Inter-Carrier Compensation for ISP-Bound Traffic

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 51

[CC Docket No. 99-68; FCC 99-38]

Inter-Carrier Compensation for ISP-Bound Traffic

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: On February 26, 1999, the Commission released a Notice of

Proposed Rulemaking (NPRM) in CC Docket No. 99-68 concerning

compensation between carriers for the delivery of traffic bound for

Internet service providers (ISPs). The NPRM initiates a proceeding to

determine, on a prospective basis, a federal inter-carrier compensation

mechanism. It tentatively concludes that private negotiations driven by

market forces are more likely to lead to efficient outcomes than are

rates set by regulation. This document also seeks comment on an

alternative proposal under which this Commission would establish rules

governing inter-carrier compensation for ISP-bound traffic and resolve

disputes through a federal arbitration process.

DATES: Comments are due on or before April 12, 1999 and reply comments

are due on or before April 27, 1999.

ADDRESSES: Federal Communications Commission, 445 Twelfth St., S.W.,

Room TW-A325, Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Tamara Preiss, Attorney, Common

Carrier Bureau, Competitive Pricing Division, (202) 418-1520.

SUPPLEMENTARY INFORMATION: This summarizes the Commission's Notice of

Proposed Rulemaking in CC Docket No. 99-68, Inter-Carrier Compensation

for ISP-Bound Traffic, FCC 99-38, adopted February 25, 1999, and

released February 26, 1999. The NPRM seeks comment on the tentative

conclusion that inter-carrier compensation should be governed

prospectively by interconnection agreements negotiated and arbitrated

under Sections 251 and 252 of the Act (47 U.S.C. 251, 252). State

commissions would arbitrate disputes if parties fail to agree on a

compensation mechanism. The file in its entirety is available for

inspection and copying during the weekday hours of 9:00 a.m. to 4:30

p.m. in the Commission's Reference Center, room 239, 1919 M St., N.W.,

Washington D.C., or copies may be purchased from the Commission's

duplicating contractor, ITS, Inc.; 1231 20th St., N.W., Washington,

D.C. 20036, phone (202) 857-3800.

Analysis of proceeding

A. Discussion

1. The Commission does not have an adequate record upon which to

adopt a rule regarding inter-carrier compensation for ISP-bound

traffic. It does believe, however, that adopting such a rule to govern

prospective compensation would serve the public interest. As a general

matter, the Commission tentatively concludes that

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our rule should strongly reflect our judgment that commercial

negotiations are the ideal means of establishing the terms of

interconnection contracts. The Commission seeks comment on two

alternative proposals for implementing such a regime. Until adoption of

a final rule, state commissions will continue to determine whether

reciprocal compensation is due for this traffic. As discussed, the

Commission's holding that parties' agreements, as interpreted by state

commissions, should be binding also applies to those state commissions

that have not yet addressed the issue.

2. For the traffic at issue here, the Commission tentatively

conclude that a negotiation process, driven by market forces, is more

likely to lead to efficient outcomes than are rates set by regulation.

In addition, setting a rate by regulation appears unwise because the

actual amounts, need for, and direction of inter-carrier compensation

might reasonably vary depending on the underlying commercial

relationships with the end user, and who ultimately pays for

transmission between its location and the ISP. The Commission

acknowledges that, no matter what the payment arrangement, LECs incur a

cost when delivering traffic to an ISP that originates on another LEC's

network. The Commission believes that efficient rates for inter-carrier

compensation for ISP-bound traffic are not likely to be based entirely

on minute-of-use pricing structures. In particular, pure minute-of-use

pricing structures are not likely to reflect accurately how costs are

incurred for delivering ISP-bound traffic. For example, flat-rated

pricing based on capacity may be more cost-based. Parties also might

reasonably agree to rates that include a separate call set-up charge,

coupled with very low per-minute rates. These economic characteristics

of this traffic are likely to make voluntary agreements among the

parties easier to reach. For these reasons, the Commission proposes

that inter-carrier compensation rates for ISP-bound traffic be based on

commercial negotiations undertaken as part of the broader

interconnection negotiations between incumbent LECs and CLECs. The

Commission seeks comment below on two alternative proposals to govern

the negotiations with respect to ISP-bound traffic.

3. The Commission tentatively concludes that, as a matter of

federal policy, the inter-carrier compensation for this interstate

telecommunications traffic should be governed prospectively by

interconnection agreements negotiated and arbitrated under Sections 251

and 252 of the Act. Resolution of failures to reach agreement on inter-

carrier compensation for interstate ISP-bound traffic then would occur

through arbitrations conducted by state commissions, which are

appealable to federal district courts. As with other issues on which

parties petition state commissions for arbitration under Section 252 of

the Act, if a state commission fails to act, the Commission will assume

the responsibility of the state commission within 90 days of being

notified of such failure. 47 U.S.C. 252(e)(5). This proposal could help

facilitate the policy goals set forth by forcing the parties to hold a

single set of negotiations regarding rates, terms, and conditions for

interconnected traffic and to submit all disputes regarding

interconnected traffic to a single arbitrator. The Commission seeks

comment on this tentative conclusion.

4. The Commission also seeks comment on an alternative proposal

that it adopt a set of federal rules governing inter-carrier

compensation for ISP-bound traffic pursuant to which parties would

engage in negotiations concerning rates, terms, and conditions

applicable to delivery of interstate ISP-bound traffic. These

negotiations would commence on the effective date of the adopted rule

but could proceed in tandem with broader interconnection negotiations

between the parties. The Commission realizes, however, that the success

of any negotiation over rates is likely to depend on the availability

of the swift and certain resolution of disputes, and the structure of

the resolution process. For example, the Commission, through delegation

to the Common Carrier Bureau, might resolve such disputes, at the

request of either party, through an arbitration-like process, following

a discrete period of voluntary negotiation. The Commission seeks

comment on how such an approach would operate procedurally and what

costing standards the Commission might use in arbitrating disputes. The

Commission also seeks comment on how this proposal compares with a

broad interconnection negotiation in which most disputes are resolved

by a state arbitrator but disputes regarding ISP-bound traffic are

resolved through a federal arbitration-like process. The Commission

also seeks comment on whether it is possible, as a technical matter, to

segregate intrastate and interstate ISP-bound traffic and whether any

federal rules it adopts should apply to all intrastate and interstate

ISP-bound traffic.

5. The Commission also seeks comment on whether the Commission has

the authority to establish an arbitration process that is final and

binding and not subject to judicial review. For instance, the

Commission notes that parties might agree to binding arbitration

pursuant to the Administrative Dispute Resolution Act. Administrative

Dispute Resolution Act, Public Law 101-552, 104 Stat. 2738, codified at

5 U.S.C. 571 et seq. The Commission seeks comment on whether and how

such a system should be implemented. In particular, it seeks comment on

the desirability of arbitration before an arbitrator selected by the

parties, as provided by the Administrative Dispute Resolution Act, as

opposed to a federal or state decision-maker. See 5 U.S.C. 577.

6. The Commission also invites parties to submit alternative

proposals for inter-carrier compensation for interstate ISP-bound

traffic that will advance our policy goals in this area. For example,

Ameritech has proposed basing inter-carrier compensation for ISP-bound

traffic on sharing the incumbent LEC's revenue associated with the

interconnected ISP-bound traffic. The Commission also request parties

to comment on how any alternatives they propose will advance its goals

of ensuring the broadest possible entry of efficient new competitors,

eliminating incentives for inefficient entry and irrational pricing

schemes, and providing to consumers as rapidly as possible the benefits

of competition and emerging technologies.

7. The Commission is aware that disputes may arise regarding

various terms and conditions for inter-carrier compensation for ISP-

bound traffic. Although many such disputes could be resolved through a

negotiation and arbitration process, the Commission seeks comment on

whether there are any issues under our two proposals that it can and

should address in the first instance through rules rather than through

arbitration. The Commission requests parties to comment on the need for

rules pertaining to such matters and, to the extent that parties

believe that rules are appropriate, the substance and degree of

specificity of such rules. The Commission emphasizes, however, that it

does not seek comment on whether interstate access charges should be

imposed on ESPs as part of this proceeding. The Commission recently

reaffirmed that exemption in the Access Charge Reform Order, and it

does not reconsider it here. Access Charge Reform Order.

8. Pursuant to Section 252(i) of the Act, interconnection

agreements often have clauses (often referred to as ``most-favored

nation'' or ``MFN'' provisions) that allow parties to select, to

varying degrees of specificity, provisions from other parties'

interconnection

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agreements with that particular LEC. 47 U.S.C. 252(i). The Commission

understands that an arbitrator recently permitted a CLEC to exercise

MFN rights to opt into an interconnection agreement that an incumbent

LEC previously had negotiated with another CLEC. That interconnection

agreement, executed in July 1996, has a three-year term. The arbitrator

concluded that the new CLEC was entitled to opt into the agreement for

a new three-year term, thus raising the possibility that the incumbent

LEC might be subject to the obligations set forth in that agreement for

an indeterminate length of time, without any opportunity for

renegotiation, as successive CLECs opt into the agreement. The

Commission seeks comment, therefore, on whether and how section 252(i)

and MFN rights affect parties' ability to negotiate or renegotiate

terms of their interconnection agreements.

9. As discussed, not all ISP-bound traffic is interstate. The

Commission seeks comment on whether it should adopt rules for the

interstate traffic that would coexist with state rules governing the

intrastate traffic, or whether it is too difficult or inefficient to

separate intrastate ISP-bound traffic from interstate ISP-bound

traffic. The Commission further seeks comment on the technical and

practical implications of requiring the separation of intrastate and

interstate ISP-bound traffic. In addition, it seeks comment on the

implications of various proposals regarding inter-carrier compensation

for ISP-bound traffic on the separations regime, such as the

appropriate treatment of incumbent LEC revenues and payments associated

with the delivery of such traffic. This Commission is mindful of

concerns that our jurisdictional analysis may result in allocation to

different jurisdictions of the costs and revenues associated with ISP-

bound traffic, and the Commission wishes to make clear that it has no

intention of permitting such a mismatch to occur. With respect to

current arrangements, the Commission notes that this order does not

alter the long-standing determination that ESPs (including ISPs) can

procure their connections to LEC end offices under intrastate end-user

tariffs, and thus for those LECs subject to jurisdictional separations

both the costs and the revenues associated with such connections will

continue to be accounted for as intrastate.

B. Procedural Matters

1. Ex Parte Presentations

This Notice of Proposed Rulemaking is a permit-but-disclose notice-

and-comment rulemaking proceeding. Ex Parte presentations are

permitted, in accordance with the Commission's rules, provided that

they are disclosed as required. See generally 47 CFR 1.1200, 1.1202,

1.1204, 1.1206.

2. Initial Regulatory Flexibility Analysis

11. As required by the Regulatory Flexibility Act (RFA), the

Commission has prepared this Initial Regulatory Flexibility Analysis

(IRFA) of the possible significant economic impact on small entities by

the policies and rules proposed in the Notice of Proposed Rulemaking

(Notice). See 5 U.S.C. 603. Written public comments are requested on

the IRFA. These comments must be filed by the deadlines for comment on

the remainder of the Notice, and should have a separate and distinct

heading designating them as responses to the IRFA. The Commission will

send a copy of the Notice, including the IRFA, to the Chief Counsel for

Advocacy of the Small Business Administration (SBA), in accordance with

the RFA, 5 U.S.C. 603(a).

12. Need for and Objectives of the Proposed Rules. The Commission

tentatively conclude that it should adopt a rule regarding inter-

carrier compensation for ISP-bound traffic that strongly reflects our

judgment that commercial negotiations are the ideal means of

establishing the terms of interconnection contracts. The Commission

seeks comment on two alternative proposals for implementing such a

regime. Until adoption of a final rule, state commissions will continue

to determine whether reciprocal compensation is due for this traffic.

In light of comments received in response to the Notice, the Commission

might issue new rules or alter existing rules.

13. Legal Basis. The legal basis for any action that may be taken

pursuant to the Notice is contained in Sections 1, 2, 4, 201, 202, 274,

and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C.

151, 152, 154, 201, 202, 251, 252, and 303(r).

14. Description and Estimate of the Number of Small Entities That

May Be Affected by the Notice of Proposed Rulemaking. The RFA directs

the Commission to provide a description of and, where feasible, an

estimate of the number of small entities that might be affected by

proposed rules. 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. 5 U.S.C. 601(3). 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

SBA. 15 U.S.C. 632. The SBA has defined a small business for Standard

Industrial Classification (SIC) category 4813 (Telephone

Communications, Except Radiotelephone) to be an entity with no more

than 1,500 employees. See 13 CFR 121.201. Consistent with prior

practice, the Commission excludes small incumbent local exchange

carriers (LECs) from the definition of ``small entity'' and ``small

business concern.'' Although such a company may have 1,500 or fewer

employees and thus fall within the SBA's definition of a small

telecommunications entity, such companies are either dominant in their

field of operations or are not independently owned and operated. Out of

an abundance of caution, however, for regulatory flexibility analysis

purposes, the Commission will consider small incumbent LECs within this

present analysis and use the term ``small incumbent LECs'' to refer to

any incumbent LEC that arguably might be defined by SBA as a small

business concern.

15. 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. This number includes a

variety of different categories of carriers, including local exchange

carriers (both incumbent and competitive), 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 because they are not ``independently owned or 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

either small entities or small incumbent LECs that may be affected by

this Notice.

16. Local Exchange Carriers. Neither the Commission nor the SBA has

developed a definition of small providers of local exchange services.

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The closest applicable definition under the SBA's rules is for

telephone communications companies other than radiotelephone (wireless)

companies. The most reliable source of information regarding the number

of LECs nationwide of which it is aware appears to be the data that the

Commission collects annually in connection with the Telecommunications

Relay Service (TRS). According to our most recent data, 1,371 companies

reported that they were engaged in the provision of local exchange

services. Although it seems certain that some of these carriers are not

independently owned and operated, or have more than 1,500 employees, or

are dominant, the Commission is unable at this time to estimate with

greater precision the number of LECs that would qualify as small

business concerns under the SBA's definition. Consequently, the

Commission estimates that fewer than 1,371 small providers of local

exchange service are small entities or small incumbent LECs that may be

affected by the Notice.

17. Description of Projected Reporting, Recordkeeping and Other

Compliance Requirements. As a result of rules that the Commission 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 entrants may be required to produce

information regarding the costs of carrying ISP-bound traffic on their

networks.

18 Steps Taken to Minimize Significant Economic Impact on Small

Entities, and Alternatives Considered. As noted, the Commission

proposes to adopt rules that may require incumbent LECs and CLECs to

discern the amount of traffic carried on their networks that is bound

for ISPs. The Commission anticipates that if it adopts 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 Notice also

requests comment on alternative proposals.

19. Federal Rules that May Duplicate, Overlap, or Conflict with the

Proposed Rules. None.

3. Comment Filing Procedures

20. Pursuant to sections 1.415 and 1.419 of the Commission's rules,

47 CFR 1.415, 1.419, interested parties may file comments on or before

April 12, 1999, and reply comments on or before April 27, 1999.

Comments may be filed using the Commission's Electronic Comment Filing

System (ECFS) or by filing paper copies. See Electronic Filing of

Documents in Rulemaking Proceedings, 63 Fed. Reg. 24,121 (1998).

21. 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. If multiple docket or rulemaking

numbers appear in the caption of this proceeding, however, commenters

must transmit one electronic copy of the comments to each docket or

rulemaking number referenced in the caption. In completing the

transmittal screen, commenters should include their full name, Postal

Service mailing address, and the applicable docket or rulemaking

number. 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 message to [email protected] and include ``get form '' in the body of the message. A

sample form and directions will be sent in reply.

22. Parties that choose to file by paper must file an original and

four copies of each filing. All filings must be sent to the

Commission's Secretary, Magalie Roman Salas, Office of the Secretary,

Federal Communications Commission, 445 Twelfth St., S.W., Room TW-A325,

Washington, DC 20554.

23. Parties that choose to file by paper should also submit their

comments on diskette. These diskettes should be submitted to: Wanda

Harris, Federal Communications Commission, Common Carrier Bureau,

Competitive Pricing Division, 445 Twelfth St., S.W., Fifth Floor,

Washington, DC 20554. Such a submission should be on a 3.5 inch

diskette formatted in an IBM compatible format using WordPerfect 5.1

for Windows 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 labelled with the commenter's name,

proceeding (including the docket number in this case, CC Docket No. 99-

68); 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 Copy--Not an Original.'' Each

diskette should contain only one party's pleadings, preferably in a

single electronic file. In addition, commenters must send diskette

copies to the Commission's copy contractor, International Transcription

Service, Inc., 1231 20th Street, N.W., Washington, DC 20036.

V. Ordering Clauses

24. Accordingly, it is ordered, pursuant to Sections 1, 4 (i) and

(j), 201-209, 251, 252, and 403 of the Communications Act, as amended,

47 U.S.C. 151, 154(i), 154(j), 201-209, 251, 252 and 403, that this

Notice of Proposed Rulemaking is hereby adopted and comments are

requested.

25. It is further ordered that the Commission's Office of Public

Affairs, Reference Operations Division, shall send a copy of this

Notice of Proposed Rulemaking, including the Initial Regulatory

Flexibility Analysis, to the Chief Counsel for Advocacy of the Small

Business Administration.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

[FR Doc. 99-7160 Filed 3-23-99; 8:45 am]

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