[Federal Register Volume 64, Number 56 (Wednesday, March 24, 1999)]
[Proposed Rules]
[Pages 14203-14206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7160]


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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

[[Page 14204]]

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

[[Page 14205]]

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.

[[Page 14206]]

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]
BILLING CODE 6712-01-U