[Federal Register Volume 66, Number 94 (Tuesday, May 15, 2001)]
[Rules and Regulations]
[Pages 26800-26806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12165]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 51

[CC Docket Nos. 96-98, 99-68; FCC 01-131]


Implementation of the Local Competition Provisions in the 
Telecommunications Act of 1996; Intercarrier Compensation for ISP-Bound 
Traffic

AGENCY: Federal Communications Commission.

ACTION: Final rule; order on remand and report and order.

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SUMMARY: In this final rule, the Commission reconsiders the proper 
treatment of telecommunications traffic delivered to Internet service 
providers (ISPs) for purposes of inter-carrier compensation. The 
Commission reaffirms its previous conclusion that traffic delivered to 
an ISP is predominantly interstate access traffic, in particular, 
information access, subject to section 201 of the Communications Act of 
1934, as amended (the Act), and the Commission establishes an 
appropriate cost recovery mechanism for the exchange of such traffic.

DATES: The amendments to 47 CFR part 51 are effective June 14, 2001. 
However the portion of the Order specified in the ordering clauses 
takes effect upon May 15, 2001.

FOR FURTHER INFORMATION CONTACT: Tamara Preiss, Deputy Chief, Common 
Carrier Bureau, Competitive Pricing Division, (202) 418-1520.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order 
on Remand and Report and Order in CC Docket Nos. 96-98, 99-68, adopted 
April 18, 2001, and released on April 27, 2001. The full text of this 
document is available for public inspection Monday through Thursday 
from 8:00 a.m. to 4:30 p.m. and Friday from 8:00 a.m. to 11:30 a.m. in 
the FCC Reference Information Center, Room CY-A257, 445 Twelfth Street, 
S.W., Washington, DC 20554. The complete text of the order may be 
purchased from the Commission's duplicating contractor, ITS, Inc., at 
1231 20th Street N.W., Washington, DC 20036 (202-857-3800).

Synopsis of Order on Remand and Report and Order

    1. After a remand by the U.S. Court of Appeals for the D.C. Circuit 
in Bell Atlantic Telephone Cos. v. FCC, 206 F.3d 1 (D.C. Cir. 2000), in 
this final rule the Commission reconsiders the rationales underlying 
its regulatory treatment of telecommunications traffic delivered to 
ISPs to determine whether ISP-bound traffic is subject to statutory 
reciprocal compensation requirements. A more comprehensive review of 
the statute reveals that Congress intended to exempt certain enumerated 
categories of service from the universe of ``telecommunications'' 
subject to the reciprocal compensation requirements of section 
251(b)(5), 47 U.S.C. 251(b)(5). The statute does not mandate reciprocal 
compensation for ``exchange access, information access, and exchange 
services for such access'' when the service is provided by local 
exchange carriers (LECs) to interexchange carriers (IXCs) or 
information service providers. The Commission finds that Congress 
specifically exempted the services enumerated under section 251(g), 47 
U.S.C. 251(g), from the newly-imposed reciprocal compensation 
requirement in order to ensure that section 251(b)(5) is not 
interpreted to override either existing or future regulations 
prescribed by the Commission. Because the Commission interprets 
paragraph (g) as a carve-out provision, the focus of the inquiry is on 
the universe of traffic that falls within paragraph (g) and not the 
universe of traffic that falls within paragraph (b)(5).
    2. The Commission specifically finds that ISP-bound traffic falls 
within at least one of the three enumerated categories in section 
251(g). Regardless of whether this traffic falls under the category of 
``exchange access,'' an issue pending before the U.S. Court of Appeals 
for the D.C. Circuit in a separate proceeding, the Commission concludes 
that this traffic, at a minimum, falls under the rubric of 
``information access,'' a legacy term imported into section 251(g) of 
the 1996 Act from the Modified Final Judgment (MFJ), but not expressly 
defined in the Communications Act. See United States v. AT&T, 552 F. 
Supp. 131 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 
U.S. 1001 (1983). The

[[Page 26801]]

ISP-bound traffic at issue here falls within that category because it 
is access traffic destined for an information service provider. Because 
the legacy term ``information access'' in section 251(g) encompasses 
ISP-bound traffic, this traffic is excepted from the scope of the 
``telecommunications'' subject to reciprocal compensation under section 
251(b)(5). For these reasons, the Commission finds that Congress, 
through section 251(g), expressly limited the reach of section 
251(b)(5) to exclude ISP-bound traffic.
    3. For services that qualify under section 251(g), compensation is 
based on rules, regulations, and policies that preceded the 
Telecommunications Act of 1996 (1996 Act), and not on section 251(b)(5) 
which was minted by the 1996 Act. At least until the Commission by 
regulation should determine otherwise, Congress preserved the pre-1996 
Act regulatory treatment of all the interstate access services 
enumerated under section 251(g). Although section 251(g) does not 
itself compel this outcome with respect to intrastate access regimes 
(because it expressly preserves only the Commission's traditional 
policies and authority over interstate access services), it 
nevertheless highlights an ambiguity in the scope of 
``telecommunications'' subject to section 251(b)(5)--demonstrating that 
the term must be construed in light of other provisions in the statute. 
In this regard, the Commission again concludes that it is reasonable to 
interpret section 251(b)(5) to exclude traffic subject to parallel 
intrastate access regulations, because it would be incongruous to 
conclude that Congress was concerned about the effects of potential 
disruption to the interstate access charge system, but had no such 
concerns about the effects on analogous intrastate mechanisms.
    4. Accordingly, the Commission affirms, although for different 
reasons, the conclusion in 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 (NPRM) in CC Docket No. 99-68, 
14 FCC Rcd 3689 (1999), 64 FR 14239 (March 24,1999) (Declaratory 
Ruling), that ISP-bound traffic is not subject to the reciprocal 
compensation obligations of section 251(b)(5).
    5. Having found that ISP-bound traffic is excluded from section 
251(b)(5) by section 251(g), the Commission finds that it has authority 
pursuant to section 201 to establish rules governing intercarrier 
compensation for such traffic. Under section 201, the Commission has 
long exercised its jurisdictional authority to regulate the interstate 
access services that local exchange carriers (LECs) provide to connect 
callers with IXCs or information service providers in order to 
originate or terminate calls that travel across state lines. Access 
services to ISPs for Internet-bound traffic are no exception. The 
Commission has held, and the Eighth Circuit has recently concurred, 
that traffic bound for information service providers (including 
Internet access traffic) often has an interstate component. Indeed, 
that court observed that the interstate and intrastate components 
cannot be reliably separated. Thus, ISP traffic is properly classified 
as interstate. Hence, it falls under the Commission's section 201 
jurisdiction.
    6. The Commission further concludes that section 251(i) provides 
additional support for the finding that Congress has granted the 
Commission the authority on a going-forward basis to establish a 
compensation regime for ISP-bound traffic.
    7. Because the Commission determines that intercarrier compensation 
for ISP-bound traffic is within the jurisdiction of this Commission 
under section 201, it is incumbent upon the Commission to establish an 
appropriate cost recovery mechanism for delivery of this traffic. Based 
upon the record before it, the Commission believes that the most 
efficient recovery mechanism for ISP-bound traffic is likely to be bill 
and keep, whereby each carrier recovers costs from its own end-users.
    8. As the Commission recognizes in the accompanying Notice of 
Proposed Rulemaking, Developing a Unified Intercarrier Compensation 
Regime, CC Docket Nos. 01-92, 98-98, Notice of Proposed Rulemaking, FCC 
01-132 (April 27, 2001), compensation regimes that require carrier-to-
carrier payments are likely to distort the development of competitive 
markets by divorcing cost recovery from the ultimate consumer of 
services. In the NPRM, the Commission suggests that, given the 
opportunity, carriers always will prefer to recover their costs from 
other carriers rather than their own end-users in order to gain 
competitive advantage. Thus, carriers have every incentive to compete, 
not on the basis of quality and efficiency, but on the basis of their 
ability to shift costs to other carriers, a troubling distortion that 
prevents market forces from distributing limited investment resources 
to their most efficient uses.
    9. The Commission believes that this situation is particularly 
acute in the case of carriers delivering traffic to ISPs because these 
customers generate extremely high volumes of traffic that are entirely 
one-directional. Indeed, the weight of the evidence in the current 
record indicates that precisely the types of market distortions 
identified above are taking place with respect to ISP traffic. For 
example, comments in the record indicate that competitive local 
exchange carriers (CLECs), on average, terminate eighteen times more 
traffic than they originate, resulting in annual CLEC reciprocal 
compensation billings of approximately two billion dollars, ninety 
percent of which is for ISP-bound traffic. Moreover, the traffic 
imbalances for some competitive carriers are in fact much greater, with 
several carriers terminating more than forty times more traffic than 
they originate. There is nothing inherently wrong with carriers having 
substantial traffic imbalances arising from a business decision to 
target specific types of customers. In this case, however, the 
Commission believes that such decisions are driven by regulatory 
opportunities that disconnect costs from end-user market decisions. 
Thus, under the current carrier-to-carrier recovery mechanism, it is 
conceivable that a terminating carrier could serve an ISP free of 
charge and recover all of its costs from originating carriers. This 
result distorts competition by subsidizing one type of service at the 
expense of others.
    10. Based upon the current record in this proceeding, however, bill 
and keep appears to be the preferable cost recovery mechanism for ISP-
bound traffic because it eliminates a substantial opportunity for 
regulatory arbitrage. The Commission does not fully adopt a bill and 
keep regime in this Order, however, because there are specific 
questions regarding bill and keep that require further inquiry, and the 
Commission believes that a more complete record on these issues is 
desirable before requiring carriers to recover most of their costs from 
end-users. Because these questions are equally relevant to its 
evaluation of a bill and keep approach for other types of traffic, the 
Commission will consider them in the context of the NPRM. Moreover, the 
Commission believes that there are significant advantages to a global 
evaluation of the intercarrier compensation mechanisms applicable to 
different types of traffic to ensure a more systematic, symmetrical 
treatment of these issues.
    11. Because the record in this proceeding indicates a need for 
immediate action with respect to ISP-bound traffic, however, in this 
final rule

[[Page 26802]]

the Commission implements an interim recovery scheme that: (i) moves 
aggressively to eliminate arbitrage opportunities presented by the 
existing recovery mechanism for ISP-bound by lowering payments and 
capping growth; and (ii) initiates a 36-month transition towards a 
complete bill and keep recovery mechanism while retaining the ability 
to adopt an alternative mechanism based upon a more extensive 
evaluation in the NPRM proceeding. Specifically, the Commission adopts 
a gradually declining cap on the amount that carriers may recover from 
other carriers for delivering ISP-bound traffic. The Commission also 
caps the amount of traffic for which any such compensation is owed, in 
order to eliminate incentives to pursue new arbitrage opportunities. In 
sum, the Commission's goal in this Order is decreased reliance by 
carriers upon carrier-to-carrier payments and an increased reliance 
upon recovery of costs from end-users. In this regard, the Commission 
emphasizes that the rate caps the Commission imposes are not intended 
to reflect the costs incurred by each carrier that delivers ISP 
traffic. Some carriers' costs may be higher; some are probably lower. 
Rather, the Commission concludes, based upon all of the evidence in 
this record, that these rates are appropriate limits on the amounts 
recovered from other carriers and provide a reasonable transition from 
rates that have (at least until recently) typically been much higher. 
Carriers whose costs exceed these rates are (and will continue to be) 
able to collect additional amounts from their ISP customers. As noted, 
and explained in more detail in the Order, the Commission believes that 
such end-user recovery likely is the most efficient mechanism.
    12. Beginning on the effective date of the final rule, and 
continuing for six months, intercarrier compensation for ISP-bound 
traffic will be capped at a rate of $.0015/minute-of-use (mou). 
Starting in the seventh month, and continuing for eighteen months, the 
rate will be capped at $.0010/mou. Starting in the twenty-fifth month, 
and continuing through the thirty-sixth month or until further 
Commission action (whichever is later), the rate will be capped at 
$.0007/mou. In addition to the rate caps, the Commission imposes a cap 
on total ISP-bound minutes for which a LEC may receive this 
compensation. For the year 2001, a LEC may receive compensation, 
pursuant to a particular interconnection agreement, for ISP-bound 
minutes up to a ceiling equal to, on an annualized basis, the number of 
ISP-bound minutes for which that LEC was entitled to compensation under 
that agreement during the first quarter of 2001, plus a ten percent 
growth factor. For 2002, a LEC may receive compensation, pursuant to a 
particular interconnection agreement, for ISP-bound minutes up to a 
ceiling equal to the minutes for which it was entitled to compensation 
under that agreement in 2001, plus another ten percent growth factor. 
In 2003, a LEC may receive compensation, pursuant to a particular 
interconnection agreement, for ISP-bound minutes up to a ceiling equal 
to the 2002 ceiling applicable to that agreement. This interim regime 
affects only the intercarrier compensation (i.e., the rates) applicable 
to the delivery of ISP-bound traffic. It does not alter carriers' other 
obligations under the Commission's part 51 rules, 47 CFR part 51, or 
existing interconnection agreements, such as obligations to transport 
traffic to points of interconnection. These caps are consistent with 
projections of the growth of dial-up Internet access for the first two 
years of the transition and are necessary to ensure that such growth 
does not undermine the goal of limiting intercarrier compensation and 
beginning a transition toward bill and keep. Nothing in the final rule 
prevents any carrier from serving or indeed expanding service to ISPs, 
so long as they recover the costs of additional minutes from their ISP 
customers.
    13. Because the transitional rates are caps on intercarrier 
compensation, they have no effect to the extent that states have 
ordered LECs to exchange ISP-bound traffic either at rates below the 
caps or on a bill and keep basis (or otherwise have not required 
payment of compensation for this traffic). The rate caps are designed 
to provide a transition toward bill and keep, and no transition is 
necessary for carriers already exchanging traffic at rates below the 
caps. Thus, if a state has ordered all LECs to exchange ISP-bound 
traffic on a bill and keep basis, or if a state has ordered bill and 
keep for ISP-bound traffic in a particular arbitration, those LECs 
subject to the state order would continue to exchange ISP-bound traffic 
on a bill and keep basis.
    14. In order to limit disputes and costly measures to identify ISP-
bound traffic, the Commission adopts a rebuttable presumption that 
traffic exchanged between LECs that exceeds a 3:1 ratio of terminating 
to originating traffic is ISP-bound traffic subject to the compensation 
mechanism set forth in the final rule. This ratio is consistent with 
those adopted by state commissions to identify ISP or other convergent 
traffic that is subject to lower intercarrier compensation rates. 
Carriers that seek to rebut this presumption, by showing that traffic 
above the ratio is not ISP-bound traffic or, conversely, that traffic 
below the ratio is ISP-bound traffic, may seek appropriate relief from 
their state commissions pursuant to section 252 of the Act.
    15. It would be unwise as a policy matter, and patently unfair, to 
allow incumbent LECs to benefit from reduced intercarrier compensation 
rates for ISP-bound traffic, with respect to which they are net payors, 
while permitting them to exchange traffic at state reciprocal 
compensation rates, which are much higher than the caps the Commission 
adopts here, when the traffic imbalance is reversed. Because the 
Commission is concerned about the superior bargaining power of 
incumbent LECs, the Commission will not allow them to ``pick and 
choose'' intercarrier compensation regimes, depending on the nature of 
the traffic exchanged with another carrier. The rate caps for ISP-bound 
traffic that the Commission adopts here apply, therefore, only if an 
incumbent LEC offers to exchange all traffic subject to section 
251(b)(5) at the same rate. Thus, if the applicable rate cap is $.0010/
mou, the ILEC must offer to exchange section 251(b)(5) traffic at that 
same rate. Similarly, if an ILEC wishes to continue to exchange ISP-
bound traffic on a bill and keep basis in a state that has ordered bill 
and keep, it must offer to exchange all section 251(b)(5) traffic on a 
bill and keep basis. If, however, a state has ordered bill and keep for 
ISP-bound traffic only with respect to a particular interconnection 
agreement, as opposed to state-wide, the Commission does not require 
the incumbent LEC to offer to exchange all section 251(b)(5) traffic on 
a bill and keep basis. This limitation is necessary so that an 
incumbent is not required to deliver all section 251(b)(5) in a state 
on a bill and keep basis even though it continues to pay compensation 
for most ISP-bound traffic in that state. For those incumbent LECs that 
choose not to offer to exchange section 251(b)(5) traffic subject to 
the same rate caps the Commission adopts for ISP-bound traffic, the 
Commission orders them to exchange ISP-bound traffic at the state-
approved or state-arbitrated reciprocal compensation rates reflected in 
their contracts. This ``mirroring'' rule ensures that incumbent LECs 
will pay the same rates for ISP-bound traffic that they receive for 
section 251(b)(5) traffic.
    16. Finally, a different rule applies in the case where carriers 
are not exchanging traffic pursuant to

[[Page 26803]]

interconnection agreements prior to the adoption date of this Order 
(April 18, 2001), where, for example, a new carrier enters the market 
or an existing carrier expands into a market it previously had not 
served. In such a case, as of the effective date of the final rule, 
carriers must exchange ISP-bound traffic on a bill-and-keep basis 
during this interim period.
    17. The interim compensation regime the Commission establishes here 
applies as carriers re-negotiate expired or expiring interconnection 
agreements. It does not alter existing contractual obligations, except 
to the extent that parties are entitled to invoke contractual change-
of-law provisions. This Order does not preempt any state commission 
decision regarding compensation for ISP-bound traffic for the period 
prior to the effective date. Because the Commission now exercises its 
authority under section 201 to determine the appropriate intercarrier 
compensation for ISP-bound traffic, however, state commissions will no 
longer have authority to address this issue. For this same reason, as 
of the date this Order is published in the Federal Register, carriers 
may no longer invoke section 252(i) to opt into an existing 
interconnection agreement with regard to the rates paid for the 
exchange of ISP-bound traffic. Section 252(i) applies only to 
agreements arbitrated or approved by state commissions pursuant to 
section 252; it has no application in the context of an intercarrier 
compensation regime set by this Commission pursuant to section 201. The 
Commission finds there is good cause under 5 U.S.C. 553(d)(3), however, 
to prohibit carriers from invoking section 252(i) with respect to rates 
paid for the exchange of ISP-bound traffic upon publication of this 
Order in the Federal Register, in order to prevent carriers from 
exercising opt in rights during the thirty days after Federal Register 
publication. To permit a carrier to opt into a reciprocal compensation 
rate higher than the caps the Commission has adopted during that window 
would seriously undermine the Commission's effort to curtail regulatory 
arbitrage and to begin a transition from dependence on intercarrier 
compensation and toward greater reliance on end-user recovery. In any 
event, the Commission's rule implementing section 252(i) requires 
incumbent LECs to make available ``[i]ndividual interconnection, 
service, or network element arrangements'' to requesting 
telecommunications carriers only ``for a reasonable period of time.'' 
47 CFR 51.809(c). The Commission concludes that any ``reasonable period 
of time'' for making available rates applicable to the exchange of ISP-
bound traffic expires upon the Commission's adoption in this Order of 
an intercarrier compensation mechanism for ISP-bound traffic.
    18. In summary, the interim regime the Commission adopts in this 
final rule ``provides relative certainly in the marketplace'' pending 
further Commission action, thereby allowing carriers to develop 
business plans, attract capital, and make intelligent investments. The 
interim regime should reduce carriers' reliance on carrier-to-carrier 
payments as they recover more of their costs from end-users, while 
avoiding a ``flash cut'' to bill and keep which might upset legitimate 
business expectations. The Commission believes that the analysis 
supplied in the Order amply responds to the court mandate that the 
Commission explains how its conclusions regarding ISP-bound traffic fit 
within the governing statute.

Paperwork Reduction Act

    19. This order contains no new or modified information collections 
subject to the Paperwork Reduction Act of 1995 (PRA).

Final Regulatory Flexibility Analysis

    20. As required by the Regulatory Flexibility Act (RFA), 5 U.S.C. 
603, an Initial Regulatory Flexibility Analysis (IRFA) was incorporated 
in the Declaratory Ruling and NPRM. Declaratory Ruling, 14 FCC Rcd at 
3710-13. The Commission sought and received written comments on the 
IRFA. The Final Regulatory Flexibility Analysis (FRFA) in this Order on 
Remand and Report and Order conforms to the RFA, as amended. See 5 
U.S.C. 604. The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., was 
amended by the ``Small Business Regulatory Enforcement Fairness Act of 
1996'' (SBREFA), which was enacted as Title II of the Contract With 
America Advancement Act of 1996, Public Law No. 104-121, 110 Stat. 847 
(1996) (CWAAA).
    21. To the extent that any statement contained in this FRFA is 
perceived as creating ambiguity with respect to the Commission's rules, 
or statements made in preceding sections of this Order on Remand and 
Report and Order, the rules and statements set forth in those preceding 
sections shall be controlling.

Need for, and Objectives of, This Order on Remand and Report and Order

    22. In the Declaratory Ruling, the Commission found that it did not 
have an adequate record upon which to adopt a rule regarding 
intercarrier compensation for ISP-bound traffic, but the Commission 
indicated that adoption of a rule would serve the public interest. 
Declaratory Ruling and NPRM, 14 FCC Rcd at 3707. The Commission sought 
comment on two alternative proposals, and stated that the Commission 
might issue new rules or alter existing rules in light of the comments 
received. Declaratory Ruling and NPRM, 14 FCC Rcd at 3711. Prior to the 
release of a decision on such intercarrier compensation, the U.S. Court 
of Appeals for the District of Columbia Circuit vacated certain 
provisions of the Declaratory Ruling and remanded the matter to the 
Commission. See Bell Atlantic, 206 F.3d 1.
    23. This Order on Remand and Report and Order addresses the 
concerns of various parties to this proceeding and responds to the 
court's remand. The Commission exercises jurisdiction over ISP-bound 
traffic pursuant to section 201, and establishes a three-year interim 
intercarrier compensation mechanism for the exchange of ISP-bound 
traffic that applies if incumbent LECs offer to exchange section 
251(b)(5) traffic at the same rates. During this interim period, 
intercarrier compensation for ISP-bound traffic is subject to a rate 
cap that declines over the three-year period, from $.0015/mou to 
$.0007/mou. The Commission also imposes a cap on the total ISP-bound 
minutes for which a LEC may receive this compensation under a 
particular interconnection agreement equal to, on an annualized basis, 
the number of ISP-bound minutes for which that LEC was entitled to 
receive compensation during the first quarter of 2001, increased by ten 
percent in each of the first two years of the transition. If an 
incumbent LEC does not offer to exchange all section 251(b)(5) traffic 
subject to the rate caps set forth herein, the exchange of ISP-bound 
traffic will be governed by the reciprocal compensation rates approved 
or arbitrated by state commissions.

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

    24. The Office of Advocacy, U.S. Small Business Administration 
(Office of Advocacy) submitted two filings in response to the IRFA. 
Office of Advocacy, U.S. Small Business Administration ex parte, May 
27, 1999; Office of Advocacy, U.S. Small Business Administration ex 
parte, June 14, 1999. In these filings, the Office of Advocacy raises 
significant issues regarding the Commission's description, in the IRFA, 
of small entities to which the Commission's rules will apply, and the

[[Page 26804]]

discussion of significant alternatives considered and rejected. 
Specifically, the Office of Advocacy argues that the Commission has 
failed accurately to identify all small entities affected by the 
rulemaking by refusing to characterize small incumbent local exchange 
carriers (LECs), and failing to identify small ISPs, as small entities. 
Office of Advocacy, U.S. Small Business Administration ex parte, May 
27, 1999, at 1-3; Office of Advocacy, U.S. Small Business 
Administration ex parte, June 14, 1999, at 2-3. The Commission notes 
that, in the IRFA, the Commission stated that the Commission excluded 
small incumbent LECs from the definitions of ``small entity'' and 
``small business concern'' because such companies are either dominant 
in their field of operations or are not independently owned and 
operated. Declaratory Ruling and NPRM, 14 FCC Rcd at 3711. The 
Commission also stated, however, that the Commission would nonetheless, 
out of an abundance of caution, include small incumbent LECs in the 
IRFA, and did so. Declaratory Ruling and NPRM, 14 FCC Rcd at 3711. 
Small incumbent LECs and other relevant small entities are included in 
the Commission's present analysis as described.
    25. The Office of Advocacy also states that Internet service 
providers (ISPs) are directly affected by the Commission's actions, and 
therefore should be included in its regulatory flexibility analysis. 
The Commission finds, however, that rates charged to ISPs are only 
indirectly affected by its actions. The Commission has, nonetheless, 
briefly discussed the effect on ISPs in the primary text of this Order.
    26. Last, the Office of Advocacy also argues that the Commission 
has failed adequately to address significant alternatives that 
accomplish its stated objective and minimize any significant economic 
impact on small entities. Office of Advocacy, U.S. Small Business 
Administration ex parte, June 14, 1999, at 3. The Commission notes 
that, in the IRFA, it described the nature and effect of its proposed 
actions, and encouraged small entities to comment (including giving 
comment on possible alternatives). The Commission also specifically 
sought comment on the two alternative proposals for implementing 
intercarrier compensation--one that resolved intercarrier compensation 
pursuant to the negotiation and arbitration process set forth in 
section 252, and another that would have had the Commission adopt a set 
of federal rules to govern such intercarrier compensation. Declaratory 
Ruling [IRFA], 14 FCC Rcd at 3711 (para. 39); see also Declaratory 
Ruling, 14 FCC Rcd at 3707-08 (paras. 30-31). The Commission believes, 
therefore, that small entities had a sufficient opportunity to comment 
on alternative proposals.
    27. NTCA also filed comments, not directly in response to the IRFA, 
urging the Commission to fulfill its obligation to consider small 
telephone companies. NTCA NPRM Comments at vi, 15. Some commenters also 
raised the issue of small entity concerns over increasing Internet 
traffic and the use of Extended Area Service (EAS) arrangements. See, 
e.g., ICORE NPRM Comments at 1-7; IURC NPRM Comments at 7; Richmond 
Telephone Company NPRM Comments at 1-8. The Commission is especially 
sensitive to the needs of rural and small LECs that handle ISP-bound 
traffic, but the Commission finds that the costs that LECs incur in 
originating this traffic extends beyond the scope of the present 
proceeding and should not dictate the appropriate approach to 
compensation for delivery of ISP-bound traffic.

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

    28. The rules the Commission is adopting apply to local exchange 
carriers. To estimate the number of small entities that would be 
affected by this economic impact, the Commission first considers the 
statutory definition of ``small entity'' under the RFA. The RFA 
generally defines ``small entity'' as having the same meaning as the 
term ``small business,'' ``small organization,'' and ``small 
governmental jurisdiction.'' 5 U.S.C. 601(6). In addition, the term 
``small business'' has the same meaning as the term ``small business 
concern'' under the Small Business Act, unless the Commission has 
developed one or more definitions that are appropriate to its 
activities. 5 U.S.C. 601(3) (incorporating by reference the definition 
of ``small business concern'' in 5 U.S.C. 632). Under the Small 
Business Act, a ``small business concern'' is one that: (1) is 
independently owned and operated; (2) is not dominant in its field of 
operation; and (3) meets any additional criteria established by the 
Small Business Administration (SBA). 15 U.S.C. 632. The SBA has defined 
a small business for Standard Industrial Classification (SIC) 
categories 4812 (Radiotelephone Communications) and 4813 (Telephone 
Communications, Except Radiotelephone) to be small entities when they 
have no more than 1,500 employees. 13 CFR 121.201.
    29. The most reliable source of information regarding the total 
numbers of certain common carrier and related providers nationwide, as 
well as the numbers of commercial wireless entities, appears to be data 
the Commission publishes annually in its Carrier Locator report, 
derived from filings made in connection with the Telecommunications 
Relay Service (TRS). FCC, Carrier Locator: Interstate Service 
Providers, Figure 1 (Jan. 2000) (Carrier Locator). According to data in 
the most recent report, there are 4,144 interstate carriers. Carrier 
Locator at Fig. 1. These carriers include, inter alia, incumbent local 
exchange carriers, competitive local exchange carriers, competitive 
access providers, interexchange carriers, other wireline carriers and 
service providers (including shared-tenant service providers and 
private carriers), operator service providers, pay telephone operators, 
providers of telephone toll service, wireless carriers and services 
providers, and resellers.
    30. The Commission has included small incumbent local exchange 
carriers (LECs) in this present regulatory flexibility analysis. As 
noted above, a ``small business'' under the RFA is one that, inter 
alia, meets the pertinent small business size standard (e.g., a 
telephone communications business having 1,500 or fewer employees), and 
``is not dominant in its field of operation.'' 5 U.S.C. 601(3). The 
SBA's Office of Advocacy contends that, for RFA purposes, small 
incumbent LECs are not dominant in their field of operation because any 
such dominance is not ``national'' in scope. Office of Advocacy, U.S. 
Small Business Administration ex parte, May 27, 1999, at 1-3; Office of 
Advocacy, U.S. Small Business Administration ex parte, June 14, 1999, 
at 2-3. The Small Business Act contains a definition of ``small 
business concern,'' which the RFA incorporates into its own definition 
of ``small business.'' See 15 U.S.C. 632(a) (Small Business Act); 5 
U.S.C. 601(3) (RFA). SBA regulations interpret ``small business 
concern'' to include the concept of dominance on a national basis. 13 
CFR 121.102(b). Since 1996, out of an abundance of caution, the 
Commission has included small incumbent LECs in its regulatory 
flexibility analyses. See, e.g., Implementation of the Local 
Competition Provisions of the Telecommunications Act of 1996, CC 
Docket, 96-98, First Report and Order, 11 FCC Rcd 15499, 16144-45 
(1996). The Commission has therefore included small incumbent LECs in 
this regulatory flexibility analysis, although the Commission 
emphasizes that this regulatory flexibility analysis action has

[[Page 26805]]

no effect on the Commission's analyses and determinations in other, 
non-RFA contexts.
    31. Total Number of Telephone Companies Affected. The United States 
Bureau of the Census (the Census Bureau) reports that, at the end of 
1992, there were 3,497 firms engaged in providing telephone services, 
as defined therein, for at least one year. United States Department of 
Commerce, Bureau of the Census, 1992 Census of Transportation, 
Communications, and Utilities: Establishment and Firm Size, at Firm 
Size 1-123 (1995) (1992 Census). This number contains a variety of 
different categories of carriers, including local exchange carriers, 
interexchange carriers, competitive access providers, cellular 
carriers, mobile service carriers, operator service providers, pay 
telephone operators, PCS providers, covered SMR providers, and 
resellers. It seems certain that some of those 3,497 telephone service 
firms may not qualify as small entities or small incumbent LECs because 
they are not ``independently owned and operated.'' 15 U.S.C. 632(a)(1). 
For example, a PCS provider that is affiliated with an interexchange 
carrier having more than 1,500 employees would not meet the definition 
of a small business. It seems reasonable to conclude, therefore, that 
fewer than 3,497 telephone service firms are small entity telephone 
service firms or small incumbent LECs that may be affected by the 
decisions and rule changes adopted in this proceeding.
    32. Wireline Carriers and Service Providers. The SBA has developed 
a definition of small entities for telephone communications companies 
other than radiotelephone companies. The Census Bureau reports that, 
there were 2,321 such telephone companies in operation for at least one 
year at the end of 1992. 1992 Census at Firm Size 1-123. According to 
the SBA's definition, a small business telephone company other than a 
radiotelephone company is one employing no more than 1,500 persons. 13 
CFR 121.201, Standard Industrial Classification (SIC) Code 4813. All 
but 26 of the 2,321 non-radiotelephone companies listed by the Census 
Bureau were reported to have fewer than 1,000 employees. Thus, even if 
all 26 of those companies had more than 1,500 employees, there would 
still be 2,295 non-radiotelephone companies that might qualify as small 
entities or small incumbent LECs. Although it seems certain that some 
of these carriers are not independently owned and operated, the 
Commission is unable at this time to estimate with greater precision 
the number of wireline carriers and service providers that would 
qualify as small business concerns under the SBA's definition. 
Consequently, the Commission estimates that there are fewer than 2,295 
small entity telephone communications companies other than 
radiotelephone companies that may be affected by the decisions and rule 
changes adopted in this proceeding.
    33. Local Exchange Carriers, Interexchange Carriers, Competitive 
Access Providers, Operator Service Providers, and Resellers. Neither 
the Commission nor the SBA has developed a definition particular to 
small LECs, interexchange carriers (IXCs), competitive access providers 
(CAPs), operator service providers (OSPs), or resellers. The closest 
applicable definition for these carrier-types under the SBA rules is 
for telephone communications companies other than radiotelephone 
(wireless) companies. 13 CFR 121.201, SIC Code 4813. According to the 
Commission's most recent TRS data, there are 1,348 incumbent LECs and 
212 CAPs and competitive LECs. Carrier Locator at Fig. 1. Although it 
seems certain that some of these carriers are not independently owned 
and operated, or have more than 1,500 employees, the Commission is 
unable at this time to estimate with greater precision the number of 
these carriers that would qualify as small business concerns under the 
SBA's definition. Consequently, the Commission estimates that there are 
fewer than 1,348 incumbent LECs and fewer than 212 CAPs and competitive 
LECs that may be affected by the decisions and rule changes adopted in 
this proceeding.

Description of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

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

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

    35. In the Declaratory Ruling and NPRM the Commission proposed 
various approaches to intercarrier compensation for ISP-bound traffic. 
Declaratory Ruling, 14 FCC Rcd at 3707-10. During the course of this 
proceeding the Commission has considered and rejected several 
alternatives. None of the significant alternatives considered would 
appear to succeed as much as the Commission's present rule in balancing 
its desire to minimize any significant economic impact on relevant 
small entities with its desire to deal with the undesirable incentives 
created under the current reciprocal compensation regime that governs 
the exchange of ISP-bound traffic in most instances. The Commission 
also finds that for small ILECs and CLECs the administrative burdens 
and transaction costs of intercarrier compensation will be minimized to 
the extent that LECs begin a transition toward recovery of costs from 
end-users, rather than other carriers.
    36. Although a longer transition period was considered by the 
Commission, it was rejected because a three-year period was considered 
sufficient to accomplish the Commission's policy objectives with 
respect to all LECs. Differing compliance requirements for small LECs 
or exemption from all or part of this rule is inconsistent with the 
Commission's policy goal of addressing the market distortions 
attributable to the prevailing intercarrier compensation mechanism for 
ISP-bound traffic and beginning a smooth transition to bill-and-keep.
    37. Report to Congress: The Commission will send a copy of this 
Order on Remand and Report and Order, including this FRFA, in a report 
to be sent to Congress pursuant to the Congressional Review Act of 
1996. 5 U.S.C. 801(a)(1)(A). In addition, the Commission will send a 
copy of this Order on Remand and Report and Order, including FRFA, to 
the Chief Counsel for Advocacy of the Small Business Administration. 
See also 5 U.S.C. 604(b). A copy of this Order on Remand and Report and 
Order and FRFA (or summaries thereof) will be published in the Federal 
Register. See 5 U.S.C. 604(b).

Ordering Clauses

    Accordingly, IT IS ORDERED, pursuant to sections 1, 4(i) and (j), 
201-209, 251, 252, 332, and 403 of the Communications Act, as amended, 
47 U.S.C. 151, 154(i), 154(j), 201-209, 251, 252, 332, and 403, and 
section 553 of Title 5, United States Code, 5 U.S.C. 553, that this 
Order on Remand and Report and Order and revisions to part 51 of the 
Commission's rules, 47 CFR part 51, ARE ADOPTED. This Order on Remand 
and Report and Order and the rule revisions adopted herein will be 
effective 30 days after publication in the Federal Register except 
that, for good cause shown, as set forth in paragraph 82 of this Order 
and as described in paragraph 17 of this Federal Register

[[Page 26806]]

document, the provision of this Order prohibiting carriers from 
invoking section 252(i) of the Act to opt into an existing 
interconnection agreement as it applies to rates paid for the exchange 
of ISP-bound traffic will be effective immediately upon publication of 
this Order in the Federal Register.
    It is further ordered that the Commission's Consumer Information 
Bureau, Reference Information Center, shall send a copy of this Order 
on Remand and Report and Order, including the Final Regulatory 
Flexibility Analysis, to the Chief Counsel for Advocacy of the Small 
Business Administration.

List of Subjects in 47 CFR Part 51

    Communications, common carriers, Interconnection, 
Telecommunications, Internet service providers.

Federal Communications Commission.
Magalie Roman Salas,
Secretary.
    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR part 51 as follows:

PART 51--INTERCONNECTION

    1. The authority citation for part 51 continues to read:

    Authority: Sections 1-5, 7, 201-05, 207-09, 218, 225-27, 251-54, 
271, 332, 48 Stat. 1070, as amended, 1077; 47 U.S.C. Secs. 151-55, 
157, 201-05, 207-09, 218, 225-27, 251-54, 271, 332, unless otherwise 
noted.


    2. The heading in part 51, subpart H, is revised to read as 
follows:

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

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


Sec. 51.701  Scope of transport and termination pricing rules.

* * * * *
    (b) Telecommunications traffic. For purposes of this subpart, 
telecommunications traffic means:
    (1) Telecommunications traffic exchanged between a LEC and a 
telecommunications carrier other than a CMRS provider, except for 
telecommunications traffic that is interstate or intrastate exchange 
access, information access, or exchange services for such access (see 
FCC 01-131, paragraphs 34, 36, 39, 42-43); or
    (2) Telecommunications traffic exchanged between a LEC and a CMRS 
provider that, at the beginning of the call, originates and terminates 
within the same Major Trading Area, as defined in Sec. 24.202(a) of 
this chapter.
* * * * *
    4. Sections 51.701(a), 51.701(c) through (e), 51.703, 51.705, 
51.707, 51.709, 51.711, 51.713, 51.715, and 51.717 are amended by 
removing the term ``local telecommunications traffic'' and adding in 
its place ``telecommunications traffic'' each place it appears.

[FR Doc. 01-12165 Filed 5-14-01; 8:45 am]
BILLING CODE 6712-01-P