Is ISP-bound traffic local or interstate?

• Author: Bonnett, Thomas W.
• Position: Internet service providers

1. INTRODUCTION

   On February 26, 1999, the Federal Communications Commission ("FCC" or "Commission") issued a Declaratory Ruling that "ISP-bound traffic is jurisdictionally mixed and appears to be largely interstate."(1) The ruling did not invalidate existing interconnection agreements or preempt the state commissions that had "imposed reciprocal compensation obligations for this traffic."(2) Indeed, according to the Declaratory Ruling, "parties should be bound by their existing interconnection agreements, as interpreted by state commissions."(3) On March 24, 2000, the D.C. Circuit Court of Appeals vacated the Declaratory Ruling and remanded the issue to the FCC.(4) Nevertheless, the D.C. Circuit added that incumbents, in the interim, were "free to seek relief from state-authorized compensation that they believe[d] to be wrongfully imposed."(5)

   In the rich history of communications policy, this particular issue has proven one of the most curious. On the surface, the dispute appears to hinge on jurisdiction and money. The competitive local exchange carriers ("CLECs") maintain that calls initiated on an incumbent's network and transferred through the CLEC's network to an Internet service provider ("ISP") are local calls subject to termination fees under negotiated interconnection agreements. The incumbent local exchange carriers ("ILECs"), however, maintain that ISP-bound traffic is not local because those calls do not terminate at the ISP, but instead access the Internet, a global medium of communication.(6)

   Two elements of this dispute have defined communications policy for decades: the jurisdictional tension between federal and state regulators, and the self-interested claims and counterclaims of rival telecommunications providers. This Article focuses primarily on the jurisdictional question: Should the FCC declare ISP-bound traffic interstate, and, thus, place it under its jurisdiction?(7) Alternatively, should state commissions on their own initiative intervene to resolve this dispute between the ILECs and CLECs? The substance of this semantic conflict also takes on importance in the debate: What is a local call, and why does this matter to public regulators?

   Answering these esoteric questions requires some understanding of the rapid changes in information technologies in recent years. Indeed, lurking below the surface of this dispute is an explosion of emerging technologies that threatens to transform the function and scope of the publicly switched telephone network ("PSTN").(8)

   Part II of this Article explains how the once invincible PSTN has evolved into a diverse, dynamic "network of networks."(9) Part III presents a broad history of the dual federalism of the FCC and the state commissions. Part IV presents an interpretation of why this issue is far more important to communications policy than merely a bitter dispute over a few billion dollars in claims of reciprocal compensation.(10) Data traffic outweighs voice and is growing at a much faster rate.(11) This dispute--the nature of calls to ISPs--foreshadows many technological developments that could threaten to marginalize the publicly switched network.(12) The failure to ascertain the actual costs of transmitting data through the publicly switched network, and to impose those costs on appropriate providers, could undermine the integrity of the publicly switched network as traffic leaps into the digital future of data packet transmission via Internet Protocol ("IP").(13) While all eyes are focused on the bright, shiny Pretty Amazing New Stuff ("PANS"),(14) federal and state regulators must not neglect the tarnished, copper plain old telephone services ("POTS").(15) Indeed, both require a publicly switched network capable of accommodating emerging technologies such as data packet transmission without being subsumed by them.(16) Part V argues that ISP-bound traffic is interstate in nature, and that state commissions should initiate a generic rulemaking process to resolve this dispute, facilitating the next round of interconnection agreements. If the state commissions do not resolve these conflicts on ISP-bound traffic, one would expect the FCC to reissue its Order defining appropriate obligations under reciprocal compensation.

   Based on this case study, Part VI concludes that the regulatory philosophy employed during the regime of monopoly providers (bargaining among competing interests or balancing conflicting social objectives) must be replaced by a new paradigm that seeks to establish a level, technologically neutral playing field through regulatory parity.(17) The twin forces of competition and technological advance create a powerful synergy that regulators must embrace by ensuring that regulated entities bear equal burdens or receive adequate compensation.(18) Especially in this competitive context, intercarrier compensation must be sufficient to enable providers to cover their costs and maintain adequate investment in their proprietary networks. The failure of public policy to achieve this intermediate objective jeopardizes the future quality and integrity of the network of networks.

2. THE PUBLICLY SWITCHED TELEPHONE NETWORK ("PSTN") EVOLVES INTO A "NETWORK OF NETWORKS"

   Before the AT&T divestiture in 1984, telephony was provided through the PSTN owned and maintained by monopoly providers, which were regulated by the FCC and the state commissions.(19) Other providers, such as MCI, handled a small percentage of long-distance calls, but even those calls were initiated and/or terminated through the facilities of the local exchange carriers. In this regime of publicly regulated monopoly providers, the PSTN reigned supreme.

   Later in the 1980s, more competition emerged in the long-distance market, and competitive access providers ("CAPs") began to develop local transmission systems to bypass the local exchange carriers.(20) Also in this decade, telephony sprouted wings., as the FCC awarded cellular licenses in the top markets to provide mobile, wireless communications.(21) The PSTN still dominated the telephony market, but the leakage to rival networks had begun.

   In 1989, two events changed the world. The Berlin Wall fell, and the New York Public Service Commission ("NY PSC") allowed competition in the local exchange services. The NY PSC ruling shocked the telecommunications industry. Although competition in the long-distance market had matured since the 1984 AT&T divestiture, few thought the local telephone monopoly would be broken. For most of this century, conventional wisdom held that local exchanges were natural monopolies.(22)

   Competition in the local exchange market, once viewed as a radical departure from the regime of regulating monopoly providers, swept across the nation as a grass fire might flash across the prairie after a summer drought. By January 1996, "[a]t least 29 states, including New York, [had] approved measures to end telephone monopolies."(23) Drawing heavily upon the work of state commissions, especially in the area of developing interconnection agreements between rival networks,(24) Congress enacted and President Clinton signed into law the Telecommunications Act of 1996 ("1996 Act").(25) It promoted competition in telephone and cable television services, and partially deregulated much of the telecommunications industry.(26)

   The 1996 Act envisioned that competition in local telephone services would take three forms: building facility-based networks, contracting for the use of unbundled network elements ("UNEs") from the ILECs, and providing resale.(27) Building facility-based networks is the most expensive way to compete against the incumbent providers. Examples of this approach include wireless technologies such as cellular and personal communications services ("PCS"); cable television systems upgraded to include switches to provide two-way voice transmission; and the alternative networks built by the CLECs, mostly in urban areas, to serve businesses and larger users.(28)

   The second approach comes from the use of the incumbent's network in combination with the prospective competitors' facilities. This requires an interconnection agreement that specifies the terms of the use of the incumbent's network elements, or the price for transport over the incumbent's network. If a cable television system wanted to provide telephony, it would have to make a major investment in switches and then negotiate with the incumbent provider to use some of the latter's facilities in combination with its own network. Similarly, a CLEC might wish to contract for the use of some of the incumbent's network elements instead of building a parallel network infrastructure.

   The third method--resale--occurs when a prospective competitor buys network capacity from the ILEC at wholesale rates and then retails these services directly to consumers. The best example of resale comes from the long-distance industry. More than a decade ago, AT&T sold large blocks of long-distance services to large users. At that time, the FCC forced the company to sell that wholesale capacity at the same rate to entrepreneurial companies, which resold those long-distance services directly to the consumers at rates competitive with AT&T's tariffed rates. Until recently, "only the four [or five] largest long-distance companies maintained their own networks, [while] hundreds of smaller companies [bought] capacity from them at wholesale rates and then [resold] services to the public.(29)

   Some consumer advocates have been disappointed that competition in telephone and cable television markets has not advanced more rapidly since the passage of the 1996 Act.(30) Expectations of subsequent competition in liberalized markets based on the rhetorical hyperbole surrounding the 1996 Act would have been impossible to meet.(31)

   Competition in local telephone markets has begun in all but 18 of the nation's 193 local access and transport areas ("LATAs").(32) CLECs have entered the...