Before the
Federal Communications Commission
Washington, D.C. 20554

In the Matter of

Developing a Unified Intercarrier
Compensation Regime
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CC Docket No. 01-92

NOTICE OF PROPOSED RULEMAKING

	Adopted:  April 19, 2001	Released:  April 27, 2001

Comment Date:  90 days after publication in the Federal Register
Reply Comment Date:  135 days after publication in the Federal Register

By the Commission:  Chairman Powell and Commissioner Ness issuing separate statements; 
Commissioner Furchtgott-Roth concurring and issuing a statement


TABLE OF CONTENTS
Paragraph No.
I.	INTRODUCTION	1
II.	BACKGROUND	5
A.	Existing Intercarrier Compensation Regimes	5
B.	Issues Raised by Existing Interconnection Regulations	11
C.	Economic Rationales for Intercarrier Compensation	19
1.	Traditional Rationale for Calling-Partys-Network-Pays Regimes	19
2.	New Approaches to Intercarrier Compensation	22
III.	DISCUSSION	31
A.	Appropriate Goals for Intercarrier Compensation Rules in Competitive 
Markets	31
B.	Bill-and-Keep Arrangements	37
1.	Policy Justifications for a Bill-and-Keep Regime	37
2.	Re-examining the Efficiencies of Bill-and-Keep Arrangements	42
3.	Bill and Keep as a Solution to Existing Interconnection Issues	52
4.	Weighing the Potential Disadvantages of Bill-and-Keep 
Arrangements	58
5.	Bill and Keep for ISP-Bound Traffic	66
6.	Bill and Keep for Traffic Subject to Section 251(b)(5)	69
7.	Commission Authority Over LEC-CMRS Interconnection	78
8.	LEC-CMRS Intercarrier Compensation	90
9.	Bill and Keep for Interstate Access Charges	97
C.	Reforming the Existing Calling-Partys-Network-Pays Regime	98
1.	Can CPNP Regimes Be Efficient?	99
2.	Can CPNP Regimes Resolve the Existing Interconnection Issues 
and Will They Be Administratively Feasible?	116
D.	Other Issues	121
1.	Legal Authority	121
2.	Jurisdictional Responsibility	122
3.	Impact on End-User Prices and Universal Service	123
4.	Impact on Interconnection Agreements Between International 
Carriers	125
5.	Impact on Interconnection Agreements Between Internet 
Backbones	127
6.	Impact on Small Entities	128
7.	Further Possible Approaches to Intercarrier Compensation	129
IV.	PROCEDURAL MATTERS	131
A.	Initial Regulatory Flexibility Analysis	131
B.	Comment Filing Procedures	182
V.	ORDERING CLAUSES	190


I. INTRODUCTION
1. With this Notice of Proposed Rulemaking (NPRM), we begin a fundamental re-
examination of all currently regulated forms of intercarrier compensation.  We intend to test the 
concept of a unified regime for the flows of payments among telecommunications carriers that 
result from the interconnection of telecommunications networks under current systems of 
regulation.  Specifically, we seek comment on the feasibility of a bill-and-keep approach for such 
a unified regime.  We also seek alternative comment on modifications to existing intercarrier 
compensation regimes.  In sum, we seek to move forward from the transitional intercarrier 
compensation regimes to a more permanent regime that consummates the pro-competitive vision 
of the Telecommunications Act of 1996 (1996 Act). 
2. As discussed below, there are currently two general intercarrier compensation 
regimes:  (1) access charges for long-distance traffic; and (2) reciprocal compensation.  
We believe it essential to re-evaluate these existing intercarrier compensation regimes in light 
of increasing competition and new technologies, such as the Internet and Internet-based services, 
and commercial mobile radio services (CMRS).  We are particularly interested in identifying a 
unified approach to intercarrier compensationone that would apply to interconnection 
arrangements between all types of carriers interconnecting with the local telephone network, and 
to all types of traffic passing over the local telephone network.  The purpose of this NPRM is to 
seek comment on the broad universe of existing intercarrier compensation arrangements.  In 
issuing this NPRM, we do not expect that we will extend intercarrier compensation rules to 
Internet backbones, on which we do not currently impose rate-making regulation.  Neither do we 
expect to extend compensation rules to other interconnection arrangements that are not currently 
subject to rate regulation and that do not exhibit symptoms of market failure.   We do, however, 
seek comment on whether imposing any particular unified intercarrier compensation regime only 
with respect to rates that we currently regulate would lead to distortions or other problems that 
would undermine the benefits of that regime.  We emphasize at the outset that we seek an 
approach to intercarrier compensation that will encourage efficient use of, and investment in, 
telecommunications networks, and the efficient development of competition.  Consistent with 
the deregulatory goals of the 1996 Act, we seek an approach to intercarrier compensation that 
minimizes the need for regulatory intervention, both now and as competition continues 
to develop.
3. In a related order that we are adopting today (ISP Intercarrier Compensation 
Order),  we address intercarrier compensation for traffic that is specifically bound for Internet 
service providers (ISPs).  We adopt interim measures that, for the next three years, will 
significantly reduce, but not altogether eliminate, the flow of intercarrier payments associated 
with delivery of dial-up traffic to ISPs.  In another order that we are adopting today (CLEC 
Access Charge Order),  we address the access charges that long-distance carriers pay to 
competitive local exchange carriers (CLECs).  We adopt another three-year interim measure, 
under which CLECs may file tariffs establishing access rates only if their rates are at or below a 
benchmark rate, to bring CLEC rates closer to incumbent local exchange carrier (ILEC) rates.
4. In this NPRM, we envision that a bill-and-keep regime would fulfill the goals of 
the two interim measures, combined with the larger goal of a unified regime.  We seek comment 
on our proposal to adopt a bill-and-keep rule to govern local exchange carrier (LEC) recovery 
of costs associated with the delivery of ISP-bound traffic after the three-year interim period.  
We also seek comment on the potential adoption of a bill-and-keep approach to reciprocal 
compensation payments governed by section 251 of the 1996 Act, and the eventual application 
of bill and keep to interstate access charges regulated under section 201 of the Communications 
Act of 1934, as amended (Communications Act).  With respect to all categories of currently-
regulated intercarrier compensation, we also seek comment on alternative reform measures that 
would build upon current requirements for cost-based intercarrier payments.
II. BACKGROUND
A. Existing Intercarrier Compensation Regimes
5. Interconnection arrangements between carriers are currently governed by a 
complex system of intercarrier compensation regulations.  These regulations treat different types 
of carriers and different types of services disparately, even though there may be no significant 
differences in the costs among carriers or services.  The interconnection regime that applies in a 
particular case depends on such factors as:  whether the interconnecting party is a local carrier, 
an interexchange carrier, a CMRS carrier or an enhanced service provider; and whether the 
service is classified as local or long-distance, interstate or intrastate, or basic or enhanced.
6. Existing intercarrier compensation rules may be categorized as follows:  
access charge rules, which govern the payments that interexchange carriers (IXCs) and 
CMRS carriers make to LECs to originate and terminate long-distance calls; and reciprocal 
compensation rules, which govern the compensation between telecommunications carriers 
for the transport and termination of local traffic.  Such an organization is clearly an 
oversimplification, however, as both sets of rules are subject to various exceptions (e.g., long-
distance calls handled by ISPs using IP telephony are generally exempt from access charges 
under the enhanced service provider (ESP) exemption). 
7. The access charge rules can be further broken down into interstate access charge 
rules that are set by this Commission, and intrastate access charge rules that are set by state 
public utility commissions.  Both the interstate and intrastate access charge rules establish 
charges that IXCs must pay to LECs when the LEC originates or terminates a call for an IXC, or 
transports a call to, or from, the IXCs point of presence (POP).  CMRS carriers also pay 
access charges to LECs for CMRS-to-LEC traffic that is not considered local and hence not 
covered by the reciprocal compensation rules.  Other customers carrying traffic to or from points 
within an exchange area to points outside the exchange area may also pay access charges to the 
LEC.  These access charges may have different rate structuresi.e., they may be flat-rated or 
traffic-sensitive.  In general, where a long-distance call passes through a LEC circuit switch, a 
per-minute charge is assessed.  In order to keep local telephone rates low, access charges have 
traditionally exceeded the forward-looking economic costs of providing access. 
8. Section 251(b)(5) imposes on all LECs a duty to establish reciprocal 
compensation arrangements for the transport and termination of telecommunications.   Under 
current Commission rules interpreting the reciprocal compensation obligations of incumbent 
LECs, the calling partys LEC must compensate the called partys LEC for the additional costs 
associated with transporting the call from the carriers interconnection point to the called partys 
end office, and for the additional costs of terminating the call to the called party.   The 
Commissions rules further require that the charges for both transport and termination must be 
set at forward-looking economic costs.   The Commissions rules permit a state public utility 
commission (PUC) to impose a bill-and-keep arrangement, provided that the traffic exchanged 
between the interconnecting carriers is relatively balanced and neither party has rebutted the 
presumption of symmetric rates. 
9. Existing access charge rules and the majority of existing reciprocal compensation 
agreements require the calling partys carrier, whether LEC, IXC or CMRS, to compensate the 
called partys carrier for terminating the call.  Hence, these interconnection regimes may be 
referred to as calling-partys-network-pays (or CPNP).  Such CPNP arrangements, where 
the calling partys network pays to terminate a call, are clearly the dominant form of 
interconnection regulation in the United States and abroad.   An alternative to such CPNP 
arrangements, however, is a bill-and-keep arrangement.  Because there are no termination 
charges under a bill-and-keep arrangement, each carrier is required to recover the costs of 
termination (and origination) from its own end-user customers.   As previously noted, under the 
Commissions rules, state PUCs may impose bill-and-keep arrangements on interconnection 
agreements involving an ILEC, provided that the traffic between the carriers is relatively 
balanced and neither carrier has rebutted the presumption of symmetrical rates.  In addition, bill-
and-keep arrangements are found in interconnection agreements between adjacent ILECs.   
Finally, some Internet backbones have voluntarily negotiated interconnection agreements that 
resemble bill-and-keep arrangements. 
10. Finally, when entities connect to telephone networks as end users rather than as 
interconnecting networks, they do not pay usage-sensitive access or reciprocal compensation 
charges.  For example, residential customers typically pay flat-rated subscription charges (or 
occasionally, local measured service rates), while business customers typically pay a flat 
monthly charge, plus a per-minute or per-call charge for originating calls.  ESPs, including ISPs, 
are charged pursuant to the same rules that apply to local end users and are exempt from access 
and reciprocal compensation charges, even though the calls they send and receive generally 
travel outside the local service area.   We also note that paging networks, which primarily 
receive traffic, are treated as networks under our existing reciprocal compensation rules.   
Payphone companies, which primarily originate traffic, are treated as end-user customers. 
B. Issues Raised by Existing Interconnection Regulations
11. The existing intercarrier compensation rules raise several pressing issues.  First, 
and probably most important, are the opportunities for regulatory arbitrage  created by the 
existing patchwork of intercarrier compensation rules.  One source of regulatory arbitrage 
appears to be inefficient reciprocal compensation rates.  As we explain in the ISP Intercarrier 
Compensation Order released today, these rates, whether they are inefficiently structured or set 
too high, do not simply compensate the terminating network, but also appear to generate profits 
for each minute that is terminated, thus creating a potential windfall for networks that primarily 
or exclusively receive traffic.   As a result of these inefficient termination charges, certain 
CLECs appear to have targeted customers that primarily or solely receive traffic, particularly 
ISPs, in order to become net recipients of local traffic. 
12. Another source of regulatory arbitrage arises from the different rates that different 
types of service providers must pay for essentially the same types of calls.  For example, the fact 
that an IXC must pay access charges to the LEC that originates a long-distance call, while an ISP 
that provides IP telephony does not, gives the provider of IP telephony an artificial cost 
advantage over providers of traditional long-distance service.  Similarly, a long-recognized form 
of regulatory arbitrage is the ability of certain owners of private branch exchanges (PBXs) to 
avoid paying access charges on long-distance calls (the leaky PBX problem).   More 
generally, any discrepancy in regulatory treatment between similar types of traffic or similar 
categories of parties is likely to create opportunities for regulatory arbitrage.  That is, parties will 
revise or rearrange their transactions to exploit a more advantageous regulatory treatment, even 
though such actions, in the absence of regulation, would be viewed as costly or inefficient.
13. A second major issue involves terminating access monopolies.  This problem 
results from the fact that an end user typically subscribes to only one LEC.  Hence, other carriers 
seeking to deliver calls to that end user have no choice but to purchase terminating access from 
the called partys LEC.   These originating carriers generally have little practical means of 
affecting the called partys choice of access provider.  Indeed, as we explain in the CLEC Access 
Charge Order released today, a number of CLECs, whose terminating access charges are not 
regulated, have taken advantage of this situation by charging terminating access rates that 
significantly exceed those charged by rate-regulated ILECs.   As described in the order, we find 
that, absent intervention, the current disputes between CLECs and IXCs over access rate levels 
could disrupt the ubiquitous interconnectedness that consumers expect of the public switched 
telephone network.   We adopt, as an interim measure, a detariffing regime in which CLECs 
may file tariffs establishing access rates only if the rates are at or below a benchmark rate.   
Rates above the benchmark may not be tariffed.   The benchmark is designed to bring CLEC 
rates closer to ILEC rates over the three-year period that these interim measures are in place. 
14. The terminating access problem is exacerbated by rate averaging policies that are 
adopted voluntarily by the carrier, or required by regulation such as section 254(g).   Rate 
averaging prevents carriers from passing on termination charges directly to the particular 
customers whose calls give rise to those charges.  Because the originating carrier is effectively 
unable to pass on termination costs to particular end-user customers or to create incentives for 
end users to choose LECs with low termination charges, the end user who chooses the LEC with 
the high termination charges does not have an incentive to minimize costs.  We note, in this 
regard, that even if averaging policies were eliminated, it is unclear whether calling parties 
could, due to transaction-cost considerations, effectively induce called parties to choose LECs 
with low termination charges.
15. A related terminating access issue may arise where ILECs also provide 
interexchange services in competition with IXCs.  Certain IXCs have argued that, where access 
charges exceed economic cost, ILECs, and in particular the Regional Bell Operating Companies 
(RBOCs), may have the incentive and ability to discriminate in favor of their long-distance 
affiliates by engaging in a predatory price squeeze. 
16. Third, questions have arisen recently whether different types of networks require 
different interconnection rates.  Specifically, in the Local Competition Proceeding, the 
Commission established a presumption that, for reciprocal compensation agreements involving 
an ILEC, the termination rate should be symmetrical and based on the ILECs forward-looking, 
traffic-sensitive cost of terminating the call.   A recent study argues, however, that the traffic-
sensitive costs of terminating calls on wireless networks may differ from the traffic-sensitive 
costs of the ILECs wireline networks.   In addition, certain ILECs have argued that the various 
CLECs targeting ISPs as customers have designed their networks so as to reduce the traffic-
sensitive costs of termination.  These arguments suggest that, under existing reciprocal 
compensation rules, regulators may have to evaluate the specific costs of terminating traffic on 
different types of networks, and then carry out this exercise repeatedly as technology and prices 
continue to change.
17. Fourth, inefficient intercarrier compensation rules likely distort the structure and 
level of end-user charges.  Typically, our existing rules allow, and in some cases require, 
interconnection charges to be set on a traffic-sensitive basis (i.e., on a per-minute or per-call 
basis).  Because these traffic-sensitive termination charges represent real marginal costs to the 
carrier that pays them, they impose pressure on the calling partys carrier to flow these costs 
through to end-user customers and to adopt traffic-sensitive retail prices.  If the underlying 
network costs are non-traffic sensitive, however, then these traffic-sensitive retail rates will 
reduce network usage to inefficient levels.  In addition, such traffic-sensitive termination charges 
may create incentives for carriers to charge higher prices for calls that cross networks, than for 
calls that remain on the calling partys network.
18. Finally, inefficient interconnection prices may distort an entitys subscription 
decision.  For example, the availability of termination charges (either access charges or 
reciprocal compensation charges) that are inefficiently structured or above-cost may create 
incentives for an entity that primarily or exclusively receives traffic to claim to be a network 
rather than to subscribe as an end-user customer.   In addition, to the extent that carriers are 
allowed to charge a higher rate for calls that go off their networks (off-net calls) than for calls 
that remain on their networks (on-net calls), this may cause subscribers to choose larger 
networks, which could cause competitive networks to tip into monopoly.
C. Economic Rationales for Intercarrier Compensation
1. Traditional Rationale for Calling-Partys-Network-Pays Regimes
19. Modern economic analysis of intercarrier compensation dates to the introduction 
of competition into the long-distance market in the United States.  Given this background, it is 
not surprising that mainstream economic analyses have generally focused on the problem of 
setting both end-user rates and access charges so as to recover the full costs of a local network 
while at the same time ensuring efficient usage of the network.   Because these studies assumed 
that local networks exhibit increasing returns to scale, setting price equal to marginal cost would 
not generate sufficient revenues to cover the total cost of the network.  Accordingly, the authors 
generally applied Ramsey-type analysis to determine the optimal increase of price above 
marginal cost for each service provided over the network, including the price of access to the 
network.   Two features of these traditional analyses are particularly noteworthy.  First, in 
defining the problem, these studies took as a given that local exchange carriers would charge 
other carriers for access to their networks.  In other words, these models did not explicitly 
consider whether carriers should charge other carriers interconnection prices; rather, they only 
examined the efficient level of those charges assuming that they were assessed.  Second, while 
the authors recognized that both parties to a call generally benefited from a call,  they 
nevertheless assumed that the calling party was the sole cost causer of the call.   They made this 
simplifying assumption not only to make the analysis more tractable, but also because they 
believed that the parties could solve (or internalize) any externality caused by charging only 
the calling party by simply trading phone calls. 
20. Bill-and-keep arrangements are generally considered inefficient under traditional 
analyses of intercarrier compensation.  More specifically, if one assumes that the calling party 
should pay the cost of the terminating carrier, then a bill-and-keep arrangement is only efficient 
if the cost of transporting and terminating a call is zero.  If there is a positive cost of termination, 
which most analyses have assumed, then a bill-and-keep arrangement is inefficient because it 
will cause originating carriers (and calling parties) to overuse other carriers termination 
facilities.   Despite this, the Commission, recognizing that bill-and-keep arrangements could 
reduce administrative burdens and transaction costs, held in the Local Competition Proceeding 
that state PUCs could impose bill-and-keep arrangements if traffic is roughly balanced in the 
two directions and neither carrier has rebutted the presumption of symmetrical rates. 
21. As discussed below, however, subsequent analyses have cast doubt on the 
assumption that the calling party is the sole cost causer and sole beneficiary of a call, and on 
the traditional view that bill-and-keep arrangements are only efficient in certain narrow 
circumstances.
2. New Approaches to Intercarrier Compensation
22. In light of the issues discussed in section II.B above, Commission staff members 
have released two working papers that propose alternative solutions to these intercarrier 
compensation problems.  While the two papers differ significantly in their details, both offer 
justifications for a bill-and-keep approach to intercarrier compensation.  Both working papers 
also propose default interconnection rules that would apply only when carriers cannot agree on 
the terms for interconnection.
23. Central Office Bill and Keep (COBAK).  Patrick DeGraba proposes default 
interconnection rules that would apply to all types of carriers that interconnect with, and to all 
types of traffic that pass over, the local circuit-switched network.  Specifically, for local calls 
involving two local networks, DeGraba proposes two rules:  (1) that no carrier may recover any 
costs of its customers local access facilities from an interconnecting carrier;  and (2) that the 
calling partys network is responsible for the cost of transporting the call to the called partys 
central office.   As DeGraba explains, his Rule 1 means that the called partys network cannot 
charge the calling partys network to terminate a call.  DeGrabas Rule 2 means that the calling 
partys network must either construct transport facilities to the called partys central office, or 
purchase transport facilities or services from another carrier, including possibly the called partys 
network.  As DeGraba explains, the main theoretical rationale underlying his proposal is that 
both parties generally benefit from participating in a call, and therefore, that both parties should 
split the cost of the call.  Notice that DeGrabas theoretical rationale, that both parties should 
split the cost since both benefit, provides a rebuttal to the traditional criticism of bill-and-keep 
arrangementsi.e., that they do not properly assign the cost of the call to the cost causer.
24. DeGraba claims various additional advantages of COBAK.  First, he claims that 
COBAK will significantly reduce regulatory arbitrage, including the ISP reciprocal 
compensation problem and the regulatory advantage that IP telephony providers currently have 
over traditional IXCs.  Second, he argues that, by eliminating termination charges, COBAK 
will eliminate, or significantly reduce, the terminating access monopoly problem.  Third, by 
eliminating most per-minute interconnection charges, DeGraba argues that COBAK should lead 
to more efficient retail rates and thus more efficient network usage.  Finally, he contends that 
COBAK will reduce the need for regulatory interventionspecifically, the need for regulators 
today to determine the economically efficient level and structure of termination charges, and in 
the longer term, to regulate transport rates. 
25. Split the Incremental Cost of Interconnection.  Approaching the problem from a 
different perspective, Jay Atkinson and Christopher Barnekov develop an analysis that also 
supports a default bill-and-keep interconnection regime.  Emphasizing the goals of efficiency 
and competitive neutrality, Atkinson-Barnekov propose Bill Access to Subscribers
Interconnection Cost Split (BASICS).  BASICS consists of two rules:  (1) networks should 
recover all intra-network costs from their end-user customers; and (2) networks should divide 
equally the costs that result purely from interconnection.
26. Atkinson-Barnekov develop their analysis in the context of fully-provisioned 
networksi.e., networks that have sufficient capacity to allow their subscribers to make and 
receive all calls as they wish.  They then extend this analysis to less fully provisioned networks, 
showing that if a network chooses to lower its quality of service (i.e., the probability of a call 
getting through falls below 100 percent), then calls entirely within that network are affected, 
together with interconnecting calls.  However, service quality within the network of the other 
interconnecting carrier is not degraded by this choice.  The facilities required within a network to 
handle calls to and from that networks own subscribers are considered intra-network costs in 
the Atkinson-Barnekov analysis.
27. For fully provisioned networks that face the same costs per unit of facilities, the 
Atkinson-Barnekov proposal results in an equal per-subscriber cost for the two interconnecting 
networks.  This cost per subscriber is also equal to that of a single network containing the 
subscribers of both interconnecting networks, so that interconnection is equivalent to 
subscription.  More generally, Atkinson-Barnekov show that their proposed rule does not distort 
whatever cost and quality relationship the networks had before interconnecting.  They argue that 
the rule is competitively neutral in this sense. 
28. Two important assumptions underlie the Atkinson-Barnekov analysis.  The first 
assumption is that one can clearly distinguish between a carriers intra-network costs and the 
incremental cost of interconnection.  The second underlying assumption is that the incremental 
costs of interconnection involve primarily capacity costs that should be recovered through flat 
charges.  Accepting this latter assumption eliminates the need for traffic-sensitive 
interconnection charges.
29. Atkinson-Barnekov assert that, if their theoretical solution can be implemented, it 
would induce interconnecting carriers to negotiate efficient interconnection agreements.  In the 
presence of a competitive transport market, regulators would not need to intervene unless normal 
negotiation and arbitration procedures failed to produce agreement.   Atkinson-Barnekov also 
assert that their proposal avoids the problems of common cost allocation entirely.  They further 
claim that their proposal produces an efficient allocation of interconnection costs between 
carriers regardless of the balance of traffic between networks, or how the calling and called 
parties bear the cost of a call. 
30. Notice that Atkinson-Barnekovs Rule 1 is similar to DeGrabas Rule 1.  
Whether they are identical depends on how one interprets Atkinson-Barnekovs definition of 
intra-network costs, and the details of DeGrabas definition of local access facilities.   
Atkinson-Barnekovs Rule 2 clearly differs from DeGrabas second rule.  Nevertheless, both 
rules attempt to achieve an efficient allocation of transport costs.  The main difference appears to 
be that DeGraba intentionally chooses an inefficient default rule for transport costs in order to 
prevent free-riding and to encourage voluntary negotiation, while Atkinson-Barnekov choose a 
rule that possesses certain efficiency properties.
III. DISCUSSION
A. Appropriate Goals for Intercarrier Compensation Rules in Competitive 
Markets
31. It is well recognized that regulators, including this Commission, have long used 
intercarrier compensation rules to achieve multiple goals.   One of the main goals of this 
Commission in setting intercarrier compensation rules in recent years has been to encourage 
efficiency.  Thus, for example, the Commission has repeatedly emphasized the need to establish 
efficient rate structures and efficient rate levels.   But efficiency has not been the only goal of 
intercarrier compensation rules.  For example, in order to encourage universal service, this 
Commission and state regulators historically set access charges above cost.  By doing so, they 
hoped to be able to keep local telephone rates low, and thus telephone penetration rates high.  
Similarly, in order to encourage the development of enhanced services, this Commission in 1983 
exempted ESPs from having to pay carrier access charges. 
32. With the passage of the 1996 Act, and its mandate for opening all 
telecommunications markets to competition, it is no longer clear that intercarrier compensation 
rules can serve all of these multiple goals.  For example, Congress, in passing the 1996 Act, 
recognized that the implicit subsidies historically contained in access charges are not sustainable 
in competitive local telecommunications markets.   Accordingly, Congress in the 1996 Act 
directed this Commission and the states to reform universal service, and in particular, to 
eliminate implicit subsidies contained in access charges and instead make all universal service 
support explicit. 
33. In light of the major recent changes in telecommunications markets, including the 
passage of the 1996 Act and the resulting increase in competition in local telephone markets, and 
the rapid technological changes that have been occurring in telecommunications, we seek 
comment on the appropriate goals for intercarrier compensation regulations.  In particular, we 
seek comment on whether efficiency should be the sole or paramount goal of intercarrier 
compensation policy.  We also seek comment on how we should evaluate whether a particular 
intercarrier compensation regime encourages efficiency.  More specifically, should we consider 
whether a particular pricing regime encourages the efficient use of the network by end-user 
customers?  Should we also consider whether a particular pricing regime encourages the efficient 
investment in, and deployment of, network infrastructure, including investment in broadband 
infrastructure?  In this context, should we consider whether a particular intercarrier 
compensation regime is technologically and competitively neutral?
34. It also seems appropriate to consider the degree of regulatory intervention 
required to implement various interconnection regimes.  Some regimes require extensive 
regulatory intervention, while others are more market-oriented and thus largely self-
administering.  Market-oriented solutions may provide more timely adjustments and avoid 
distortions resulting from incorrect or outdated regulatory decisions.  They may also avoid 
substantial litigation costs.  Certain types of regulatory decisions are especially problematic
e.g., the allocation of common costs among services or users.  There is precedent for resolving 
problems such as common cost allocation, or possible market power in some market segments, 
by creating a demarcation.  For example, customer premises equipment (CPE) was deregulated 
by separating it from the market for local exchange services.   Bill and keep would similarly 
provide a demarcation between networks, so that regulators need not allocate costs.  We invite 
comment on the weight we should give to such considerations, as well as on the extent to which 
particular proposals require regulatory intervention.
35. It also appears reasonable to consider whether a particular intercarrier 
compensation proposal would resolve the difficult issues that characterize current intercarrier 
compensation regimes.  Related to this, it appears reasonable to ask whether a particular pricing 
proposal is likely to create new problems.  We seek comment on these observations.  We also 
invite parties to suggest alternative goals that the Commission should consider in evaluating 
alternative intercarrier compensation regimes.
36. Finally, many of those advocating the need for reforming existing intercarrier 
compensation rules argue that, with the introduction of local competition and new technologies 
(including packet-switched networks that are used for both voice and data), it has become 
essential to adopt a single, unified approach to intercarrier compensation.   We seek comment 
on this view.  In particular, we invite comment on the possible advantages and disadvantages of 
moving to a single, unified approach to intercarrier compensation.
B. Bill-and-Keep Arrangements
1. Policy Justifications for a Bill-and-Keep Regime
37. CPNP regimes may be viewed as implicitly embracing the premise that the 
originating caller receives all the benefits of a call and should, therefore, bear the costs of both 
origination and termination.   Under this reasoning, the originating LEC pays the terminating 
telecommunications carrier and presumably recovers the payment from the rates charged to the 
originating caller.  We question this assumption.  If a caller telephones a catalog merchant, surely 
that merchant benefits at least as much as the caller.  When a LEC terminates a call originating 
on the network of another LEC, it provides a benefit to both the originating caller and to its 
customer, the called party.  As a consequence, there may be no reason why both LECs should not 
recover the costs of providing these benefits directly from their end users.  Bill-and-keep 
provides a mechanism whereby end users pay for the benefit of making and receiving calls. 
Therefore, we seek comment on whether both the calling and the called party benefit from a call, 
and on the implications that cost causality has for choice of an intercarrier payment regime.
38. An intercarrier compensation regime that involves termination payments may 
create the opportunity to exploit undesirable pricing power for the terminating carrier.  
A terminating carrier has a sort of monopoly over the loop serving its end user:  any 
interconnecting carrier that wishes to reach that customer must use that carriers network.  
While end users can choose carriers, an interconnecting carrier must use the carrier that the end 
user has selected if it is to deliver traffic to the end user at all.  Thus, the originating carrier 
cannot itself avoid unreasonable terminating charges.  Moreover, where the originating carrier is 
effectively unable to pass on to the calling parties any terminating charges because of flat rate 
pricing and rate averaging, then the callers see no market price signals giving them an incentive 
to avoid those costs.  In this situation, unreasonable termination charges may persist.  
Furthermore, per-minute reciprocal compensation rates may also give carriers the opportunity 
and incentive to leverage their position by seeking end users with disproportionately incoming 
traffic.  Such artificial incentives may indeed have contributed to the current imbalances in 
traffic exchanged between ILECs and CLECs.   We seek comment on these observations.
39. Proponents of bill and keep claim that it can enable regulators to avoid two 
difficult problems.   The first is the allocation of common costs among services.  The traditional 
approach to interconnection requires viewing intercarrier calls (local or long-distance) as 
services among the many others that carriers market to end users.  This makes most network 
costs (particularly loop costs) common costs to be allocated among these various services.  
Markets make such allocations correctly, proponents argue.  Regulators, however, cannot know 
enough relevant detail about specific market conditions.   This problem is intensified by the rule 
that the calling partys network pays the entire cost of the call.  Because this cost includes an 
allocation of common costs, the calling partys network pays a share of the common costs of the 
called partys network.  There is no perfect solution to these cost allocation problems, largely 
because regulators cannot know how benefits are distributed between the parties.  That is, 
regulators cannot see individuals demand functions.  Any allocation that a regulator can make is 
arbitrary (in the economic sense), yet even a small allocation error can produce massive 
distortions.  Proponents argue that an efficient bill-and-keep regime spares regulators the 
necessity of allocating common costs.
40. The second problem avoided by bill and keep, according to proponents, is the 
sense that end users have no direct control over access arrangements under current regimes.  
Under the access charge regime, IXCs must purchase access from LECs on both the originating 
and terminating ends of calls.  IXCs must average the access charges they pay, so that IXC 
customers pay the same rate whether they call to, or from, a high-cost or low-cost LEC.  IXCs 
may not pass through the access charges incurred on a particular call to the end user who makes 
that call.  For local traffic, the current reciprocal compensation rules produce similar results.  
Thus, even if an omniscient regulator could discern the correct intercarrier cost allocations, these 
would not necessarily result in correct end user rates.  The parties to a call are not empowered, 
under current arrangements, to choose the lowest-cost means of completing a call with the 
quality and other characteristics that they prefer.  Therefore, correct intercarrier cost assignments 
cannot even assure efficient outcomes under current arrangements, because end users have no 
direct control over their access arrangements.
41. Bill-and-keep proposals may be seen as following the precedent of the 
Commissions 1980 Computer II decision that deregulated CPE.   This decision was equivalent 
to mandating interconnection with customer-owned CPE, and setting a zero interconnection rate 
for CPE.   That is, local carriers could no longer charge for, or control, the end users purchase 
or use of CPE meeting FCC technical standards.  Prior to 1980, LECs priced CPE usage as many 
discrete services.  The resulting common cost allocation problems were insoluble, and pricing 
was based primarily on marketing estimates of demand elasticities for particular services.  
Computer II gave customers complete control of (and responsibility for) the wiring and 
equipment on their side of the network interface device (NID).   This decision also eliminated 
the cost allocation problems involving CPE.  Atkinson-Barnekov suggest that, just as CPE was 
separated from local service, an efficient bill-and-keep regime can separate inter-network 
interconnection from local service in a manner that resolves common cost allocation problems.  
Such a regime also gives end users direct control over their access arrangementsi.e., the ability 
to choose carriers on the basis of services and costs.
2. Re-examining the Efficiencies of Bill-and-Keep Arrangements
42. Termination Costs.  As discussed above, traditional economic analyses of 
intercarrier compensation viewed bill-and-keep arrangements as inefficient in general because 
they did not require the calling party and her network to pay the cost of the terminating carrier.  
This meant that the originating carrier was likely to overuse other carriers termination facilities.  
The one exception, where bill and keep was viewed as efficient, was where there were no traffic-
sensitive costs of termination.  The Commission adopted this analysis in the Local Competition 
Proceeding, though for reasons of administrative economy, it also permitted bill-and-keep 
arrangements where the traffic between two networks is relatively balanced while the rates 
are symmetric. 
43. Subsequent to the release of the Commissions Local Competition Order, a 
number of developments have occurred that may justify our re-examining this conclusion about 
the inefficiencies of bill and keep.  For example, we have seen large Internet backbone providers 
enter into peering arrangements.  Similarly, certain ILECs have proposed bill-and-keep 
arrangements for certain classes of traffic.   Finally, the OPP working papers summarized above 
have suggested justifications for bill-and-keep arrangements.  In light of these developments, 
we seek comment on our earlier conclusion in the Local Competition Order.
44. More specifically, we seek comment first on possible reasons or rationales why 
bill-and-keep arrangements may be efficient.  For example, we seek comment on the rationales 
contained in the DeGraba and Atkinson-Barnekov working papers.  We also seek comment on 
any other rationales for finding bill and keep efficient.  With respect to any justification of bill 
and keep, we ask that parties explain the conditions under which the justification holds.  
For example, would a particular rationale hold if:  (1) only one party to the call benefited from 
the call; (2) the two interconnected networks had unbalanced traffic;  (3) the two networks had 
dissimilar costs or cost structures (e.g., one network exhibited significant economies of scale); or 
(4) the two networks offered different qualities of service?  Thus, for any proposed justification, 
we ask the parties to state the conditions where bill and keep would be efficient (and in what 
sense), and the conditions where bill and keep would not be efficient.
45. Finally, we seek comment on whether bill-and-keep arrangements would preclude 
efficient forms of price discrimination.  We note that regulators have historically recognized that 
it may be efficient to charge different prices to different users in order to recover the fixed cost of 
the network.   We seek comment on whether the potential efficiency gains of such non-uniform 
pricing are outweighed by the benefits of bill-and-keep arrangements.
46. Transport Costs.  As previously noted, there are a number of different approaches 
to the treatment of transport costs under bill and keep.  For example, DeGraba suggests that the 
calling partys network should be responsible for the cost of transporting the call to the called 
partys central office.  A second approach would be for the parties to split the cost of transport 
equally.  For example, the Atkinson-Barnekov proposal, requiring that the incremental cost of 
interconnection be split, leads under certain assumptions to an equal division of transport costs.  
A third approach would be for the interconnecting networks to share the cost of transport based 
on their relative balance of peak traffic.  We invite parties to suggest alternative approaches to 
allocating transport costs.  Parties are strongly encouraged to comment on any alternative 
approaches offered by other parties, as the latter may contain aspects that the Commission will 
choose to pursue.
47. DeGraba acknowledges that his proposed rule for transport is inefficient, but 
argues that it will create incentives for interconnecting carriers to agree on a more economical 
and efficient meet-point arrangement.  We seek comment on DeGrabas analysis.  In particular, 
we seek comment on whether the potential savings offered under a meet point arrangement will 
induce carriers to agree to a more efficient solution to the transport problem.  We also ask parties 
to comment on the strength and effectiveness of this incentive to negotiate a solution where 
traffic between the parties is unbalanced.
48. As previously indicated, Atkinson-Barnekov argue that it is efficient to require 
that interconnecting carriers equally split the incremental cost of interconnection.  More 
specifically, Atkinson-Barnekov demonstrate that, under certain assumptions, their split-the-cost 
rule would require each network to bear equal per-subscriber costs after interconnection.  More 
generally, they show that this rule does not distort whatever cost and quality relationship the 
networks had before interconnecting.  They argue that the rule is competitively neutral in this 
sense.  We seek comment on whether this conclusion holds true under other assumptions 
concerning network size, cost structure, and quality of service.  If parties believe that the 
Atkinson-Barnekov results cannot be easily generalized under alternative network assumptions, 
we seek comment on whether their proposed rule would nevertheless result in an efficient 
intercarrier compensation regime.
49. More generally, with respect to the DeGraba and Atkinson-Barnekov approaches, 
and any alternative approaches that parties might suggest, we ask parties to comment on whether 
that approach is efficient, and in what sense.  For example, we seek comment on whether 
particular approaches to allocating transport costs will generate efficient usage of the network 
and efficient deployment of network facilities, particularly transport facilities.  We also seek 
comment on whether a particular approach would be competitively neutral.   Finally, we seek 
comment on whether a particular approach to allocating transport costs will likely result in 
entities making efficient choices between subscribing to a network as an end-user customer or 
interconnecting with a network as a carrier.
50. A criterion for efficient resource allocation is that the marginal benefit from 
consumption should equal the marginal cost of production.  We seek comment on the extent to 
which cost sharing should be a criterion for selecting an intercarrier compensation regime.  
We seek comment on the importance of an interconnection regimes equitable cost distribution 
relative to its other efficiency properties.
51. Transactions Costs.  Measuring and billing for terminating access invariably 
involves transactions costs, no matter which party to the transaction is billed.  For example, with 
CPNP, the terminating LEC bills the originating network, whereas with COBAK, the terminating 
LEC bills its own customers.  It is also possible that a terminating LEC may wish to bill the 
originating customer directly for termination services.  These alternatives are not mutually 
exclusive, but they do involve transactions costs of measuring and billing; and notably, lower 
transactions costs are preferred to higher transactions costs.  We invite comments on the relative 
sizes of transactions costs for these various alternatives, and how these transactions costs 
compare with other efficiencies (or lack thereof) for the various alternatives.
3. Bill and Keep as a Solution to Existing Interconnection Issues
52. We also ask parties to comment on whether bill and keep in general, or specific 
bill-and-keep proposals, will resolve, in whole or in part, existing interconnection problems.  
Both DeGraba and Atkinson-Barnekov argue that their versions of bill and keep will eliminate or 
ameliorate most of the regulatory arbitrage opportunities caused by existing interconnection 
regulations.  More specifically, DeGraba contends that COBAK both will eliminate the 
regulatory advantage that IP telephony currently has over traditional long-distance service, and, 
by eliminating termination charges, will solve or reduce the ISP reciprocal compensation 
problem and the one-way-network problem.   Similarly, Atkinson-Barnekov argue that their 
proposal will significantly dampen current schemes to evade access charges.   We seek 
comment on these assertions.  In particular, we seek comment on whether bill-and-keep 
arrangements in general, or specific forms of bill and keep, will solve or reduce these problems.  
We also seek comment on whether COBAK or other forms of bill and keep will reduce 
incentives, created by the existing system of interconnection regulation, for carriers to invest 
inefficiently.
53. We also seek comment on the potential impact of bill and keep on issues raised by 
terminating access monopolies.  DeGraba, for example, argues that, by requiring local carriers to 
recover the cost of termination from their end-user customers, bill and keep eliminates the 
terminating monopoly.   We seek comment on this argument.  In particular, we seek comment 
on whether a bill-and-keep arrangement will eliminate any market power arising from the local 
carriers bottleneck control, or whether, because the terminating local carrier still possesses 
bottleneck control over the trunk port at the central office, a terminating local carrier could still 
exercise monopoly power.  If it could, then are there easily implementable solutions to this 
problem?  For example, would it be sufficient simply to prohibit the terminating carrier from 
charging a traffic-sensitive charge for the trunk port?
54. As Atkinson-Barnekov point out, existing interconnection regimes may distort an 
entitys decision whether to subscribe as an end-user customer, or to interconnect as a network.  
For example, where an entity primarily or exclusively receives traffic, it may have an incentive 
under the current CPNP regime to claim to be a network.  Both DeGraba and Atkinson-Barnekov 
claim that their proposals will reduce this effect.   We seek comment on those claims.  We also 
seek comment on how their proposals might affect the subscription/interconnection decisions of 
entities that primarily or exclusively originate traffic, such as payphones.
55. DeGraba suggests that, if we move to COBAK, we should also shift from 
recovering termination costs through per-minute charges, to recovering termination costs through 
flat monthly charges.   This raises the issue of how moving to a bill-and-keep arrangement 
might affect end-user rates.  For example, if we move to a bill-and-keep arrangement and recover 
termination costs from the called party, should we regulate the rates that carriers charge their end 
users for termination?  Assuming that we want to continue to regulate end-user rates for 
dominant carriers, what is the appropriate rate structure to adopt?  Should LECs recover 
termination costs through per-minute charges, or should we require flat monthly charges?  
Should we allow carriers to give customers a choice between paying per-minute rates or flat 
monthly rates for termination?  What measures, if any, might we adopt to protect called parties 
from charges caused by unwanted calls?
56. An additional advantage of bill and keep, DeGraba claims, is that it eliminates the 
need for regulators to set the level and structure of termination rates.   DeGraba also claims that 
bill and keep reduces the incentive for carriers to overstate their termination costs, because 
termination costs must be recovered from end-user customers who can change carriers if rates 
are too high.   Similarly, to the extent that termination costs are not incremental to 
interconnection, the Atkinson-Barnekov approach requires carriers to recover termination costs 
from their own customers, and thus, like the DeGraba approach, frees regulators from setting 
termination rates.   We seek comment in general on these assertions.
57. DeGraba further argues that his proposal for allocating transport costs should be 
easy for regulators to implement, because it creates incentives for networks to agree on 
interconnection terms and thus frequently avoid the need for regulatory intervention.   We seek 
comment on this assertion.  More specifically, we seek comment on DeGrabas claim that his 
rule will encourage networks to voluntarily negotiate interconnection agreements.  We also seek 
comment on Atkinson-Barnekovs claims that the incremental costs of interconnection are easy 
to estimate, and generally will not involve incremental switching costs.  For example, we seek 
comment on how a regulator would estimate the incremental costs of interconnection, where a 
CLEC interconnects with an ILEC at the ILECs tandem switch.  We seek comment on the 
relative merits of these assertions.  Finally, with respect to any alternative method of allocating 
transport costs, we seek comment on the relative advantages and disadvantages of such an 
approach compared to the current treatment of transport costs.
4. Weighing the Potential Disadvantages of Bill-and-Keep Arrangements
58. One obvious concern about shifting to a new paradigm for intercarrier 
compensation is that the new approach may create new and unexpected problems, and that these 
new problems may outweigh the benefits of the new regime.  Accordingly, in this section, we 
seek comment on various implementation issues or problems that are likely to arise if we should 
move to a bill-and-keep regime.  In particular, we seek comment on certain concerns regarding 
the DeGraba and Atkinson-Barnekov proposals.
59. As DeGraba points out, two implementation issues associated with COBAK are:  
(1) how to define the central office; and (2) whether COBAK creates an incentive for carriers to 
locate central offices inefficiently.   DeGraba notes that COBAKs rules for allocating the cost 
of transporting the call may create an incentive for a carrier either to claim that the central office 
is close to its customer, or to physically locate the central office close to its customer.   The 
issue of how to treat such host-remote switches illustrates this problem.  First, parties are likely 
to disagree as to whether a remote switch is a central office, because a remote switch possesses 
different functionalities than a host, and in particular, because a remote switch is not 
interconnected directly with other remotes.  Second, if we were to decide that only host switches 
qualify as a central office, then this might deter networks from deploying host-remote 
configurations which might otherwise be the most efficient switching technology currently 
available.  A related issue can arise in the case of a network that chooses to deploy switches to 
serve subscribers over a large geographic area.  Under COBAK, a remote network seeking 
interconnection would be required to carry traffic to this switch.  DeGraba suggests that this 
could be resolved by allowing networks to assess toll charges for such transport.   Alternatively, 
COBAK could be interpreted to apply only to networks maintaining switches in singular, well-
defined local calling areas.  We seek comment on these concerns and invite parties to 
recommend alternative solutions.
60. A second implementation issue raised by DeGraba concerns unwanted calls.   
Under the current CPNP regime, called parties generally do not pay for unwanted calls.   Under 
the DeGraba proposal, unwanted calls may increase because the costs imposed on calling parties 
are reduced.  In addition, it is possible (depending on the retail rate structure) that called parties 
may have to pay traffic-sensitive charges for unwanted calls.  We seek comment on the extent to 
which this is likely to be a problem, and invite parties to suggest ways to alleviate this problem.
61. Finally, DeGraba acknowledges that, at least until competition in transport 
develops further, it may be necessary to regulate the transport rates charged by ILECs.   
He argues, however, that this would require no additional regulation of ILECs beyond what is 
required under existing CPNP regimes, and no additional regulation of end-user rates by 
CLECs.   We seek comment on this analysis.
62. Atkinson-Barnekov emphasize the distinction between the costs incremental to 
traffic and costs incremental to interconnection,  and they argue that only the costs incremental 
to interconnection should be split between carriers.   Underlying their analysis of the 
incremental cost of interconnection is the concept of a fully provisioned network, which 
essentially is a network with such sufficient capacity that any subscriber can always complete a 
call to any other subscriber who is not already engaged in a conversation.   We seek comment 
on Atkinson-Barnekovs distinction between costs incremental to traffic and costs incremental to 
interconnection, and on their concept of a fully provisioned network.  In particular, we seek 
comment on how a regulator or arbitrator, in trying to determine the incremental costs of 
interconnection, would apply these concepts.  We also seek comment on how this approach 
would be extended to interconnection arrangements between networks with different structures.  
Finally, we seek comment on how a regulator would resolve disputes between carriers 
concerning the incremental cost of interconnection.
63. Both DeGraba and Atkinson-Barnekov argue that their proposals would not 
preclude various end-user pricing schemes, such as calling-party-pays options or 800 numbers.   
We seek comment on this claim.  We also seek comment on whether the adoption of a bill-and-
keep arrangement would generate new billing or collection problems for carriers, particularly 
where a carrier seeks to charge an entity that is not its customer.
64. We seek comment on whether the DeGraba or Atkinson-Barnekov proposals will 
generate other new problems.  For example, if we move to a bill-and-keep arrangement for ISP-
bound traffic, as proposed below, will this cause carriers to increase the rates they charge ISPs, 
which could then result in higher Internet access prices?  To the extent that Internet access prices 
would rise, is the increase likely to take the form of a higher flat rate, or is it likely to result in the 
introduction of traffic-sensitive rates?  Finally, to the extent that parties suggest other bill-and-
keep arrangements, we ask them to identify any new problems that such an arrangement is likely 
to generate, and to suggest ways of dealing with those problems.  Parties should provide concrete 
evidence and explanations for their calculations and assumptions.
65. We seek comment on the possible application of a bill-and-keep regime to LEC-
CMRS interconnection.  We note that the concerns motivating this NPRM primarily stem from 
certain wireline interconnection situations, particularly those involving LEC-ISP interconnection.  
The LEC-CMRS interconnection challenge may be different from that of interconnecting 
wireline carriers.  For example, we are not aware of complaints against CMRS carriers for 
excessive termination rateseven in unregulated interconnection arrangementsor for engaging 
in regulatory arbitrage.  Thus, there may be less of an imperative to apply a new regime to LEC-
CMRS interconnection where significant problems do not exist.  We also seek comment on the 
ability or inability of CMRS carriers to obtain adequate compensation for local call termination 
under COBAK, BASICS, and other bill-and-keep regimes.
5. Bill and Keep for ISP-Bound Traffic
66. The record developed in the ISP Intercarrier Compensation proceeding strongly 
suggested that we should consider adopting a bill-and-keep compensation rule for ISP-bound 
traffic.   We now believe that adopting such a rule is the correct policy choice because the 
exchange of reciprocal compensation payments appears to have distorted the development 
of competition in the local exchange market.  Thus, we propose to adopt a bill-and-keep 
arrangement for all ISP-bound traffic.  We seek comment on this proposal.  We also seek 
comment on the implications of adopting bill and keep for ISP-bound traffic in the absence of a 
unified bill and keep regime for other, non-ISP-bound traffic.
67. Some parties note that compensation rates applicable to ISP-bound traffic have 
fallen,  and that undesirable incentives will be reduced as rates start to approach a LECs actual 
costs.  We believe, however, that even reduced rates will serve only as an approximation of a 
LECs actual costs, and will not, in any event, reflect the LECs opportunity to recover its costs 
from its end-user customers.  Current compensation rates are based on average ILEC costs, and 
are assessed per-minute, which tends to overstate the costs of calls of longer duration.  We 
therefore believe that as long as LECs are able to recover the cost of delivering such traffic from 
other LECs, they may have an incentive to target customers for whom termination costs are 
lower than average, and who predominantly receive traffic.  We also note that ILECs seem less 
able than CLECs to shift any costs of serving ISP customers to other carriers because ILECs 
serve many more ISP subscribers and would only receive reciprocal compensation when a CLEC 
customer calls an ISP served by an ILEC.  We seek comment on this reasoning.
68. Some commenters suggest that there has until now been a relationship between 
the payments that ILECs have had to make with respect to ISP-bound traffic, and the prices at 
which ILECs are willing to offer unbundled network elements (UNEs).  These commenters 
believe that this relationship must be maintained in order to avoid opportunistically high UNE 
rates.   We therefore seek comment regarding what effect, if any, a bill-and-keep approach to 
ISP-bound traffic will have on ILEC incentives to support lower UNE rates.  We believe that a 
bill-and-keep approach to ISP-bound traffic will not compromise the ability of state commissions 
to rely on the cost studies that ILECs have submitted over the past 12-24 months in support of 
lower rates for reciprocal compensation and UNEs.  We seek comment on this reasoning.
6. Bill and Keep for Traffic Subject to Section 251(b)(5)
69. In light of the current imbalances in traffic exchanged among interconnected 
networks, and the potential for inefficient incentives under the existing per-minute reciprocal 
compensation rates, we generally seek comment on the relative benefits of bill and keep for all 
traffic subject to section 251(b)(5),  versus the current per-minute reciprocal compensation rates 
imposed by most states.  We seek comment from state commissions, in particular, regarding the 
benefits of either approach.  We ask that parties discuss the incentives provided by each 
approach to intercarrier compensation.  We also seek comment on the benefits of each approach 
in promoting competition and negating the effects of market power.  We ask that commenters 
discuss the relative benefits of bill-and-keep and per-minute reciprocal compensation with 
respect to the pricing signals provided, and the relation between actual costs and prices 
determined under each approach.  We seek comment on how the Commission should weigh the 
benefits of implementing bill and keep against any disadvantages that commenters may identify.  
We also seek comment on the disadvantages of applying a bill-and-keep arrangement to any 
particular type of traffic currently exchanged among interconnected carriers.
70. We seek comment on the best method for allocating transport responsibilities and 
costs among interconnected carriers under a mandatory bill-and-keep approach to reciprocal 
compensation.  Under our current rules, the originating telecommunications carrier bears the 
costs of transporting traffic to its point of interconnection with the terminating carrier.  If carriers 
must recover their transport costs from their end users, does this rule still make sense?  What 
incentives does this rule create regarding location and number of points of interconnection 
(POIs)?  Is there a more appropriate way to allocate transport costs?
71. Qwest argues, for example, that a bill-and-keep arrangement does not work when 
three carriers are involved in the transport and termination of traffic, because the middle carrier 
that transports the traffic from one LEC to the other does not really have a customer involved 
in the call from which it can recover costs.   Qwest therefore argues that the Commission should 
allow LECs to continue charging each other for delivering transiting traffic that originates on the 
networks of other carriers.   We ask commenters to address this and other issues related to the 
transport obligations of interconnected LECs under a bill-and-keep regime.  CMRS carriers also 
originate and terminate three-carrier calls, some of which are governed by reciprocal 
compensation.  We seek comment on the issues or problems that the current intercarrier 
compensation rules present for three-carrier calls.  We seek comment on how bill and keep 
might affect such calls.
72. Under our current rules, interconnecting CLECs are obligated to provide one POI 
per LATA.   Under a bill-and-keep regime, should this rule still apply?  How should carriers 
select points of interconnection?  If a CLEC chooses a point of interconnection outside a local 
calling area, should the LEC be obligated to meet the CLEC there?  Or, should the CLEC be 
required to locate in every local calling area, or pay the ILEC transport and/or access charges if it 
does not?  CMRS carriers may have several switches per MTA, which can comprise several 
states and multiple LATAs.  Should originating carriers be required to deliver calls to all of a 
CMRS carriers POIs?  Should the Commission promulgate rules governing the technical 
requirements of interconnection, as it does for interconnection between CPE and the public 
switched telephone network?   We seek comment on how the costs of interconnection should be 
allocated between carriers in this context.  We seek comment on how carriers will allocate the 
costs of actual interconnection facilities.  In addition, we seek comment on how the costs for 
internal network upgrades necessary for interconnection should be allocated. 
73. Section 251(b)(5) provides that each LEC has the duty to establish reciprocal 
compensation arrangements for the transport and termination of telecommunications.   
In addition, section 252(d)(2) states that, for the purpose of ILEC compliance with section 
251(b)(5), the terms and conditions for reciprocal compensation must:  (1) provide for the 
mutual and reciprocal recovery by each carrier of costs associated with the transport and 
termination on each carriers network facilities of calls that originate on the network facilities of 
the carrier; and (2) determine such costs on the basis of a reasonable approximation of the 
additional costs of terminating such calls.   Section 252(d)(2)(B)(i) further provides that the 
foregoing language shall not be construed to preclude arrangements that afford the mutual 
recovery of costs through the offsetting of reciprocal obligations, including arrangements that 
waive mutual recovery (such as bill-and-keep).   The legislative history of the 1996 Act 
indicates that the term mutual and reciprocal recovery of costs includes a range of 
compensation schemes, such as in-kind exchange of traffic without cash payment (known as bill-
and-keep arrangements). 
74. In the Local Competition Order, the Commission rejected claims that the 
Commission and states lack the authority to mandate bill-and-keep arrangements under any 
circumstances.   It instead found that in some circumstances, bill-and-keep arrangements can be 
imposed in the context of the arbitration process for termination of traffic.   The Commission 
reasoned that as long as the cost of terminating traffic is positive, 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.   The Commission found, nevertheless, that in certain circumstances, the advantages 
of bill-and-keep arrangements outweigh the disadvantages.   For instance, the Commission 
recognized that bill-and-keep arrangements may minimize administrative burdens and 
transaction costs, when traffic is in balance and symmetrical rates are applied. 
75. We believe that bill-and-keep arrangements also provide for the mutual and 
reciprocal recovery of costs associated with the transport and termination of traffic when traffic 
is not in balance.  We therefore seek comment on whether a bill-and-keep rate structure for 
traffic subject to section 251(b)(5) is consistent with the 1996 Act.  We ask commenters to 
discuss whether a bill-and-keep regime satisfies both the requirement for carriers to provide 
reciprocal compensation under section 251(b)(5), and the reciprocal compensation pricing 
standards set forth in section 252, even when traffic is not in balance.  To what extent are carriers 
entitled to asymmetric reciprocal compensation under the Communications Act if they can 
establish additional costs of terminating calls on their networks?  We note that the statute 
explicitly identifies bill and keep as one arrangement that affords the mutual recovery of costs 
through the offsetting of reciprocal obligations :  one party terminates the others calls and 
vice-versa, thus providing for in-kind reciprocal compensation.  It may be, however, that the 
statute does not permit the imposition of bill-and-keep where there is a significant imbalance in 
the traffic exchanged among interconnected LECs. 
76. We therefore seek comment on whether bill and keep provides for the mutual 
and reciprocal recovery of costs,  when traffic is not in balance.  In particular, we ask parties 
to address whether the opportunity to recover costs from end users afford[s] the mutual 
recovery of costs.  To the extent that recovery from end users is consistent with the statute, what 
implication does this method of cost recovery have for retail rate levels and rate structures?  We 
also seek comment on whether a bill-and-keep arrangement affords the mutual recovery of costs 
through the offsetting of reciprocal obligations  when traffic is not in balance, or whether the 
use of the term offsetting implies that traffic must be balanced.
77. We seek comment on whether the imposition of bill-and-keep regime would 
require that the Commission forbear from section 252(d)(2)s additional cost pricing standard.  
In addition, we seek comment on whether the prohibition on forbearance from section 271,  
a statutory section that references section 252(d)(2), makes imposition of bill and keep legally 
problematic.
7. Commission Authority Over LEC-CMRS Interconnection
78. In recent submissions to the Commission, the Cellular Telecommunications 
and Internet Association (CTIA) urges the Commission to immediately replace the existing 
reciprocal compensation mechanism for LEC-CMRS interconnection with a bill-and-keep 
regime.   In a December 12 letter,  CTIA contends that the Commission has exclusive and 
plenary jurisdiction to regulate LEC-CMRS interconnection under section 332(c)(1)(B) of the 
Communications Act, and Iowa Utils. Bd. v. FCC.   CTIA further argues, in a December 29 
letter, that the Commission has exclusive authority to establish the terms of, and to review, LEC-
CMRS interconnection agreements.   In this portion of the NPRM, we review and seek 
comment on the Commissions authority over LEC-CMRS interconnection and, specifically, 
on the issues raised by the two CTIA letters.
a. Background
79. In 1993, Congress adopted amendments to section 332 of the Communications 
Act in the 1993 Budget Act.   The Budget Act amendments, inter alia, included new section 
332(c)(1)(B) concerning interconnection between CMRS providers and common carriers, and 
new section 332(c)(3) preempting certain types of state regulation of CMRS providers.  In 1994, 
we released the CMRS Second Report and Order, which implemented the 1993 Budget Act.   
In the CMRS Second Report and Order, we ordered that, pursuant to section 201 of the 
Communications Act, common carriers must provide the type of interconnection reasonably 
requested by any CMRS provider.   We also required LECs and CMRS providers to 
compensate one another for the reasonable costs incurred in terminating the others traffic.   
As a matter of enforcement, we stated that under section 208 of the Communications Act, if a 
complainant could demonstrate that a LEC was charging different rates for the same type of 
interconnection, then the LEC would shoulder the burden of showing that the variance in its 
charges did not constitute unreasonable discrimination in violation of section 202(a) of the 
Communications Act.   Finally, we held that a LEC could not deny a CMRS provider a form of 
interconnection that it provided to another carrier, unless the LEC could show that the provision 
of such interconnection was either technically infeasible or economically unreasonable. 
80. Subsequently, in the LEC-CMRS Interconnection NPRM, we observed that 
section 332 explicitly preempts state regulation that effectively precludes CMRS entry; that state 
regulation which precludes reasonable interconnection would be inconsistent with the federal 
right to interconnect established by section 332 and the Commissions prior decisions; and that 
preemption of intrastate regulation may be warranted on the basis of inseverability.   As one 
option, we sought comment on whether we should require that LEC-CMRS interconnection be 
on a bill-and-keep basis. 
81. Shortly thereafter, the 1996 Act became law.  In the Local Competition Order, 
we noted our jurisdiction to regulate LEC-CMRS interconnection under section 332, but decided 
to apply sections 251 and 252 to LEC-CMRS interconnection.   At that time, we declined to 
delineate the precise contours of, or the relationship between, our jurisdiction over LEC-CMRS 
interconnection under sections 251 and 332, but made clear that we were not rejecting 
section 332 as an independent basis for jurisdiction.   Thus, we promulgated rules governing 
LEC-CMRS interconnection under the newly enacted sections 251 and 252, rather than under 
section 332.  This approach would, we believed, facilitate consistent resolution of 
interconnection issues for CMRS providers and other carriers.   We reserved the right, 
however, to revisit invoking our jurisdiction under section 332 to regulate LEC-CMRS 
interconnection, if circumstances should so warrant.   We noted, for example, that section 332 
generally precludes states from rate and entry regulation of CMRS providers, differentiating 
CMRS from other carriers.  If the regulatory scheme established by sections 251 and 252 did not 
sufficiently address the problems encountered by CMRS providers in obtaining interconnection 
on just, reasonable and nondiscriminatory terms and conditions, we indicated that we might 
consider invoking jurisdiction under section 332 to regulate LEC-CMRS interconnection rates. 
82. Several parties sought judicial review of various aspects of the Local Competition 
Report and Order.  These petitions were consolidated before the Eighth Circuit Court of 
Appeals.   In Iowa Utils. Bd. v. FCC, the court concluded that certain of the rules promulgated 
in the Local Competition Proceeding exceeded our jurisdiction under sections 251 and 252 of the 
1996 Act and that, in imposing other rules, the Commission substantively misinterpreted its 
jurisdiction under sections 251 and 252.   At the same time, the court held that section 332(c), 
read in combination with section 2(b), gave the Commission independent authority to 
promulgate rules governing LEC-CMRS interconnection.   In arguments before the court, 
CMRS providers had claimed that several of the Commissions rules were especially crucial to 
LEC-CMRS interconnection, and therefore should be upheld in that context even if they were 
otherwise struck down.   The court noted that these particular rules of special concern to the 
CMRS providers would continue to apply to interconnection involving those providers.   
This CMRS interconnection aspect of the Eighth Circuits decision was not appealed to the 
Supreme Court, nor addressed by the Court in AT&T v. Iowa Utils. Bd. 
83. As noted above, in its letters advocating a bill-and-keep regime for LEC-CMRS 
intercarrier compensation, CTIA contends that the Commission has exclusive jurisdiction to 
regulate the rates for interconnection between CMRS providers and LECs, pointing to the 1993 
Budget Act and the Iowa Utils. Bd. v. FCC decision.  CTIA argues that Congress, in amending 
section 332 and section 2(b), established a federal regulatory framework to govern the offerings 
of all commercial mobile services because these services operate without regard to state lines as 
an integral part of the nations telecommunications infrastructure.  CTIA further argues that the 
Eighth Circuits interpretation of section 332 recognizes the Commissions broad authority to 
preempt state rate and entry regulation of CMRS.  CTIA posits that, because the Commission has 
exclusive jurisdiction, there is no role for states to regulate LEC-CMRS interconnection. 
b. Statutory Provisions
84. The 1993 Budget Act significantly changed the regulatory framework for 
CMRS.   In place of traditional public utility regulation, the 1993 Budget Act sought to 
establish a competitive nationwide market for commercial mobile radio services with limited 
regulation.  CMRS interconnection was a significant element of this framework.   Several 
provisions of the Communications Act, as amended by the 1993 Budget Act, are relevant to 
CMRS jurisdiction issues.  First, the role of the states in regulating CMRS is expressly limited by 
section 332(c)(3).   That section bars the states from regulating the entry or rates of CMRS 
providers, but expressly permits states to regulate other terms and conditions of service.   
Second, section 332(c)(1)(B), on the other hand, expressly grants the Commission the authority 
to order carriers to interconnect with CMRS providers.   Finally, in the 1993 Budget Act, 
Congress also added an exception to section 2(b) of the Communications Act.   Section 2(b) 
generally reserves to the states jurisdiction over intrastate communication service by wire or 
radio of any carrier.  The 1993 Budget Act amended section 2(b) to exempt section 332 from 
its provisions. 
c. Discussion
85. We seek comment on the question of whether we have authority under section 
332 to replace the existing reciprocal compensation mechanism for LEC-CMRS interconnection 
with a bill-and-keep regime, as advocated by CTIA, as well as more generally on the scope of 
the Commissions jurisdiction under section 332.  To assist the Commission in addressing these 
matters, we seek comment on the following more specific issues.
86. First, we seek comment on the relationship between the CMRS interconnection 
authority assigned to the Commission under sections 201 and 332, and that granted to the states 
under sections 251 and 252.  In adopting sections 251 and 252, and other provisions of the 1996 
Act, Congress did not repeal or amend the prior sections, and in fact adopted specific savings 
clauses for the Commissions interconnection authority under section 201  and for the 
preemption of state entry and rate regulation under section 332(c)(3).   But the 1996 Act did 
establish a general interconnection framework that is subject, in part, to state jurisdiction and 
which, by its terms, applies to CMRS as well as to other carriers.  How should the 
interconnection provisions in these various sections of the amended Communications Act be 
applied?  To the extent that policies and rules, or rates and terms, under these frameworks 
conflict, how should the conflicts be resolved?
87. Second, we seek comment on the extent to which section 332 preempts state 
regulation of intrastate LEC-CMRS interconnection and gives such authority to the Commission.  
We note that in Iowa Utils. Bd. v. FCC, the court, when affirming the Commissions authority to 
adopt national LEC-CMRS interconnection rules, cited sections 332(c)(1)(B) and 332(c)(3)(A) 
as relevant to an evaluation of the Commissions intrastate LEC-CMRS interconnection 
authority.   We seek comment on whether this reference by the court suggests that these 
subparagraphs of section 332(c) preempt state CMRS intrastate interconnection jurisdiction and 
assign the matter to the Commission.  According to CTIA, the court observed that Congress 
provided express Commission authority to regulate LEC-CMRS interconnection under 
section 332(c)(1)(B), and concluded that federal regulation of CMRS rates and entry is a 
function of the Commissions plenary authority over communications by wire and 
communications by radio.   On the other hand, because the court affirmed one rule for CMRS 
providers that assigns authority over true-ups of interim rates to state commissions, and 
another rule recognizing the role of state commissions in the negotiation and arbitration 
process,  do the states have some authority over interconnection, particularly when read in 
conjunction with sections 251 and 252?
88. Third, we seek comment on whether forbearance is appropriate in the context of 
LEC-CMRS interconnection.  Specifically, the Communications Act gives the Commission the 
authority and responsibility to forbear from regulating telecommunications carriers in certain 
specified cases.  Section 332(c)(1),  adopted by the 1993 Budget Act, permits the Commission 
to forbear from applying most provisions of Title II of the Communications Act to CMRS 
providers, while section 10 of the Communications Act,  adopted by the 1996 Act, directs the 
Commission to forbear from regulating any telecommunications carrier or service, if the 
Commission determines that certain conditions are met.  The three-part test for forbearance is 
essentially identical for each section.  In summary, the test is:  (1) that a provision of the statute 
is not necessary to ensure that rates and terms are just and reasonable and not unjustly or 
unreasonably discriminatory; (2) that the provision is not necessary for the protection of 
consumers; and (3) that forbearance is in the public interest.  Under both sections, the 
Commission may determine that the public interest will be served if it concludes that forbearance 
will promote competition.  In this regard, section 10(e) states that [a] State commission may not 
continue to enforce or apply any provision of this Act that the Commission has determined to 
forbear from applying under [section 10(a)]. 
89. More specifically, in light of the fact that both section 332 and sections 251 and 
252 appear to provide processes and standards for LEC-CMRS interconnection, we seek 
comment on whether the Commission should forbear from applying some or all of the provisions 
of sections 251 and 252 to LEC-CMRS interconnection in some or all state jurisdictions.  
Alternatively, we seek comment on whether we should forbear from applying some or all of 
section 332 to LEC-CMRS interconnection in light of sections 251 and 252, and on the extent of 
our authority to do so.  To whatever extent that those provisions overlap, application of both 
provisions may be unnecessary.  For example, the process of negotiating and enforcing CMRS 
interconnection rates and terms with over 1,200 LECs in over 50 jurisdictions probably raises 
costs and otherwise impedes competition among CMRS providers and other services.  On the 
other hand, the initial round of interconnection negotiations undertaken through the regulatory 
framework of sections 251 and 252 has been completed and has been successful in many 
respects (e.g., setting rates that are more equitable and cost-based).  We ask commenters to 
address these issues, as well as whether forbearance is warranted by other regulations or 
provisions affecting CMRS interconnection.  Commenters should also address the practical 
consequences of the approaches the Commission might take to exercising, or forbearing from 
exercising, its authority over LEC-CMRS interconnection.  For example, how would 
interconnection work, and how would the rates and terms for interconnection be established?
8. LEC-CMRS Intercarrier Compensation
90. We seek comment on the rules we should adopt to govern LEC interconnection 
arrangements with CMRS providers, whether pursuant to section 332, or other statutory 
authority.  Generally, we seek comment on the rules necessary to further our goal of adopting a 
unified approach that encourages the efficient use of, and investment in, telecommunications 
networks, and the efficient development of competition.
91. The Local Competition Order held that the new transport and termination rules 
should be applied to LECs and CMRS providers so that CMRS providers continue not to pay 
interstate access charges for traffic that currently is not subject to such charges, and are assessed 
such charges for traffic that is currently subject to interstate access charges.   LEC-CMRS 
interconnection for calls that originate and terminate in the same MTA (as of the start of a call) 
are governed by section 251, and are subject to reciprocal compensation.  Two common types of 
local LEC-CMRS interconnection include:  connection through a LEC (typically an ILEC) end 
office (Type 1); and direct mobile switching center (MSC) connection with a LEC tandem (Type 
2A).  Where CMRS-LEC traffic volumes are small, as in rural areas, the CMRS carrier can 
connect to other LEC end offices and other carriers via a LEC end office switch.   The other 
interconnection alternative is a trunk between a MSC and the LEC tandem, whereby the CMRS 
carrier connects to LEC end offices connected to the tandem together with other carriers 
(including IXCs) interconnected through the tandem.
92. Under both types of LEC-CMRS interconnection, the LEC receives forward-
looking economic cost- (FLEC-) based reciprocal compensation for the LECs additional costs of 
terminating CMRS-originated calls.  The CMRS carrier, on the other hand, is compensated at the 
LECs FLEC-based rate, which is used as a presumptive proxy for the CMRS carriers own 
termination costs,  unless the CMRS carrier submits a forward-looking economic study to rebut 
this presumptive symmetrical rate.   Local LEC-CMRS calls would presumably be governed 
by any new, unified bill-and-keep regime.  We seek comment on whether any such regime 
should be applied to these types of LEC-CMRS interconnection.  We also seek comment on the 
potential effects of a unified bill-and-keep regime on local LEC-CMRS interconnection.
93. LEC-paging traffic is exchanged largely by mutual agreement.   LEC-paging 
interconnection are of the same three types technically as LEC-CMRS generally:  Type 1 
(through a LEC end office); Type 2A (direct connection with a LEC tandem office); or Type 2B 
(direct connection limited to a specific LEC end office).   Paging companies are paid 
terminating compensation stipulated in their mutual contractual agreements.  The compensation 
rates vary by agreement.  Some agreements stipulate charges per minutes of use.   Terminating 
compensation is paid to paging companies on the basis of aggregated minutes at the end of each 
month.  We seek comment on whether (and if so, how) a bill-and-keep regime may apply to 
LEC-paging interconnection arrangements.
94. We also seek comment on whether access charges, when they apply to 
interexchange traffic under sections 201, 251(g) and 251(i), should also apply to CMRS carriers, 
and to what extent.  In that context, commenters should also address whether CMRS carriers are 
entitled to receive access charges, or some additional compensation, for interexchange traffic 
terminating on their networks.
95. We note that there are further examples of carrier-to-carrier interconnection 
involving CMRS carriers that are not currently rate-regulated.  Pursuant to section 251(a), as 
well as sections 201(a) and 332(c), CMRS carriers have a general duty to directly or indirectly 
interconnect with each other.  In the absence of detailed interconnection regulation, many CMRS 
carriers appear to have entered into voluntary interconnection agreements.  Because intercarrier, 
local CMRS traffic is often insufficient to justify a dedicated trunk, the majority of CMRS-to-
CMRS call exchange occurs through a RBOC tandem switch.  Under this arrangement, CMRS 
carriers appear to exchange local traffic on a bill-and-keep basis.  As wireless traffic is growing, 
however, CMRS carriers increasingly enter into direct interconnection agreements.  When the 
traffic between these carriers justifies a trunk, wireless carriers typically interconnect directly.  
We understand that the recurring and non-recurring cost of the trunk line is divided among the 
carriers by mutual contractual agreement, and that the carriers exchange traffic on a bill-and-
keep basis.  No instances of unreasonable terminating charges for these CMRS-to-CMRS calls 
have been brought to our attention.  While we do not contemplate extending compensation rules 
to these arrangements, we nonetheless seek comment on how well these existing unregulated 
bill-and-keep agreements work, and their implications for a possible unified regime.  We also 
invite comment on why we have not seen unreasonable termination fees from CMRS firms, 
while we have from wireline CLECs.  Finally, we seek comment on whether (and if so, how) 
adopting a unified bill-and-keep regimesuch as COBAK or BASICSmight affect 
unregulated types of intra-MTA, CMRS-to-CMRS interconnection.
96. Another category of unregulated interconnected calls subject to neither reciprocal 
compensation nor access charges is CMRS-IXC interconnection.   For inter-MTA call traffic, 
CMRS carriers effectively act as resellers, buying large, volume-discounted bundles of minutes 
of use from IXCs, then reselling them to CMRS subscribers.  We understand that the IXCs then 
pay any terminating access, frequently absorbing terminating access charges that exceed the 
wholesale, flat rates negotiated with CMRS carriers.  We seek comment on whether (and if so, 
how) COBAK and BASICS might affect the current quasi-resale regime.  We seek comment on 
how eliminating terminating access under bill and keep might change the frequency or terms of 
IXC-CMRS agreements.
9. Bill and Keep for Interstate Access Charges
97. The long-term goal of this NPRM is to develop a uniform regime for all forms 
of intercarrier compensation, including interstate access.  We do not, however, anticipate 
implementing major changes to our access charge rules in the initial phase of this proceeding.  
The CALLS plan established, for the period July 1, 2000 through June 30, 2005, interstate access 
rate levels and an aggregate amount of interstate universal service support for ILECs subject to 
price cap regulation.   The Commission recently sought comment on an industry-sponsored 
access reform and universal service proposal for all other ILECs; this plan would, if adopted, be 
implemented over a five-year period.   We begin now to explore the possible application of 
bill-and-keep approaches to interstate LEC-IXC interconnection, with the intention of 
developing an answer to the question, What comes after CALLS?  We recognize that large 
ILECs, small ILECs, and CLECs are all at different stages of the access reform processes that we 
have carried out over the last five years.  We expect that, under current rules and proposed rules, 
their access rate levels may be much more similar four or five years from now than they are 
today.  If we adopt a bill-and-keep rule for the intercarrier arrangements that currently fall under 
the access charge rules, should we attempt to apply it at the same time, and in the same manner, 
for all types of LECs?  Will the possible benefits of bill and keep dissipate if it is phased in over 
a period of years?  Will a staggered approach to reforming intercarrier compensation create 
certain opportunities for regulatory arbitrage?  We seek comment on how best to proceed, in a 
coordinated manner, with this phase in the development of a pro-competitive intercarrier 
compensation regime.
C. Reforming the Existing Calling-Partys-Network-Pays Regime
98. As discussed above, traditional economic analysis and Commission precedent 
have favored CPNP intercarrier compensation regimes.  In general, the prevailing view has been 
that, if a regulator sets the appropriate rate level and rate structure, a CPNP regime should be 
efficient.   Given the strong support CPNP regimes have received from the economic literature 
and from Commission precedent, we seek comment generally on whether, and how, the existing 
CPNP interconnection regimes can be reformed in the event that the Commission decides not to 
adopt bill and keep.
1. Can CPNP Regimes Be Efficient?
a. Rate Level Issues
99. What Is the Appropriate Cost Methodology?  We note that the Commission, in 
implementing the reciprocal compensation provisions of the 1996 Act, determined that reciprocal 
compensation rates should be based on forward-looking economic costs.  Similarly, while 
interstate access charges had been based on historical costs (as modified by the Commissions 
price cap regime), the Commission in 1997 determined that access charges should likewise move 
to forward-looking economic costs.  The introduction of competition and new technologies 
appear to be exacerbating regulatory arbitrage opportunities, which suggests that we need to 
move quickly to a single cost methodology for setting both access charges and reciprocal 
compensation rates.  To the extent that we need to adopt a uniform methodology other than bill 
and keep, we believe that, consistent with our decisions in the Local Competition Proceeding and 
the access charge reform proceeding, we should adopt a forward-looking cost methodology.  
We seek comment on this reasoning.  We also seek comment on whether, in order to achieve the 
benefits of a uniform intercarrier compensation regime, state public utility commissions would 
need to move intrastate access charges to forward-looking-economic costs.
100. The Commission determined in the Local Competition Order that the pricing 
standards established by section 252(d)(1) for interconnection and unbundled elements, and by 
section 252(d)(2) for transport and termination of traffic, are sufficiently similar to permit the use 
of the same general methodologies for establishing rates under both statutory provisions.   
The Commission reasoned that a new entrant might use unbundled network elements as a 
substitute for transporting traffic under section 252(d)(2), and that transport of traffic for 
termination on a competing carriers network is, therefore, largely indistinguishable from 
transport for termination of calls on a carriers own network.   The Commission therefore 
found that the additional costs standard for transport and termination permits the use of the 
forward-looking, economic cost-based (total element long-run incremental cost, or TELRIC) 
pricing standard that it established for interconnection and unbundled elements. 
101. We seek comment on this analysis, and specifically ask that parties comment on 
whether, if the Commission declines to adopt bill and keep, the Commissions use of the 
TELRIC cost standard is the most appropriate methodology for establishing additional costs 
under section 252(d)(2).   What would be the implications of using short-run incremental costs 
when determining the additional costs incurred in terminating calls that originate on another 
carriers network?  Do the additional costs of terminating traffic differ significantly from the 
average incremental costs calculated under TELRIC?  If so, we seek comment on how we should 
more accurately calculate the additional costs of terminating calls.  We also ask whether 
advances in technology have provided carriers with essentially inexhaustible capacity, and 
whether the additional costs of delivering a call that originates on a competing carriers 
network currently approach zero.
102. In the Local Competition Proceeding, the Commission concluded that the 
incumbent LECs transport and termination prices should be the presumptive proxy for other 
telecommunications carriers additional costs of transport and termination.   This rule, 
however, grew subject to demonstration by a telecommunications carrier that it incurs higher 
costs than the ILEC to transport and terminate local traffic.  The Local Competition Order also 
determined that states could establish transport and termination rates during the arbitration 
process that varied according to whether the traffic is routed through a tandem switch or directly 
through an end-office switch.   The Commission reasoned that different rates are justified 
because the additional costs that a LEC incurs are likely to vary depending on whether the LEC 
uses both tandem and end-office switching, or end-office switching alone.   Moreover, the 
Commission determined that the ILECs tandem interconnection rate should be applied as a 
proxy when interconnecting carriers utilize new switch technologies that serve a geographic area 
comparable to that served by the ILECs tandem switch.
103. The presumptive ILEC cost proxy and the tandem-rate criteria have been disputed 
by carriers.  Among carriers who have questioned the accuracy of the presumptive ILEC cost 
proxy, Verizon argues that, because certain CLECs have installed technology different from that 
of the ILECs, the CLECs costs of termination are lower.   Sprint PCS, on the other hand, 
claims that its local-call termination costs exceed the ILEC proxy. 
104. To assist parties in helping us to explore the broader question of moving to a 
unified interconnection regime raised in this proceeding, we review the application of the 
Commissions current orders and rules regarding asymmetric reciprocal compensation for LEC-
CMRS interconnection.  Under the language of section 252(d)(2)(A) of the Communications 
Act,  CMRS carriers are entitled to the opportunity to demonstrate that their termination costs 
exceed those of the ILECs.  The equivalent facility language of sections 51.701(c) and (d) of 
the Commissions rules was not intended to require that wireless network components be 
reviewed on the basis of their relationship to wireline network components.  Nor, given the 
language of the statute, was it intended to have the effect of barring a CMRS carrier from 
receiving compensation for the additional costs that it incurs in terminating traffic on its network 
if those costs exceed the ILECs.  Instead, a cost-based approachone that looks at whether the 
particular wireless network components are cost sensitive to increasing call trafficshould be 
used to identify compensable wireless network components.   Thus, if a CMRS carrier can 
demonstrate that the costs associated with spectrum, cell sites, backhaul links, base station 
controllers and mobile switching centers vary, to some degree, with the level of traffic that is 
carried on the wireless network, a CMRS carrier can submit a cost study to justify its claim to 
asymmetric reciprocal compensation that includes additional traffic sensitive costs associated 
with those network elements.  We note that, under our rules, the CMRS carrier bears the burden 
of justifying in its analysis precisely what are its additional costs, and demonstrating that its 
analysis complies with all applicable Commission rules. 
105. In addition, section 51.711(a)(3) of the Commissions rules  requires only 
that the comparable geographic area test be met before carriers are entitled to the tandem 
interconnection rate for local call termination.  Although there has been some confusion 
stemming from additional language in the text of the Local Competition Order regarding 
functional equivalency,  section 51.711(a)(3) is clear in requiring only a geographic area test.  
Therefore, we confirm that a carrier demonstrating that its switch serves a geographic area 
comparable to that served by the incumbent LECs tandem switch is entitled to the tandem 
interconnection rate to terminate local telecommunications traffic on its network. 
106. Turning to the broader, forward-looking questions, we seek comment first on 
whether we should eliminate the symmetry presumption.  If a party contends that we should 
eliminate this presumption, then it should explain how regulators should calculate the forward-
looking cost of transport and termination for CLECs.  In particular, is it possible for states to 
estimate a single cost of transport and termination for all CLECs, or should we require 
calculations of individual transport and termination rates for every CLEC?  Alternatively, should 
we provide for calculation of separate rates only where a CLEC uses a different technology, and 
if so, for which technologies should there be a separate interconnection rate?  Similarly, could 
transport and termination rates be established for CMRS carriers as a group, for categories of 
CMRS carriers, or on a carrier-by-carrier basis only?  If a party suggests the need for a separate 
interconnection rate for each carrier, we ask it to explain how this position is consistent with the 
principles of forward-looking cost pricing.  We also seek comment on whether adopting 
asymmetrical transport and termination rates is consistent with the efficient development of 
competition.  Finally, we seek comment on the additional burdens that such a rule change might 
impose both on parties and on regulators.
107. We seek comment on whether our current tandem-rate rule creates an opportunity 
for regulatory arbitrage.  We also seek comment on whether the rule, or any modification of it, 
facilitates or distorts the efficient development of competition.  In particular, we seek comment 
on whether elimination of the rule may significantly disadvantage carriers with newer networks 
having fewer tandems, particularly where traffic exchanged between such networks and the 
incumbent is balanced.  We also seek comment on whether section 51.711(a)(3) should be 
amended to include the functional equivalency concept discussed in the text of the Local 
Competition Order. 
108. As previously indicated, IXCs have argued that, to the extent that access charges 
exceed economic cost, ILECs have the incentive and ability to discriminate in favor of their 
long-distance affiliates by engaging in a predatory price squeeze.  We seek comment on this 
argument.  Finally, we invite parties to raise any other rate-level issues that they believe the 
Commission needs to consider in evaluating how it might reform existing CPNP regimes.
b. Rate Structure Issues
109. The Commission has repeatedly recognized that, as a theoretical matter, the 
traffic-sensitive costs of shared facilities should be recovered through peak-load prices, under 
which a higher price would be assessed on traffic occurring during the peak period.   Because 
of various implementation problems,  however, the Commission has never ordered a peak-load 
pricing rate structure, though it has permitted such rate structures.  In implementing the 
reciprocal compensation provisions of the 1996 Act, for example, the Commission permitted 
states to adopt alternative rate structures, including:  (1) a higher rate for peak periods; 
(2) a uniform per-minute rate; (3) a capacity-based rate; or (4) a bill-and-keep arrangement, 
provided that traffic is relatively balanced.   States, however, in applying the Commissions 
rules governing reciprocal compensation, have generally adopted average per-minute rates.  
Similarly, with respect to interstate access charges, the Commission has permitted ILECs to 
charge either a uniform per-minute rate to recover the costs of switching, or a two-part tariff 
consisting of a call setup charge and a per-minute charge.   The Commission has also sought 
comment on whether it should adopt capacity-based charges to recover switching costs. 
110. Our recent experience with ISP reciprocal compensation issues suggests certain 
questions about the use of uniform per-minute charges to recover the traffic-sensitive costs of 
termination.  In particular, it appears that the Commission may have underestimated the 
inefficiencies associated with the use of uniform per-minute prices.  Accordingly, we seek 
comment first on whether an average per-minute rate structure can efficiently recover the traffic 
sensitive costs of interconnection, whether for reciprocal compensation or for access charges.  
If parties believe that such a rate structure is inherently inefficient, then we ask them to propose 
alternative, more efficient rate structures.  We also seek comment on whether the Commission 
overestimated the practical difficulties associated with peak-load pricing arrangements.  
In particular, we seek comment on:  (1) how to deal with the practical, implementation problems 
associated with peak-load pricing; and (2) whether a peak-load pricing structure can eliminate 
the regulatory arbitrage opportunities of the existing interconnection pricing regimes.
111. We also invite comment on whether alternative rate structures would be more 
efficient, and whether they would eliminate some of the problems we are currently experiencing.  
For example, we ask parties to comment on the advantages and disadvantages of using a 
capacity-based rate structure, and a multi-part rate structure that includes both a call set-up 
charge and a per-minute charge.  Finally, we invite parties to propose alternative rate structures 
that they believe would be more efficient, and to explain the basis for their belief.
c. Single Point of Interconnection Issues
112. As previously mentioned, an ILEC must allow a requesting telecommunications 
carrier to interconnect at any technically feasible point, including the option to interconnect at a 
single POI per LATA.   Our current reciprocal compensation rules preclude an ILEC from 
charging carriers for local traffic that originates on the ILECs network.   These rules also 
require that an ILEC compensate the other carrier for transport  and termination  for local 
traffic that originates on the network facilities of such other carrier.   Application of these rules 
has led to questions concerning which carrier should bear the cost of transport to the POI, and 
under what circumstances an interconnecting carrier should be able to recover from the other 
carrier the costs of transport from the POI to the switch serving its end user.  In particular, 
carriers have raised the question whether a CLEC, establishing a single POI within a LATA, 
should pay the ILEC transport costs to compensate the ILEC for the greater transport burden it 
bears in carrying the traffic outside a particular local calling area to the distant single POI.   
Some ILECs will interconnect at any POI within a local calling area; however, if a CLEC wishes 
to interconnect outside the local calling area, some LECs take the position that the CLEC must 
bear all costs for transport outside the local calling area.   CLECs hold the contrary view, that 
our rules simply require LECs to interconnect at any technically feasible point within a LATA, 
and that each carrier must bear its own transport costs on its side of the POI. 
113. If a carrier establishes a single POI in a LATA, should the ILEC be obligated to 
interconnect there and thus bear its own transport costs up to the single POI when the single POI 
is located outside the local calling area?  Alternatively, should a carrier be required either to 
interconnect in every local calling area, or to pay the ILEC transport and/or access charges if the 
location of the single POI requires the ILEC to transport a call outside the local calling area?  
Further, if we should determine that a carrier establishing a single POI outside a local calling 
area must bear some portion of the ILECs transport costs, do our regulations permit the 
imposition of access charges for calls that originate and terminate within one local calling area 
but cross local calling area boundaries due to the placement of the POI? 
114. Finally, we are concerned that the interplay of our single POI rules and reciprocal 
compensation rules may lead to the deployment of inefficient or duplicative networks.  By 
requiring an ILEC to interconnect with a requesting carrier at any technical feasible point in a 
LATA of that carriers choosing, are we compelling inefficient network design by forcing the 
LEC to provision extra transport?  Or, by requiring carriers to pay ILECs for transport outside a 
local calling area, are we forcing the competitive carrier into an inefficient replication of the 
ILEC network?  Assuming that the ILEC receives reciprocal compensation for transporting 
terminating traffic, how precisely does a distant POI unfairly burden the LEC?  Is the efficiency 
concern limited to those instances in which traffic between two networks is unbalanced and/or 
where transport is required beyond a certain distance?  We seek comment on these questions, 
and any other issues related to the interplay between our single POI rules and our reciprocal 
compensation rules.
d. Virtual Central Office Codes
115. We seek comment on the use of virtual central office codes (NXXs),  and their 
effect on the reciprocal compensation and transport obligations of interconnected LECs.  
Commenters in this proceeding have indicated that some LECs are inappropriately using virtual 
NXXs to collect reciprocal compensation for traffic that the ILEC is then forced to transport 
outside of the local calling area.   We note that the Commission has delegated some of its 
authority to state public utility commissions in order that they may order the North American 
Numbering Plan Administrator (NANPA) to reclaim NXX codes that are not used in accordance 
with the Central Office Code Assignment Guidelines.   The Maine Public Utility Commission 
recently addressed the issue of virtual NXXs when it directed the NANPA to reclaim the NXX 
codes that Brooks Fiber used to provide unauthorized interexchange service as opposed to 
facilities-based local exchange service.   In light of these developments, we seek comment 
on the following issues:  (1) Under what circumstances should a LEC be entitled to use virtual 
NXX codes?  (2) If LECs are permitted to use virtual NXX codes, what is the transport 
obligation of the originating LEC?  (3) Should the LEC employing the virtual NXX code be 
required to provide transport from the central offices associated with those NXX codes?
2. Can CPNP Regimes Resolve the Existing Interconnection Issues and 
Will They Be Administratively Feasible?
116. We seek comment on how, if the Commission declines to adopt bill and keep, the 
existing CPNP regimes could be modified to deal with the issues presented by existing 
interconnection regimes, and whether CPNP regimes can be modified so that regulators can 
administer them easily.  We also seek comment on how existing CPNP rules could be modified 
to address situations of regulatory arbitrage.  To the extent that certain regulatory arbitrage 
opportunities arise from the disparities between existing interconnection regimes, we seek 
comment on the costs and benefits of moving to a uniform CPNP regime.
117. We also seek comment on how, under a unified CPNP regime, regulators should 
deal with the terminating access monopoly problem.  In this regard, we ask parties to discuss the 
administrative feasibility of any proposed solution to this problem.  For example, is there any 
way that regulators can avoid having to regulate the access rates of all local carriers?  If the rates 
of all local carriers must be regulated, is there any way to simplify the form of regulation?  
For example, should we simply prohibit CLECs from charging terminating access charges that 
exceed those of the ILEC?
118. Parties should also address whether a CPNP regime increases the possibility of 
predatory price squeezes, particularly against long-distance carriers, and how this problem could 
be addressed.  In this context, and to the extent that parties contend we should drop the 
presumption of symmetrical reciprocal compensation rates, we seek comment on how we can 
minimize the administrative burdens of setting multiple interconnection rates.
119. With respect to the problem of inefficient end-user charges, we seek comment on 
how existing CPNP rules can be modified to reduce this problem.  For example, would this 
problem disappear if we moved to a capacity-based intercarrier compensation scheme?  We also 
invite comment on how we can modify the existing intercarrier compensation scheme to 
eliminate any regulatory inefficiencies that might cause an entity to claim to be a network rather 
than a subscriber.  Similarly, we seek comment on whether CPNP regimes create an incentive for 
carriers to discriminate between on-net and off-net calls, and whether this could increase any 
tendency toward tipping into monopoly.
120. Finally, we ask parties to comment on the administrative costs or regulatory 
burdens associated with reforming the existing CPNP regimes and making them more uniform.  
We also ask parties to discuss whether, under a CPNP regime, regulatory intervention can be 
reduced.  For example, can rules be adopted that provide incentives for carriers to reveal their 
true costs of termination in a regulatory or arbitration process?  Alternatively, if we will be 
unable to eliminate regulatory intervention, can we simplify the regulations?
D. Other Issues
1. Legal Authority
121. In Section II.B.6 above, we seek comment on whether the Commission has legal 
authority to establish bill-and-keep arrangements for reciprocal compensation between 
telecommunications carriers.  With respect to any modification to the existing intercarrier 
compensation rules discussed herein or proposed by any party, we seek comment on whether the 
Commission has legal authority to adopt such a modification.  In particular, with respect to bill-
and-keep arrangements, we seek comment on whether the Commission has legal authority to 
modify our existing interstate access rules to move them into a bill-and-keep regime.  
Additionally, we seek comment (particularly from state public utility commissions) on whether 
the state commissions have authority to mandate bill-and-keep arrangements for intrastate access 
charges.  Finally, to the extent that parties believe it is important for bill-and-keep arrangements 
to be administered uniformly, we seek comment on how the Commission could ensure that all 
states adopt a bill-and-keep approach to intrastate access charges.
2. Jurisdictional Responsibility
122. As previously indicated, this Commission and the state public utility commissions 
have long shared the responsibility for regulating intercarrier compensation.  Furthermore, this 
Commission has always strived to cooperate with the states to carry out this dual responsibility.  
In considering ways to reform intercarrier compensation, we are cognizant of the need to 
cooperate with the states, and the importance of not interfering unnecessarily with legitimate 
state policies.  Thus, with respect to any proposed intercarrier compensation reform, we seek 
comment on how such a reform might affect this balance of responsibilities between the 
Commission and the states.  We also seek comment on how each proposed reform might affect 
existing state policies.  Finally, we seek comment on how each proposed reform might affect 
other existing Commission and state regulations.  For example, how would a bill-and-keep 
regime for carrier access charges affect existing separations rules?
3. Impact on End-User Prices and Universal Service
123. We recognize that modifying our existing intercarrier compensation rules may 
affect end-user prices.  For example, reforming the existing CPNP regimes might require a 
reduction in per-minute charges and an increase in flat charges.  Similarly, DeGraba argues that 
instituting a bill-and-keep arrangement should result in a reduction in traffic-sensitive end-user 
rates, and a concomitant increase in network usage.  Such a shift would also likely result in some 
increase in the flat-rated charges assessed against end users.  In addition, while it is possible that, 
in moving to a bill-and-keep regime, carriers would simply charge existing traffic-sensitive 
termination charges to their end-user customers, it appears equally likely, or more likely, that 
carriers might modify the rate structure by moving to flat-rated charges.  This likewise would 
result in an increase in flat-rated end-user charges.  Finally, if we were to move to a bill-and-
keep regime for access charges, this would reduce the portion of a consumers total 
telecommunications bill that is subject to the geographic rate averaging required by section 
254(g), which could further increase the rates of customers in high-cost areas.  We seek 
comment on how significant any increase in flat-rated charges may be, and also the extent to 
which increases in flat-rated charges may affect telephone penetration levels.  In particular, we 
invite parties to comment on the elasticities of demand with respect to usage and subscription.  
We also seek comment on the aggregate costs and benefits of a bill-and-keep approach, 
including any distributional consequences to any particular subscriber group.
124. We also seek comment on how a bill-and-keep regime would impact universal 
service.  Specifically, we seek comment on whether a bill-and-keep approach would affect the 
Commissions ability to preserve and advance universal service through specific and predictable 
support mechanisms as required by the Communications Act.   For example, to the extent that 
higher fixed rates may cause certain subscribers to drop off the network, we seek comment on 
how we can continue to achieve universal service throughout the U.S.  In addition, we seek 
comment on how any new intercarrier compensation regime, including bill and keep, will impact 
the collection of universal service contributions under the existing contribution methodology.  
Since our contribution methodology continues to evolve in response to changing market 
conditions, we seek comment on how that methodology should account for any new intercarrier 
compensation regime that we establish. 
4. Impact on Interconnection Agreements Between International 
Carriers
125. As previously indicated, this NPRM focuses on efficient intercarrier compensation 
mechanisms for all types of carriers interconnecting with a local telephone network, and for all 
types of traffic passing over that network.  We invite parties to comment on whether any reforms 
we adopt as part of this proceeding should be extended to other interconnection arrangements; 
and if not, how such reforms might affect other types of interconnection arrangements.  
In particular, we seek comment on whether the reforms proposed for domestic intercarrier 
compensation could be a useful substitute for the traditional international settlements system  
for the exchange of international traffic between U.S. international carriers and foreign carriers, 
were they adopted by other countries.  The current international accounting rate system was 
developed as part of a regulatory tradition in which international telecommunications services 
were supplied through a bilateral correspondent relationship between national monopoly carriers.  
An accounting rate is the price that a U.S. facilities-based carrier negotiates with a foreign carrier 
for handling one minute of international telephone service.  Each carriers portion of the 
accounting rate is referred to as the settlement rate.  In almost all cases, the settlement rate is 
equal to one-half the negotiated accounting rate.  In a series of decisions since 1996, the 
Commission has adopted policies to encourage U.S. carriers to negotiate settlement 
arrangements outside the traditional accounting rate system with foreign carriers that lack 
market power and on routes where there is competition within the foreign market.
126. We also seek comment on what impact the proposed reforms, if adopted solely for 
domestic intercarrier compensation, would have on international settlement arrangements and on 
the prices that consumers pay for international services.  We further seek comment on whether 
the reforms would require revision of the Commissions international settlement rate benchmarks 
policy and/or the International Settlements Policy.  The International Settlements Policy 
requires:  (1) the equal division of the accounting rate between the U.S. and foreign carrier; 
(2) nondiscriminatory treatment of U.S. carriers (all U.S. carriers must receive the same 
accounting rate, with the same effective date); and (3) proportionate return of inbound traffic.  
The International Settlements Policy was developed to prevent foreign monopoly carriers from 
discriminating against U.S. international carriers in their settlement negotiations.  
The international settlement rate benchmarks policy requires U.S. carriers to negotiate settlement 
rates that comply with benchmark rates established by the Commission.  In the Benchmarks 
Order, the Commission categorized countries by economic development level and established 
three benchmark rates for the different categories and a transition timetable from January 1, 1999 
to January 1, 2003 for achieving those rates. 
5. Impact on Interconnection Agreements Between Internet Backbones
127. As previously indicated, we do not intend to address directly the issue of 
interconnection agreements among Internet backbones.  The backbones appear to be successfully 
negotiating interconnection agreements among themselves without any regulatory intervention, 
and we see no reason to intervene in this efficiently functioning market.  Nevertheless, we are 
concerned that any of the actions we might take in this proceeding could have unintended 
consequences for interconnection agreements among Internet backbones.  Thus, with respect to 
the various proposals for reforming intercarrier compensation, we seek comment on whether 
such proposals are consistent with existing interconnection arrangements among Internet 
backbones, and how, if at all, they might affect these privately negotiated arrangements.
6. Impact on Small Entities
128. For each proposed approach to intercarrier compensation, we seek further 
comment on the potential impact on small entities.  We seek comment on the relative importance 
of developing a unified regime, and the pro-competitive vision of the 1996 Act, weighed against 
the specific needs of small entities in (and new entrants into) the telecommunications market.  
For example, would a different compliance timetable for small entities be appropriate in any of 
these contexts?
7. Further Possible Approaches to Intercarrier Compensation
129. Finally, we ask parties to comment on whether there are other types of intercarrier 
compensation not yet addressed (i.e., unified CPNP approaches, or approaches other than CPNP 
and bill and keep) that can ameliorate the problems facing existing intercarrier compensation 
arrangements.  In particular, we invite parties to propose alternative unified approaches to 
reforming intercarrier compensation.  With respect to each proposal, we ask that the parties 
explain how their proposal encourages efficient usage of the network and deployment of network 
infrastructure, the likely transaction costs, whether their proposal solves existing interconnection 
problems, and whether it creates new ones.
130. Additionally, we ask parties to comment on the use of a market-based approach to 
intercarrier compensation.  Specifically, we seek comment on whether allowing carriers freely to 
contract arrangements for intercarrier compensation could serve as a unified or partial approach 
to reforming intercarrier compensation.  In what circumstances would such an approach lead to 
more efficient results, or better resolve the current problems, than a regulatory approach?  
We also ask parties to address whether, under a contract-based approach, carriers should be 
allowed to refuse to carry traffic for each other.  What are the legal and practical implications of 
allowing parties to refuse to carry traffic for each other?  What are the potential impacts of this 
behavior on small entities?  Parties should also address the circumstances under which the use of 
tariffs rather than contracts would be more efficient or would better resolve the problems facing 
existing intercarrier compensation arrangements.
IV. PROCEDURAL MATTERS
A. Initial Regulatory Flexibility Analysis
131. As required by the Regulatory Flexibility Act (RFA),  the Commission has 
prepared this present Initial Regulatory Flexibility Analysis (IRFA) of the possible significant 
economic impact on small entities by the policies and rules proposed in this NPRM.  Written 
public comments are requested on this IRFA.  Comments must be identified as responses to the 
IRFA and must be filed by the deadlines for comments on the NPRM provided below in 
paragraph 182.  The Commission will send a copy of the NPRM, including this IRFA, to the 
Chief Counsel for Advocacy of the Small Business Administration (SBA).  See 5 U.S.C. 
 603(a).  In addition, the NPRM and IRFA (or summaries thereof) will be published in the 
Federal Register.  See id.
1. Need for, and Objectives of, the Proposed Rules
132. The existing intercarrier compensation regime applies different sets of rules to 
different types of carriers and to different types of traffic.  Basically, this patchwork of rules can 
be broken down into:  (1) reciprocal compensation rules, which apply to the exchange of local 
traffic; and (2) access rules that apply to traffic exchanged between local carriers and long-
distance carriers.  Both sets of rules are calling-partys-network-pays (CPNP) arrangements 
(i.e., they require the calling partys network to pay the called partys network to terminate a 
call).  Both sets of rules are also subject to numerous exceptions, such as the enhanced service 
provider (ESP) exemption from access charges.
133. This NPRM is motivated by numerous problems that have appeared recently 
concerning the existing rules governing intercarrier compensation.  A primary concern is the 
opportunity, under the current regime, for profit-seeking behavior to take advantage of cost or 
revenue disparities that are due solely to regulation.  For example, competitive local exchange 
carriers (CLECs) often target Internet service providers (ISPs) as customers in order to become 
net-recipients of traffic, and thus profit from reciprocal compensation revenues.  Similarly, 
Internet Protocol (IP) telephony threatens to erode access revenues for LECs because it is exempt 
from the access charges that traditional long-distance carriers must pay.  Another major concern 
is that local carriers possess monopoly power over terminating access.  As a result, CLECs often 
impose access charges that far exceed the regulated access charges of incumbent LECs.  Finally, 
the current regime can generate inefficient traffic-sensitive end-user rates, and can also create 
incentives for entities to claim to be networks in order to qualify for interconnection, rather than 
to simply subscribe as a customer.
134. This NPRM seeks comment on the existing CPNP regime, and asks whether it can 
be effectively reformed to address these problems.  This NPRM also seeks comment on 
alternative approaches to intercarrier compensation, including the possibility of adopting some 
form of bill and keep.  In particular, this NPRM seeks comment on the proposals contained in 
two working papers written by Commission staff members.  In the first paper, Patrick DeGraba 
proposes the following two rules (called Central Office Bill and Keep, or COBAK):  (1) that 
no carrier may recover any costs of its customers local access facilities from an interconnecting 
carrier; and (2) that the calling partys network is responsible for the cost of transporting the call 
to the called partys central office.  In the second paper, Jay M. Atkinson and Christopher C. 
Barnekov propose another set of rules (called Bill Access to SubscribersInterconnection Cost 
Split, or BASICS):  (1) networks should recover all intra-network costs from their end-user 
customers; and (2) networks should divide equally the costs that result purely from 
interconnection.  This NPRM seeks comment on COBAK and BASICS, together with any 
alternative bill-and-keep approaches.
135. With respect to each approach to intercarrier compensation, this NPRM seeks 
comment on whether it will encourage an efficient use of, and investment in, the network, and 
whether it will be administratively feasible.  This NPRM also seeks comment on whether each of 
the alternative proposals will solve existing interconnection problems, and the extent to which 
the proposals will create new problems.
2. Legal Basis
136. The legal basis for any action that may be taken pursuant to the NPRM is 
contained in sections 4, 201-202, 303 and 403 of the Communications Act of 1934, as amended, 
47 U.S.C.  154, 201-202, 303 and 403, and sections 1.1, 1.411 and 1.412 of the Commissions 
rules, 47 C.F.R.  1.1, 1.411 and 1.412.
3. Description and Estimate of the Number of Small Entities to Which 
Rules Will Apply
137. The RFA directs agencies to provide a description of, and, where feasible, an 
estimate of the number of small entities that may be affected by the proposed rules, if adopted.   
The RFA defines the term small entity as having the same meaning as the terms small 
business, small organization and small business concern under section 3 of the Small 
Business Act.   A small business concern is one which:  (1) is independently owned and 
operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria 
established by the SBA. 
138. A small organization is generally any not-for-profit enterprise which is 
independently owned and operated and is not dominant in its field.   Nationwide, as of 1992, 
there were approximately 275,801 small organizations.   Small governmental jurisdiction  
generally means governments of cities, counties, towns, townships, villages, school districts, or 
special districts, with a population of less than 50,000.   As of 1992, there were approximately 
85,006 such jurisdictions in the United States.   This number includes 38,978 counties, cities, 
and towns; of these, 37,566, or 96 percent, have populations of fewer than 50,000.   The 
Census Bureau estimates that this ratio is approximately accurate for all governmental entities.  
Thus, of the 85,006 governmental entities, we estimate that 81,600 (96 percent) are small 
entities.  According to SBA reporting data, there were 4.44 million small business firms 
nationwide in 1992.   Below, we further describe and estimate the number of small entity 
licensees and regulatees that may be affected by rules adopted pursuant to this NPRM.
139. The most reliable source of information regarding the total numbers of certain 
common carrier and related providers nationwide, as well as the number of commercial wireless 
entities, appears to be the data that the Commission publishes in its Trends in Telephone Service 
report.   In a recent news release, the Commission indicated that there are 4,822 interstate 
carriers.   These carriers include, inter alia, local exchange carriers, wireline carriers and 
service providers, interexchange carriers, competitive access providers, operator service 
providers, pay telephone operators, providers of telephone service, providers of telephone 
exchange service, and resellers.
140. The SBA has defined establishments engaged in providing Radiotelephone 
Communications and Telephone Communications, Except Radiotelephone to be small 
businesses when they have no more than 1,500 employees.   Below, we discuss the total 
estimated number of telephone companies falling within the two categories, and the number of 
small businesses in each.  We then attempt to further refine those estimates to correspond with 
the categories of telephone companies that are commonly used under our rules.
141. We have included small incumbent LECs (small ILECs) in this present RFA 
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.   The SBAs Office of 
Advocacy contends that, for RFA purposes, small ILECs are not dominant in their field of 
operation because any such dominance is not national in scope.   We have therefore included 
small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no 
effect on Commission analyses and determinations in other, non-RFA contexts.
142. Total Number of Telephone Companies Affected.  The U.S. Bureau of the Census 
(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.   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, covered specialized mobile radio providers, and resellers.  
It seems certain that some of these 3,497 telephone service firms may not qualify as small 
entities or small ILECs because they are not independently owned and operated.   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 is reasonable to conclude that 
fewer than 3,497 telephone service firms are small entity telephone service firms or small ILECs 
that may be affected by the new rules.
143. Wireline Carriers and Service Providers.  The SBA has developed a definition of 
small entities for telephone communications companies except radiotelephone (i.e., wireless) 
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.   According to the SBAs definition, a small 
business telephone company other than a radiotelephone company is one employing no more 
than 1,500 persons.   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 ILECs.  We do not have data specifying 
the number of these carriers that are not independently owned and operated, and thus 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 SBAs definition.  
Consequently, we estimate 2,295 or fewer small telephone communications companies other 
than radiotelephone companies are small entities or small ILECs that may be affected by rules 
adopted pursuant to this NPRM.
144. Local Exchange Carriers.  Neither the Commission nor the SBA has developed a 
definition for small providers of local exchange services (LECs).  The closest applicable 
definition under the SBA rules is for telephone communications companies other than 
radiotelephone (i.e., wireless) companies.   According to the most recent Telecommunications 
Industry Revenue data, 1,335 incumbent carriers reported that they were engaged in the provision 
of local exchange services.   We do not have data specifying the number of these carriers that 
are either dominant in their field of operations, are not independently owned and operated, or 
have more than 1,500 employees, and thus are unable at this time to estimate with greater 
precision the number of LECs that would qualify as small business concerns under the SBAs 
definition.  Consequently, we estimate that 1,335 or fewer providers of local exchange service 
are small entities or small ILECs that may be affected by the new rules.
145. Interexchange Carriers.  Neither the Commission nor the SBA has developed a 
definition of small entities specifically applicable to providers of interexchange services (IXCs).  
The closest applicable definition under the SBA rules is for telephone communications 
companies other than radiotelephone (i.e., wireless) companies.   According to the most recent 
Trends in Telephone Service data, 204 carriers reported that they were engaged in the provision 
of interexchange services.   We do not have data specifying the number of these carriers that 
are not independently owned and operated or have more than 1,500 employees, and thus are 
unable at this time to estimate with greater precision the number of IXCs that would qualify as 
small business concerns under the SBAs definition.  Consequently, we estimate that there are 
204 or fewer small-entity IXCs that may be affected by rules adopted pursuant to this NPRM.
146. Competitive Access Providers.  Neither the Commission nor the SBA has 
developed a definition of small entities specifically applicable to competitive access services 
providers (CAPs).  The closest applicable definition under the SBA rules is for telephone 
communications companies other than radiotelephone (i.e., wireless) companies.   According 
to the most recent Trends in Telephone Service data, 349 CAP/CLEC carriers and 60 other LECs 
reported that they were engaged in the provision of competitive local exchange services.   
We do not have data specifying the number of these carriers that are not independently owned 
and operated, or have more than 1,500 employees, and thus are unable at this time to estimate 
with greater precision the number of CAPs that would qualify as small business concerns under 
the SBAs definition.  Consequently, we estimate that there are 349 or fewer small-entity CAPs 
and 60 or fewer other LECs that may be affected by rules adopted pursuant to this NPRM.
147. Operator Service Providers.  Neither the Commission nor the SBA has developed 
a definition of small entities specifically applicable to providers of operator services.  The closest 
applicable definition under the SBA rules is for telephone communications companies other than 
radiotelephone (i.e., wireless) companies.   According to the most recent Trends in Telephone 
Service data, 21 carriers reported that they were engaged in the provision of operator services.   
We do not have data specifying the number of these carriers that are not independently owned 
and operated or have more than 1,500 employees, and thus are unable at this time to estimate 
with greater precision the number of operator service providers that would qualify as small 
business concerns under the SBAs definition.  Consequently, we estimate that there are 21 or 
fewer small-entity operator service providers that may be affected by rules adopted pursuant to 
this NPRM.
148. Pay Telephone Operators.  Neither the Commission nor the SBA has developed a 
definition of small entities specifically applicable to pay telephone operators.  The closest 
applicable definition under SBA rules is for telephone communications companies other than 
radiotelephone (i.e., wireless) companies.   According to the most recent Trends in Telephone 
Service data, 758 carriers reported that they were engaged in the provision of pay telephone 
services.   We do not have data specifying the number of these carriers that are not 
independently owned and operated or have more than 1,500 employees, and thus are unable at 
this time to estimate with greater precision the number of pay telephone operators that would 
qualify as small business concerns under the SBAs definition.  Consequently, we estimate that 
there are 758 or fewer small-entity pay telephone operators that may be affected by rules adopted 
pursuant to this NPRM.
149. Resellers (including debit card providers).  Neither the Commission nor the SBA 
has developed a definition of small entities specifically applicable to resellers.  The closest 
applicable SBA definition for a reseller is a telephone communications company other than 
radiotelephone (i.e., wireless) companies.   According to the most recent Trends in Telephone 
Service data, 454 toll and 87 local entities reported that they were engaged in the resale of 
telephone service.   We do not have data specifying the number of these carriers that are not 
independently owned and operated or have more than 1,500 employees, and thus are unable at 
this time to estimate with greater precision the number of resellers that would qualify as small 
business concerns under the SBAs definition.  Consequently, we estimate that there are 454 or 
fewer small-toll-entity resellers and 87 or fewer small-local-entity resellers that may be affected 
by rules adopted pursuant to this NPRM.
150. Toll-Free 800 and 800-Like Service Subscribers.   Neither the Commission nor 
the SBA has developed a definition of small entities specifically applicable to 800 and 800-like 
service (toll free) subscribers.  The most reliable source of information regarding the number 
of these service subscribers appears to be data the Commission collects on the 800, 888, and 877 
numbers in use.   According to our most recent data, at the end of January 1999, the number of 
800 numbers assigned was 7,692,955; the number of 888 numbers that had been assigned was 
7,706,393; and the number of 877 numbers assigned was 1,946,538.  We do not have data 
specifying the number of these subscribers that are not independently owned and operated or 
have more than 1,500 employees, and thus are unable at this time to estimate with greater 
precision the number of toll free subscribers that would qualify as small business concerns under 
the SBAs definition.  Consequently, we estimate that there are 7,692,955 or fewer small-entity 
800 subscribers, 7,706,393 or fewer small-entity 888 subscribers, and 1,946,538 or fewer small-
entity 877 subscribers that may be affected by rules adopted pursuant to this NPRM.
151. Cellular Licensees.  Neither the Commission nor the SBA has developed a 
definition of small entities applicable to cellular licensees.  Therefore, the applicable definition 
of small entity is the definition under the SBA rules applicable to radiotelephone (i.e., wireless) 
companies.  This definition provides that a small entity is a radiotelephone company employing 
no more than 1,500 persons.   According to the Bureau of the Census, only 12 radiotelephone 
firms out of a total of 1,178 such firms that operated during 1992 had 1,000 or more 
employees.   Therefore, even if all 12 of these firms were cellular telephone companies, nearly 
all cellular carriers were small businesses under the SBA's definition.  In addition, we note that 
there are 1,758 cellular licenses; however, we do not know the number of cellular licensees, 
since a cellular licensee may own several licenses. The most reliable source of information 
regarding the number of cellular service providers nationwide appears to be data the Commission 
publishes annually in its Telecommunications Industry Revenue report, regarding the 
Telecommunications Relay Service (TRS).  The report places cellular licensees and Personal 
Communications Service (PCS) licensees in one group.  According to recent data, 808 carriers 
reported that they were engaged in the provision of either cellular or PCS services.   We do not 
have data specifying the number of these carriers that are not independently owned and operated 
or have more than 1,500 employees, and thus are unable at this time to estimate with greater 
precision the number of cellular service carriers that would qualify as small business concerns 
under the SBA's definition.  Consequently, we estimate that there are no more than 808 small 
cellular service carriers.
152. 220 MHz Radio ServicePhase I Licensees.  The 220 MHz service has both 
Phase I and Phase II licenses.  Phase I licensing was conducted by lotteries in 1992 and 1993.  
There are approximately 1,515 such non-nationwide licensees and 4 nationwide licensees 
currently authorized to operate in the 220 MHz band.  The Commission has not developed a 
definition of small entities specifically applicable to such incumbent 220 MHz Phase I licensees.  
To estimate the number of such licensees that are small businesses, we apply the definition under 
the SBA rules applicable to radiotelephone communications companies.  This definition provides 
that a small entity is a radiotelephone company employing no more than 1,500 persons.   
According to a 1995 estimate by the Bureau of the Census, only 12 radiotelephone firms out of a 
total of 1,178 such firms that operated during 1992 had 1,000 or more employees.   Therefore, 
assuming that this general ratio has not changed significantly in recent years in the context of 
Phase I 220 MHz licensees, we estimate that nearly all such licensees are small businesses under 
the SBA's definition.
153. 220 MHz Radio ServicePhase II Licensees.  The Phase II 220 MHz service is a 
new service, and is subject to spectrum auctions.  In the 220 MHz Third Report and Order, we 
adopted criteria for defining small businesses and very small businesses for purposes of 
determining their eligibility for special provisions such as bidding credits and installment 
payments.   We have defined a small business as an entity that, together with its affiliates and 
controlling principals, has average gross revenues not exceeding $15 million for the preceding 
three years.  Additionally, a very small business is defined as an entity that, together with its 
affiliates and controlling principals, has average gross revenues that are not more than $3 million 
for the preceding three years.   The SBA has approved these definitions.   An auction of 
Phase II licenses commenced on September 15, 1998, and closed on October 22, 1998.   
Nine hundred and eight (908) licenses were auctioned in three different-sized geographic areas:  
3 nationwide licenses, 30 Regional Economic Area Group (REAG) licenses, and 875 Economic 
Area (EA) licenses.  Of the 908 licenses auctioned, 693 were sold.  Companies claiming small 
business status won: 1 of the Nationwide licenses, 67% of the Regional licenses, 47% of the 
REAG licenses and 54% of the EA licenses.  As of January 22, 1999, the Commission 
announced that it was prepared to grant 654 of the Phase II licenses won at auction.   A second 
220 MHz Radio Service auction began on June 8, 1999 and closed on June 30, 1999. This 
auction offered 225 licenses in 87 EAs and 4 REAGs. (A total of 9 REAG licenses and 216 EA 
licenses. No nationwide licenses were available in this auction.)  Of the 215 EA licenses won, 
153 EA licenses (71%) were won by bidders claiming small business status.  Of the 7 REAG 
licenses won, 5 REAG licenses (71%) were won by bidders claiming small business status.
154. Private and Common Carrier Paging.  The Commission has adopted a two-tier 
definition of small businesses in the context of auctioning licenses in the Common Carrier 
Paging and exclusive Private Carrier Paging services.  A small business will be defined as either:  
(1) an entity that, together with its affiliates and controlling principals, has average gross 
revenues for the three preceding years of not more than $3 million; or (2) an entity that, together 
with affiliates and controlling principals, has average gross revenues for the three preceding 
calendar years of not more than $15 million.  Because the SBA has not yet approved this 
definition for paging services, we will utilize the SBA's definition applicable to radiotelephone 
companies, i.e., an entity employing no more than 1,500 persons.   At present, there are 
approximately 24,000 Private Paging licenses and 74,000 Common Carrier Paging licenses.  
According to recent data, 172 carriers reported that they were engaged in the provision of either 
paging or "other mobile" services, which are placed together in the data.   We do not have data 
specifying the number of these carriers that are not independently owned and operated or have 
more than 1,500 employees, and thus are unable at this time to estimate with greater precision 
the number of paging carriers that would qualify as small business concerns under the SBA's 
definition.  Consequently, we estimate that there are no more than 172 small paging carriers.  
We estimate that the majority of private and common carrier paging providers would qualify as 
small entities under the SBA definition.
155. Mobile Service Carriers.  Neither the Commission nor the SBA has developed a 
definition of small entities specifically applicable to mobile service carriers, such as paging 
companies.  As noted above in the section concerning paging service carriers, the closest 
applicable definition under the SBA rules is that for radiotelephone (i.e., wireless) companies,  
and recent data show that 172 carriers reported that they were engaged in the provision of either 
paging or other mobile services.   Consequently, we estimate that there are no more than 172 
small mobile service carriers.
156. Broadband Personal Communications Service (PCS).  The broadband PCS 
spectrum is divided into six frequency blocks designated A through F, and the Commission has 
held auctions for each block.  The Commission defined "small entity'' for blocks C and F as an 
entity that has average gross revenues of less than $40 million in the three previous calendar 
years.   For block F, an additional classification for "very small business" was added and is 
defined as an entity that, together with affiliates, has average gross revenues of not more than 
$15 million for the preceding three calendar years.   These regulations defining "small entity'' in 
the context of broadband PCS auctions have been approved by the SBA.   No small businesses 
within the SBA-approved definition bid successfully for licenses in blocks A and B.  There were 
90 winning bidders that qualified as small entities in the C block auctions.  A total of 93 small 
and very small business bidders won approximately 40% of the 1,479 licenses for blocks D, E 
and F.   On March 23, 1999, the Commission held another auction (Auction No. 22) of C, D, E 
and F block licenses for PCS spectrum returned to the Commission by previous license holders.  
In that auction, 48 bidders claiming small business, very small business or entrepreneurial status 
won 272 of the 341 licenses (80%) offered.  Based on this information, we conclude that the 
number of small broadband PCS licensees includes the 90 winning C block bidders, the 93 
qualifying bidders in the D, E and F blocks, and the 48 winning bidders from Auction No. 22, 
for a total of 231 small-entity PCS providers as defined by the SBA and the Commission's 
auction rules.
157. Narrowband PCS.  The Commission has auctioned nationwide and regional 
licenses for narrowband PCS.  There are 11 nationwide and 30 regional licensees for narrowband 
PCS.  The Commission does not have sufficient information to determine whether any of these 
licensees are small businesses within the SBA-approved definition for radiotelephone 
companies.  At present, there have been no auctions held for the major trading area (MTA) and 
basic trading area (BTA) narrowband PCS licenses.  The Commission anticipates a total of 561 
MTA licenses and 2,958 BTA licenses will be awarded by auction.  Such auctions, however, 
have not yet been scheduled. Given that nearly all radiotelephone companies have no more than 
1,500 employees, and no reliable estimate of the number of prospective MTA and BTA 
narrowband licensees can be made, we assume, for our purposes here, that all of the licenses will 
be awarded to small entities, as that term is defined by the SBA.
158. Rural Radiotelephone Service.  The Commission has not adopted a definition of 
small entity specific to the Rural Radiotelephone Service.   A significant subset of the Rural 
Radiotelephone Service is the Basic Exchange Telephone Radio Systems (BETRS).   We will 
use the SBA's definition applicable to radiotelephone companies, i.e., an entity employing no 
more than 1,500 persons.   There are approximately 1,000 licensees in the Rural 
Radiotelephone Service, and we estimate that almost all of them qualify as small entities under 
the SBA's definition.
159. Air-Ground Radiotelephone Service.  The Commission has not adopted a 
definition of small entity specific to the Air-Ground Radiotelephone Service.   Accordingly, we 
will use the SBA's definition applicable to radiotelephone companies, i.e., an entity employing 
no more than 1,500 persons.   There are approximately 100 licensees in the Air-Ground 
Radiotelephone Service, and we estimate that almost all of them qualify as small under the 
SBA definition.
160. Specialized Mobile Radio (SMR).  The Commission awards bidding credits in 
auctions for geographic area 800 MHz and 900 MHz SMR licenses to two tiers of firms:  
(1) "small entities," those with revenues of no more than $15 million in each of the three 
previous calendar years; and (2) "very small entities," those with revenues of no more than 
$3 million in each of the three previous calendar years.  The regulations defining "small entity" 
and "very small entity" in the context of 800 MHz SMR (upper 10 MHz and lower 230 channels) 
and 900 MHz SMR have been approved by the SBA.  The Commission does not know how 
many firms provide 800 MHz or 900 MHz geographic area SMR service pursuant to extended 
implementation authorizations, nor how many of these providers have annual revenues of no 
more than $15 million.  One firm has over $15 million in revenues.  We assume, for our 
purposes here, that all of the remaining existing extended implementation authorizations are held 
by small entities, as that term is defined by the SBA.  The Commission has held auctions for 
geographic area licenses in the 800 MHz (upper 10 MHz) and 900 MHz SMR bands.  There 
were 60 winning bidders that qualified as small and very small entities in the 900 MHz auction.  
Of the 1,020 licenses won in the 900 MHz auction, 263 licenses were won by bidders qualifying 
as small and very small entities.  In the 800 MHz SMR auction, 38 of the 524 licenses won were 
won by small and very small entities.
161. Marine Coast Service.  Between December 3, 1998 and December 14, 1998, the 
Commission held an auction of 42 VHF Public Coast licenses in the 157.1875-157.4500 MHz 
(ship transmit) and 161.775-162.0125 MHz (coast transmit) bands.  For purposes of this auction, 
and for future public coast auctions, the Commission defines a "small" business as an entity that, 
together with controlling interests and affiliates, has average gross revenues for the preceding 
three years not to exceed $15 million dollars.  A "very small" business is one that, together with 
controlling interests and affiliates, has average gross revenues for the preceding three years not 
to exceed $3 million dollars.   There are approximately 10,672 licensees in the Marine Coast 
Service, and the Commission estimates that almost all of them qualify as "small" businesses 
under the Commission's definition, which has been approved by the SBA.
162. Fixed Microwave Services.  Microwave services include common carrier,  
private-operational fixed,  and broadcast auxiliary radio services.   At present, there are 
approximately 22,015 common carrier fixed licensees and 61,670 private operational-fixed 
licensees and broadcast auxiliary radio licensees in the microwave services.  The Commission 
has not yet defined a small business with respect to microwave services.  For our purposes here, 
we will utilize the SBA's definition applicable to radiotelephone companiesi.e., an entity with 
no more than 1,500 persons.   Under this definition, we estimate that all of the Fixed 
Microwave licensees (excluding broadcast auxiliary licensees) would qualify as small entities.
163. Local Multipoint Distribution Service.  The Commission held two auctions for 
licenses in the Local Multipoint Distribution Services (LMDS) (Auction No. 17 and Auction 
No. 23).  For both of these auctions, the Commission defined a small business as an entity, 
together with its affiliates and controlling principals, having average gross revenues for the three 
preceding years of not more than $40 million.  A very small business was defined as an entity, 
together with affiliates and controlling principals, having average gross revenues for the three 
preceding years of not more than $15 million.  Of the 144 winning bidders in Auction Nos. 17 
and 23, 125 bidders (87%) were small or very small businesses.
164. 24 GHzIncumbent 24 GHz Licensees.  The rules that we may later adopt could 
affect incumbent licensees who were relocated to the 24 GHz band from the 18 GHz band, and 
applicants who wish to provide services in the 24 GHz band.  The Commission has not 
developed a definition of small entities applicable to licensees in the 24 GHz band.  
Therefore, the applicable definition of small entity is the definition under the SBA rules for the 
radiotelephone industry, providing that a small entity is a radiotelephone company employing 
fewer than 1,500 persons.   The 1992 Census of Transportation, Communications and Utilities, 
conducted by the Bureau of the Census, which is the most recent information available, shows 
that only 12 radiotelephone firms out of a total of 1,178 such firms that operated during 1992 had 
1,000 or more employees.   This information notwithstanding, we believe that there are only 
two licensees in the 24 GHz band that were relocated from the 18 GHz band, Teligent and 
TRW, Inc.   Both Teligent and TRW, Inc. appear to have more than 1,500 employees.  
Therefore, it appears that no incumbent licensee in the 24 GHz band is a small business entity.
165. Future 24 GHz Licensees.  The rules that we may later adopt could also affect 
potential new licensees on the 24 GHz band.  Pursuant to 47 C.F.R.  24.720(b), the Commission 
has defined small business for Blocks C and F broadband PCS licensees as firms that had 
average gross revenues of less than $40 million in the three previous calendar years.  This 
regulation defining small business in the context of broadband PCS auctions has been 
approved by the SBA.   With respect to new applicants in the 24 GHz band, we shall use this 
definition of small business and apply it to the 24 GHz band under the name entrepreneur.  
With regard to small business, we shall adopt the definition of very small business used for 
39 GHz licenses and PCS C and F block licenses:  businesses with average annual gross 
revenues for the three preceding years not in excess of $15 million.  Finally, very small 
business in the 24 GHz band shall be defined as an entity with average gross revenues not to 
exceed $3 million for the preceding three years.  The Commission will not know how many 
licensees will be small or very small businesses until the auction, if required, is held.  Even after 
that, the Commission will not know how many licensees will partition their license areas or 
disaggregate their spectrum blocks, if partitioning and disaggregation are allowed.
166. 39 GHz.  The Commission held an auction (Auction No. 30) for fixed point-to-
point microwave licenses in the 38.6 to 40.0 GHz band (39 GHz Band).   For this auction, the 
Commission defined a small business as an entity, together with affiliates and controlling 
interests, having average gross revenues for the three preceding years of not more than 
$40 million.  A very small business was defined as an entity, together with affiliates and 
controlling principals, having average gross revenues for the three preceding years of not more 
than $15 million.  The SBA has approved these definitions.   Of the 29 winning bidders in 
Auction No. 30, 18 bidders (62%) were small business participants. 
167. Multipoint Distribution Service (MDS). This service involves a variety of 
transmitters, which are used to relay data and programming to the home or office, similar to that 
provided by cable television systems.   In connection with the 1996 MDS auction, the 
Commission defined small businesses as entities that had annual average gross revenues for the 
three preceding years not in excess of $40 million.   This definition of a small entity in the 
context of MDS auctions has been approved by the SBA.   These stations were licensed prior to 
implementation of Section 309(j) of the Communications Act of 1934, as amended.   Licenses 
for new MDS facilities are now awarded to auction winners in Basic Trading Areas (BTAs) and 
BTA-like areas.   The MDS auctions resulted in 67 successful bidders obtaining licensing 
opportunities for 493 BTAs.  Of the 67 auction winners, 61 meet the definition of a small 
business.
168. MDS is also heavily encumbered with licensees of stations authorized prior to the 
MDS auction.  SBA has developed a definition of small entities for pay television services, 
which includes all such companies generating $11 million or less in annual receipts.   This 
definition includes MDS systems, and thus applies to incumbent MDS licensees and wireless 
cable operators which may not have participated or been successful in the MDS auction.  
Information available to us indicates that there are 832 of these licensees and operators that do 
not generate revenue in excess of $11 million annually.  Therefore, for purposes of this analysis, 
we find there are approximately 892 small MDS providers as defined by the SBA and the 
Commissions auction rules.
169. Offshore Radiotelephone Service.  This service operates on several UHF TV 
broadcast channels that are not used for TV broadcasting in the coastal area of the states 
bordering the Gulf of Mexico.   At present, there are approximately 55 licensees in this service.  
We are unable at this time to estimate the number of licensees that would qualify as small under 
the SBA's definition for radiotelephone communications.
170. Wireless Communications Services (WCS).  This service can be used for fixed, 
mobile, radio-location and digital audio broadcasting satellite uses.  The Commission defined 
"small business" for the WCS auction as an entity with average gross revenues of $40 million for 
each of the three preceding years, and a "very small business" as an entity with average gross 
revenues of $15 million for each of the three preceding years.  The Commission auctioned 
geographic area licenses in the WCS service.  In the auction, there were seven winning bidders 
that qualified as very small business entities, and one winning bidder that qualified as a small 
business entity.  We conclude that the number of geographic area WCS licensees affected 
includes these eight entities.  
171. General Wireless Communication Service (GWCS).  This service was created by 
the Commission on July 31, 1995  by transferring 25 MHz of spectrum in the 4660-4685 MHz 
band from the federal government to private sector use.  The Commission sought and obtained 
SBA approval of a refined definition of "small business" for GWCS in this band.   According to 
this definition, a small business is any entity, together with its affiliates and entities holding 
controlling interests in the entity, that has average annual gross revenues over the three preceding 
years that are not more than $40 million.   By letter dated March 30, 1999, NTIA reclaimed the 
spectrum allocated to GWCS and identified alternative spectrum at 4940-4990 MHz.  On 
February 23, 2000, the Commission released its Notice of Proposed Rulemaking in WT Docket 
No. 00-32 proposing to allocate and establish licensing and service rules for the 4.9 GHz band. 
4. Description of Projected Reporting, Recordkeeping and Other 
Compliance Requirements
172. There are certain transaction costs for terminating access, including measuring 
and billing.  Under the existing CPNP regime, the terminating LEC bills the originating network, 
whereas under bill and keep, the terminating LEC may bill its own customers.  In this NPRM, we 
seek comment on the relative transaction costs of each proposal, weighed against the other 
efficiencies of the various alternatives.   We note that transaction costs can increase under a 
bill-and-keep arrangement, for example, since each carrier may be responsible for measuring and 
billing its own customers for all traffic, rather than merely measuring and billing the originating 
carrier.
173. Apart from the transaction costs for termination, this NPRM more broadly 
suggests that a new regime could free regulators from allocating transport costs, and from setting 
the level and structure of termination rates.   Where rates had once been set by regulation, 
individual carriers, including small entities, could inherit this responsibility.
174. As a result of rules that we may adopt, incumbent LECs and CLECs may be 
required to discern the amount of traffic carried on their networks that is bound for ISPs.  
In addition, such incumbent LECs and competitive entrants may be required to produce 
information regarding the costs of carrying ISP-bound traffic on their networks. 
175. In this NPRM, we seek comment on the extent to which a new regime would 
comply with our reciprocal compensation obligations regarding traffic balances and symmetrical 
rates.   If we adopt rules on this issue, we may require carriers to report traffic imbalances, 
corresponding to rate symmetry.  This is especially true in the context of LEC-CMRS 
interconnection, in which we seek comment on the feasibility of cost studies that CMRS carriers 
could use to justify separate treatment. 
5. Steps Taken to Minimize Significant Economic Impact on Small 
Entities, and Significant Alternatives Considered
176. The RFA requires an agency to describe any significant alternatives that it has 
considered in reaching its proposed approach, which may include the following four alternatives 
(among others):  (1) the establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small entities; (2) the clarification, 
consolidation, or simplification of compliance or reporting requirements under the rule for small 
entities; (3) the use of performance, rather than design, standards; and (4) an exemption from 
coverage of the rule, or any part thereof, for small entities. 
177. Although the transaction costs for terminating access can increase under a bill-
and-keep arrangement, the impact on small entities would be minimal since measuring and 
billing is already a fundamental component of their operations.  Furthermore, the advantages of a 
bill-and-keep regime, in providing clearer demarcations of cost between carriers, appear to 
outweigh the minimal increase in transaction costs that could occur under bill and keep.  With 
regard to the related task of allocating transport costs, the same reasoning applies to small 
entities in that the clearer demarcations between carriers inherent in bill and keep outweighs the 
potential burden of setting the level and structure of termination rates.  We note, in any case, that 
many small entities are competitive entrants such as CLECs, which currently enjoy specific 
exemptions from ILEC rate regulation.
178. We also note a potential benefit that may accrue to small-entity LECs transporting 
ISP-bound traffic.  As discussed above, we may adopt rules that may require incumbent LECs 
and CLECs to discern the amount of traffic carried on their networks that is bound for ISPs.  
We anticipate that if we adopt such rules, incumbent LECs and CLECs, including small-entity 
incumbent LECs and CLECs, will be able to receive compensation for the delivery of ISP-bound 
traffic that they might not otherwise receive.  The NPRM separately requests comment on 
alternative proposals.
179. In the NPRM, we seek comment on the issue of asymmetrical compensation for 
unbalanced traffic.  Although small entities could experience an increase in reporting and 
recordkeeping when submitting cost studies to this effect, if adopted, we note that such a 
requirement would more accurately serve the revenue requirements of small entities in relation to 
larger competitors.
180. Finally, in the NPRM, we seek comment on additional impacts on small entities 
that may result from any new intercarrier compensation regime.   When seeking comment on 
the alternative of contractual arrangements for intercarrier compensation, we ask commenters to 
address the potential impacts of such a market-based approach on small entities, such as the 
refusal to carry traffic. 
6. Federal Rules that May Duplicate, Overlap or Conflict With the 
Proposed Rules
181. None.
B. Comment Filing Procedures
182. Pursuant to sections 1.415, 1.419, and 1.430 of the Commissions rules, 47 C.F.R. 
 1.415, 1.419, 1.430, interested parties may file comments within 90 days after publication in 
the Federal Register, and reply comments within 135 days after publication in the Federal 
Register.  All filings should refer to CC Docket No. 01-92.  Comments may be filed using the 
Commissions Electronic Comment Filing System (ECFS) or by filing paper copies.   
Comments filed through the ECFS can be sent as an electronic file via the Internet to 
<http://www.fcc.gov/e-file/ecfs.html>.  Generally, only one copy of an electronic submission 
must be filed.  In completing the transmittal screen, commenters should include their full name, 
Postal Service mailing address, and the applicable docket number, which in this instance is 
CC Docket No. 01-92.  Parties may also submit an electronic comment by Internet e-mail.  
To get filing instructions for e-mail comments, commenters should send an e-mail to 
<ecfs@fcc.gov>, and should include the following words in the body of the message:  get form 
<your e-mail address>.  A sample form and directions will be sent in reply.
183. Parties who choose to file by paper must file an original and four copies of each 
filing.  All filings must be sent to the Commissions Secretary, Magalie Roman Salas, Office of 
the Secretary, Federal Communications Commission, Room TW-B204, 445 12th Street, S.W., 
Washington, D.C. 20554.  Regardless of whether parties choose to file electronically or by paper, 
parties should also serve:  (1) Paul Moon, Common Carrier Bureau, 445 12th Street, S.W., 
Room 3-C423, Washington, D.C. 20554; (2) Jane Jackson, Common Carrier Bureau, 
445 12th Street, S.W., Room 5-A225, Washington, D.C. 20554; and (3) the Commissions 
copy contractor, International Transcription Service, Inc. (ITS), 445 12th Street, S.W., 
Room CY-B402, Washington, D.C. 20554, (202) 857-3800, with copies of any documents filed 
in this proceeding.  Comments and reply comments will be available for public inspection during 
regular business hours in the FCC Reference Center, Room CY-A257, 445 12th Street, S.W., 
Washington, D.C. 20554.
184. Parties who choose to file by paper should also submit their comments on 
diskette.  These diskettes should be submitted to Wanda Harris, Common Carrier Bureau, 
445 12th Street, S.W., Room 5-A452, Washington, D.C. 20554.  Such a submission should be on 
a 3.5-inch diskette formatted in a Windows-compatible format using Microsoft Word or 
compatible software.  The diskette should be accompanied by a cover letter and should be 
submitted in "read only" mode.  The diskette should be clearly labeled with the commenters 
name, proceeding (including the docket numberin this case, CC Docket No. 01-92), type of 
pleading (comment or reply comment), date of submission, and the name of the electronic file on 
the diskette.  The label should also include the following phrase:  "Disk CopyNot an Original."  
Each diskette should contain only one partys pleadings, preferably in a single electronic file.  
In addition, commenters must send diskette copies to the Commissions copy contractor, 
International Transcription Service, Inc., 1231 20th Street, N.W., Washington, D.C. 20036.
185. Comments and reply comments must include a short and concise summary of the 
substantive arguments raised in the pleading.  Comments and reply comments must also comply 
with section 1.49 and all other applicable sections of the Commissions rules.   We also direct 
all interested parties to include the name of the filing party and the date of the filing on each page 
of their comments and reply comments.  All parties are encouraged to utilize a table of contents, 
regardless of the length of their submission.  We also strongly encourage that parties track the 
organization set forth in this NPRM to facilitate our internal review process.
186. Pursuant to 47 C.F.R.  1.200(a), which permits the Commission to adopt 
modified or more stringent ex parte procedures in particular proceedings if the public interest so 
requires, we announce that this proceeding will be governed by permit-but-disclose ex parte 
procedures that are applicable to non-restricted proceedings under 47 C.F.R.  1.1206.  
Designating this proceeding as permit-but-disclose will provide an opportunity for all 
interested parties to receive notice of the various technical, legal, and policy issues raised in 
ex parte presentations made to the Commission in the course of this proceeding.  This will 
allow interested parties to file responses or rebuttals to proposals made on the record in this 
proceeding.  Accordingly, we find that it is in the public interest to designate this proceeding 
as permit-but-disclose.
187. Parties making oral ex parte presentations are reminded that memoranda 
summarizing the presentation must contain a summary of the substance of the presentation and 
not merely a listing of the subjects discussed.  More than a one or two sentence description of the 
views and arguments presented is generally required.  See 47 C.F.R.  1.1206(b)(2), as revised.  
Other rules pertaining to oral and written presentations are set forth in Section 1.206(b) as well.  
Interested parties are to file any written ex parte presentations in this proceeding with the 
Commission Secretary, Magalie Roman Salas, 445 12th Street, S.W., TW-B204, Washington, 
D.C. 20554, and serve with copies:  (1) Paul Moon, Common Carrier Bureau, 445 12th Street, 
S.W., Room 3-C423, Washington, D.C. 20554; (2) Jane Jackson, Common Carrier Bureau, 
445 12th Street, S.W., Room 5-A225, Washington, D.C. 20554; and (3) International 
Transcription Service, Inc. (ITS), 445 12th Street, S.W., Room CY-B402, Washington, 
D.C. 20554, (202) 857-3800.
188. Because many of the matters on which we request comment in this NPRM may 
call on parties to disclose proprietary information such as market research and business or 
technical plans, we suggest that parties consult 47 C.F.R.  0.459 about the submission of 
confidential information.
189. Alternative formats (computer diskette, large print, audio recording, and Braille) 
are available to persons with disabilities by contacting Brian Millin at (202) 418-7426 voice, 
(202) 418-7365 TTY, or <bmillin@fcc.gov>.  This NPRM can also be downloaded in Microsoft 
Word and ASCII formats at <http://www.fcc.gov/ccb/cpd>.
V. ORDERING CLAUSES
190. Accordingly, IT IS ORDERED that, pursuant to authority contained in sections 4, 
201-202, 303 and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  154, 201-
202, 303 and 403, and sections 1.1, 1.411 and 1.412 of the Commissions rules, 47 C.F.R.  1.1, 
1.411 and 1.412, this NPRM IS ADOPTED.
191. IT IS FURTHER ORDERED that the Commissions Consumer Information 
Bureau, Reference Information Center, SHALL SEND a copy of this NPRM, including the Initial 
Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business 
Administration.
					FEDERAL COMMUNICATIONS COMMISSION




					Magalie Roman Salas
					Secretary

SEPARATE STATEMENT OF
CHAIRMAN MICHAEL K. POWELL

Re:	Notice of Proposed Rulemaking, Developing a Unified Intercarrier Compensation Regime 
(CC Docket No. 01-92)

I am immensely proud of the Commission and our staff for initiating this proceeding, in 
which we will explore whether and how we can rationalize the disparate compensation 
arrangements between carriers and other companies for traffic that traverses the public switched 
telephone network.

Since I arrived at the Commission, I have been known to talk about the public switched 
telephone network as the hub of a wheel, the spokes being the many companies (e.g., paging 
companies, wireless carriers, ISPs, long distance carriers) that interconnect with and pass traffic 
to and from the wireline telephone network.  As all regulators and businesses know, however, the 
rates for interconnecting with the phone network vary depending on the type of company that is 
doing the interconnecting.  In a competitive environment, this leads to arbitrage and inefficient 
entry incentives, as companies try to interconnect at the most attractive rates.  I support this 
Notice because it seeks comment on how we can make these varied intercarrier compensation 
regimes more consistent with each other and, thus, with competition.

In endorsing this Notice regarding intercarrier compensation, I should underscore that 
I consider this action to be part and parcel with two other items:  first, the Order on remand that 
the Commission hopes to adopt in the next few days regarding reciprocal compensation for 
Internet-bound traffic; and second, the soon-to-be-adopted Order regarding how much CLECs 
can tariff and charge long distance companies in access charges.  In all three of these 
proceedings, the Commission has demonstrated its willingness to tackle complex and often 
intractable pricing-related issues while, when appropriate, giving carriers a transition period to 
adjust to new compensation regimes.

I (and much of the CLEC industry) would have preferred that we adopt all three of these 
items at the same time, since they are inter-related.  But because of the intricacies of both the 
issues and our internal deliberations, we have a few loose ends to tie up regarding CLEC access 
charges and reciprocal compensation.  With the cooperation of my colleagues, however, I am 
very hopeful that we can finish those deliberations quickly, such that all three items can be 
finalized and released in the next few days.

In closing, I would note that these actions, which are the products of intense and long 
discussions and which will take years to implement, are hardly precipitous.  They are, 
nonetheless, critical to the continued development of economically efficient and sustainable 
competition in telecommunications.  Thus, I applaud my colleagues and our able staff for their 
courage and hard work in addressing these issues in a meaningful, albeit gradual, manner.

SEPARATE STATEMENT OF
COMMISSIONER SUSAN NESS

Re:	Notice of Proposed Rulemaking, Developing a Unified Intercarrier Compensation Regime 
(CC Docket No. 01-92)

In the five years since passage of the Telecommunications Act of 1996, we have taken 
significant steps to adapt to the changing marketplace the payments made from one carrier to 
another for the exchange of traffic.  We have begun, although not yet completed, efforts to 
identify and make explicit the subsidies embedded in intercarrier payments.  And we have 
modified rate structures so that payments more accurately reflect costs and the manner in which 
those costs are incurred.  Our goal in all of these measures has been to reduce distortions in the 
marketplace that serve as impediments to competition.

Each of these incremental actions, however, addressed problems with a specific 
intercarrier compensation mechanism.  Yet, we still have in place today a system under which 
the amounts, and even the direction, of payments vary depending on whether the carrier routes 
the traffic to a local carrier, a long-distance carrier, an Internet provider, or a CMRS or paging 
provider.  In an era of convergence of markets and technologies, this patchwork of regimes no 
longer makes sense.  What had been a historical artifact may have become an unsustainable 
anomaly.

Todays proceeding gives us an opportunity to take a fresh look at these various regimes 
and consider actions to harmonize the different payment structures.  We should not 
underestimate the complexity of this undertaking.  Even were we writing on a clean slate, this 
proceeding would present a daunting challenge.  We must now also take account of the historical 
structure and the business plans and expectations that have been created by those regimes.  
We must also resist merely applying legacy regimes to new services.  Although it is not clear that 
a one-size-fits-all approach to intercarrier compensation is warranted, our goal must be a 
consistent and rational system that relies to the greatest extent possible on market forcesand 
not the possibility of arbitrage created by different payment structuresto drive technological 
advances and innovation.  If we are successful in our efforts to eliminate barriers to competition, 
consumers will reap the benefitsmore choice, improved services, and lower prices.

At the same time, I urge the Commission to remain mindful of the implications of our 
actions on those living in rural and other high-cost areas.  We must take heed to preserve the 
third pillar of the Telecommunications Act of 1996universal service.  Consumers will only 
benefit when we establish an economically rational, competitively neutral, explicit mechanism 
that will promote the Acts goals of competition, deregulation, and universal service.

SEPARATE STATEMENT OF
COMMISSIONER HAROLD FURCHTGOTT-ROTH

Re:	Notice of Proposed Rulemaking, Developing a Unified Intercarrier Compensation Regime 
(CC Docket No. 01-92)

	This NPRM seeks comment on a variety of pricing mechanisms for commercial 
relationships between and among carriers, placing particular emphasis on bill-and-keep 
arrangements.  Such mechanisms are worthy of praise when they are employed voluntarily and 
by mutual assent in contracts.  This NPRM thus may do some good in informing the public of 
various contractual options, expanding and illuminating the range of pricing mechanisms that 
carriers can agree to adopt.

	If, however, the goal of the NPRM is ultimately to limit the range of permissible 
contractual arrangements private parties may undertake, this is a sad and shameful day for the 
Commission.  We would be telling private parties that Washington knows how to improve their 
lot better than they do themselves.  We would be mandating an invasive form of nationwide 
price regulation, a great irony at a time when politicians of all stripes embraces the ideals of 
economic deregulation.

	The Communications Act of 1934, as amended by the Telecommunications Act of 1996 
(1996 Act), does not require the Commission to regulate the prices charged between and 
among carriers.  Indeed, the entire elaborate framework of Sections 251 and 252 of the 1996 Act 
is predicated on the primacy of contracts between private parties, not rate regulation from 
Washington, D.C.  See 47 U.S.C.  251-252.

	Moreover, the 1996 Act explicitly aims to remove impediments to contract.  For example, 
section 252 limits the grounds on which State commissions may reject privately negotiated 
intercarrier agreements.  See 47 U.S.C.  252(e)(2)(A).  In addition, section 253(a) prohibits 
barriers to entrywhich necessarily include foreclosing options to contract between private 
parties:  No State or local statute or regulation, or other State or local legal requirement, may 
prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or 
intrastate telecommunications service.  47 U.S.C.  253(a).  These provisions make unlawful 
many forms of price regulation that limit the scope of contracts between and among carriers.  
While the focus of these provisions is primarily upon State and local governments, the federal 
government should be slow to adopt regulation that State or local governments cannot legally 
impose.

	Allowing and encouraging freedom of contract is profoundly important.  As Milton and 
Rose Friedman explain in Free To Choose:

One set of ideas was embodied in The Wealth of Nations, the masterpiece that 
established the Scotsman Adam Smith as the father of modern economics.  
It analyzed the way in which a market system could combine the freedom of 
individuals to pursue their own objectives with the extensive cooperation and 
collaboration needed in the economic field to produce our food, our clothing, our 
housing.  Adam Smiths key insight was that both parties to an exchange can 
benefit and that, so long as cooperation is strictly voluntary, no exchange will 
take place unless both parties do benefit.  No external force, no coercion, no 
violation of freedom is necessary to produce cooperation among individuals all of 
whom can benefit.  That is why, as Adam Smith put it, an individual who intends 
only his own gain is led by an invisible hand to promote an end which was no 
part of his intention.  Nor is it always the worse for the society that it was no part 
of it.  By pursuing his own interest he frequently promotes that of the society 
more effectually than when he really intends to promote it.  I have never known 
much good done by those who affected to trade for the public good.

Milton & Rose Friedman, Freedom To Choose 1-2 (1980) (quoting Adam Smith, The Wealth of 
Nations (1776)).

Two lessons relevant to this proceeding can be drawn from the Friedmans essay.  First, 
limiting the scope of potential contracts among carriers, or coercing the terms of such contracts, 
cannot advantage all carriers; indeed, it will certainly harm some carriers relative to no 
limitations on contracts.  Second, the unfettered pursuit of private interest, including through 
contracts, will lead to greater social welfare gains than the intentional, including governmental, 
efforts to promote welfare.  Stated simply, contracts, rather than government regulation, are the 
surest way to promote the public interest.

Requiring intercarrier compensation of specific forms, such as bill-and-keep, is nothing 
more than price regulationharmful to contracts, carriers, consumers, and the public at large.  
No amount of studies or documents can paper over that simple fact.  Indeed, the burden should 
be on proponents of new forms of price regulation and new forms of contract foreclosure to 
demonstrate that such regulation promotes public welfare more than contractual flexibility.  
I await such demonstrations.

	For its entire history, the Commission has regulated telecommunications rates with a 
heavy, clumsy, at times sadistic, and all too visible hand.  Limiting voluntary contracts among 
private parties, or coercing the terms of such contracts, cannot promote the public interest.  
I hope that this proceeding will afford the public an opportunity to provide comments to the 
Commission on the legacy of Commission rate regulation and its substantial unintended harms.  
Perhaps it is time for the Commission to promote both the reality as well as the rhetoric of 
deregulation.
  Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996 Act).
  Thus, we do not contemplate a need to adopt new rules governing CLEC-to-CLEC, IXC-to-IXC, CMRS-to-CMRS 
or CMRS-to-IXC arrangements.
  In the Matter of Intercarrier Compensation for ISP-Bound Traffic, CC Docket No. 99-68, Order on Remand and 
Report and Order, FCC 01-131 (rel. Apr. 27, 2001) (ISP Intercarrier Compensation Order).
  In the Matter of Access Charge Reform; Reform of Access Charges Imposed by Competitive Local Exchange 
Carriers, CC Docket No. 96-262, Seventh Report and Order, FCC 01-146 (rel. Apr. 27, 2001) (CLEC Access 
Charge Order).
  The phrases Internet telephony and Internet Protocol telephony (IP telephony) refer to similar, but distinct 
concepts.  IP telephony involves the provision of a telephony service or application using Internet Protocol.  
IP telephony may be provided over the public Internet or over a private IP network.  In contrast, Internet telephony 
is a subset of IP telephony that is distinguished by the fact that it is provided over the public Internet and uses the 
domain-name system for routing.  See, e.g., In the Matter of Federal-State Joint Board on Universal Service, Report 
to Congress, 13 FCC Rcd. 11501, 11541-51  83-104 (Stevens Report) (discussing Internet and IP telephony); 
HARRY NEWTON, NEWTONS TELECOM DICTIONARY 378 (14th ed. 1998).  For simplicity, the text will refer 
generally to the broader concept of IP telephony.
IP telephony can also be categorized by the equipment used to provide the service.  For example, IP telephony may 
be provided using two personal computers (computer-to-computer IP telephony); the service may be provided 
between a computer and a standard telephone using a single IP gateway (computer-to-phone IP telephony); or it 
may be provided using two standard telephones that connect through two IP gateways (phone-to-phone IP 
telephony).  See, e.g., Stevens Report, 13 FCC Rcd. at 11543-44  87-89.
  See In the Matter of Federal-State Joint Board on Universal Service, Report and Order, 12 FCC Rcd. 8776 (1997) 
(Universal Service Order).  See also GERALD W. BROCK, TELECOMMUNICATION POLICY FOR THE INFORMATION 
AGE:  FROM MONOPOLY TO COMPETITION 189-93 (1994); PETER W. HUBER, MICHAEL K. KELLOGG & JOHN 
THORNE, FEDERAL TELECOMMUNICATIONS LAW 552 (2d ed. 1999).  Following the passage of the 1996 Act, the 
Commission, in addition to implementing the local competition provisions and reforming existing universal service 
subsidies, also initiated a proceeding to reform access charges.  Specifically, in May 1997, the Commission 
concluded that it would, in the first instance, allow market forces to drive interstate access charges to economic cost.  
As a back-stop, however, the Commission ordered price cap ILECs to file forward-looking economic cost studies on 
or before February 8, 2001.  See In the Matter of Access Charge Reform, First Report and Order, 12 FCC Rcd. 
15982, 16003  48 (1997) (Access Charge Reform).  See also In the Matter of Access Charge Reform, CC Docket 
No. 96-262, Sixth Report and Order, 15 FCC Rcd. 12962 (2000) (CALLS Order) (adopting CALLS proposal and 
allowing price cap ILECs to opt out of CALLS in anticipation of completion of cost study proceeding).
  47 U.S.C.  251(b)(5).  In addition, section 252(d)(2) imposes additional requirements on reciprocal compensation 
agreements involving an ILEC.  47 U.S.C.  252(d)(2).
  47 U.S.C.  252(d)(2)(A).  See also In the Matter of Implementation of the Local Competition Provisions in the 
Telecommunications Act of 1996, First Report and Order, 11 FCC Rcd. 15499, 16024-25  1056-59 (1996) 
(Local Competition Order), affd in part and vacated in part sub nom. Competitive Telecommunications Assn v. 
FCC, 117 F.3d 1068 (8th Cir. 1997) and Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997), affd in part and 
remanded, AT&T v. Iowa Utils. Bd., 525 U.S. 366 (1999).  In the Local Competition Order, the Commission also 
concluded that the new transport and termination rules should be applied to LECs and CMRS providers.  Local 
Competition Order, 11 FCC Rcd. at 16016-17  1043.
  47 C.F.R.  51.705.  See also Local Competition Order, 11 FCC Rcd. at 16054-58  1111-18.  Carriers are 
permitted to receive compensation only for the traffic-sensitive components of local switching, and not for local 
loop costs, which are not considered traffic sensitive.  Local Competition Order, 11 FCC Rcd. at 16024-25  1057.
  Local Competition Order, 11 FCC Rcd. at 16054-58  1111-18; 47 U.S.C.  252(d)(2)(B).  For purposes of this 
NPRM, we define a bill-and-keep arrangement as an intercarrier compensation mechanism in which there are no 
termination chargesi.e., a mechanism in which the called partys carrier is not allowed to recover any of the cost 
of the called partys loop or local switch from an interconnecting carrier.  As will become clear below, the treatment 
of transport costs may vary.
  JEAN-JACQUES LAFFONT & JEAN TIROLE, COMPETITION IN TELECOMMUNICATIONS 4-8 (2000).
  As discussed below, there are a number of alternative ways to allocate transport costs under a bill-and-keep 
arrangement.  See infra Section III.B.2.
  See Comments of Time Warner Communications Holdings Inc., CC Docket No. 96-98 at 100 (May 16, 1996); 
Comments of American Communications Services, Inc., CC Docket No. 96-98 at 23 (May 16, 1996).
  See Michael Kende, The Digital Handshake:  Connecting Internet Backbones at 4-8 (Federal Communications 
Commission, OPP Working Paper No. 32, Sept. 2000).
  The Commission has stated that the reciprocal compensation provisions of the 1996 Act, 47 U.S.C.  251(b)(5), 
do not apply to ISP-bound traffic, but has allowed the states to require reciprocal compensation under existing 
interconnection agreements.  In the Matter of 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, 3703-06 
 21-27 (1999).  The D.C. Circuit reversed and remanded it to the Commission.  See Bell Atlantic Tel. Cos. v. FCC, 
206 F.3d 1 (D.C. Cir. 2000).  In an order released today, the Commission adopts an interim measure that aims to 
move away from the current reciprocal compensation regime for ISP-bound traffic, over a three-year period.  
See ISP Intercarrier Compensation Order, supra note 3.
  Local Competition Order, 11 FCC Rcd. at 16043  1092.
  Id. at 15936  876.
  The phrase regulatory arbitrage refers to profit-seeking behavior that can arise when a regulated firm is required 
to set different prices for products or services with a similar cost structure.  See, e.g., Patrick DeGraba, Bill and Keep 
at the Central Office as the Efficient Interconnection Regime at 1  2 n.3 (Federal Communications Commission, 
OPP Working Paper No. 33, Dec. 2000).
  ISP Intercarrier Compensation Order at  70 (ILECs assert that CLECs terminate an average of 18, 21 and even 
40 times more traffic than they originate, and that 90 percent of CLEC reciprocal compensation billings are for ISP-
bound traffic).
  Id. at  38-39.
  The leaky PBX problem arises where large end users that employ multiple PBXs in multiple locations lease 
private lines to connect their various PBXs.  Although these lines were intended to permit employees of the large 
users to communicate between locations without incurring access charges, some large users permitted long-distance 
calls to leak from the PBX into the local public network where they were terminated without incurring access 
charges.  In order to address this problem, the Commission in 1983 imposed a $25 per month charge on each trunk 
that could leak traffic into the public switched network.  See 47 C.F.R.  69.115.  See generally In the Matter of 
MTS and WATS Market Structure, Memorandum Opinion and Order, 97 FCC 2d 682 (1983); Memorandum 
Opinion and Order, 97 FCC 2d 834 (1984).
  With regard to wireless networks, we recognize that, where a customer subscribes to both a wireless and a 
wireline network, the wireline network does not have a complete monopoly over termination.  We believe, however, 
that the customers possession of a wireless number does not completely resolve all terminating access issues.  Since 
wireless customers are generally charged per-minute rates when they receive calls, they have an incentive to receive 
calls on their wireline phones.  To encourage this, wireless customers frequently withhold their wireless numbers, 
both directly, and from directory databases.  In turn, many callers respect this preference by choosing to call the 
customers wireline number before trying the wireless number.
  See CLEC Access Charge Order, supra note 4; see also In the Matter of Access Charge Reform, Fifth Report and 
Order and Further Notice of Proposed Rulemaking, 14 FCC Rcd. 14221, 14338-49  236-257 (1999) (Pricing 
Flexibility Order and NPRM); Petition for Declaratory Ruling filed by AT&T Regarding Interexchange Carrier 
Purchases of Switched Access Services Offered by Competitive Local Exchange Carriers (Oct. 23, 1998).
  CLEC Access Charge Order at  24.
  Id. at  40.
  Id.
  Id. at  49.
  Section 254(g) requires IXCs to geographically average access charges.  See 47 U.S.C.  254(g); see also CLEC 
Access Charge Order at  31.
  See, e.g., In the Matter of Regulatory Treatment of LEC Provision of Interexchange Services Originating in the 
LECs Local Exchange Area, CC Docket No. 96-149, Second Report and Order, 12 FCC Rcd. 15756, 15826-33 
 120-30 (1997); Access Charge Reform, 12 FCC Rcd. at 16100-05  275-84.
  Local Competition Order, 11 FCC Rcd. at 16040-41  1085-86.
  Bridger M. Mitchell & Padmanabhan Srinagesh, Transport and Termination Costs in PCS Networks:  
An Economic Analysis at 20-21 (Sprint PCS, White Paper, Apr. 4, 2000) (Sprint PCS Study).
  See DeGraba, supra note 18, at 32-33  113.
  More formally, these mathematical models have maximized a social welfare function (usually the sum of 
consumers and producers surpluses) subject to the constraint that the LEC break even or earn a normal return.  
For example, Willig considered the problem of setting optimal prices for access and network services in a model 
where the ILEC is the monopoly provider of access and local usage, but competes in providing various non-local 
services.  While recognizing that consumers generally benefit from both incoming and outgoing calls, Willig argued 
that one could develop optimal access charges by billing only the calling partys network for outgoing calls.  
See Robert D. Willig, The Theory of Network Access Pricing, in ISSUES IN PUBLIC UTILITY REGULATION 109 
(H. Trebing, ed. 1979).  More recently, Laffont and Tirole considered optimal pricing rules in models of both one-
way access (i.e., LECs providing access to long-distance carriers) and  two-way access (i.e., two competing local 
networks compensating each other for terminating calls originating on each others network).  See, e.g., JEAN-
JACQUES LAFFONT & JEAN TIROLE, supra note 11, at 179-215.
  Ramsey pricing is a form of non-uniform pricing that is used in situations where setting price equal to marginal 
cost would not allow a firm to recover all its costs.  More specifically, in decreasing cost industries where marginal-
cost pricing would result in deficits, Ramsey analysis provides a rule for setting prices above marginal cost, where 
the deviation of price from marginal cost depends on the price elasticities of demand, including cross-price 
elasticities of demand, for the firms product.  See generally Frank Ramsey, A Contribution to the Theory of 
Taxation, 37 ECON. J. 47 (1927); KENNETH E. TRAIN, OPTIMAL REGULATION:  THE ECONOMIC THEORY OF 
NATURAL MONOPOLY 115-45 (1992).
  See, e.g., Lyn Squire, Some Aspects of Optimal Pricing for Telecommunications, 4 BELL J. ECON. 515 (1973) 
(noting that the called party generally benefits from receiving a call); Willig, supra note 33, at 114, 124-28.
  We recognize that some parties have argued, in discussions of access charge reform, that both the calling party 
and her IXC are the cost causers of long-distance calls.  See, e.g., CALLS Order, 15 FCC Rcd. at 12999-13000 
 94-95.  We note, however, that the Commission has uniformly found that it is the calling party, and not its IXC, 
that causes the cost of the long-distance call.  Id.  As discussed below, the more immediate issue is whether the 
calling party is the sole cost causer of a call, or whether the calling party and called party are joint cost causers.  
See infra Section III.B.1.
  An externality occurs where there is a divergence between private and social costs and benefits.  See, e.g., 
WILLIAM J. BAUMOL, ECONOMIC THEORY AND OPERATIONS ANALYSIS 517-20 (4th ed. 1977).  In this case, the 
externality occurs because both the calling party and called party benefit from the call, but only the calling party is 
charged for the call.  The parties can solve this externality by taking turns calling each other, so that both parties 
will pay for the cost of the call as well as benefiting from the call.  See, e.g., Willig, supra note 33, at 128.
  See, e.g., Local Competition Order, 11 FCC Rcd. at 16055  1112.
  Id.
  DeGraba defines local access facilities as consisting of the loop serving the customers premises and the central 
office that serves the customers loop.  DeGraba, supra note 18, at 9  23.
  Id.  For interexchange calls, DeGrabas second rule is modified to make the calling partys LEC responsible for  
delivering the call to the IXCs point of presence (POP), and the calling partys IXC responsible for delivering the 
call to the called partys central office.  Id. at 10  28.
  Id. at 22-29  75-101, 34-35  121-24.
  Thus, if end-user prices are based on cost, splitting interconnection costs does not bias end users choices between 
networks or between technologies.  Atkinson-Barnekov argue that, in this sense, their proposal satisfies their goal of 
competitive neutrality.  Jay M. Atkinson & Christopher C. Barnekov, A Competitively Neutral Approach to Network 
Interconnection at 13-15  33-38 (Federal Communications Commission, OPP Working Paper No. 34, Dec. 2000).
  Id. at 8  18.
  Id. at 15  38.
  Atkinson-Barnekov adopt a general theoretical approach to intercarrier compensation, but in the context of 
various stylized network models.  DeGraba, in contrast, appears to adopt a more explicit approach by attempting to 
clearly define the boundary between local access and transport facilities.
  See, e.g., JEAN-JACQUES LAFFONT & JEAN TIROLE, supra note 11, at 98 (noting that interconnection regulation 
generally must reflect multiple objectives).
  See, e.g., Local Competition Order, 11 FCC Rcd. at 15874-79  743-57; CALLS Order, 15 FCC Rcd. at 12970 
 19-20.
  See MTS and WATS Market Structure, 97 FCC 2d at 711-12 (1983).
  See S. REP. NO. 103-367 (1994).
  47 U.S.C.  254(e).  See also H.R. CONF. REP. NO. 104-458 at 131(1996); Universal Service Order, 12 FCC Rcd. 
at 8783-84  9.
  See infra  41.
  See DeGraba, supra note 18, at 25  85.
  We note, however, that with respect to LEC-to-CMRS calls, CPNP typically does not assign the full cost to the 
originating carrier and caller.  CMRS firms typically still charge their own subscribers for incoming calls.
  See ISP Intercarrier Compensation Order at  75-76; CLEC Access Charge Order at  28-31.
  Atkinson-Barnekov, supra note 43, at 4-6  9-11.
  Proponents argue that even if regulators could gather the relevant data, it would be out of date before they could 
assemble it.  The genius of markets is their ability to make rapid, decentralized decisions that are efficient.  
See Friedrich A. Hayek, The Use of Knowledge in Society, AMERICAN ECONOMIC REVIEW, XXXV, No. 4 at 519-30 
(Sept. 1945).
  See Atkinson-Barnekov, supra note 43, at 6  12.
  GERALD W. BROCK, INTERCONNECTION AND MUTUAL COMPENSATION WITH PARTIAL COMPETITION at 17, 
reprinted in GERALD W. BROCK, THE ECONOMICS OF INTERCONNECTION (Teleport Communications Group 1995).
  See generally Brock, supra note 6, at 79-101.
  See 47 C.F.R.  51.713; Local Competition Order, 11 FCC Rcd. at 16028-29  1063-64.
  See, e.g., Letter from Robert T. Blau, Vice President-Executive and Federal Regulatory Affairs, BellSouth, to 
Dorothy Attwood, Chief, Common Carrier Bureau, CC Docket No. 99-68 at 8-10 (filed Dec. 22, 2000) (proposing 
that the Commission ramp down to bill and keep by placing limits on the volume of dial-up Internet access calls 
that qualify for reciprocal compensation).
  See, e.g., JEAN-JACQUES LAFFONT & JEAN TIROLE, supra note 11, at 101-05, 191-95; KENNETH E. TRAIN, supra 
note 34, at 115-145.
  In responding to this question, we ask parties to explain what they mean by competitively neutral.
  DeGraba, supra note 18, at 22-24  75-83.
  Atkinson-Barnekov, supra note 43, at 26-27  76.
  DeGraba, supra note 18, at 25-26  89-90.
  Id. at 24-25  84-88; Atkinson-Barnekov, supra note 43, at 13-14  34 n.46.
  DeGraba, supra note 18, at 27-28  95-96.
  Id. at 26-27  91-93.
  Id. at 27-29  94-101.
  Atkinson-Barnekov, supra note 43, at 15-16  39-40.
  DeGraba, supra note 18, at 21-22  73.
  Id. at 30-32  103-112.
  Id. at 30  103.
  Id. at 31-32  110.
  Id. at 33-34  117-119.
  We note that CMRS subscribers may be required to pay for unwanted calls under CPNP regimes.  That is, even 
under CPNP, CMRS subscribers may still pay directly for termination.  However, market solutions to the unwanted 
call problem have emerged, such as first-incoming-minute-free pricing plans.
  DeGraba, supra note 18, at 34  120-21.
  Id.
  See Atkinson-Barnekov, supra note 43, at 18  48.
  Id. at 15  39.
  Id. at 9  22.  Atkinson-Barnekov note that, should interconnection result in an increased demand for calling, the 
costs of expanding the network to handle such increased demand without any blocking should be classified as costs 
incremental to traffic volume, but not incremental to interconnection.  Id. at 18-19  49.
  DeGraba, supra note 18, at 11-12  32; Atkinson-Barnekov, supra note 43, at 25  68.
  ISP Intercarrier Compensation Order at  2.
  See Allegiance Telecom, Inc., et al. ex parte in CC Docket No. 99-68 at 1, Attachment B (filed Oct. 20, 2000) 
(comparing initial reciprocal compensation rates with greatly reduced rates that have been established more recently 
in several states).
  See, e.g., AT&T ex parte in CC Docket No. 99-68 at 5-6 (filed Aug. 11, 2000).
  See supra note 7 and accompanying text.
  Qwest ex parte in CC Docket No. 99-68, Appendix B, at ii (filed Nov. 22, 2000).
  Id.
  47 C.F.R.  51.321; see also In the Matter of Application by SBC Communications Inc. et al. to Provide In-
Region, InterLATA Services in Texas, CC Docket No. 00-65, Memorandum Opinion and Order, FCC 00-238 at 
 78, n.174 (rel. June 30, 2000).
  See generally 47 C.F.R. Part 68.
  See Atkinson-Barnekov, supra note 43, at 13-14 (showing that the incremental cost of interconnection includes 
internal provisioning necessary to handle traffic exchanged with the interconnecting carrier).
  47 U.S.C.  251(b)(5).
  47 U.S.C.  252(d)(2).
  47 U.S.C.  252(d)(2)(B)(i).
  See S. Rep. No. 230, 104th Cong., 2nd Sess. 125 (1996), reprinted in A&P S. Rep. 104-230, 125 (1996).
  Local Competition Order, 11 FCC Rcd. at 16054.  See also BellSouth Local Competition Comments in 
CC Docket No. 96-98 at 73-75; GTE Local Competition Comments in CC Docket No. 96-98 at 56-59; SBC Local 
Competition Comments in CC Docket No. 96-98 at 51-53.
  Local Competition Order, 11 FCC Rcd. at 16054.
  See Local Competition Order, 11 FCC Rcd. at 16055.  Several commenters also argued that bill-and-keep 
arrangements could not be mandated without violating the 1996 Act.  See, e.g., SBC Comments in CC Docket 
No. 96-98 at 51-52.
  See Local Competition Order, 11 FCC Rcd. at 16055.
  Id.
  47 U.S.C.  252(d)(2)(B).
  For example, Time Warner suggests that a bill-and-keep approach to reciprocal compensation is not consistent 
with Section 251(d)(2)(B)(i), 47 U.S.C.  252(d)(2)(B)(i), when traffic is not in balance because it does not afford 
the mutual recovery of costs through the offsetting of reciprocal obligations.  Time Warner ex parte in CC Docket 
No. 99-68 at 4 (filed Oct. 20, 2000).
  See 47 U.S.C.  252(d)(2)(A)(i).
  See 47 U.S.C.  252(d)(2)(B)(i).
  47 U.S.C.  10(c).
  Letter from Thomas E. Wheeler, CTIA, to Chairman William E. Kennard (Dec. 12, 2000) (December 12 
letter); Letter from Michael F. Altschul, CTIA, to Chairman William E. Kennard (Dec. 29, 2000) (December 29 
letter).
  December 12 letter at 2-3.
  Iowa Utils. Bd. v. FCC, 120 F.3d at 800 n.21.
  December 29 letter at 1.
  Omnibus Budget Reconciliation Act of 1993, Pub.L. No. 103-66, Title VI,  6002(b)(2)(A), 6002(b)(2)(B), 
107 Stat. 312 (1993).
  In the Matter of Implementation of Sections 3(n) and 332 of the Communications Act, Regulatory Treatment of 
Mobile Services, GN Docket No. 93-252, Second Report and Order, 9 FCC Rcd. 1411 (1994) (CMRS Second 
Report and Order).
  Id. at 1497  227.
  Id. at 1498  231.
  Id. at  233.
  Id. at  234.
  In the Matter of Interconnection Between Local Exchange Carriers and Commercial Mobile Radio Service 
Providers, CC Docket No. 95-185, Notice of Proposed Rulemaking, 11 FCC Rcd. 5020, 5072-73  111 (1996) 
(LEC-CMRS Interconnection NPRM).
  Id. at 5049-50  60-62.
  Local Competition Order, 11 FCC Rcd. at 16005-06; see also Iowa Utils. Bd. v. FCC, 120 F.3d at 800 (finding 
that the Commission has jurisdiction under section 332 to issue rules regarding LEC-CMRS interconnection, 
including reciprocal compensation rules).
  Local Competition Order, 11 FCC Rcd. at 16005.
  Local Competition Order, 11 FCC Rcd. at 16005  1024.
   Id. at 16006  1025.
  Id.
  Iowa Utils. Bd. v. FCC, supra note 8.
  Id.
  Id. at 800 n.21.
  See Brief for Intervenors CMRS Providers in Support of Respondents, Iowa Utils. Bd. v. FCC, Nos. 96-3321 
et al. (8th Cir. Dec. 23, 1996).
  Iowa Utils. Bd. v. FCC, 120 F.3d at 800 n.21.
  AT&T Corp v. Iowa Utils. Bd., 525 U.S. 366 (1999).
  December 29 letter at 2.
  LEC-CMRS Interconnection NPRM, 11 FCC Rcd. at 5029-30  19-21.
  The House Report stated, The Committee considers the right to interconnect an important one which the 
Commission shall seek to promote, since interconnection serves to enhance competition and advance a seamless 
national network.  House Report on H.R. 2264 at 261 (1993).
  47 U.S.C.  332(c)(3).
  Section 332(c)(3) provides in relevant part:  Notwithstanding sections 2(b) and 221(b), no state or local 
government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service 
or any private mobile service, except that this paragraph shall not prohibit a state from regulating the other terms 
and conditions of commercial mobile services.  Id.
  47 U.S.C.  332(c)(1)(B).  Section 332(c)(1)(B) provides in relevant part:  Upon reasonable request of any 
person providing commercial mobile service, the Commission shall order a common carrier to establish physical 
connections with such service pursuant to the provisions of section 201 of the Act.  Except to the extent that the 
Commission is required to respond to such a request, this subparagraph shall not be construed as a limitation or 
expansion of the Commissions authority to order interconnection pursuant to this Act.  Id.  Section 201, in turn, 
provides that [i]t shall be the duty of every common carrier engaged in interstate or foreign commerce by wire or 
radio...to establish physical connections with other carriers..."  47 U.S.C.  201(a).
  47 U.S.C.  152(b).
  Id.
  See 47 U.S.C.  251(i).
  See 47 U.S.C.  253(e); see also section 601(c) of the 1996 Act.
  Iowa Utils. Bd. v. FCC, 120 F.3d at 800 n.21.
  December 29 letter at 3.
  47 C.F.R.  51.715(d), 51.717(b).
  47 U.S.C.  332(c)(1).
  47 U.S.C.  160.
  47 U.S.C.  160(e).
  Local Competition Order, 11 FCC Rcd. at 16016-17  1043.
  Alternatively, in rural settings, wireless carriers can elect to deliver CMRS-originated calls to a large ILEC 
(typically a Regional Bell Operating Company [RBOC]) for routing to the rural LEC carrier.  The large ILEC and 
rural LEC are interconnected on a bill-and-keep basis for the exchange of wireline calls.  Once the CMRS-originated 
traffic is switched by the ILEC tandem, CMRS-originated traffic travels on the same trunk as wireline calls to the 
ILEC.  The CMRS carrier pays the ILEC for switching and transport, and the rural LEC can seek recovery of its 
termination costs (if it can segregate the traffic) by asking the ILEC to charge the CMRS carrier.  Increasingly, the 
large ILEC is unwilling to bill for the rural carrier, so rural LECs have begun to insist that the CMRS carrier deliver 
calls directly to the rural LECs switch.
  Local Competition Order, 11 FCC Rcd. at  1085; 47 C.F.R.  51.711(a).
  Local Competition Order, 11 FCC Rcd. at  1089; 47 C.F.R.  51.711(b).
  Where LECs and paging companies are unable to negotiate agreed-upon rates, we direct states, when arbitrating 
disputes under section 252(d)(2), to establish rates for the termination of traffic by paging providers based on the 
forward-looking economic cost of such termination to the paging provider.  The paging provider seeking termination 
fees must prove to the state commission the costs of terminating local calls.  Local Competition Order, 11 FCC Rcd. 
at  1093.
  Columbia Institute for Tele-Information ex parte in CC Docket Nos. 99-68 et al., Stakeholders Workshop on 
Interconnection Pricing at Attachment 4 (filed Dec. 22, 2000).
  For example, Sprint and Paging Networks, Inc. have agreed to a constant $0.00425 per minute of use in a 16-state 
territory.  Id.  Verizon Wireless Messaging Services and SBC have contracted for SBC to pay $0.005 per minute of 
use for Type 1 or Type 2A interconnection, and between $0.00174 and 0.006 per minute of use for Type 2B 
interconnection.  Id.
  This category of interconnected calls encompasses CMRS-to-IXC-to-a-third telecommunications carrier.
  See CALLS Order, supra note 6.
  See Multi-Association Group (MAG) Plan for Regulation of Interstate Services of Non-Price Cap Incumbent 
Local Exchange Carriers and Interexchange Carriers, CC Docket No. 00-256, Notice of Proposed Rulemaking, 
FCC 00-448 (rel. Jan. 5, 2001).
  See, e.g., Local Competition Order, 11 FCC Rcd. at 15873-77  741-757.  See also JEAN-JACQUES LAFFONT & 
JEAN TIROLE, supra note 11, at 101-105 (discussion and characterization of efficient access pricing under a 
CPNP regime).
  Local Competition Order, 11 FCC Rcd. at 16023.
  Id.
  Id.
  See, e.g., Joint ILEC ex parte in CC Docket No. 99-68 at 12 n.33 (filed Nov. 3, 2000) (arguing that, unlike 
TELRIC, the additional costs statutory standard for calculating reciprocal compensation is a pure incremental cost 
standard that requires a short-run marginal cost analysis).
  Local Competition Order, 11 FCC Rcd. at 16040  1085.  The Commission went on to state:
If a competing local service provider believes that its cost will be greater than that of the 
incumbent LEC for transport and termination, then it must submit a forward-looking economic 
cost study to rebut this presumptive symmetrical rate.  In that case, we direct state 
commissions...to depart from symmetrical rates only if they find that the costs of efficiently 
configured and operated systems are not symmetrical and justify a different compensation rate.
Id.
  Local Competition Order, 11 FCC Rcd. at 16042.
  Id.
  Comments of Verizon Communications at 25-27 (in response to Comment Sought on Remand of the 
Commissions 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)); see also id., Declaration of William E. 
Taylor, at 13-19.
  Sprint PCS submitted a cost study purporting to show that a CMRS providers network components (including 
mobile telephone exchange, base station controller, base transceiver system, structure and antennae, and spectrum) 
are traffic-sensitive and should be included in the cost of termination.  See Sprint PCS Study, supra note 31.
  The Communications Act permits asymmetric reciprocal compensation.  Specifically, section 252(d)(2)(A) states 
that the terms and conditions of reciprocal compensation will be just and reasonable if:  (i) such terms and 
conditions provide for the mutual and reciprocal recovery by each carrier of costs associated with the transport and 
termination on each carriers network facilities of calls that originate on the network facilities of the other carrier; 
and (ii) such terms and conditions determine such costs on the basis of a reasonable approximation of the additional 
costs of terminating such calls.  47 U.S.C.  252 (d)(2)(A).
  Local Competition Order, 11 FCC Rcd. at 16024-25  1057; 47 C.F.R.  51.707, 51.711.
  We note that our rules do not require network elements to be priced on a minutes-of-use basis.  Element rates can 
be structured consistently with the way network-element costs are incurred.  For example, the costs of shared 
facilities may be recovered either through usage-sensitive charges or capacity-based flat-rated charges, if the state 
commissions find that such rates reflect the way users impose costs.  See 47 C.F.R.  51.507(a), (c).
  47 C.F.R.  51.711(a)(3).
  Local Competition Order, 11 FCC Rcd. at 16042  1090.
  47 C.F.R.  51.711(a)(3).
  We note that, in dealing with the problems presented by ISP-bound traffic, some states have incorporated a 
functional equivalency test into their interpretations of section 51.711(a)(3).  See Proceeding on Motion of the 
Commission to Reexamine Reciprocal Compensation, Case 99-C-0529, Opinion and Order Concerning Reciprocal 
Compensation, Opinion No. 99-10, at 35-40, 56-58 (New York PSC Aug. 26, 1999) (New York PSC Order); 
Texas PUC Remand Comments, attached Proceeding to Examine Reciprocal Compensation Pursuant to Section 252 
of the Federal Telecommunications Act of 1996, Docket No. 21982, Arbitration Award at 19-29 (Texas PUC 
July 12, 2000) (Texas PUC Order).  Both the Texas PUC and New York PSC concluded that large imbalances in 
traffic flows strongly suggest that a carrier is serving a higher proportion of convergent customers rather than a large 
distribution of customers similar to those served by an ILEC tandem switch.  New York PSC Order at 37-38, 54-55; 
Texas PUC Order at 19-29.  The New York PSC found that the costs of serving a small number of large, 
convergent customers will likely be lower than the costs of serving a mass market, and it therefore established a 
rebuttable presumption that a LEC is not providing tandem functionality when the traffic it exchanges exceeds a 
certain ratio.  New York PSC Order at 54-58.  These interpretations, while inconsistent with our rule, suggest that we 
should consider whether to amend the rule to give states greater flexibility in applying a tandem interconnection rate 
to networks using newer, more efficient technologies.  Commenters are invited to address this issue in light of our 
treatment, under section 201 of the Communications Act, of intercarrier compensation related to ISP-bound traffic.  
See ISP Intercarrier Compensation Order, supra note 3.
  See, e.g., Local Competition Order, 11 FCC Rcd. at 15878  755-57, 16028-29  1064; LEC-CMRS 
Interconnection NPRM, 11 FCC Rcd. at 5051  67.
  The practical difficulties associated with peak-load pricing schemes include:  (1) that peak traffic volumes may 
occur at different times in different areas (e.g., between a downtown business area and a residential suburb); (2) that 
peak periods may change over time (e.g., in response to increasing Internet use); and (3) that implementing a peak-
load pricing scheme may cause a shift in the peak.
  See 47 C.F.R.  51.507(c), 51.713; Local Competition Order, 11 FCC Rcd. at 15878-79  755-757, 16028-29 
 1063-64.
  See 47 C.F.R.  69.106.
  Pricing Flexibility Order and NPRM, 14 FCC Rcd. at 14328-30  211-16.
  See supra note 91 and accompanying text.
  See In the Matter of Joint Application by SBC Communications, Inc. et al. for Provision of In-Region, 
InterLATA Services in Kansas and Oklahoma, CC Docket No. 00-217, Memorandum Opinion and Order, 
FCC 01-29 at  235 (rel. Jan. 22, 2001) (Kansas/Oklahoma 271 Order) (citing 47 C.F.R.  51.703(b); In the 
Matters of TSR Wireless, LLC et al. v. U.S. West, 15 FCC Rcd. 11166 (2000), pet. for review docketed sub nom., 
Qwest v. FCC, No. 00-1376 (D.C. Cir. Aug. 17, 2000)).
  47 C.F.R.  51.701(c).
  47 C.F.R.  51.701(d).
  47 C.F.R.  51.701(e).
  See Kansas/Oklahoma 271 Order, supra note 180, at  232-34.
  SBC Reply in CC Docket No. 00-217, at 83-84.
  AT&T Comments in CC Docket No. 00-217, Attachment 2, Fettig Declaration, at 26-27.
  See ISP Intercarrier Compensation Order at  24-30 (discussing relationship between reciprocal compensation 
and access charges).
  Virtual NXX codes are central office codes that correspond with a particular geographic area that are assigned to 
a customer located in a different geographic area.
  See, e.g., BellSouth ex parte in CC Docket No. 99-68 at 2 (Nov. 7, 2000).
  See In the Matter of Numbering Resource Optimization, CC Docket No. 99-200, Report and Order and Further 
Notice of Proposed Rulemaking, 15 FCC Rcd. 7574, 7678-7682 (2000).
  Investigation into the Use of Central Office Codes (NXXs) by New England Fiber Communications, LLC d/b/a 
Brooks Fiber Docket No. 98-758, Order Requiring Reclamation of NXX Codes and Special ISP Rates by ILECs, 
Order No. 4, at 4 (Maine PUC June 30, 2000).
  See 47 U.S.C.  254.
  See In the Matter of Federal-State Joint Board on Universal Service, Report and Order and Order on 
Reconsideration, CC Docket No. 96-45, FCC 01-85 (rel. Mar. 14, 2001) (modifying universal service collection 
mechanism by shortening revenue assessment from one year to six months).
  See Policy Statement on International Accounting Rate Reform, 11 FCC Rcd. 3146 (1996); In the Matter of 
Regulation of International Accounting Rates, Phase II, Fourth Report and Order, 11 FCC Rcd. 20063 (1996); 
In the Matter of 1998 Biennial Regulatory Review, Reform of the International Settlements Policy and Associated 
Filing Requirements, Report and Order on Reconsideration, 14 FCC Rcd. 7963 (1999).
  See In the Matter of Implementation and Scope of the Uniform Settlements Policy for Parallel Routes, Report 
and Order, 51 Fed. Reg. 4736 (1986).
  See International Settlement Rates, IB Docket No. 96-261, Report and Order on Reconsideration and 
Order Lifting Stay, 14 FCC Rcd. 9256 (1996); affd sub nom. Cable & Wireless P.L.C. v. FCC, 166 F.3d 1224 
(D.C. Cir. 1999).
  See 5 U.S.C.  603. The RFA, see 5 U.S.C.  601 et. seq., has been amended by the Contract With America 
Advancement Act of 1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA).  Title II of the CWAAA is the 
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).
  5 U.S.C.  603(b)(3).
  Id. at  601(3).
  Id. at  632.
  Id. at  601(4).
  1992 Economic Census, U.S. Bureau of the Census, Table 6 (special tabulation of data under contract to Office 
of Advocacy of the U.S. Small Business Administration).
  47 C.F.R.  1.1162
  5 U.S.C.  601(5).
  U.S. Dept. of Commerce, Bureau of the Census, 1992 Census of Governments.
  Id.
  1992 Economic Census, U.S. Bureau of the Census, Table 6 (special tabulation of data under contract to Office 
of Advocacy of the U.S. Small Business Administration).
  Federal Communications Commission, Common Carrier Bureau, Industry Analysis Division, Trends in 
Telephone Service, Table 16.3 (Dec. 2000).
  Id.
  See 13 C.F.R.  121.201, Standard Industrial Classification (SIC) codes 4812 and 4813; see also Executive 
Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987).
  5 U.S.C.  601(3).
  Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, Chairman, FCC 
(May 27, 1999).  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); 5 U.S.C.  601(3).  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., Local Competition Order, 11 FCC Rcd. at 16144-45 (1996).
  U.S. 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).
  See generally 15 U.S.C.  632(a)(1).
  1992 Census at Firm Size 1-123.
  13 C.F.R.  121.201, SIC code 4813.
  Id.
  Trends in Telephone Service, supra note 208, at Table 16.3.
  13 C.F.R.  121.201, SIC code 4813.
  Trends in Telephone Service, supra note 208, at Table 16.3.
  13 C.F.R.  121.201, SIC code 4813.
  Trends in Telephone Service, supra note 208, at Table 16.3.
  13 C.F.R.  121.201, SIC code 4813.
  Trends in Telephone Service, supra note 208, at Table 16.3.
  13 C.F.R.  121.201, SIC code 4813.
  Trends in Telephone Service, supra note 208, at Table 16.3.
  13 C.F.R.  121.201, SIC code 4813.
  Trends in Telephone Service, supra note 208, at Table 16.3.
  We include all toll-free number subscribers in this category, including 888 number subscribers.
  Trends in Telephone Service, supra note 208, at Table 19.2.
  13 C.F.R.  121.201, SIC code 4812.
  1992 Census at Firm Size 1-123.
  Federal Communications Commission, Common Carrier Bureau, Industry Analysis Division, Trends in 
Telephone Service, Table 19.3 (Mar. 2000).
  13 C.F.R.  121.201, SIC code 4812.
  1992 Census at Firm Size 1-123.
  In the Matter of Amendment of Part 90 of the Commissions Rules to Provide for the Use of the 220-222 MHz 
Band by the Private Land Mobile Radio Service, PR Docket No. 89-552, Third Report and Order, 12 FCC Rcd. 
10943, 11068-70  291-95 (1997).
  Id. at 11068-69  291.
  See Letter from A. Alvarez, Administrator, SBA, to D. Phythyon, Chief, Wireless Telecommunications Bureau, 
FCC (filed Jan. 6, 1998).
  See generally Phase II 220 MHz Service Auction Closes, Auction No. 18, Public Notice, 14 FCC Rcd. 605 
(1998).
  FCC Announces It is Prepared to Grant 654 Phase II 220 MHz Licenses After Final Payment is Made, Auction 
No. 18, Public Notice, 14 FCC Rcd. 1085 (1999).
  13 C.F.R.  121.201, SIC code 4812.
  Federal Communications Commission, Common Carrier Bureau, Industry Analysis Division, Trends in 
Telephone Service, Table 19.3 (Feb. 19, 1999).
  13 C.F.R.  121.201, SIC code 4812.
  Trends in Telephone Service, supra note 242, at Table 19.3.
  See In the Matter of Amendment of Parts 20 and 24 of the Commissions RulesBroadband PCS Competitive 
Bidding and the Commercial Mobile Radio Service Spectrum Cap, WT Docket No. 96-59, Report and Order, 
11 FCC Rcd. 7824,  57-60 (1996); 61 FR 33859 (Jul. 1, 1996); see also 47 C.F.R.  24.720(b).
  Id. at  60.
  See, e.g., In the Matter of Implementation of Section 309(j) of the Communications ActCompetitive Bidding, 
PP Docket No. 93-253, Fifth Report and Order, 9 FCC Rcd. 5532, 5581-84 (1994).
  FCC News, Broadband PCS, D, E and F Block Auction Closes, No. 71744 (rel. Jan. 14, 1997).
  The service is defined in section 22.99 of the Commissions Rules, 47 C.F.R.  22.99.
  BETRS is defined in sections 22.757 and 22.759 of the Commissions Rules, 47 C.F.R.  22.757 and 22.759.
  13 C.F.R. 121.201, SIC code 4812.
  The service is defined in section 22.99 of the Commissions Rules, 47 C.F.R.  22.99.
  13 C.F.R.  121.201, SIC code 4812.
  In the Matter of Amendment of the Commission's Rules Concerning Maritime Communications, PR Docket 
No. 92-257, Third Report and Order and Memorandum Opinion and Order, 13 FCC Rcd. 19853 (1998).
  47 C.F.R.  101 et seq. (formerly, part 21 of the Commission's Rules).
  Persons eligible under parts 80 and 90 of the Commission's rules can use Private Operational-Fixed Microwave 
services.  See 47 C.F.R. parts 80 and 90.  Stations in this service are called operational-fixed to distinguish them 
from common carrier and public fixed stations.  Only the licensee may use the operational-fixed station, and only for 
communications related to the licensee's commercial, industrial or safety operations.
  Auxiliary Microwave Service is governed by Part 74 of Title 47 of the Commission's Rules.  See 47 C.F.R.  74 
et seq.  Available to licensees of broadcast stations and to broadcast and cable network entities, broadcast auxiliary 
microwave stations are used for relaying broadcast television signals from the studio to the transmitter, or between 
two points such as a main studio and an auxiliary studio.  The service also includes mobile TV pickups, which relay 
signals from a remote location back to the studio.
  13 C.F.R.  121.201, SIC code 4812.
  See 13 C.F.R.  121.201, SIC code 4812.
  1992 Census at Firm Size 1-123.
  Teligent has acquired the DEMS licenses of FirstMark, the only other licensee in the 24 GHz band whose license 
has been modified to require relocation to the 24 GHz band.
  See In the Matter of Implementation of Section 309(j) of the Communications ActCompetitive Bidding, 
Fifth Report and Order, 9 FCC Rcd. 5532, 5581-82  115 (1994).
  See 39 GHz Band Auction Closes; Winning Bidders of 2,173 Licenses Announced, Public Notice, DA 00-1035 
(rel. May 10, 2000)
  See Letter to Kathleen OBrien Ham, Chief, Auctions and Industry Analysis Division, Wireless 
Telecommunications Bureau, FCC, from Aida Alvarez, Administrator, SBA (filed Feb. 4, 1998).
  For purposes of this item, MDS includes both the single channel Multipoint Distribution Service (MDS) and the 
Multichannel Multipoint Distribution Service (MMDS).
  47 C.F.R.  1.2110 (a)(1).
  In the Matter of Amendment of Parts 21 and 74 of the Commission's Rules with Regard to Filing Procedures in the 
Multipoint Distribution Service and in the Instructional Television Fixed Service; Implementation of Section 309(j) of 
the Communications ActCompetitive Bidding, MM Docket No. 94-131, PP Docket No. 93-253, Report and Order, 
10 FCC Rcd. 9589 (1995), 60 FR 36524 (Jul. 17, 1995).
  47 U.S.C.  309(j).
  Id.  A Basic Trading Area (BTA) is the geographic area by which the Multipoint Distribution Service is licensed.  
See RAND MCNALLY, 1992 COMMERCIAL ATLAS AND MARKETING GUIDE 36-39 (123rd ed. 1992).
  13 C.F.R. 121.201.
  This service is governed by subpart I of Part 22 of the Commission's Rules.  See 47 C.F.R.  22.1001-22.1037.
  See In the Matter of Allocation of Spectrum Below 5 GHz Transferred from Federal Government Use, 
ET Docket No. 94-32, Second Report and Order, 11 FCC Rcd. 624 (1995).
  See Letter to Daniel B. Phythyon, Chief, Wireless Telecommunications Bureau, FCC, from Aida Alvarez, 
Administrator, SBA (filed May 19, 1998).
  See 47 C.F.R.  26.4.
  See In the Matter of the 4.9 GHz Band Transferred From Federal Government Use, WT Docket No. 00-32, 
Notice of Proposed Rulemaking, 15 FCC Rcd. 4778 (2000).
  See supra  51.
  See supra  56-57.
  See infra  178.
  See supra  73-77.
  See supra  90-96.
  5 U.S.C.  603(c).
  See supra Section III.D.6.
  See supra  130.
  See Electronic Filing of Documents in Rulemaking Proceedings, 63 Fed. Reg. 24121 (1998).
  See 47 C.F.R.  1.49.
 
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