Pac-West Telecomm, Inc.

Prism Communications Services, Inc.

Qwest Corporation

Riter, Josephine

SBC Communications, Inc. (SBC)

Sprint Corporation

Time Warner Telecom Inc. (Time Warner)

US Internet Industry Association

United States Telecom Association

Verizon Communications (Verizon)

Western Telephone Integrated Communications, Inc.

WorldCom, Inc.

[Comments Filed in Response to the February 26, 1999 Notice of Proposed
Rulemaking]{.underline}

Airtouch Paging

America Online, Inc. (AOL)

Ameritech

Association for Local Telecommunications Services

AT&T Corp. (AT&T)

Baldwin, Jesse

Bardsley, June

Bell Atlantic Corporation

BellSouth Corporation

Cablevision Lightpath, Inc.

California Public Utilities Commission

Choice One Communications (Choice One)

Cincinnati Bell Telephone Company

Commercial Internet eXchange Association

Competitive Telecommunications Association )

Corecomm Limited

Cox Communications, Inc. (Cox)

CT Cube, Inc. & Leaco Rural Telephone Cooperative, Inc.

CTSI, Inc.

Florida Public Service Commission

Focal Communications Corporation

Frontier Corporation

General Communication, Inc.

General Services Administration

Global NAPs Inc.

GST Telecom, Inc.

GTE Services Corporation (GTE)

GVNW Consulting, Inc.

Hamilton, Dwight

ICG Communications

ICORE, Inc.

Indiana Utility Regulatory Commission

Information Technology Association of America

Intermedia Communications Inc. (Intermedia)

Keep America Connected; Federation of Hispanic Organizations of the
Baltimore Metropolitan Area, Inc; Latin American Women and Supporters;
League of United Latin American Citizens; Massachusetts Assistive
Technology Partnership; National Association of Commissions for Women;
National Association of Development Organizations; National Hispanic
Council on Aging; New York Institute of Technology; Resources for
Independent Living; Telecommunications Advocacy Project; The Child
Health Foundation; The National Trust for the Development of African
American Men; United Homeowners Association; United Seniors Health
Cooperative

KMC Telecom Inc.

Lewis, Shawn

Lloyd, Kimberly, D.

MCI WorldCom, Inc.

MediaOne Group (Media One)

Miner, George

Missouri Public Service Commission

National Telephone Cooperative Association

New York State Department of Public Service

Pennsylvania Public Utility Commission

Personal Communications Industry Assoc.

Public Utility Commission of Texas

Prism Communications Services, Inc.

RCN Telecom Services, Inc.

Reinking, Jerome C.

Richmond Telephone Company

RNK Inc.

SBC Communications

Schaefer, Karl W.

Sefton, Tim

Shook, Ofelia E.

Sprint Corporation

John Staurulakis, Inc.

Telecommunications Resellers Association

Telephone Association of New England

Thomas, William J.

Time Warner Telecom Inc. (Time Warner)

United States Telephone Association

Verio Inc.

Vermont Public Service Board

Virgin Islands Telephone Corporation

Wisconsin State Telecommunications Association

[Reply Comments Filed in Response to the February 26, 1999 Notice of
Proposed Rulemaking]{.underline}

Airtouch Paging

Ameritech

Association for Local Telecommunications Services

AT&T Corp.

Bell Atlantic Corporation

BellSouth Corporation and BellSouth Telecommunications, Inc.

Competitive Telecommunications Association

Corecomm Limited (CoreComm)

Cox Communications, Inc. (Cox)

Focal Communications Corporation

General Services Administration

Global NAPs Inc.

GST Telecom Inc.

GTE Services Corporation (GTE)

GVNW Consulting, Inc.

ICG Communications, Inc

Illinois Commerce Commission

Intermedia Communications Inc.

KMC Telecom Inc.

MCI WorldCom, Inc.

National Exchange Carrier Association, Inc.

National Telephone Cooperative Association

Network Plus, Inc.

New York State Department of Public Services

Pac-West Telecomm., Inc.

Pennsylvania Public Utility Commission

Personal Communications Industry Association

Prism Communications Services, Inc.

Public Service Commission of Wisconsin

RCN Telecom Services

RNK Telecom

SBC Communications, Inc.

Sprint Corporation

Supra Telecommunications & Information Systems, Inc.

TDS Telecommunications Corporation

Time Warner Telecom

United States Telephone Association

US West Communications, Inc.

Verio Inc.

Virgin Islands Telephone Corporation

Wyoming Public Service Commission

**Appendix B -- Final Rules**

**AMENDMENTS TO THE CODE OF FEDERAL REGULATIONS**

Part 51, Subpart H, of Title 47 of the Code of Federal Regulations
(C.F.R.) is amended as follows:

1.  The title of part 51, Subpart H, is revised to read as follows:

**Subpart** **H**\--**Reciprocal Compensation for Transport and
Termination of Telecommunications Traffic**

2\. Section 51.701(b) is revised to read as follows:

(a) **§ 51.701 Scope of transport and termination pricing rules.**

\*\*\*\*\*

(b) *Telecommunications traffic*. For purposes of this subpart,
    telecommunications traffic means:

```{=html}
<!-- -->
```
(1) Telecommunications traffic exchanged between a LEC and a
    telecommunications carrier other than a CMRS provider, except for
    telecommunications traffic that is interstate or intrastate exchange
    access, information access, or exchange services for such access
    (*see* FCC 01-131, paras. 34, 36, 39, 42-43); or

(2) Telecommunications traffic exchanged between a LEC and a CMRS
    provider that, at the beginning of the call, originates and
    terminates within the same Major Trading Area, as defined in §
    24.202(a) of this chapter.

3\. Sections 51.701(a), 51.701(c) through (e), 51.703, 51.705, 51.707,
51.709, 51.711, 51.713, 51.715, and 51.717 are each amended by striking
\"local\" before \"telecommunications traffic\" each place such word
appears.

**SEPARATE STATEMENT OF CHAIRMAN MICHAEL K. POWELL**

*Re: Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996; Intercarrier Compensation for ISP-Bound
Traffic (CC Docket Nos. 96-98, 99-68)*

In this *Order,* we re-affirm our prior conclusion that
telecommunications traffic delivered to Internet service providers
(ISPs) is subject to our jurisdiction under section 201 of the Act.
Thus, we reject arguments that section 251(b)(5) applies to this
traffic. I firmly believe that this *Order* is supported by reasonable
interpretations of statutory provisions that read together are ambiguous
and, absent a reconciling interpretation, conflicting.

I also support the fact that this *Order,* for the first time,
establishes a transition mechanism that will gradually wean competitive
carriers from heavy reliance on the excessive reciprocal compensation
charges that incumbents have been forced to pay these competitors for
carrying traffic from the incumbent to the ISP. This transition
mechanism was carefully crafted to balance the competing interests of
incumbent and competitive telephone companies and other parties, so as
not to undermine the Act's goal of promoting efficient local telephone
competition.

I write separately only to emphasize a few points:

As an initial matter, I respectfully disagree with the objections to our
conclusion that section 251(g) "carves out" certain categories of
services that, in the absence of that provision, would likely be subject
to the requirements of section 251(b)(5).[^237] Section 251(b)(5)'s
language first appears to be far-reaching, in that it would seem to
apply, by its express terms, to all "telecommunications."[^238] There is
apparently no dispute, however, that at least one category of the
LEC-provided telecommunications services enumerated in section 251(g)
(namely, "exchange access") is not subject to section 251(b)(5), despite
the broad language of this provision. Indeed, the *Bell Atlantic* Court
appears to have endorsed that conclusion.[^239] The question then arises
whether the other categories of traffic that are enumerated in section
251(g) (including, "information access") should also be exempted from
the application of section 251(b)(5). We answer this question in the
affirmative, and no justification (compelling or otherwise) has been
offered for why only one service -- exchange access -- should be
afforded disparate treatment in the construction of section 251(g). I
would note, moreover, that on the only other occasion in which the
Commission directly addressed the question whether section 251(g) serves
as such a "carve-out," the Commission concluded, as we do here, that it
does perform that function.[^240]

Nor do I find the position we adopt here irreconcilable with our
decision in the *Advanced Services Remand Order.*[^241] In discussing
the term "information access" in that *Order,* we were not addressing
the question whether section 251(g) exempts certain categories of
traffic provided by LECs to ISPs and interexchange carriers from the
other requirements of section 251. Rather, we addressed only the
relationship between "information access" and the categories of
"exchange access" and "telephone exchange service." Specifically, we
"decline\[d\] to find that information access services are a separate
category of services, distinct from, and mutually exclusive with,
telephone exchange and exchange access services."[^242] But under the
reading of section 251(g) put forth in this *Order,* the question
whether information access is distinct from these other services is
irrelevant. Because information access is specifically enumerated in
section 251(g), it is not subject to the requirements of section
251(b)(5), whether or not that category of service overlaps with, or is
distinct from, telephone exchange service or exchange access.

Similarly, I reject the suggestion that section 251(g) *only* preserves
the MFJ requirements. The language of section 251(g) specifically refers
to "each local exchange carrier," not just to the Bell Operating
Companies.[^243] Section 251(g) also expressly refers to any
"regulation, order, or policy of the Commission."[^244] Such clauses
support the reading of section 251(g) that we adopt today.[^245]

Finally, I disagree that section 251(g) cannot be construed to exempt
certain categories of traffic from the requirements of section
251(b)(5), simply because the former provision does not include the
words "exclude" or "reciprocal compensation" or
"telecommunications."[^246] As I have said, our reading that the
categories of LEC-provided services enumerated in subsection (g) are
exempted from reciprocal compensation arises from our duty to give
effect to both section 251(g) and section 251(b)(5). I also would point
out that section 251(g) does include a specific reference to "receipt of
compensation," just as the services enumerated in that section (e.g.,
exchange access, information access) undeniably involve
telecommunications.[^247]

In closing, I would only reiterate that the statutory provisions at
issue here are ambiguous and, absent a reconciling interpretation,
conflicting. Thus, the Commission has struggled long and hard in an
effort to give as full a meaning as possible to each of the provisions
in a manner we conclude is consistent with the statutory purpose. It
would not be overstating matters to acknowledge that these issues are
highly complex, disputed and elusive, and that what we decide here will
have enormous impact on the development of new technologies and the
economy more broadly. It is for their relentless efforts to wrestle with
(and now resolve) these issues that I am deeply grateful to my
colleagues and our able staff.

DISSENTING STATEMENT OF

**COMMISSIONER HAROLD FURCHTGOTT-ROTH**

# Re: Implementation of the Local Competition Provisions in the Telecommunications Act of 1996 and Inter-Carrier Compensation for ISP-Bound Traffic, Order on Remand and Report and Order, CC Docket Nos. 96-98, 99-68. {#re-implementation-of-the-local-competition-provisions-in-the-telecommunications-act-of-1996-and-inter-carrier-compensation-for-isp-bound-traffic-order-on-remand-and-report-and-order-cc-docket-nos.-96-98-99-68. .Appendix-Heading}

To some observers, the Telecommunications Act of 1996 ("1996 Act"), in
general, and sections 251 and 252 (47 U.S.C. §§ 251 and 252), in
particular, have become unnecessary inconveniences. The poster child for
those who proclaim the 1996 Act's failure is reciprocal compensation. It
has led to large billings -- some paid, some unpaid -- among
telecommunications carriers. These billings have not shrunk, in large
part because the Commission's interpretation of the pick-and-choose
provision of the Act (47 U.S.C. § 252(i)) has led to unstable contracts,
with perverse incentives for renegotiation.

Reciprocal compensation is an obscure and tedious topic. It is not,
however, a topic that Congress overlooked. To the contrary, in
describing reciprocal compensation arrangements in sections 251 and 252,
Congress went into greater detail than it did for almost any other
commercial relationship between carriers covered in the 1996 Act. Among
other things, Congress mandated that reciprocal compensation
arrangements would be:

\(1\) made by contract; (2) under State supervision; (3) at rates to be
negotiated or arbitrated; and (4) would utilize a bill-and-keep plan
only on a case-by-case basis under specific statutory conditions. *See*
47 U.S.C. §§ 251(b)(5), 252(a), 252(b), 252(d)(2).

Faced with these statutory mandates, how should the large billings for
reciprocal compensation be addressed? Renegotiating contracts would be
the simple market solution, only made precarious by our pick-and-choose
rules. Another solution would be to seek review of reciprocal
compensation agreements by State commissions. Other solutions would be
for this Commission to change its pick-and-choose rules or to issue
guidelines for State commission decisions (*see AT&T Corp. v. Iowa
Utilities Bd.*, 525 U.S. 366, 385 (1999)).

Each of these solutions, of course, would reflect at least a modicum of
respect for States, their lawmakers, their regulators, federal law, and
the Congress that enacted the 1996 Act. Each would also be consistent
with, and respectful of, the prior ruling on reciprocal compensation by
the Court of Appeals for the D.C. Circuit. *See Bell Atlantic Tel. Cos.
v. FCC*, 206 F.3d 1 (D.C. Cir. 2000).

There is, however, one solution that is not respectful of other
governmental institutions. It is a solution that places under exclusive
federal jurisdiction broad expanses of telecommunications. It is a
solution that does not directly solve the problem at hand. It is a
solution that can be reached only through a twisted interpretation of
the law and a vitiation of economic reasoning and general common sense.
That solution is nationwide price regulation. That is the regrettable
solution the Commission has adopted.

The Commission's decision has broad consequences for the future of
telecommunications regulation. In holding that essentially all
packetized communications fall within federal jurisdiction, the
Commission has dramatically diminished the States' role going forward,
as such communications are fast becoming the dominant mode. Whatever the
merits of this reallocation of authority, it is a reallocation that
properly should be made only by Congress. It certainly should not be
made, as here, by a self-serving federal agency acting unilaterally.

There is doubtlessly underway a publicity campaign by the proponents of
today's action. It will spin nationwide mandatory price regulation as
"deregulation." It will spin the abandonment of States and contracts as
"good government."

The media might be spun by this campaign. The public might be spun. But
it will be far more difficult to convince the courts that the current
action is lawful.

**A Flawed Order From Flawed Decisionmaking**

Today's order is the product of a flawed decisionmaking process that
occurs all too frequently in this agency. It goes like this. First, the
Commission settles on a desired outcome, based on what it thinks is good
"policy" and without giving a thought to whether that outcome is legally
supportable. It then slaps together a statutory analysis. The result is
an order like this one, inconsistent with the Commission's precedent and
fraught with legal difficulties.

In March 2000, the Court of Appeals for the D.C. Circuit vacated the
Commission's conclusion that section 251(b)(5) does not apply to calls
made to Internet service providers ("ISPs"). *See Bell Atlantic*, 206
F.3d at 9. The court ruled that, among other things, the Commission had
not provided a "satisfactory explanation why LECs that terminate calls
to ISPs are not properly seen as 'terminating . . . local
telecommunications traffic,' and why such traffic is 'exchange access'
rather than 'telephone exchange service.'" *Id.*

The Commission has taken more than a year to respond to the court's
remand decision. My colleagues some time ago decided on their general
objective -- asserting section 201(b) jurisdiction over ISP-bound
traffic and permitting incumbent carriers to ramp down the payments that
they make to competitive ones. The delay in producing an order is
attributable to the difficulty the Commission has had in putting
together a legal analysis to support this result, which is at odds with
the agency's own precedent as well as the plain language of the statute.

Today, the Commission rules, once again, that section 251(b)(5) does not
apply to ISP-bound traffic. In a set of convoluted arguments that
sidestep the court's objections to its previous order, the Commission
now says that ISP-bound traffic is "information access," which, the
Commission asserts, is excluded "from the universe of
'telecommunications' referred to in section 251(b)(5)" (Order ¶¶ 23, 30)
-- despite the Commission's recent conclusion in another context that
"information access" is not a separate category of service exempt from
the requirements of section 251. *See Deployment of Wireline Services
Offering Advanced Telecommunications Capability*, Order on Remand, 15
FCC Rcd 385, ¶¶ 46-49 (1999) ("*Advanced Services Remand Order*").

The result will be another round of litigation, and, in all likelihood,
this issue will be back at the agency in another couple of years. In the
meantime, the uncertainty that has clouded the issue of compensation for
ISP-bound traffic for the last five years will continue. The Commission
would act far more responsibly if it simply recognized that ISP-bound
traffic comes within section 251(b)(5). To be sure, this conclusion
would mean that the Commission could not impose on these communications
any rule that it makes up, as the agency believes it is permitted to do
under section 201(b). Rather, the Commission would be forced to work
within the confines of sections 251(b)(5) and 252(d)(2), which, among
other things, grant authority to State commissions to decide on "just
and reasonable" rates for reciprocal compensation. 47 U.S.C. §
252(d)(2). But the Commission surely could issue "rules to guide the
state-commission judgments" regarding reciprocal compensation (*Iowa
Utilities Bd.*, 525 U.S. at 385) and perhaps could even put in place the
same compensation scheme it orders here. At the same time, the confusion
that this order will add to the agency's already bewildering precedent
on Internet-related issues would be avoided.

> **The Commission's Previous Order and**
>
> **the Court's Remand Decision**

To see how far the Commission has come in its attempt to assert section
201(b) jurisdiction over ISP-bound traffic, let us briefly review the
court's decision on the Commission's previous order, which receives
little attention in the order released today. In its previous order,
issued in February 1999, the Commission focused on the jurisdictional
nature of ISP-bound traffic. *See Implementation of the Local
Competition Provisions in the Telecommunications Act of 1996;
Inter-Carrier Compensation for ISP-Bound Traffic*, Declaratory Ruling,
14 FCC Rcd 3689 (1999) ("*Reciprocal Compensation Declaratory Ruling*").
Applying an "end-to-end" analysis, the agency concluded that calls to
ISPs do not terminate at the ISP's local server, but instead continue to
the "ultimate destination or destinations, specifically at a\[n\]
Internet website that is often located in another state." *Id.* ¶ 12.
Based on this jurisdictional analysis, the Commission ruled that a
substantial portion of calls to ISPs are jurisdictionally interstate,
and it described ISP-bound traffic as interstate "access service." *Id.*
¶¶ 17, 18. The Commission reasoned that, since reciprocal compensation
is required only for the transport and termination of *local* traffic,
section 251(b)(5)'s obligations did not apply to ISP-bound calls. *See
id.* ¶¶ 7, 26.

> **1. The Court Asked the Commission Why ISPs Are Not Like Other Local
> Businesses**

The court vacated the Commission's decision. It held that, regardless of
the jurisdictional issue, the Commission had not persuasively
distinguished ISPs from other businesses that use communications
services to provide goods or services to their customers. *See Bell
Atlantic*, 206 F.3d at 7. In the court's view, the Commission had failed
to explain 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.'" *Id.* (citation omitted).

> **2. The Court Asked the Commission Why Calls Do Not Terminate at
> ISPs**

The court also questioned the Commission's conclusion that a call to an
ISP did not "terminate" at the ISP. "\[T\]he mere fact that the ISP
originates further telecommunications does not imply that the original
telecommunication does not 'terminate' at the ISP." *Id.* The court
concluded that, "\[h\]owever sound the end-to-end analysis may be for
jurisdictional purposes," the Commission had failed to explain why
treating these "linked telecommunications as continuous works for
purposes of reciprocal compensation." *Id*.

> **3. The Court Asked the Commission How Its Treatment of ISP-Bound
> Traffic Is Consistent with Its Treatment of Enhanced Service
> Providers**

The court also wondered whether the Commission's treatment of ISP-bound
traffic was consistent with the approach it applies to enhanced service
providers ("ESPs"), which include ISPs. *See id.* at 7-8. The Commission
has long exempted ESPs from the access charge system, effectively
treating them as end-users of local service rather than long-distance
carriers. The court observed that this agency, in the Eighth Circuit
access charge litigation, had taken the position "that a call to an
information service provider is really like a call to a local business
that then uses the telephone to order wares to meet the need." *Id.* at
8. The court rejected as "not very compelling" the Commission's argument
that the ESP exemption is consistent with the understanding that ESPs
use interstate access services. *Id.*

> **4. The Court Asked the Commission Whether ISP-Bound Traffic is
> "Exchange Access" or "Telephone Exchange Service"**

Finally, the court rejected the Commission's suggestion that ISPs are
"users of access service." *Id*. The court noted that the statute
creates two statutory categories -- "telephone exchange service" and
"exchange access" -- and observed that on appeal, the Commission had
conceded that these categories occupied the field. *Id.* If the
Commission had meant to say that ISPs are users of "exchange access,"
wrote the court, it had "not provided a satisfactory explanation why
this is the case." *Id.*

**The Commission's Latest Order**

Today, the Commission fails to answer any of the court's questions.
Recognizing that it could not reach the desired result within the
framework it used previously, the Commission offers up a completely new
analysis, under which it is irrelevant whether ISP-bound traffic is
"local" rather than "long-distance" or "telephone exchange service"
rather than "exchange access."

In today's order, the Commission concludes that section 251(b)(5) is not
limited to local traffic as it had previously maintained, but instead
applies to all "telecommunications" traffic except the categories
specifically enumerated in section 251(g). *See* Order ¶¶ 32, 34. The
Commission concludes that ISP-bound traffic falls within one of these
categories -- "information access" -- and is therefore exempt from
section 251(b)(5). *See id.* ¶ 42. The agency wraps up with a
determination that ISP-bound traffic is interstate, and it thus has
jurisdiction under section 201(b) to regulate compensation for the
exchange of ISP-bound traffic. *See id.* ¶¶ 52-65.

The Commission's latest attempt to solve the reciprocal compensation
puzzle is no more successful than were its earlier efforts. As discussed
below, its determination that ISP-bound traffic is "information access"
and, hence, exempt from section 251(b)(5) is inconsistent with
still-warm Commission precedent. Moreover, its interpretation of section
251(g) cannot be reconciled with the statute's plain language.

**1.** Today's decision is a complete reversal of the Commission's
recent decision in the *Advanced Services Remand Order.* In that order,
the Commission rejected an argument that xDSL traffic is exempt from the
unbundling obligations of section 251(c)(3) as "information access."
Among other things, the Commission found meritless the argument that
section 251(g) exempts "information access" traffic from other
requirements of section 251. *Id.* ¶ 47. Rather, the Commission
explained, "this provision is merely a continuation of the equal access
and nondiscrimination provisions of the Consent Decree until superseded
by subsequent regulations of the Commission." *Id.* According to the
Commission, section 251(g) "is a transitional enforcement mechanism that
obligates the incumbent LECs to continue to abide by equal access and
nondiscriminatory interconnection requirements of the MFJ." *Id.* The
Commission thus concluded that section 251(g) was not intended to exempt
xDSL traffic from section 251's other provisions. *See id.* ¶¶ 47-49.

In addition, the Commission rejected the contention that "information
access" is a statutory category distinct from "telephone exchange
service" and "exchange access." *See id.* ¶ 46.[^248] It pointed out
that "'information access' is not a defined term under the Act, and is
cross-referenced in only two transitional provisions." *Id.* ¶ 47. It
ultimately concluded that nothing in the Act suggests that "information
access" is a category of services mutually exclusive with exchange
access or telephone exchange service. *See id.* ¶ 48.

The Commission further determined that ISP-bound traffic is properly
classified as "exchange access." *See id.* ¶ 35. It noted that exchange
access refers to "access to telephone exchange services or facilities
for the purpose of originating or terminating communications that travel
outside an exchange." *Id.* ¶ 15. Applying this definition, and citing
the *Reciprocal Compensation Declaratory Ruling*, the Commission
reasoned that the service provided by the local exchange carrier to an
ISP is ordinarily exchange access service, "because it enables the ISP
to transport the communication initiated by the end-user subscriber
located 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 the interexchange transport." *Id.* ¶ 35.

The *Advanced Services Remand Order* was appealed to the D.C. Circuit.
*See WorldCom*, 2001 WL 395344. The Commission argued to the court in
February that the term "information access" is merely "a holdover term
from the MFJ, which the 1996 Act supersedes." *WorldCom, Inc. v. FCC*,
Brief for Respondents at 50 (D.C. Cir. No. 00-1002). Its brief also
emphasized that section 251(g) was "designed simply to establish a
transition from the MFJ's equal access and nondiscrimination provisions
. . . to the new obligations set out in the statute." *Id.*

Today, just two months after it made those arguments to the D.C.
Circuit, the Commission reverses itself. It now says that section 251(g)
exempts certain categories of traffic, including "information access,"
entirely from the requirements of section 251(b)(5) and that ISP-bound
traffic is "information access." *See* Order ¶¶ 32, 34, 42. The
Commission provides nary a word to explain this reversal.

Of course, the Commission's conclusions in the *Advanced Services Remand
Order* that ISP-bound traffic is "exchange access" and that the term
"information access" has no relevance under the 1996 Act were themselves
reversals of earlier Commission positions. In the *Non-Accounting
Safeguards Order*,[^249] the Commission concluded, relying in part on a
purported distinction between "exchange access" and "information
access," that ISPs "do not use exchange access as it is defined by the
Act." *Id.* ¶ 248. In that order, the Commission was faced with
determining the scope of section 272(e)(2), which states that a Bell
operating company \["BOC"\] "shall not provide any facilities, services,
or information regarding its provision of exchange access to \[a BOC
affiliate\] unless such facilities, services, or information are made
available to other providers of interLATA services in that market on the
same terms and conditions." 47 U.S.C. § 272(e)(2). The Commission
rejected the argument that BOCs are required to provide exchange access
to ISPs, reasoning that ISPs do not use exchange access. *See
Non-Accounting Safeguards Order* ¶ 248. In making that decision, the
Commission relied on the language of the statute as well as the MFJ's
use of the term "information access." *See id.* ¶ 248 & n. 621. As the
Commission explained, its "conclusion that ISPs do not use exchange
access is consistent with the MFJ, which recognized a difference between
'exchange access' and 'information access.'" *Id.* ¶ 248 n.621.

Thus, in reversing itself yet again, the Commission here follows a
time-honored tradition. When it is expedient to say that ISPs use
"exchange access" and that there is no such thing as "information
access," that is what the Commission says. *See Advanced Service Remand
Order* ¶¶ 46-48. When it is convenient to say that ISPs use the local
network like local businesses, then the Commission adopts that approach.
*See Access Charge Reform*, First Report and Order, 12 FCC Rcd 15982, ¶
345 (1997). And, today, when it helps to write that ISPs use
"information access," then that is what the Commission writes. The only
conclusion that one can soundly draw from these decisions is that the
Commission is willing to make up whatever law it can dream up to suit
the situation at hand.

Nevertheless, there is one legal proposition that the Commission has,
until now, consistently followed -- a fact that is particularly
noteworthy given the churn in the Commission's other legal principles.
The Commission has consistently held that section 251(g) serves only to
"preserve\[\] the LECs' existing equal access obligations, originally
imposed by the MFJ." *Operator Communications, Inc., D/B/A Oncor
Communications*, Memorandum Opinion and Order, 14 FCC Rcd 12506, ¶ 2 n.5
(1999).[^250] Today's order ignores this precedent and transforms
section 251(g) into a categorical exemption for certain traffic from
section 251(b)(5). It is this transformation -- much more than the shell
game played with "information access" and "exchange access" -- that is
most offensive in today's decision.

**2.** The Commission's claim that section 251(g) "excludes several
enumerated categories of traffic from the universe of
'telecommunications' referred to in section 251(b)(5)" (Order ¶ 23)
stretches the meaning of section 251(g) past the breaking point. Among
other things, that provision does not even mention "exclud\[ing\],"
"telecommunications," "section 251(b)(5)," or "reciprocal compensation."

Section 251(g), which is entitled, "Continued enforcement of exchange
access and interconnection requirements," states in relevant part:

> On and after February 8, 1996, each local exchange carrier, to the
> extent that it provides wireline services, shall provide exchange
> access, information access, and exchange services for such access to
> interexchange carriers and information service providers in accordance
> with the same equal access and nondiscriminatory interconnection
> restrictions and obligations (including receipt of compensation) that
> apply to such carrier on the date immediately preceding February 8,
> 1996 under any court order, consent decree, or regulation, order, or
> policy of the Commission, until such restrictions and obligations are
> explicitly superseded by regulations prescribed by the Commission
> after February 8, 1996.

47 U.S.C. § 251(g).

As an initial matter, it is plain from reading this language that
section 251(g) has absolutely no application to the vast majority of
local exchange carriers, including those most affected by today's order.
The provision states that "each local exchange carrier . . . shall
provide \[the enumerated services\] . . . in accordance with the same
equal access and nondiscriminatory interconnection restrictions and
obligations . . . *that apply to such carrier on the date immediately
preceding February 8, 1996*." *Id.* (emphasis added). If a carrier was
not providing service on February 7, 1996, no restrictions or
obligations applied to "such carrier" on that date, and section 251(g)
would appear to have no impact on that carrier. The Commission has thus
repeatedly stated that section 251(g) applies to "Bell Operating
Companies" and is intended to incorporate aspects of the MFJ.
*Applications For Consent To The Transfer Of Control Of Licenses And
Section 214 Authorizations From Tele-Communications, Inc., Transferor To
AT&T Corp., Transferee.*, Memorandum Opinion and Order, 14 FCC Rcd 3160,
¶ 53 (1999); *see also* cases cited *supra* note 3. Accordingly, by its
express terms, section 251(g) says nothing about the obligations of most
CLECs serving ISPs, which are the primary focus of the Commission's
order.

Moreover, it is inconceivable that section 251(g)'s preservation of
pre-1996 Act "equal access and nondiscriminatory interconnection
restrictions and obligations" is intended to displace section
251(b)(5)'s explicit compensation scheme for local carriers transporting
and terminating each other's traffic. Prior to passage of the 1996 Act,
there were no rules governing compensation for such services, whether or
not an ISP was involved. It seems unlikely, at best, that Congress
intended the absence of a compensation scheme to preempt a provision
explicitly providing for such compensation.[^251] At the very least, one
would think Congress would use language more explicit than that seized
upon by the Commission in section 251(g).

Finally, if, as the Commission maintains, section 251(g) "excludes
several enumerated categories of traffic from the universe of
'telecommunications' referred to in section 251(b)(5)" (Order ¶ 23), why
does section 251(g) not also exclude this traffic from the "universe of
'telecommunications'" referred to in the rest of section 251, or,
indeed, in the entire 1996 Act? As noted, section 251(g) nowhere
mentions "reciprocal compensation" or even "section 251." In fact, there
appears to be no limiting principle. It would thus seem that, under the
Commission's interpretation, the traffic referred to in section 251(g)
is exempt from far more than reciprocal compensation -- a consequence
the Commission is sure to regret. *See*, *e.g.*, *Implementation of the
Local Competition Provisions in the Telecommunications Act of 1996;
Interconnection Between Local Exchange Carriers and Commercial Mobile
Radio Service Providers*, First Report and Order 11 FCC Rcd 15499, ¶ 356
(1996) (concluding that "exchange access" provided to IXCs is subject to
the unbundling requirements of section 251(c)(3)).

\* \* \*

The end result of today's decision is clear. There will be continued
litigation over the status of ISP-bound traffic, prolonging the
uncertainty that has plagued this issue for years. At the same time, the
Commission will be forced to reverse itself yet again, as soon as it
dislikes the implication of treating ISP-bound traffic as "information
access" or reading section 251(g) as a categorical exemption from other
requirements of the 1996 Act. The Commission could, and should, have
avoided these consequences by applying its original analysis in the
manner sought by the court.

[^1]: Implementation of the Local Competition Provisions in the
    Telecommunications Act of 1996; Intercarrier Compensation for
    ISP-Bound Traffic, Declaratory Ruling in CC Docket No. 96-98 and
    Notice of Proposed Rulemaking in CC Docket No. 99-68, 14 FCC Rcd
    3689 (1999) (*Declaratory Ruling* or *Intercarrier Compensation
    NPRM*).

[^2]: *See* 47 U.S.C. § 201, Communications Act of 1934 (the Act), as
    amended by the Telecommunications Act of 1996, Pub. L. No. 104-104,
    110 Stat. 56 (1996 Act). Hereinafter, all citations to the Act and
    to the 1996 Act will be to the relevant section of the United States
    Code unless otherwise noted.

[^3]: 47 U.S.C. § 251(b)(5).

[^4]: *See* *Bell Atl. Tel. Cos. v. FCC*, 206 F.3d 1 (D.C. Cir. 2000)
    (*Bell Atlantic*).

[^5]: Developing a Unified Intercarrier Compensation Regime, CC Docket
    No. 01-92, Notice of Proposed Rulemaking, FCC 01-132 (rel. April 27,
    2001) ("*Unified Intercarrier Compensation NPRM*" or "*NPRM*").

[^6]: "Bill and keep" refers to an arrangement in which neither of two
    interconnecting networks charges the other for terminating traffic
    that originates on the other network. Instead, each network recovers
    from its own end-users the cost of both originating traffic that it
    delivers to the other network and terminating traffic that it
    receives from the other network. Implementation of the Local
    Competition Provisions in the Telecommunications Act of 1996;
    Interconnection between Local Exchange Carriers and Commercial
    Mobile Radio Service Providers, CC Docket Nos. 96-98, 95-185, First
    Report and Order, 11 FCC Rcd 15499, 16045 (1996) (*Local Competition
    Order*), *aff'd in part and vacated in part sub nom. Competitive
    Telecommunications Ass'n v. FCC*, 117 F.3d 1068 (8^th^ Cir. 1997)
    (*CompTel*), *aff'd in part and vacated in part sub nom. Iowa Utils.
    Bd. v. FCC*, 120 F.3d 753 (8^th^ Cir. 1997) (*Iowa Utils. Bd*.),
    *aff'd in part and rev'd in part sub nom., AT&T Corp. v. Iowa Utils.
    Bd*., 525 U.S. 366 (1999); Order on Reconsideration, 11 FCC Rcd
    13042 (1996); Second Order on Reconsideration*,* 11 FCC Rcd 19738
    (1996); Third Order on Reconsideration and Further Notice of
    Proposed Rulemaking, 12 FCC Rcd 12460 (1997); *further recon.
    pending*. Bill and keep does not, however, preclude intercarrier
    charges for transport of traffic between carriers' networks. *Id.*

[^7]: 47 U.S.C. § 251(g).

[^8]: Access Charge Reform, CC Docket No. 96-262, First Report and
    Order, 12 FCC Rcd 15982, 15998-99 (1997) (*Access Charge Reform
    Order*), *aff'd, Southwestern Bell Telephone Co. v. FCC,* 153 F.3d
    523 (8^th^ Cir. 1998).

[^9]: *See, e.g.,* Letter from Robert T. Blau, BellSouth, to Magalie
    Roman Salas, Secretary, FCC (November 6, 2000); *see also* Verizon
    Remand Comments at 2 (Verizon will be billed more than one billion
    dollars in 2000 for Internet-bound calls); Letter from Richard J.
    Metzger, Focal, to Deena Shetler, Legal Advisor to Commissioner
    Gloria Tristani, FCC (Jan. 11, 2001)(ILECs owed \$1.98 billion in
    reciprocal compensation to CLECs in 2000). On June 23, 2000, the
    Commission released a Public Notice seeking comment on the issues
    raised by the court's remand. *See* Comment Sought on Remand of the
    Commission's Reciprocal Compensation Declaratory Ruling by the U.S.
    Court of Appeals for the D.C. Circuit, CC Docket Nos. 96-98, 99-68,
    Public Notice, 15 FCC Rcd 11311 (2000) (*Public Notice*). Comments
    and reply comments filed in response to the *Public Notice* are
    identified herein as "Remand Comments" and "Remand Reply Comments,"
    respectively. Comments and replies filed in response the 1999
    *Intercarrier Compensation NPRM* are identified as "Comments" and
    "Reply Comments," respectively.

[^10]: *See, e.g.,* Verizon Remand Comments at 11, 21.

[^11]: *See Bell Atlantic*, 206 F.3d 1.

[^12]: *Declaratory Ruling*, 14 FCC Rcd at 3691.

[^13]: *Declaratory Ruling*, 14 FCC Rcd at 3691.

[^14]: *Declaratory Ruling*, 14 FCC Rcd at 3691.

[^15]: *Declaratory Ruling*, 14 FCC Rcd at 3691 (citing Federal-State
    Joint Board on Universal Service, CC Docket No. 96-45, Report to
    Congress, 13 FCC Rcd 11501, 11531 (1998) (*Universal Service Report
    to Congress*)).

[^16]: The Commission defines "enhanced services" as "services, offered
    over common carrier transmission facilities used in interstate
    communications, which employ computer processing applications that
    act on the format, content, code, protocol or similar aspects of the
    subscriber's transmitted information; provide the subscriber
    additional, different, or restructured information; or involve
    subscriber interaction with stored information." 47 C.F.R. §
    64.702(a). The 1996 Act describes these services as "information
    services." *See* 47 U.S.C. § 153(20) ("information service" refers
    to the "offering of a capability for generating, acquiring, storing,
    transforming, processing, retrieving, utilizing, or making available
    information via telecommunications."). *See also* *Universal Service
    Report to Congress*, 13 FCC Rcd at 11516 (the "1996 Act's
    definitions of telecommunications service and information service
    essentially correspond to the pre-existing categories of basic and
    enhanced services").

[^17]: MTS and WATS Market Structure, CC Docket No. 78-72, Memorandum
    Opinion and Order, 97 FCC 2d 682, 711 (1983)(*MTS/WATS Market
    Structure Order)*(ESPs are "\[a\]mong the variety of users of access
    service" and "obtain\[\] local exchange services or facilities which
    are used, in part or in whole, for the purpose of completing
    interstate calls which transit \[their\] location and, commonly,
    another location.").

[^18]: This policy is known as the "ESP exemption." *See MTS/WATS Market
    Structure Order*, 97 FCC 2d at 715 (ESPs have been paying local
    business service rates for their interstate access and would
    experience rate shock that could affect their viability if full
    access charges were instead applied); *see also* Amendments of Part
    69 of the Commission's Rules Relating to Enhanced Service Providers,
    CC Docket 87-215, Order, 3 FCC Rcd 2631, 2633 (1988) (*ESP Exemption
    Order*) ("the imposition of access charges at this time is not
    appropriate and could cause such disruption in this industry segment
    that provision of enhanced services to the public might be
    impaired"); *Access Charge Reform Order*, 12 FCC Rcd at 16133
    ("\[m\]aintaining the existing pricing structure ... avoids
    disrupting the still-evolving information services industry").

[^19]: *ESP Exemption Order*, 3 FCC Rcd at 2635 n.8, 2637 n.53. *See
    also Access Charge Reform Order*, 12 FCC Rcd at 16133-35.

[^20]: 47 U.S.C. §§ 251-252.

[^21]: 47 U.S.C. § 251(b)(5).

[^22]: *See* *Local Competition Order*, 11 FCC Rcd at 16013 ("With the
    exception of traffic to or from a CMRS network, state commissions
    have the authority to determine what geographic areas should be
    considered 'local areas' for the purpose of applying reciprocal
    compensation obligations under section 251(b)(5), consistent with
    the state commissions' historical practice of defining local service
    areas for wireline LECs."); *see also* 47 C.F.R. § 51.701(b)(1-2).
    For CMRS traffic, the Commission determined that reciprocal
    compensation applies to traffic that originates and terminates
    within the same Major Trading Area (MTA). *See* 47 C.F.R. §
    51.701(b)(2).

[^23]: *See, e.g.,* Petitions for Reconsideration and Clarification of
    Action in Rulemaking Proceedings, 61 Fed. Reg. 53922 (1996);
    Petition for Partial Reconsideration and Clarification of MFS
    Communications Co., Inc. at 28; Letter from Richard J. Metzger,
    ALTS, to Regina M. Keeney, Chief, Common Carrier Bureau, FCC (June
    20, 1997); Pleading Cycle Established for Comments on Request by
    ALTS for Clarification of the Commission's Rules Regarding
    Reciprocal Compensation for Information Service Provider Traffic,
    CCB/CPD 97-30, DA 97-1399 (rel. July 2, 1997); Letter from Edward D.
    Young and Thomas J. Tauke, Bell Atlantic, to William E. Kennard,
    Chairman, FCC (July 1, 1998). The Commission later directed parties
    wishing to make *ex parte* presentations regarding the applicability
    of reciprocal compensation to ISP-bound traffic to make such filings
    in CC Docket No. 96-98, the local competition proceeding. *See* *Ex
    Parte* Procedures Regarding Requests for Clarification of the
    Commission's Rules Regarding Reciprocal Compensation for Information
    Service Provider Traffic, CC Docket No. 96-98, Public Notice, 13 FCC
    Rcd. 15568 (1998).

[^24]: *Declaratory Ruling*, 14 FCC Rcd at 3693-94.

[^25]: *Declaratory Ruling,* 14 FCC Rcd at 3694.

[^26]: *Declaratory Ruling,* 14 FCC Rcd at 3695.

[^27]: *Declaratory Ruling,* 14 FCC Rcd at 3695-3701; *see also*
    Petition for Emergency Relief and Declaratory Ruling Filed by
    BellSouth Corporation, Memorandum Opinion and Order, 7 FCC Rcd 1619
    (1992) (*BellSouth MemoryCall*), *aff'd, Georgia Pub. Serv. Comm'n
    v. FCC*, 5 F.3d 1499 (11^th^ Cir. 1993)(table); Teleconnect Co. v.
    Bell Telephone Co. of Penn., E-88-83, 10 FCC Rcd 1626 (1995)
    (*Teleconnect*), *aff'd sub nom. Southwestern Bell Tel. Co. v. FCC*,
    116 F.3d 593 (D.C. Cir. 1997).

[^28]: *Declaratory Ruling,* 14 FCC Rcd at 3695-97.

[^29]: *Declaratory Ruling*, 14 FCC Rcd at 3697.

[^30]: *Declaratory Ruling,* 14 FCC Rcd at 3690, 3695-3703.

[^31]: *Declaratory Ruling,* 14 FCC Rcd at 3703.

[^32]: *Declaratory Ruling,* 14 FCC Rcd at 3703.

[^33]: *Declaratory Ruling,* 14 FCC Rcd at 3706.

[^34]: *Declaratory Ruling,* 14 FCC Rcd at 3703-06. The Commission did
    recognize, however, that its conclusion that ISP-bound traffic is
    largely interstate might cause some state commissions to re-examine
    their conclusions that reciprocal compensation is due to the extent
    that those conclusions were based on a finding that this traffic
    terminates at the ISP's server. *Id*. at 3706.

[^35]: *Declaratory Ruling,* 14 FCC Rcd at 3707-09.

[^36]: *See* *Bell Atlantic*, 206 F.3d 1.

[^37]: *Bell Atlantic*, 206 F.3d at 5.

[^38]: *Bell Atlantic*, 206 F.3d at 5*; see also id*. at 8 (the
    Commission had not "supplied a real explanation for its decision to
    treat end-to-end analysis as controlling" with respect to the
    application of section 251(b)(5)).

[^39]: *See Bell Atlantic*, 206 F.3d at 6-7.

[^40]: *See Bell Atlantic*, 206 F.3d at 6-7.

[^41]: *Bell Atlantic*, 206 F.3d at 8.

[^42]: *Bell Atlantic*, 206 F.3d at 8-9; 47 U.S.C. § 153(47) (defining
    "telephone exchange service").

[^43]: *Public Notice*, 15 FCC Rcd 11311.

[^44]: *Id.; see also* 47 U.S.C. § 251(g); 47 U.S.C. § 153(20).

[^45]: *See* Digital Economy 2000, U.S. Department of Commerce (June
    2000) ("Three hundred million people now use the Internet, compared
    to three million in 1994.")

[^46]: 47 U.S.C. § 251(b)(5).

[^47]: *Local Competition Order*, 11 FCC Rcd at 16012.

[^48]: *Bell Atlantic*, 206 F.3d at 5.

[^49]: *Id.*

[^50]: *Id*.

[^51]: *Id.* at 8.

[^52]: *Id.* at 8-9.

[^53]: *Id.*

[^54]: Significantly, however, the compensation mechanism effected for
    this predominantly interstate access traffic is the result of a
    federal mandate, which requires states to treat ISP-bound traffic
    for compensation purposes in a manner similar to local traffic if
    ISPs so request. *See infra* note 105.

[^55]: *Access Charge Reform Order*, 12 FCC Rcd at 16134 ("Internet
    access does generate different usage patterns and longer call
    holding times than average voice usage.").

[^56]: Some critics of the Commission's order may contend that we rely
    here on the same reasoning that the court rejected in *Bell
    Atlantic*. We acknowledge that there is a superficial resemblance
    between the Commission's previous order and this one: Here, as
    before, the Commission finds that ISP-bound traffic falls outside
    the scope of section 251(b)(5)'s reciprocal compensation requirement
    and within the Commission's access charge jurisdiction under section
    201(b). The rationale underlying the two orders, however, differs
    substantially. Here the Commission bases its conclusion that
    ISP-bound traffic falls outside section 251(b)(5) on its
    construction of sections 251(g) and (i) \-- not, as in the previous
    order, on the theory that section 251(b)(5) applies only to "local"
    telecommunications traffic and that ISP-bound traffic is interstate.
    Furthermore, to the extent the Commission continues to characterize
    ISP-bound traffic as interstate for purposes of its section 201
    authority, it has sought in this Order to address in detail the
    *Bell Atlantic* court's concerns.

[^57]: 47 U.S.C. § 251(b)(5).

[^58]: 47 U.S.C. § 153(43).

[^59]: 47 U.S.C. § 251(g) (emphasis added).

[^60]: *See AT&T Corp. v. Iowa Utils. Bd.*, 525 U.S. 366, 397 (1999)("It
    would be a gross understatement to say that the Telecommunications
    Act of 1996 is not a model of clarity. It is in many important
    respects a model of ambiguity or indeed even self-contradiction. . .
    . But Congress is well aware that the ambiguities it chooses to
    produce in a statute will be resolved by the implementing agency. .
    . . We can only enforce the clear limits that the 1996 Act
    contains.\").

[^61]: In the *Declaratory Ruling*, the Commission did not explain the
    relevance of section 251(g) nor discuss the categories of traffic
    exempted from reciprocal compensation by that provision, at least
    until the Commission should act otherwise. Reflecting this omission
    in the underlying order, the *Bell Atlantic* court does not mention
    the relationship of sections 251(g) and 251(b)(5), nor the
    enumerated categories of services referenced by subsection (g).
    Rather, the court focuses its review on the possible categorization
    of ISP-bound traffic as "local," terminology we now find
    inappropriate in light of the more express statutory language set
    forth in section 251(g).

[^62]: *Bell Atlantic*, 206 F.3d at 6; *see also AT&T Corp. v. Iowa
    Utils. Bd.*, 525 U.S. at 377-87.

[^63]: Authority over rates (or "receipt of compensation") is a core
    feature of "equal access and nondiscriminatory interconnection"
    obligations. Indeed, one of the Commission's primary goals when
    designing an access charge regime was to ensure that access users
    were treated in a nondiscriminatory manner when interconnecting with
    LEC networks in order to transport interstate communications. *See*
    *National Ass'n of Regulatory Util. Comm'nrs v. FCC*, 737 F.2d 1095,
    1101-1108, 1130-34 (D.C. Cir. 1984), *cert. denied,* 469 U.S. 1227
    (1985)(*NARUC v. FCC*).

[^64]: This view is consistent with previous Commission orders
    construing section 251(g). The Commission recognized in the
    *Advanced Services Remand Order*, for example, that section 251(g)
    preserves the requirements of the AT&T Consent Decree (*see United
    States v. AT&T*, 552 F. Supp. 131 (D.D.C. 1982)(hereinafter AT&T
    Consent Decree or Modification of Final Judgment ("MFJ"), but that
    order does not conclude that section 251(g) preserves *only* MFJ
    requirements. Deployment of Wireline Services Offering Advanced
    Telecommunications Capability, CC Docket No. 98-147 et al., Order on
    Remand, 15 FCC Rcd 385, 407 (1999)(*Advanced Services Remand
    Order*). Indeed, the ultimate issue addressed in that part of the
    order was *not* the status or scope of section 251(g) as a carve-out
    provision at all, but rather the question \-- irrelevant for our
    purposes here \-- whether \"information access\" is a category of
    service that is mutually exclusive of \"exchange access,\" as the
    latter term is defined in section 3(16) of the Act. *See* *id.* at
    407-08; *see also infra* para. 42 & note 76. By contrast, when the
    Commission first addressed the scope of the reciprocal compensation
    obligations of section 251(b)(5) in the *Local Competition Order*,
    it expressly cited section 251(g) in support of the decision to
    exempt from those obligations the tariffed interstate access
    services provided by all LECs (not just Bell companies subject to
    the MFJ) to interexchange carriers. 11 FCC Rcd at 16013. The *Bell
    Atlantic* court did not take issue with the Commission's earlier
    conclusion that section 251(b)(5) is so limited. 206 F.3d at 4. The
    interpretation we adopt here \-- that section 251(g) exempts from
    section 251(b)(5) information access services provided to
    information service providers, as well as access provided to IXCs --
    thus is fully consistent with the Commission's initial construction
    of section 251(g), in the *Local Competition Order,* as extending
    beyond the MFJ to *our own* access rules and policies.

[^65]: The term "exchange service" as used in section 251(g) is not
    defined in the Act or in the MFJ. Rather, the term "exchange
    service" is used in the MFJ as part of the definition of the term
    "exchange access," which the MFJ defines as "the provision of
    exchange services for the purpose of originating or terminating
    interexchange telecommunications." *United States v. AT&T*, 552 F.
    Supp. at 228. Thus, the term "exchange service" appears to mean, in
    context, the provision of services in connection with
    *interexchange* communications. Consistent with that, in section
    251(g), the term is used as part of the longer phrase "exchange
    services for such \[exchange\] access to interexchange carriers and
    information service providers." The phrasing in section 251(g) thus
    parallels the MFJ. All of this indicates that the term "exchange
    service" is closely related to the provision of exchange access and
    information access.

[^66]: Although section 251(g) does not itself compel this outcome with
    respect to *intrastate* access regimes (because it expressly
    preserves only *the Commission's* traditional policies and authority
    over *interstate* access services), it nevertheless highlights an
    ambiguity in the scope of "telecommunications" subject to section
    251(b)(5) \-- demonstrating that the term must be construed in light
    of other provisions in the statute. In this regard, we again
    conclude that it is reasonable to interpret section 251(b)(5) to
    exclude traffic subject to parallel intrastate access regulations,
    because "it would be incongruous to conclude that Congress was
    concerned about the effects of potential disruption to the
    interstate access charge system, but had no such concerns about the
    effects on analogous intrastate mechanisms." *Local Competition
    Order*, 11 FCC Rcd at 15869.

[^67]: *CompTel*, 117 F.3d at 1073 (emphasis added). The court continued
    that the Commission would be free under section 201 to alter its
    traditional regulatory treatment of interstate access service in the
    future, but that the standards set out in sections 251 and 252 would
    *not* be controlling. *Id.*

[^68]: *CompTel*, 117 F.3d at 1072 (emphasis added).

[^69]: For further discussion of the jurisdictionally interstate nature
    of ISP-bound traffic, *see infra* paras. 55-64. *See also NARUC v.
    FCC*, 737 F.2d at 1136 (determining that traffic to ESPs may
    properly constitute interstate access traffic); Access Billing
    Requirements for Joint Service Provision, CC Docket 87-579,
    Memorandum Opinion and Order, 4 FCC Rcd 7183 (1989).

[^70]: The Commission has historically dictated the pricing policies
    applicable to services provided by LECs to information service
    providers, although those policies differ from those applicable to
    LEC provision of access services to IXCs. Prior to the 1996 Act, it
    was the Commission that determined that ESPs either may purchase
    their interstate access services from interstate tariffs or (at
    their discretion) pay a combination of local business line rates,
    the *federal* subscriber line charges associated with those business
    lines, and, where appropriate, the *federal* special access
    surcharge. *See* note 105, *infra*. We conclude that section 251(g)
    preserves our ability to continue to dictate the pricing policies
    applicable to this category of traffic. We do not believe, moreover,
    that section 251(g) extends only to those specific carriers
    providing service on February 7, 1996. At the very least, subsection
    (g) is ambiguous on this point. On the one hand, the first sentence
    of this provision states that its terms apply to "each local
    exchange carrier, to the extent that it provides wireline services,"
    without regard to whether it may be a BOC or a competitive LEC. 47
    U.S.C. § 251(g). On the other hand, that same sentence refers to
    restrictions and obligations applicable to "such carrier" prior to
    February 8, 1996. *Id.* We believe that the most reasonable
    interpretation of that sentence, in this context, is that subsection
    (g) was intended to preserve pre-existing regulatory treatment for
    the enumerated *categories* of carriers, rather than requiring
    disparate treatment depending upon whether the LEC involved came
    into existence before or after February 1996.

[^71]: *See United States v. AT&T,* 552 F. Supp. at 229; *Advanced
    Services Remand Order*, 15 FCC Rcd at 406-08.

[^72]: *See* Deployment of Wireline Services Offering Advanced
    Telecommunications Capability, CC Docket No. 98-147, Second Report
    and Order, 14 FCC Rcd 19237 (1997), *petition for review pending*,
    *Ass'n of Communications Enterprises v. FCC*, D.C. Circuit No.
    00-1144. In effect, we have provided for concurrent authority under
    that provision and section 201 by permitting a party to purchase the
    same service under filed tariffs or to proceed under interconnection
    arrangements to secure resale services.

[^73]: *See* Implementation of the Local Competition Provisions in the
    Telecommunications Act of 1996, CC Docket No. 96-98, Third Report
    and Order and Fourth Further Notice of Proposed Rulemaking, 15 FCC
    Rcd 3696, 3775 (1999**)**. *See* *also* *Advanced Services Remand
    Order,* 15 FCC Rcd at 385, 386. We emphasize that these two examples
    are illustrative and may not be the only instances where the
    Commission chooses to supersede pre-Act requirements for interstate
    access services.

[^74]: *See infra* paras. 67-71.

[^75]: *See, e.g., SEC v. Chenery Corp*., 318 U.S. 80, 88 (1943).

[^76]: *See* *Worldcom, Inc. v. FCC*, No. 00-1022 et al. (D.C. Cir.). In
    that proceeding, the Commission has argued that the category
    previously labeled "information access" under the MFJ is a subset of
    those services now falling under the category "exchange access" as
    set forth in section 3(16) of the Act, 47 U.S.C. 153(16), while
    incumbent LECs and others have argued that the two categories are
    mutually exclusive. We need not reargue here whether "information
    access" is a subset of "exchange access" or whether instead they are
    mutually exclusive categories. The only issue relevant to our
    section 251(g) inquiry in this case is whether ISP-bound traffic
    falls, at a minimum, within the legacy category of "information
    access." Both the Commission and incumbent LECs have agreed that the
    access provided to ISPs satisfies the definition of information
    access.

[^77]: *Joint Explanatory Statement of the Committee of Conference*, S.
    Conf. Rep. No. 230, 104th Cong., 2d Session at 123 (February 1,
    1996).

[^78]: *United States v. AT&T*, 552 F. Supp. at 196, 229.

[^79]: *See* Letter from Gary L. Phillips, SBC, to Jon Nuechterlein,
    Deputy General Counsel, FCC, at 9 (Dec. 14, 2000)(stating that
    section 251(g) applies by its very terms to "information access").

[^80]: *United States v. AT&T*, 552 F. Supp. at 196, 229.

[^81]: This finding is consistent with our past statements on the issue.
    In the *Non-Accounting Safeguards Order*, we found that the access
    that LECs provide to enhanced service providers, including ISPs,
    constitutes "information access" as the MFJ defines that term.
    Implementation of the Non-Accounting Safeguards of Sections 271 and
    272 of the Communications Act, CC Docket No. 96-149, First Report
    and Order and Further Notice of Proposed Rulemaking, 11 FCC Rcd
    21905, 22024 & n.621 (1996)***.*** Although we subsequently
    overruled our statement in that order that ISPs do not also purchase
    "exchange access" under section 3(16), we have not altered our
    finding that the access provided to enhanced service providers
    (including ISPs) is "information access." *Advanced Services Remand
    Order*, 15 FCC Rcd at 404-05.

[^82]: *See, e.g.,* Letter from Gary L. Phillips, SBC, to Jon
    Nuechterlein, Deputy General Counsel, FCC, at 9 (Dec. 14, 2000).
    Some have argued that "information access" includes only certain
    specialized functions unique to the needs of enhanced service
    providers and does not include basic telecommunications links used
    to provide enhanced service providers with access to the LEC
    network. *See, e.g.,* Brief of WorldCom, Inc., D.C. Circuit No.
    00-1002, *et al.*, filed Oct. 3, 2000, at 16 n.12. The MFJ
    definition of information access, however, includes the
    telecommunications links used for the "origination, termination,
    \[and\] transmission" of information services, *and* "*where
    necessary*, the provision of network signalling" and other
    functions. *United States v. AT&T*, 552 F. Supp. at 229 (emphasis
    added). Others have argued that the "information access" definition
    engrafts a geographic limitation that renders this service category
    a subset of telephone exchange service. *See* Letter from Richard
    Rindler, Swindler, Berlin, to Magalie Roman Salas, Secretary, FCC,
    at 3 (Apr. 12, 2001). We reject that strained interpretation.
    Although it is true that "information access" is necessarily
    initiated "in an exchange area," the MFJ definition states that the
    service is provided "*in connection with* the origination,
    termination, transmission, switching, forwarding or routing of
    telecommunications traffic to or from the facilities of a provider
    of information services" *United States v. AT&T*, 552 F. Supp. at
    229 (emphasis added). Significantly, the definition 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.

[^83]: *Bell Atlantic*, 206 F.3d at 5.

[^84]: *Declaratory Ruling*, 14 FCC Rcd at 3695 (emphasis added).

[^85]: This is the compensation mechanism chosen by the ISPs. *See* note
    105, *infra*.

[^86]: *Local Competition Order*, 11 FCC Rcd at 1033-34.

[^87]: 47 U.S.C. § 332; *Local Competition Order*, 11 FCC Rcd at
    16005-06.

[^88]: *Local Competition Order*, 11 FCC Rcd at 16005-06; *see also*
    *Iowa Utils. Bd. v. FCC*, 120 F.3d at 800 n. 21 (finding that the
    Commission had jurisdiction under section 332 to issue rules
    regarding LEC-CMRS interconnection, including reciprocal
    compensation rules).

[^89]: We seek comment on these issues in the *NPRM*.

[^90]: *Local Competition Order*, 11 FCC Rcd at 16005.

[^91]: *Id*. at 16016.

[^92]: *Id.* at 16016-17.

[^93]: *Id.* at 16017.

[^94]: 47 U.S.C. § 251(i).

[^95]: *See also* Letter from Gary L. Phillips, SBC, to Jon
    Nuechterlein, Deputy General Counsel, FCC, at 8 (Dec. 14, 2000).

[^96]: For example, section 251 has expanded upon our historic functions
    by providing us with the authority to set the framework for pricing
    rules applicable to unbundled network elements, purchased under
    interconnection agreements.

[^97]: *Southwestern Bell Tel. Co. v. FCC*, 153 F.3d 523, 543 (8^th^
    Cir. 1998) (affirming the jurisdictionally mixed nature of ISP-bound
    traffic).

[^98]: *Id*.

[^99]: *See, e.g.,* *Louisiana PSC v. FCC*, 476 U.S. 355, 375 n.4.

[^100]: *See* Letter from John W. Kure, Qwest, to Magalie Roman Salas,
    Secretary, FCC (Dec. 8, 2000)(attaching *A Legal Roadmap for
    Implementing a Bill and Keep Rule for All Wireline Traffic*, at
    10-11)(*Qwest Roadmap).*

[^101]: *Bell Atlantic*, 206 F.3d at 5; *see Qwest Roadmap* at 4.

[^102]: The D.C. Circuit itself has long recognized that ESPs use
    interstate access*. See, e.g., NARUC v. FCC*, 737 F.2d at 1136.

[^103]: *Bell Atlantic*, 206 F.3d. at 8.

[^104]: *Bell Atlantic,* 206 F.3d at 7.

[^105]: As noted, the Commission has permitted ESPs to pay local
    business line rates from intrastate tariffs for ILEC-provided access
    service, in lieu of interstate carrier access charges. *See, e.g.,*
    *MTS/WATS Market Structure Order*, 97 FCC 2d at 715; *ESP Exemption
    Order*, 3 FCC Rcd at 2635 n.8, 2637 n.53. ESPs also pay the
    *federal* subscriber lines charges associated with those business
    lines and, where appropriate, the *federal* special access
    surcharge. The subscriber line charge (SLC) recovers a portion of
    the cost of a subscriber's line that is allocated, pursuant to
    jurisdictional separations, to the interstate jurisdiction. *See* 47
    C.F.R. § 69.152 (defining SLC); 47 C.F.R. Part 36 (jurisdictional
    separations). The special access surcharge recovers for use of the
    local exchange when private line/PBX owners "circumvent the
    conventional long-distance network and yet achieve interstate
    connections beyond those envisioned by the private line service."
    *NARUC v. FCC,* 737 F.2d at 1138. *See* 47 C.F.R. § 69.115.

[^106]: With judicial approval, the Commission initially adopted this
    access service pricing policy in order to avoid rate shock to a
    fledgling enhanced services industry. *NARUC v. FCC*, 737 F.2d at
    1136-37. In the decision affirming this pricing policy, the court
    expressly recognized that ESPs use interstate access service. *Id.*
    at 1136 (enhanced service providers "may, at times, heavily use
    exchange access"). The Commission recently decided to retain this
    policy, largely because it found that it made little sense to
    mandate, for the first time, the application of existing
    non-cost-based interstate access rates to enhanced services just as
    the Commission was reforming the access charge regime to eliminate
    implicit subsidies and to move such charges toward competitive
    levels. *Access Charge Reform Order*, 12 FCC Rcd at 16133, *aff'd*,
    *Southwestern Bell Telephone Co.*, 153 F.3d at 541-42.

[^107]: *See, e.g., MTS/WATS Market Structure Order*, 97 FCC 2d at
    711-12, 722; Filing and Review of Open Network Architecture Plans,
    CC Docket No. 88-2, Memorandum Opinion and Order, 4 FCC Rd 1, 141
    (1988), *aff'd, California v. FCC*, 4 F.3d 1505 (9th Cir. 1993)
    (*ONA Plans Order*); GTE Telephone Operating Cos*.*, CC Docket No.
    98-79, Memorandum Opinion and Order, 13 FCC Rcd 22466 (1998).

[^108]: *Bell Atlantic*, 206 F.3d at 3.

[^109]: *Id. at 5.*

[^110]: *See, e.g., id.* at 6, 7 (accepting, *arguendo*, that ISP-bound
    traffic is like IXC-bound traffic for jurisdictional purposes).

[^111]: *See, e.g., BellSouth MemoryCall*, 7 FCC Rcd at 1620 (voicemail
    is interstate because "there is a continuous path of communications
    across state line between the caller and the voice mail service");
    *ONA Plans Order,* 4 FCC Rcd at 141 (an enhanced service is subject
    to FCC authority if it is interstate, "that is, when it involves
    communications or transmissions between points in different states
    on an end-to-end basis").

[^112]: *ONA Plans Order*, 4 FCC Rcd at 141; *see also id.,* Memorandum
    Opinion and Order on Reconsideration, 5 FCC Rcd 3084, 3088-89
    (1990), *aff'd,* *California v. FCC*, 4 F.3d 1505 (9^th^ Cir.
    1993)(rejecting claim that basic service elements, consisting of
    features and functions provided by telephone company's local switch
    for benefit of enhanced service providers and others, are separate
    *intra*state offerings even when used in connection with end-to-end
    transmissions).

[^113]: *See, e.g.,* *MTS/WATS Market Structure Order*, 97 FCC 2d at 711
    ("\[a\]mong the variety of users of access service are ... enhanced
    service providers"); Amendment of Part 69 of the Commission's Rules
    Relating to Enhanced Service Providers, CC Docket No. 87-215, Notice
    of Proposed Rulemaking, 2 FCC Rcd 4305, 4305, 4306 (1987) (noting
    that enhanced service providers use "exchange access service"); *ESP
    Exemption Order*, 3 FCC Rcd at 2631 (referring to "certain classes
    of exchange access users, including enhanced service providers").

[^114]: *See, e.g., Access Charge Reform Order*, 12 FCC Rcd at 16131-32;
    GTE Telephone Operating Cos*.,*13 FCC Rcd at 22478. *Cf. Bell
    Atlantic,* 206 F.3d at 4, 6-7.

[^115]: Of course, the Internet provides applications other than the
    World Wide Web, such as e-mail, games, chat sites, or streaming
    media, which have different technical characteristics but all of
    which involve computers in multiple locations, often across state
    and national boundaries.

[^116]: *See Qwest Roadmap* at 4-5, 9-10.

[^117]: *See, e.g.,* Verizon Remand Reply at 9 (Internet traffic is
    indistinguishable from Feature Group A access service).

[^118]: *See Local Competition Order*, 11 FCC Rcd at 15935 n. 2091
    (describing \"Feature Group A\" access service); *see also MCI
    Telecomm. Corp. v. FCC*, 566 F.2d 365, 367 n.3 (D.C. Cir. 1977),
    *cert. denied*, 434 U.S. 1040 (1978).

[^119]: *BellSouth MemoryCall*, 7 FCC Rcd at 1619.

[^120]: *Id.* at 1620.

[^121]: *Id.* at 1621.

[^122]: It is important to note that a dial-up call to an ISP will not
    even be required when broadband services arrive. Those connections
    will be always on and there will be no phone call in any traditional
    sense. Indeed, the only initiating event will be the end-user
    interacting with other Internet content or users. Thus,
    increasingly, notions of two calls become meaningless.

[^123]: *Bell Atlantic*, 206 F.3d at 8 (citing FCC Brief at 76,
    *Southwestern Bell v. FCC*, 153 F.3d 523).

[^124]: *Access Charge Reform Order*, 12 FCC Rcd at 16133-34.

[^125]: *See* FCC Brief at 75-76, *Southwestern Bell v. FCC*, 153 F.3d
    523.

[^126]: *Southwestern Bell v. FCC*, 153 F.3d at 534.

[^127]: In the *Declaratory Ruling*, we stated that, pending adoption of
    a federal rule governing intercarrier compensation for ISP-bound
    traffic, state commissions would determine whether reciprocal
    compensation was due for such traffic. *Declaratory Ruling*, 14 FCC
    Rcd at 3706. Since that time, most, though not all, states have
    ordered the payment of reciprocal compensation for ISP-bound
    traffic.

[^128]: 47 C.F.R. § 51.703(a).

[^129]: Recovery from other carriers is premised on the economic
    assumption that the carrier whose customer originates the call has
    "caused" the transport and termination costs associated with that
    call, and the originating carrier should, therefore, reimburse the
    interconnecting carrier for "transport and termination." The
    companion *NPRM* evaluates the validity of that assumption and
    tentatively concludes that it is an incorrect premise.

[^130]: *Cf. Local Competition Order*, 11 FCC Rcd at 16043 (symmetrical
    termination payments to paging providers based on ILECs' costs
    "might create uneconomic incentives for paging providers to generate
    traffic simply in order to receive termination compensation").

[^131]: 47 C.F.R. § 51.705 (an incumbent LEC's rates for transport and
    termination shall be established on the basis of the forward-looking
    economic costs of such offerings); 47 C.F.R. § 51.711 (subject to
    certain exceptions, rates for transport and termination shall be
    symmetrical and equal to those that the incumbent LEC assesses upon
    other carriers for the same services).

[^132]: Letter from Robert T. Blau, BellSouth, to Magalie Roman Salas,
    Secretary, FCC (November 6, 2000); *see also* Verizon Remand
    Comments at 2 (Verizon will be billed more than one billion dollars
    in 2000 for Internet-bound calls); Letter from Richard J. Metzger,
    Focal, to Deena Shetler, Legal Advisor to Commissioner Gloria
    Tristani, FCC (Jan. 11, 2001)(ILECs owed \$1.98 billion in
    reciprocal compensation to CLECs in 2000).

[^133]: Verizon Remand Comments at 11, 21. Verizon also cites extreme
    cases of CLECs that terminate in excess of *eight thousand* times
    more traffic than they originate. *Id.* at 21. *See also* Letter
    from Robert T. Blau, BellSouth; Melissa Newman, Qwest; Priscilla
    Hill-Ardoin, SBC; and Susanne Guyer, Verizon, to Dorothy Attwood,
    Chief, Common Carrier Bureau, FCC (Nov. 9, 2000).

[^134]: *See, e.g.,* Verizon Remand Comments at 15 (citing case of CLEC
    offer of free long distance service to dial-up Internet customers,
    an offer it did not extend to its customers that accessed the
    Internet via cable modem or DSL service); SBC Remand Comments at 45
    (citing examples of CLEC offering free service to ISPs that
    collocated in its switching centers and CLECs offering to share
    reciprocal compensation revenues with ISPs).

[^135]: *See, e.g.,* Verizon Remand Comments at 17-18.

[^136]: The *NPRM* that we adopt in conjunction with this Order seeks
    comment on the degree to which a modified CPNP regime might address
    these concerns.

[^137]: *Local Competition Order*, 11 FCC Rcd at 16054-55; *see also* 47
    C.F.R. § 51.713(b).

[^138]: *Local Competition Order*, 11 FCC Rcd at 16055 (emphases added).

[^139]: *Id.* at 16055.

[^140]: We also note that bill and keep arrangements are common among
    entities providing Internet backbone services, where the larger
    carriers engage in so-called "peering" arrangements.

[^141]: Time Warner Remand Comments at 15-16.

[^142]: Time Warner Remand Comments at 16. Some parties suggest that a
    bifurcated rate structure (a call set-up charge and a minute of use
    charge) would ensure appropriate cost recovery. *See* Sprint Remand
    Comments at 2-4. We seek comment on this approach in the *NPRM*.

[^143]: *See infra* note 158.

[^144]: We note that many CLECs expressed the same view following
    adoption of the *Declaratory Ruling* in 1999, yet the problems
    persist. *See, e.g.,* Cox Reply Comments at 6 (If termination
    \"rates are too high, this is entirely at the ILEC\'s behest, and
    should be remedied in the next round of negotiations.\").

[^145]: A number of questions must be resolved before we are prepared to
    implement fully a bill and keep regime where most costs are
    recovered from end-users. (We say most, not all, costs are recovered
    from end-users because a bill and keep regime may include
    intercarrier charges for transport between networks.) These
    questions include, for example, the allocation of transport costs
    between interconnecting carriers and the effect on retail prices of
    adopting a bill and keep regime that is not limited to ISP-bound
    traffic. We seek comment on these and other issues in the
    accompanying intercarrier *NPRM.*

[^146]: *Cf.* Verizon Remand Reply Comments at 14-15.

[^147]: The problem of putting a per minute price tag, in the form of
    intercarrier payments, where no per minute cost exists is
    exacerbated in the case of local exchange carriers that, in most
    cases, recover costs from their end-users on a flat-rated basis.

[^148]: *See, e.g., Local Competition Order*, 11 FCC Rcd at 16028-29.

[^149]: This interim regime affects only the intercarrier *compensation*
    (*i.e.,* the rates) applicable to the delivery of ISP-bound traffic.
    It does not alter carriers' other obligations under our Part 51
    rules, 47 C.F.R. Part 51, or existing interconnection agreements,
    such as obligations to transport traffic to points of
    interconnection.

[^150]: *See* Texas Public Utility Commission, Docket No. 21982,
    Proceeding to Examine Reciprocal Compensation Pursuant to Section
    252 of the Federal Telecommunications Act of 1996, at 36 (July 12,
    2000)(applying a blended tandem switching rate to traffic up to a
    3:1 (terminating to originating) ratio; traffic above that ratio is
    presumed to be convergent traffic and is compensated at the end
    office rate unless the terminating carrier can prove tandem
    functionality); New York Public Service Commission, Op. No. 99-10,
    Proceeding on Motion of the Commission to Reexamine Reciprocal
    compensation, Opinion and Order, at 59-60 (Aug. 26, 1999) (traffic
    above a 3:1 ratio is presumed to be convergent traffic and is
    compensated at the end office rate unless the terminating carrier
    can demonstrate "that \[the terminating\] network and service are
    such as to warrant tandem-rate compensation"); Massachusetts Dept.
    of Telecommunications and Energy, D.T.E. 97-116-C, at 28-29 n.31
    (May 19, 1999) (requiring reciprocal compensation for traffic that
    does not exceed a 2:1 (terminating to originating) ratio as a proxy
    to distinguish ISP-bound traffic from voice traffic; carriers may
    rebut that presumption).

[^151]: We note that CLEC end-user recovery is generally not regulated.
    As non-dominant carriers, CLECs can charge their end-users what the
    market will bear. Access Charge Reform, CC Docket No. 96-262, Sixth
    Report and Order, 15 FCC Rcd 12962, 13005 (2000) (*CALLS
    Order*)("Competitive LECs are not regulated by the Commission and
    are not restricted in the same manner as price caps LECs in how they
    recover their costs."). Accordingly, we permit CLECs to recover any
    additional costs of serving ISPs from their ISP customers. ILEC
    end-user charges, however, are generally regulated by the
    Commission, in the case of interstate charges, or by state
    commissions, for intrastate charges. Pursuant to the ESP exemption,
    ILECs will continue to serve their ISP customers out of intrastate
    business tariffs that are subject to state regulation. As the
    Commission said in 1997, if ILECs feel that these rates are so low
    as to preclude cost recovery, they should seek relief from their
    state commissions. *Access Charge Reform Order*, 12 FCC Rcd at 16134
    ("To the extent that some intrastate rate structures fail to
    compensate incumbent LECs adequately for providing service to
    customers with *high volumes of incoming calls*, incumbent LECs may
    address their concerns to state regulators." (emphasis added)).

[^152]: Thus, if a state has ordered all LECs to exchange ISP-bound
    traffic on a bill and keep basis, or if a state has ordered bill and
    keep for ISP-bound traffic in a particular arbitration, those LECs
    subject to the state order would continue to exchange ISP-bound
    traffic on a bill and keep basis.

[^153]: *See* *American Public Communications Council v. FCC*, 215 F.3d
    51 (D.C. Cir. 2000)("Where existing methodology or research in a new
    area of regulation is deficient, the agency necessarily enjoys broad
    discretion to attempt to formulate a solution to the best of its
    ability on the basis of available information.").

[^154]: 47 U.S.C. § 252(i) (requiring LECs to "make available any
    interconnection, service, or network element provided under an
    agreement approved under this section" to "any other requesting
    telecommunications carrier"). This Order will become effective 30
    days after publication in the Federal Register. We find there is
    good cause under 5 U.S.C. § 553(d)(3), however, to prohibit carriers
    from invoking section 252(i) with respect to rates paid for the
    exchange of ISP-bound traffic upon publication of this Order in the
    Federal Register, in order to prevent carriers from exercising opt
    in rights during the thirty days after Federal Register publication.
    To permit a carrier to opt into a reciprocal compensation rate
    higher than the caps we impose here during that window would
    seriously undermine our effort to curtail regulatory arbitrage and
    to begin a transition from dependence on intercarrier compensation
    and toward greater reliance on end-user recovery.

[^155]: In any event, our rule implementing section 252(i) requires
    incumbent LECs to make available "\[i\]ndividual interconnection,
    service, or network element arrangements" to requesting
    telecommunications carriers only "for a reasonable period of time."
    47 C.F.R. § 51.809(c). We conclude that any "reasonable period of
    time" for making available rates applicable to the exchange of
    ISP-bound traffic expires upon the Commission's adoption in this
    Order of an intercarrier compensation mechanism for ISP-bound
    traffic.

[^156]: *Access Charge Reform Order*, 12 FCC Rcd at 16133-34.

[^157]: *See, e.g.,* Letter from David J. Hostetter, SBC, to Magalie
    Roman Salas, Secretary, FCC (Feb. 14, 2001), Attachment (citing
    September 2000 Morgan Stanley Dean Witter report that discusses
    utilization of lower cost switch technology); Donny Jackson, "One
    Giant Leap for Telecom Kind?," *Telephony,* Feb. 12, 2001, at 38
    (discussing cost savings associated with replacing circuit switches
    with packet switches); Letter from Gary L. Phillips, SBC, to Magalie
    Roman Salas, Secretary, FCC (Feb. 16, 2001) (attaching press release
    from Focal Communications announcing planned deployment of
    next-generation switching technology "at a fraction of the cost of
    traditional equipment"); *see also infra* para. 93**.**

[^158]: The Commission takes notice of the following interconnection
    agreements: (1) Level 3 Communications and SBC Communications
    (effective through May 2003): This 13-state agreement has two sets
    of rates. For balanced traffic, the rate is \$.0032/mou. For traffic
    that is out of balance by a ratio exceeding 3:1, the rate starts at
    \$.0018/mou, declining to a weighted average rate of \$.0007/mou by
    June 1, 2002. S*ee* PR Newswire, WL PRWIRE 07:00:00 (Jan. 17, 2001);
    Letter from John T. Nakahata, Harris, Wiltshire & Grannis, to
    Magalie Roman Salas, Secretary, FCC, Attachment (Jan. 19, 2001). (2)
    ICG Communications and BellSouth (retroactively effective to Jan. 1,
    2000): This agreement provides for rates to decline over three
    years, from \$0.002/mou to \$0.00175/mou to \$0.0015/mou. S*ee*
    Communications Daily, 2000 WL 4694709 (Mar. 15, 2000). (3) KMC
    Telecom and BellSouth: This agreement provides for a rate of
    \$0.002/mou in 2000, \$0.00175/mou in 2001, \$0.0015/mou in 2002.
    *See* Business Wire, WL 5/18/00 BWIRE 12:50:000 (May 18, 2000). (4)
    Level 3 Communications and Verizon (formerly Bell Atlantic)
    (effective Oct. 14, 1999): This agreement governs all of the former
    Bell Atlantic/NYNEX states. The applicable rate declines over the
    term of the agreement from \$.003/mou in 1999 to rates in 2001 of
    \$.0015/mou for balanced traffic and \$.0012/mou where the traffic
    imbalance exceeds a 10:1 ratio. *See* Letter from Joseph J. Mulieri,
    Bell Atlantic, to Magalie Roman Salas, Secretary, FCC (Nov. 22,
    1999)(attaching agreement); *see also* Letter from John T. Nakahata,
    Harris, Wiltshire & Grannis, to Magalie Roman Salas, Secretary, FCC,
    at 2 (Jan. 4, 2001)(reciprocal compensation rate in most recent
    Level 3 -- Verizon agreement is now \$.0012/mou in all states except
    New York, where the rate is \$.0015/mou).

[^159]: In the Level 3 -- SBC agreement, the applicable rate is
    \$.0018/mou for traffic that exceeds a 3:1 ratio; in the Level 3 --
    Verizon agreement, the applicable rate is \$.0015/mou for balanced
    traffic and \$.0012/mou for traffic that exceeds a 10:1 ratio. *See
    supra* note 158.

[^160]: *See* Letter from Jonathan Askin, ALTS, to Magalie Roman Salas,
    Secretary, FCC, at 3 (Dec. 19, 2000).

[^161]: *See supra* note 158.

[^162]: *See, e.g.,* Letter from Jonathan Askin, ALTS, to Magalie Roman
    Salas, Secretary, FCC (Dec. 18, 2000) (offering evidence that
    dial-up traffic per household will grow only 7%/year from 1998 to
    2003 and that dial-up household penetration will decline between
    2000 and 2003); Letter from Jonathan Askin, ALTS, to Magalie Roman
    Salas, Secretary, FCC (Jan. 9, 2001)(citing, *inter alia*, Merrill
    Lynch estimate of 7% annual increased Internet usage per user
    between 1999 and 2003, and PricewaterhouseCoopers' study suggesting
    that Internet usage per user declined from 1999 to 2000).

[^163]: *See, e.g.,* Letter from Robert T. Blau, BellSouth, to Dorothy
    Attwood, Chief, Common Carrier Bureau, FCC (Dec. 22, 2000)
    (forecasting 42% annual growth in total Internet access minutes
    between 2000 and 2003); *but see* Dan Beyers, "Internet Use Slipped
    Late Last Year," Washingtonpost.com, Feb. 22, 2001, at E10 (noting
    decline in average time spent online in 2000).

[^164]: *See, e.g.,* Time Warner Remand Comments at 4-5; Centennial
    Remand Comments at 2, 6-7.

[^165]: *Access Charge Reform Order*, 12 FCC Rcd at 16134; *MTS/WATS
    Market Structure Order*, 97 FCC 2d at 720-721.

[^166]: *See infra* para. 93*.*

[^167]: *See* Letter from Robert T. Blau, BellSouth, *et al.*, to
    Dorothy Attwood, Chief, Common Carrier Bureau, FCC, at 4 (Nov. 3,
    2000); SBC Remand Comments at 42, 51, 57.

[^168]: We do not suggest that it costs CLECs less to serve ISPs than
    other types of customers. New switching technologies make it less
    costly to serve *all* customers. If, however, costs are lower than
    prevailing reciprocal compensation rates, then CLECs are likely to
    target customers, such as ISPs, with predominantly incoming traffic,
    in order to maximize the resulting profit.

[^169]: *See, e.g.,* Verizon Remand Comments at 16.

[^170]: *Id.*

[^171]: Most CLECs assert that they compete with ILECs on service, not
    price, and that the rates they charge to ISPs are comparable to the
    ILEC rates for the same services. *See, e.g.,* Time Warner Remand
    Comments at 5. We acknowledge, however, that any CLECs that use
    reciprocal compensation payments to offer below cost service to ISPs
    may be unable to continue that practice under the compensation
    regime we adopt here. We reiterate that we see no public policy
    reason to maintain a subsidy running from ILEC end-users to ISPs and
    their customers.

[^172]: *See, e.g.,* Letter from Robert W. McCausland, Allegiance
    Telecom; Kelsi Reeves, Time Warner Telecom; Richard J. Metzger,
    Focal, R. Gerard Salemme, XO Communications; and Heather B. Gold,
    Intermedia; to Dorothy Attwood, Chief, Common Carrier Bureau, FCC,
    at 6 (Oct. 20, 2000).

[^173]: *See, e.g.,* SBC Remand Reply Comments at 31-32 (explaining how
    an ILEC may incur additional switching and transport costs when its
    end-user customer calls an ISP served by a CLEC).

[^174]: *See Access Charge Reform Order*, 12 FCC Rcd at 16134; *see
    also* *MTS/WATS Market Structure Order*, 97 FCC 2d at 721 (the local
    business line rate paid by ISPs subsumes switching costs). Moreover,
    most states have adopted price cap regulation of local rates, in
    which case rates do not necessarily correlate to cost in the manner
    the CLECs suggest. *See* "Price Caps Standard Form of Telco
    Regulation in 70% of States," Communications Daily, 1999 WL 7580319
    (Sept. 8, 1999).

[^175]: The four largest incumbent LECs -- SBC, BellSouth, Verizon, and
    Qwest -- estimate that they owed over \$2 billion in reciprocal
    compensation for ISP-bound traffic in 2000. *See, e.g.,* Letter from
    Robert T. Blau, BellSouth, to Dorothy Attwood, Chief, Common Carrier
    Bureau, FCC (Jan. 16, 2001).

[^176]: More calls are made from wireless phones to wireline phones than
    vice-versa. The ILECs, therefore, are net recipients of reciprocal
    compensation from wireless carriers.

[^177]: Pursuant to the analysis we adopt above, section 251(b)(5)
    applies to telecommunications traffic between a LEC and a
    telecommunications carrier other than a CMRS provider that is not
    interstate or intrastate access traffic delivered to an IXC or an
    information service provider, and to telecommunications traffic
    between a LEC and a CMRS provider that originates and terminates
    within the same MTA. *See supra* § IV.B.

[^178]: If, however, a state has ordered bill and keep for ISP-bound
    traffic only with respect to a particular interconnection agreement,
    as opposed to state-wide, we do not require the incumbent LEC to
    offer to exchange all section 251(b)(5) traffic on a bill and keep
    basis. This limitation is necessary so that an incumbent is not
    required to deliver all section 251(b)(5) in a state on a bill and
    keep basis even though it continues to pay compensation for most
    ISP-bound traffic in that state. *See, e.g.,* Letter from John W.
    Kure, Qwest, to Magalie Roman Salas, Secretary, FCC (April 2,
    2001)(citing, for example, Washington state, where 16% of ISP-bound
    traffic is subject to bill and keep). In those states, the rate caps
    we adopt here will apply to ISP-bound traffic that is not subject to
    bill and keep under the particular interconnection agreement if the
    incumbent LEC offers to exchange all section 251(b)(5) traffic
    subject to those rate caps.

[^179]: ILECs may make this election on a state-by-state basis.

[^180]: Many commenters argue that there is, in fact, no difference
    between the cost and network functions involved in terminating
    ISP-bound calls and the cost and functions involved in terminating
    other calls to users of the public switched telephone network. *See,
    e.g.,* AOL Comments at 10-12 ("there is absolutely no technical
    distinction, and therefore no cost differences, between the way an
    incumbent LEC network handles ISP-destined traffic and the way it
    handles other traffic within the reciprocal compensation
    framework."); AT&T Comments at 10-11 ("\[T\]here is no economic
    justification for subjecting voice and data traffic to different
    compensation rules." "ILECs have not demonstrated, and cannot
    demonstrate, that the costs of transporting and terminating data
    traffic differ categorically from the costs of transporting and
    terminating ordinary voice traffic."); Choice One Comments at 8
    ("\[C\]osts do not vary significantly based on whether data or voice
    traffic is being transmitted."); Corecomm Reply at 2 (network
    functions are identical whether a carrier is providing service to an
    ISP or any other end-user); Cox Comments at 7 & Exhibit 2, Statement
    of Gerald W. Brock at 2 ("None of the distinctions between ISP calls
    and average calls relate to a cost difference for handling the
    calls."); MediaOne Comments at 4 (LECs incur the same costs for
    terminating calls to an ISP as they do for terminating any other
    local calls); Time Warner Comments at 9 ("\[A\]ll LECs perform the
    same functions when transporting and delivering calls to ISP
    end-users as they do when transporting and delivering calls to other
    end-users. When LECs perform the same functions, they incur the same
    costs."); Letter from Donald F. Shepheard, Time Warner Telecom, to
    Dorothy Attwood, Chief, Common Carrier Bureau, FCC (Feb. 28,
    2001)(disputing claim that CLEC switching costs are as low as the
    ILECs argue).

[^181]: *See, e.g.,* Cox Comments at Exhibit 2, Statement of Gerald W.
    Brock at 2.

[^182]: *See, e.g.,* Intermedia Comments at 3-4 (arguing that the rates
    for transport and termination of ISP-bound traffic must be identical
    to the rates established for the transport and termination of local
    traffic).

[^183]: *See* Verizon Remand Comments, Declaration of William E. Taylor
    at 14, 17.

[^184]: *See* Time Warner Remand Reply Comments, Exhibit 1, Declaration
    of Don J. Wood at 14. *See also* Letter from John W. Kure, Qwest, to
    Magalie Roman Salas, Secretary, FCC, Attachment at 7-8 (Oct. 26,
    2000).

[^185]: *See* Verizon Remand Comments, Declaration of William E. Taylor
    at 14-15.

[^186]: *See* Time Warner Remand Reply Comments, Exhibit 1, Declaration
    of Don J. Wood at 10-11. Time Warner also disputes that the "average
    duration of calls to ISPs has been accurately measured to date."
    *Id*. at 11.

[^187]: *See* Verizon Remand Comments, Declaration of William E. Taylor
    at 17-18.

[^188]: *See* Time Warner Remand Reply Comments, Exhibit 1, Declaration
    of Don J. Wood at 14-15.

[^189]: *See* Letter from Gary L. Phillips, Ameritech, to Magalie Roman
    Salas, Secretary, FCC, Attachment at 5 (Sept. 14, 1999). *See also*
    SBC Remand Comments at 32-33 (referring to Global NAPS Comments,
    Exhibit 1, Statement of Fred Goldstein at 6, which describes CLEC
    reduction of loop costs through collocation); Letter from Melissa
    Newman, U S West, to Magalie Roman Salas, Secretary, FCC, Attachment
    at 8 (Dec. 2, 1999).

[^190]: *See* Time Warner Remand Reply Comments, Exhibit 1, Declaration
    of Don J. Wood at 25.

[^191]: *See Local Competition Order*, 11 FCC Rcd at 16025.

[^192]: SBC Remand Comments at 33.

[^193]: SBC Remand Comments at 33-34 (referring, *inter alia*, to
    "managed modem" switches).

[^194]: GTE Comments at 7-8 (noting the existence of SS7 bypass devices
    that can avoid circuit switching and arguing that competitive LEC
    networks are far less complex and utilize fewer switches than
    incumbent LEC networks); GTE Reply Comments at 16 (compensating
    competitive LECs based on an incumbent LEC's costs inflates the
    revenue that competitive LECs receive); Letter from W. Scott
    Randolph, GTE, to Magalie Roman Salas, Secretary, FCC, Attachment
    (Dec. 8, 1999 (new generation traffic architectures may use SS7
    Gateways instead of more expensive circuit-switched technology).

[^195]: *See, e.g.,* Letter from John D. Windhausen, Jr., ALTS, and H.
    Russell Frisby, Jr., CompTel, to Kyle Dixon, Legal Advisor, Chairman
    Michael Powell, FCC, at 4-5 (March 16, 2001)(Focal is testing two
    softswitches, but as of now all ISP-bound traffic terminated by
    Focal uses traditional circuit switches; Allegiance Telecom has a
    single softswitch in its network; Advanced Telecom Group, Inc. is in
    the testing phase of softswitch deployment; Pac-West Telecomm, Inc.,
    does not have any softswitches in its network; e.spire uses only
    circuit switches to terminate ISP-bound traffic);Time Warner Remand
    Reply Comments, Exhibit 1, Declaration of Don J. Wood at 27 (Time
    Warner is "deploying fully functional end office switches"); Letter
    from Donald F. Shepheard, Time Warner, to Dorothy Attwood, Chief,
    Common Carrier Bureau, FCC, at 3 (February 28, 2001)(Time Warner
    "does not provide managed modem services." Like the ILECs, Time
    Warner "has an extensive network of circuit switched technology" and
    has only just begun to deploy softswitches); Letter from Teresa
    Marrero, AT&T, to Magalie Roman Salas, Secretary, FCC, at 1 (April
    11, 2001)("Virtually all of AT&T's ISP-bound traffic is today
    terminated using full circuit switches.").

[^196]: *See* Time Warner Remand Reply Comments, Exhibit 1, Declaration
    of Don J. Wood at 28; *see also* Letter from Donald F. Shepheard,
    Time Warner, to Dorothy Attwood, Chief, Common Carrier Bureau, FCC,
    at 3 (Feb. 28, 2001)("if softswitch technology will lower carriers'
    costs, then all carriers, including the ILECs\[,\] will have
    incentive to deploy them"); Letter from John D. Windhausen, Jr.,
    ALTS, and H. Russell Frisby, Jr., CompTel, to Dorothy Attwood,
    Chief, Common Carrier Bureau, FCC, at 4 (February 16, 2001)(same).

[^197]: *See, e.g.,* Letter from Karen L. Gulick, Harris, Wiltshire &
    Grannis, to Magalie Roman Salas, Secretary, FCC, at 1 (Dec. 22,
    2000).

[^198]: *See* *CALLS Order*, 15 FCC Rcd at 12974.

[^199]: The PICC, or presubscribed interexchange carrier charge, and the
    CCLC, carrier common line charge, are charges levied by incumbent
    LECs upon IXCs to recover portions of the interstate-allocated cost
    of subscriber loops. *See* 47 C.F.R. §§ 69.153, 69.154.

[^200]: *CALLS Order,* 15 FCC Rcd at 12975 (permitting a greater
    proportion of the local loop costs of primary residential and
    single-line business customers to be recovered through the SLC).

[^201]: *CALLS Order*, 15 FCC Rcd at 12977 (The CALLS proposal is aimed
    to " bring lower rates and less confusion to consumers; and create a
    more rational interstate rate structure. This, in turn, will support
    more efficient competition, more certainty for the industry, and
    permit more rational investment decisions.").

[^202]: *Bell Atlantic*, 206 F.3d at 8.

[^203]: *See* 5 U.S.C. § 603.

[^204]: *Declaratory Ruling*, 14 FCC Rcd at 3710-13.

[^205]: *See* 5 U.S.C. § 604. The Regulatory Flexibility Act, 5 U.S.C. §
    601 *et. seq*., was amended by the \"Small Business Regulatory
    Enforcement Fairness Act of 1996\" (SBREFA), which was enacted as
    Title II of the Contract With America Advancement Act of 1996,
    Pub.L. No. 104-121, 110 Stat. 847 (1996) (CWAAA).

[^206]: *Declaratory Ruling and Intercarrier Compensation NPRM*, 14 FCC
    Rcd at 3707.

[^207]: *Declaratory Ruling and Intercarrier Compensation NPRM*, 14 FCC
    Rcd at 3711.

[^208]: *See Bell Atlantic*, 206 F.3d 1.

[^209]: Office of Advocacy, U.S. Small Business Administration *ex
    parte*, May 27, 1999; Office of Advocacy, U.S. Small Business
    Administration *ex parte*, June 14, 1999.

[^210]: Office of Advocacy, U.S. Small Business Administration *ex
    parte*, May 27, 1999, at 1-3; Office of Advocacy, U.S. Small
    Business Administration *ex parte*, June 14, 1999, at 2-3.

[^211]: *Declaratory Ruling and Intercarrier Compensation NPRM*, 14 FCC
    Rcd at 3711.

[^212]: *Declaratory Ruling and Intercarrier Compensation NPRM*, 14 FCC
    Rcd at 3711.

[^213]: *See supra* paras. 87-88.

[^214]: Office of Advocacy, U.S. Small Business Administration *ex
    parte*, June 14, 1999, at 3.

[^215]: *Declaratory Ruling \[IRFA\]*, 14 FCC Rcd at 3711 (para. 39);
    *see also* *Declaratory Ruling*, 14 FCC Rcd at 3707-08 (paras.
    30-31).

[^216]: NTCA Comments at vi, 15.

[^217]: *See, e.g.*, ICORE Comments at 1-7; IURC Comments at 7; Richmond
    Telephone Company Comments at 1-8.

[^218]: 5 U.S.C. § 601(6).

[^219]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    \"small business concern\" in 5 U.S.C. § 632).

[^220]: 15 U.S.C. § 632.

[^221]: 13 C.F.R. § 121.201.

[^222]: FCC, Carrier Locator: Interstate Service Providers, Figure 1
    (Jan. 2000) (*Carrier Locator*).

[^223]: *Carrier Locator* at Fig. 1.

[^224]: 5 U.S.C. § 601(3).

[^225]: Office of Advocacy, U.S. Small Business Administration *ex
    parte*, May 27, 1999, at 1-3; Office of Advocacy, U.S. Small
    Business Administration *ex parte*, June 14, 1999, at 2-3. The Small
    Business Act contains a definition of \"small business concern,\"
    which the RFA incorporates into its own definition of \"small
    business.\" *See* 15 U.S.C. § 632(a) (Small Business Act); 5 U.S.C.
    § 601(3) (RFA). SBA regulations interpret \"small business concern\"
    to include the concept of dominance on a national basis. 13 C.F.R. §
    121.102(b). Since 1996, out of an abundance of caution, the
    Commission has included small incumbent LECs in its regulatory
    flexibility analyses. *See, e.g.*, Implementation of the Local
    Competition Provisions of the Telecommunications Act of 1996, CC
    Docket, 96-98, First Report and Order, 11 FCC Rcd 15499, 16144-45
    (1996).

[^226]: United States Department of Commerce, Bureau of the Census, 1992
    Census of Transportation, Communications, and Utilities:
    Establishment and Firm Size, at Firm Size 1-123 (1995) (*1992
    Census*).

[^227]: 15 U.S.C. § 632(a)(1).

[^228]: *1992 Census* at Firm Size 1-123.

[^229]: 13 C.F.R. § 121.201, Standard Industrial Classification (SIC)
    Code 4813.

[^230]: 13 C.F.R. § 121.201, SIC Code 4813.

[^231]: *Carrier Locator* at Fig. 1.

[^232]: *Declaratory Ruling*, 14 FCC Rcd at 3707-10.

[^233]: *See supra* paras. 67-76 (rejecting application of a reciprocal
    compensation mechanism to ISP-bound traffic).

[^234]: We note, however, that the interim regime we adopt here governs
    for 36 months or until further action by the Commission, *whichever
    is longer*.

[^235]: 5 U.S.C. § 801(a)(1)(A).

[^236]: *See* 5 U.S.C. § 604(b).

[^237]: To be more precise, section 251(g) refers to certain categories
    of service *provided by LECs* to *ISPs and interexchange carriers.*
    47 U.S.C. § 251(g). In this statement, I use a short-hand reference
    to the "categories of services" enumerated in section 251(g).

[^238]: 47 U.S.C. § 251(b)(5).

[^239]: *See cf. Bell Atl. Tel. Cos. v. FCC,* 206 F.3d 1, 4 (D.C. Cir.
    2000) ("Although \[section\] 251(b)(5) purports to extend reciprocal
    compensation to all 'telecommunications,' the Commission has
    construed the reciprocal compensation requirement as limited to
    local traffic."). The Court then went on to conclude that the
    Commission had not provided an adequate explanation of why LECs that
    carry traffic to ISPs are providing "'exchange access,' rather than
    'telephone exchange service.'" *Id.* at 9. The Court does not appear
    to have questioned anywhere in its opinion the notion that the scope
    of the reciprocal compensation requirement does not extend to
    certain categories of LEC-provided services, including "exchange
    access."

[^240]: *Implementation of the Local Competition Provisions in the
    Telecommunications Act of 1996; Interconnection Between Local
    Exchange Carriers and Commercial Mobile Radio Service Providers,* CC
    Dkt. Nos. 96-98, 95-185, First Report and Order, 11 FCC Rcd 15499
    (1996), ¶ 1034.

[^241]: *Deployment of Wireline Services Offering Advanced
    Telecommunications Capability,* CC Dkt. Nos. 98-147 et al., Order on
    Remand, 15 FCC Rcd 385 (1999) (*Advanced Services Remand Order*);
    *see also WorldCom, Inc. v. FCC,* No. 00-1002 (D.C. Cir. filed Apr.
    20, 2001) (affirming *Advanced Services Remand Order* on one of the
    alternative grounds proffered by the Commission).

[^242]: *Advanced Services Remand Order,* 15 FCC Rcd at 406, ¶ 46.

[^243]: 47 U.S.C. § 251(g).

[^244]: *Id.*

[^245]: Had the language of section 251(g) been limited to the Bell
    Companies or to court orders and consent decrees, for example,
    perhaps one could construct an argument that Congress meant to limit
    the scope of section 251(g) to the MFJ requirements.

[^246]: Section 251(b)(5) states that all LECs must "establish
    *reciprocal compensation* arrangements for the transport and
    termination of *telecommunications.*" 47 U.S.C. § 251(g) (emphasis
    added).

[^247]: As the *Order* suggests, Section 251(g) enumerates "exchange
    access," "information access" and "exchange services for such
    access." 47 U.S.C. § 251(g). For purposes of subsection (g), all of
    these services are provided by LECs to "interexchange carriers and
    information service providers." These three categories undeniably
    involve telecommunications. "Information access" was defined in the
    MFJ as "the provision of specialized exchange *telecommunications*
    services" to information service providers. *United States v. AT&T,*
    552 F. Supp. 131, 196, 229 (D.D.C. 1982). The term \"exchange
    service\" as used in section 251(g) is not defined in the Act or in
    the MFJ. Rather, the term \"exchange service\" is used in the MFJ as
    part of the definition of the term \"exchange access,\" which the
    MFJ defines as \"the provision of exchange services for the purposes
    of originating or terminating interexchange *telecommunications.*\"
    *United States v. AT&T,* F. Supp. at 228. Thus, the term \"exchange
    service\" appears to mean, in context, the provision of services in
    connection with *interexchange* communications. Consistent with
    that, in section 251(g), the term is used as part of the longer
    phrase \"exchange services for such \[exchange\] access to
    interexchange carriers and information service providers.\" All of
    this indicates that the term \"exchange service\" is closely related
    to the provision of exchange access and information access, and that
    all three involve telecommunications.

[^248]: This aspect of the *Advanced Services Remand Order* was remanded
    to the Commission by the D.C. Circuit because of its reliance on the
    vacated *Reciprocal Compensation Declaratory Ruling*. *See WorldCom,
    Inc. v. FCC*, No. 00-1062, 2001 WL 395344, \*5-\*6 (D.C. Cir. Apr
    20, 2001).

[^249]: *Implementation of the Non-Accounting Safeguards Of Sections 271
    and 272 of the Communications Act of 1934, as Amended*, First Report
    and Order and Further Notice of Proposed Rulemaking, 11 FCC Rcd
    21905 (1996) ("*Non-Accounting Safeguards Order*").

[^250]: *See* *also*, *e.g.*, *Application for Review and Petition for
    Reconsideration or Clarification of Declaratory Ruling Regarding U S
    West Petitions To Consolidate Latas in Minnesota and Arizona*,
    Memorandum Opinion and Order, 14 FCC Rcd 14392, ¶ 17 (1999) ("In
    section 251(g), Congress delegated to the Commission sole authority
    to administer the 'equal access and nondiscriminatory
    interconnection restrictions and obligations' that applied under the
    AT&T Consent Decree."); *AT&T Corporation, et al., Complainants*,
    Memorandum Opinion and Order, 13 FCC Rcd 21438, ¶ 5 (1998)
    ("Separately, section 251(g) requires the BOCs, both pre- and
    post-entry, to treat all interexchange carriers in accordance with
    their preexisting equal access and nondiscrimination obligations,
    and thereby neutralize the potential anticompetitive impact they
    could have on the long distance market until such time as the
    Commission finds it reasonable to revise or eliminate those
    obligations.").

[^251]: The case of IXC traffic is thus completely different. There was
    a compensation scheme in effect for such traffic prior to enactment
    of the 1996 Act -- the access charge regime. Because reciprocal
    compensation and the access charge regime could not both apply to
    the same traffic, the Commission could reasonably conclude that the
    access charge regime should trump the reciprocal compensation
    provision of section 251(b)(5). *See Competitive Telecommunications
    Ass'n v. FCC*, 117 F.3d 1068, 1072-73 (8th Cir. 1997). Here, there
    is no pre-1996 Act compensation scheme to conflict with reciprocal
    compensation. As the Commission has stated, "the Commission has
    never applied either the ESP exemption or its rules regarding the
    joint provision of access to the situation where two carriers
    collaborate to deliver traffic to an ISP." *Reciprocal Compensation
    Declaratory Ruling* ¶ 26.