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IP: [NET () EDU-REPS] Special Report: The jurisdiction of the last mile
From: Dave Farber <farber () cis upenn edu>
Date: Tue, 29 Dec 1998 20:00:28 -0500


December 29, 1998
***Special for EDUCAUSE ***Special for EDUCAUSE Net () EDU members***

The jurisdiction of the last mile

On the surface it's a decision about an inescapably boring concept called
"reciprocal compensation", but a pending (and overdue) FCC order could have
ramifications that are far more interesting.  While not exactly about
"jurisdiction over the Internet", the order could decide whether the last
mile of access to the Internet - currently dominated by dial-up - is a state
PUC topic or is instead "interstate", and therefore an FCC issue.  It may
not mean much to the average consumer yet, but the decision could represent
an important centralization of regulatory power in the context of emerging
last-mile alternatives and converging voice, video and data networks.

The FCC appears to be having serious problems with the issue, and the
Commission does seem to be in a difficult spot: in one ear are 24 state
public utility commissions, along with MCI WorldCom, AOL and the Commercial
Internet eXchange.  In the other are the Regional Bells, a group of powerful
senators, and the desire for nationwide regulatory consistency and FCC

What is reciprocal compensation?

When a customer places a telephone call, and the call goes onto an ILEC
(Incumbent Local Exchange Carrier), then onto a CLEC (Competitive Local
Exchange Carrier), and then is terminated at an ISP (Internet Service
Provider), the ILEC owes the CLEC reciprocal compensation for the
termination of the call. Reciprocal compensation is basically a settlement
mechanism for telephone traffic transferred between two local networks.

The reason reciprocal compensation brings up the larger issues is because it
only applies to local traffic. The reciprocal compensation decision turns on
whether dial-up traffic from the end-user to the ISP is considered
"interstate", and therefore conceivably determines the jurisdiction of the
Internet's dominant last mile medium (at least in terms of current dominant
last-mile: dial-up. Other last mile alternatives are not yet ripe for

What is - and is not - at stake

What's driving the controversy are more practical stakes: for the ILECs and
ISP-serving CLECs, the issue is about hundreds of millions of dollars (on
paper).  If the FCC does not find the traffic is interstate and allows the
reciprocal compensation arrangements to stand, expect to see a number of
lawsuits filed by the ILECs with state PUCs and continued avoidance of

Also at stake may be the livelihood of a number of ISP-serving CLECs who
rely on the reciprocal compensation payments as a source of income.  One
opponent referred to this as "the reciprocal compensation gravytrain."

What is apparently not at stake:
*       The controversy is not about "jurisdiction over the Internet".
State PUCs will still likely have broad authority over interconnection under
Sections 251/252 of the Telecommunications Act. And the issue doesn't even
touch Internet content, or encryption, or jurisdiction for actions brought
because of on-line activity.
*       The controversy is not about access charges, yet.  ISPs are
categorized as ESPs ("enhanced services providers", in FCC-speak) and as
such they've been considered "end users of telecommunications" and access
charges do not enter the picture.  It's easy to see how that situation could
be affected by what's happening now, but changes in the access charge scheme
do not appear to be on the table at the moment.
*       Because it likely will not immediately affect access charges, the
pending order will not mean that everyone will begin paying long distance
charges for all dial-up calls to their ISP.  The FCC recently published a
fact sheet explaining this, entitled "No Consumer Per-Minute Charges to
Access ISPs", available at

The FCC approach

A holding that a non-"long-distance", "local" phone call to a local ISP is
actually "interstate" at first glance wouldn't appear to make much sense.
But there is a previously-used route that the FCC may choose to reinforce:
"the Commission traditionally has determined the jurisdictional nature of
communications by the end points of the communication and consistently has
rejected attempts to divide communications at any intermediate points of
switching or exchange between carriers." GTE ADSL Tariff Order, FCC 98-292,
at 10.   With the Internet, that apparently means anywhere in the world;
thus the telecommunication with the ISP could be interstate.

The FCC used that rationale in a recent GTE ADSL tariff order. (DSL is a
method for high-speed access over regular phone lines; the RBOCs are relying
heavily on DSL for their broadband solution.)   The Commission held that a
DSL service offered by GTE was an interstate service and therefore GTE's
ADSL tariff (statement of telecommunications services offered) should be
filed with the FCC rather than the state PUC.

The FCC insisted in the GTE order that the holding did not answer the
question of how dial-up would be treated and did not answer the reciprocal
compensation question.  (DSL and dial-up can be readily distinguished
technologically, and the FCC could treat each differently if it chose to do
so.)  The Commission went on to say it would answer the reciprocal
compensation and associated dial-up question "in the next week".  That was
late October.

Pressure from all sides ...

The delay reflects the fact that the FCC is having a hard time sorting
through the issue, and is being lobbied heavily on both sides.  On one side
are those who would like to see the FCC leave it up to the states, hold that
the phone call to the ISP is not interstate, and allow the current
reciprocal compensation agreements with ISP/CLECs to stand.   Letters and
lobbying to this effect have come from parties including AOL, the state PUC
association (NARUC), the Commercial Internet eXchange Association
(representing large ISPs), and MCI WorldCom.

MCI WorldCom's argument against an "interstate" designation is that the
actual phone call to the ISP (which then provides an information service) is
the only relevant part.  MCI WorldCom argued that the ISP is providing an
information service which is access to the Internet and the rest of the
world, and that therefore there is a clear dividing line between the
telecommunications to the information service and what happens after the
telecommunications link is established with the ISP.

NARUC held an annual conference in November, at which FCC commissioners
attended.  (At the time it appeared the FCC was waiting until after the
NARUC meeting to make a decision.)  Chairman Kennard at that meeting was
sympathetic to state arguments, saying that the FCC should not supplant
those 23 (now 24) states that have already ruled on the issue.

Kennard's statement does not answer the question, however; the FCC is
getting at least as much pressure from those who want to see it assert
jurisdiction over the last mile.  Obvious among these players are the ILECs,
who stand to be excused from n millions of dollars of reciprocal
compensation payments to CLEC/ISPs.

Supporting the ILECs are some powerful senators. Sen. Conrad Burns
(R-MT)(chair of the Commerce communications subcommittee), Sen. Sam
Brownback (R-KS), Sen. Wendell Ford (D-KY) and Sen. John Breaux (D-LA) wrote
a joint letter to the FCC in early December strongly suggesting that the
Commission find the dial-up link "interstate" and excuse the ILECs from
millions of dollars in reciprocal compensation payments.  The senators
included a veiled threat that "such payments may adversely affect those
companies' abilities to provide universal service at affordable rates to
rural customers in several states."

In spite of active lobbying from the ILECs and Congress, the FCC may choose
to categorize the phone call to the ISP "interstate" for an important reason
other than direct pressure: national regulatory consistency.   And there is
probably some desire to avoid the unpredictable rash of lawsuits likely to
result in the states if the ILECs are found to owe these reciprocal
compensation payments (which many of them have refused to pay thus far).

There's no telling what the FCC may do (close odds are that the Commission
will consider telecommunications to ISPs "interstate"), but some ideas have
been floated.  At various times over the past month reports have speculated
that the FCC may:

*       ..."try to walk a tightrope by ruling that it has jurisdiction over
such traffic but states can decide the reciprocal compensation question."
(Telecom A.M., 12/3/98)
*       ...rule that local calls to Internet service providers should be
treated as interstate. (CNET News, 12/4/98)
*       ..."render a decision that says ESP traffic, once on the Internet,
is interstate in nature and therefore subject to federal jurisdiction....
Dial-up traffic moving to an ESP's server -- prior to actually reaching the
Internet -- could be considered local and, therefore, subject to state
jurisdiction."  Washington Telecom Week, 12/11/98.

Watch for the follow-up report on this topic in the EDUCAUSE Washington
Update upon release of the order.

***Send comments on this topic to Casey Lide at ***Send comments on this topic to Casey Lide at clide () educause edu 

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