Notes: Implications of ESP Status

Cybertelecom

1. Exemption From Access Charges

[fn75] MTS/WATS Market Structure Order, 97 FCC 2d at 715.
[fn76] Not all incumbent LECs characterize Internet traffic as intrastate traffic for separations purposes.  In January, 1998, SBC indicated that it planned to allocate 100 percent of the costs associated with Internet traffic, which it previously had classified as local, to the interstate jurisdiction.  See Letter from B. Jeannie Fry, Director of Federal Regulatory Affairs, SBC Communications., Inc., to Ken Moran, Chief, Accounting and Audits Division, FCC (Jan. 20, 1998).

Although the Commission has recognized that enhanced service providers (ESPs), including ISPs, use interstate access services,[14] since 1983 it has exempted ESPs from the payment of certain interstate access charges.[15] Pursuant to this exemption, ESPs are treated as end users for purposes of assessing access charges.[16] Thus, ESPs generally pay local business rates and interstate subscriber line charges for their switched access connections to local exchange company central offices.[17] They also pay the special access surcharge on their special access lines under the same conditions applicable to end users.[18] In the Access Charge Reform Order, the Commission decided to maintain the existing pricing structure and continue to treat ESPs as end users for the purpose of applying access charges.[19] The Commission stated that retaining the ESP exemption would avoid disrupting the still-evolving information services industry and advance the goals of the Telecommunications Act of 1996 to "preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services."[20]

    [14] See, e.g., MTS and WATS Market Structure, CC Docket No. 78-72, Memorandum Opinion and Order, 97 FCC 2d 682, 711 (1983) (MTS/WATS Market Structure Order) ("[a]mong the variety of users of access service are . . . enhanced service providers"); Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, CC Docket No. 87-215, Order, 3 FCC Rcd 2631 (1988) (ESP Exemption Order) (referring to "certain classes of exchange access users, including enhanced service providers"); Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, Order, 2 FCC Rcd 4305, 4306 (1987) (ESPs, "like facilities-based interexchange carriers and resellers, use the local network to provide interstate services"); Access Charge Reform, CC Docket No. 96-262, FCC No. 97-158, First Report and Order, 12 FCC Rcd 15982, 16131-32 (1997) (Access Charge Reform Order) ("Information service providers may use incumbent LEC facilities to originate and terminate interstate calls.")
    The Access Charge Reform Order refers to "information service providers." As discussed in that order, the term "enhanced services," defined in the Commission's rules as "services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information," 47 C.F.R. § 64.702(a), is quite similar to "information services," defined in the Communications Act of 1934 (Act) as offering "a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications." 47 U.S.C. § 153(20). See also Universal Service Report to Congress, 13 FCC Rcd 11501, 11516 (reiterating Commission's conclusion that the definitions of telecommunications services and information services, added to the Act by the Telecommunications Act of 1996, "essentially correspond to the pre-existing categories of basic and enhanced services"). For purposes of this order, we refer to providers of enhanced services and providers of information services as ESPs, a category which includes Internet service providers, which we refer to here as ISPs.
    [15] The exemption was adopted at the inception of the interstate access charge regime to protect certain users of access services, such as ESPs, that had been paying the generally much lower business service rates from the rate shock that would result from immediate imposition of carrier access charges. See1983 MTS/WATS Market Structure Order, 97 FCC 2d at 715.
    [16] ESP Exemption Order, 3 FCC Rcd at 2635 n.8, 2637 n.53.
    [17] Id. at 2631, 2635 n.8, 2637 n.53. The subscriber line charge (SLC) is an access charge imposed on end users to recover at least a portion of the cost of the interstate portion of LEC facilities used to link each end user to the public switched telephone network ("PSTN"). Access Charge Reform Order, 12 FCC Rcd at 16010.
    [18] 47 C.F.R. § 69.2(m) (End user means "any customer of an interstate or foreign telecommunications service that is not a carrier except that a carrier other than a telephone company shall be deemed to be an "end user" when such carrier uses a telecommunications service for administrative purposes and a person or entity that offers telecommunications services exclusively as a reseller shall be deemed to be an "end user" if all resale transmissions offered by such reseller originate on the premises of such reseller."); see also 47 C.F.R. § 69.5(a) ("End user charges shall be computed and assessed upon public end users, and upon providers of public telephones. . ."); see also 47 C.F.R. § 69.5 (c) ("Special access surcharges shall be assessed upon users of exchange facilities that interconnect these facilities with means of interstate or foreign telecommunications to the extent that carrier's carrier charges are not assessed upon such interconnected usage."); see also 47 C.F.R. § 69.115.
    [19] Access Charge Reform Order, 12 FCC Rcd 15982, 16133, 16134 (1997). On August 19, 1998, the U.S. Court of Appeals for the Eighth Circuit affirmed the FCC's Access Charge Reform Order. Specifically, the court found that the Commission's decision to exempt information services providers from the application of interstate access charges (other than SLCs) was consistent with past precedent, did not unreasonably discriminate in favor of ISPs, did not constitute an unlawful abdication of the Commission's regulatory authority in favor of the states, and did not deprive incumbents of the ability to recover their pertinent costs. Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523, 542 (8th Cir. 1998).
    [20] Id. at 16133. See also 47 U.S.C. § 230(b)(2) ("It is the policy of the United States to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.")

Nor are we are persuaded by competitive LEC arguments that, because the Commission has treated ISPs as end users for purposes of the ESP exemption, an Internet call must terminate at the ISP's point of presence.[77] As discussed above, GTE's ADSL service offering is designed to be used by ISPs as part of their end-to-end Internet access service.[78] The Commission traditionally has characterized the link from an end user to an ESP as an interstate access service.[79] In the MTS/WATS Market Structure Order, for instance, the Commission concluded that ESPs are "among a variety of users of access service" in that they "obtain local exchange services or facilities which are used, in part or in whole, for the purpose of completing interstate calls which transit its location and, commonly, another location in the exchange area."[80] The fact that ESPs are exempt from certain access charges and purchase their PSTN links through local tariffs does not transform the nature of traffic routed to ESPs. That the Commission exempted ESPs from access charges indicates its understanding that they in fact use interstate access service; otherwise, the exemption would not be necessary.[81] We emphasize that the Commission's decision to treat ISPs as end users for access charge purposes does not affect the Commission's ability to exercise jurisdiction over such traffic.

    [77] See, e.g., CompTel Opposition at 3; PacWest Direct Case at 6-10.
    [78] GTE Direct Case at 4.
    [79] See, e.g., MTS/WATS Market Structure Order, 97 FCC 2d at 711; Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, CC Docket No. 87-215, 2 FCC Rcd 4305 (1987).
    [80] Id.; see also Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, Notice of Proposed Rulemaking, 2 FCC Rcd at 4305 (1987) ("We . . . intended to impose interstate access charges on enhanced service providers for their use of local exchange facilities to originate and terminate their interstate offerings."); ESP Exemption Order, 3 FCC Rcd at 2635 n.8, 2637 n.53 (1988) ("we granted temporary exemptions from payment of access charges to certain classes of exchange access users, including enhanced service providers.")
    [81] See, e.g., id. See also Access Charge Reform, Notice of Proposed Rulemaking, Notice of Inquiry, 11 FCC Rcd 21354, 21478 (1996) ("although ESPs may use incumbent LEC facilities to originate and terminate interstate calls, ESPs should not be required to pay interstate access charges.") (emphasis added).

In the Access Charge Reform Order, the Commission decided to maintain the existing pricing structure pursuant to which ESPs are treated as end users for the purpose of applying access charges.[15] Thus, the Commission continues to discharge its interstate regulatory obligations by treating ISP-bound traffic as though it were local.

[fn15]Access Charge Reform Order, 12 FCC Rcd at 16133-34. On August 19, 1998, the U.S. Court of Appeals for the Eighth Circuit affirmed the Commission's Access Charge Reform Order. Specifically, the court found that the Commission's decision to exempt information services providers from the application of interstate access charges (other than SLCs) was consistent with past precedent, did not unreasonably discriminate in favor of ISPs, did not constitute an unlawful abdication of the Commission's regulatory authority in favor of the states, and did not deprive incumbents of the ability to recover their pertinent costs. Southwestern Bell Telephone Co. v. FCC,

Pursuant to this exemption, ESPs are treated as end users for purposes of assessing access charges, and the Commission permits ESPs to purchase their links to the public switched telephone network (PSTN) through intrastate business tariffs rather than through interstate access tariffs.[11] Thus, ESPs generally pay local business rates and interstate subscriber line charges for their switched access connections to local exchange company central offices.[12]

[fn11] Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, CC Docket No. 87-215, Order, 3 FCC Rcd 2631, 2635 n.8, 2637 n.53 (1988) (ESP Exemption Order).
[fn12] ESP Exemption Order, 3 FCC Rcd at 2635 n.8, 2637 n.53. The subscriber line charge (SLC) is an access charge imposed on end users to recover at least a portion of the cost of the interstate portion of LEC facilities used to link each end user to the public switched telephone network (PSTN).

"In the 1983 Access Charge Reconsideration Order, we decided that, although enhanced service providers (ESPs) may use incumbent LEC facilities to originate and terminate interstate calls, ESPs should not be required to pay interstate access charges. "
--In re Access Charge Reform, NPRM, Third Report and Order, and NOI, CC Docket 96-262 & 284 (Dec 24, 1996)
 
 

"The FCC decided in the early 1980s that enhanced service providers, which include Internet service providers, should not be subject to the interstate access charges that long-distance carriers pay to local phone companies for originating and terminating calls. ISPs are therefore treated as "end users" and can purchase lines that have no per-minute usage-based charge for receiving calls from their customers. The phone companies argue that the absence of usage charges means that ISPs do not provide the revenue to cover the additional costs they impost on the network."
--Speech of Chairman Reed Hundt, Federal Communications Commission, INET '96 Convergence (June 28, 1996) (Delivered by Blair Levin, FCC Chief of Staff).
 

Enhanced service providers are treated as end users under the access charge rules. 47 C.F.R. ' 69.2(m). See MTS and WATS Market Structure, Memorandum Opinion and Order, 97 FCC2d 682, 715 (1983); Amendments to Part 69 of the Commission's Rules Relating to Enhanced Service Providers, Order, 3 FCC Rcd 2631, 2633 (1988); Amendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, Report and Order, 6 FCC Rcd 4524, 4535 (1991).
 

"The four primary goals of the access charge proceedings include the "elimination of unreasonable discrimination and undue preferences among rates for interstate service."" -- In re Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, 3 FCC Rcd 2631 & 2 (1988)
 

Under our present rules, Enhanced Service Providers are treated as end users for purposes of applying access charges. See 47 C.F.R. s 69.2 (m); Northwestern Bell Telephone Company Petition for a Declaratory Ruling, Memorandum Opinion and Order, 2 FCC Rcd 5986, 5988 at para. 20 (1987), appeal docketed, No. 87-1745 (D.C. cir. Dec. 4, 1987). Therefore, Enhanced Service Providers generally pay local business rates and interstate subscriber line charges for their switched access connections to local exchange company central offices. Enhanced Service Providers also pay special access surcharges for private lines under the conditions set out in our rules. See 47 C.F.R. ' 69.5(a) and (Commission). "
-- In re Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, 3 FCC Rcd 2631 & 2 FN8 (1988)
 

318. Finally, while some parties claim that the BOCs' state tariff proposals are an attempt to abolish the ESPs' exemption from federal access charges for interstate access, we believe that such arguments are misguided. Under the ESP exemption, ESPs are treated as end users for access charge purposes and therefore are permitted, although not required, [FN757] to take state access arrangements instead of interstate access. [FN758] We have not, however, attempted to preempt states from applying intrastate access charges, or any other intrastate charges to ESPs, when such service providers are using jurisdictionally intrastate basic services. [FN759] To the extent that the plans propose new access arrangements, the BOCs propose state tariff filings or revisions that do not implicate this Commission's access rules. Such proposed changes in state tariffs could occur separate and apart from ONA implementation. Notwithstanding such arguments, we preserve the exemption [FN760] for ESPs by approving the proposals of six of the BOCs that permit ESPs to continue to take state-tariffed access services now available to them and other "end users." [FN761] The only ONA plan that would restrict ESPs from taking existing local access services is that of BellSouth, and we disapprove this aspect of its plan. [FN762] Thus, we ensure that ESPs will continue to be able to take local business lines, or other state-tariffed access arrangements, instead of federal access, in the same manner as other end users. This treatment of ESPs as end users fully preserves our current exemption. Moreover, as discussed above, we will examine in our upcoming rulemaking different ways in which the exemption could operate in conjunction with the federal tariffing of ONA services we require in this order. [FN763] Thus, our actions on the ONA plans foreclose them from being "backdoor" means of eliminating the current exemption.
-- In the Matter of Filing and Review of Open Network Architecture Plans, CC Docket No. 88-2, Phase I, Memorandum Opinion And Order ¶ 318 (December 22, 1988)
 

"The record in this proceeding indicates that, as a result of a number of complex and interrelated factors, the enhanced services industry is entering a unique period of rapid and substantial change.  First, the Open  Network Architecture (ONA) Plans required in our Computer III proceeding [2]  were filed on February 1, 1988, but have not yet been implemented.  Second, the District Court overseeing the Modification of Final Judgment (MFJ) in the Bell System divestiture case has recently modified the restriction in the decree  that had previously prevented the Bell Operating Companies (BOCs) from offering  any information services. [3]  These regulatory and judicial events make this  an unusually volatile period for the enhanced service industry.  We have decided not to eliminate the exemption from interstate access charges currently permitted enhanced service providers at this time."
-- In re Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, 3 FCC Rcd 2631 ¶ 1 (1988)

"the enhanced services industry is in a uniquely complex period of transition.  This Commission is currently in the process of reviewing ONA plans that may have a substantial effect on the manner and the terms under which Enhanced Service Providers will originate and terminate their interstate traffic." -- In re Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, 3 FCC Rcd 2631 ¶ 13 (1988)

"Section 69.2(m) of this Commission 's rules defines end users as "any customer of an interstate of foreign telecommunications service that is not a carrier . . . " 47 C.F.R. ' 69.2(m). Section 69.5 sets out the general categories of charges to be assessed. Section 69.5(a) specifies that "end user charges shall be computed and assessed upon end users." Subsection (b) provides for the assessment of carrier's carrier charges upon interexchange carriers," and subsection (c) says that "special access surcharges shall be assessed upon users of exchange facilities that interconnect these facilities with means of interstate or foreign telecommunications to the extent that carrier's carrier charges are not assessed upon such interconnected usage . . . ." 47 C.F.R. ' 69.5." -- In Re Northwestern Bell Telephone Company, 2 FCC Rcd 5986 & 20 n. 28 (1987)
 

In this order we clarify that under our current rules, enhanced service providers are treated as end users for access charge purposes. Since end users would not pay interstate access charges when using local exchange facilities in the manner Teleconnect is using them to provide Talking Yellow Pages, we conclude Teleconnect is similarly not subject to such charges." -- In Re Northwestern Bell Telephone Company, 2 FCC Rcd 5986, 5986 & 1 (1987)

"Under these rules entities that offer both interexchange services and enhanced services are treated as carriers with respect to the former offerings, but not with respect to the latter. Thus, interexchange carriers, like Teleconnect, are eligible for an interstate access charge exemption for their enhanced service offerings." In Re Northwestern Bell Telephone Company, 2 FCC Rcd 5986 & 18 (1987)

Thus, Talking Yellow Pages involves "subscriber interaction with stored information," and falls squarely within the definition of " enhanced service" in Section 64.702(a) of this Commission 's rules, 47 C.F.R. ' 64.702(a). Second, under this Commission 's rules, enhanced service providers are classified as "end users." An end user that interconnected local exchange lines with interstate transmission facilities through a PBX or similar device on its premises would not be required to pay interstate access charges for the interstate traffic that traversed these local exchange lines. Rather, this would be treated as part of the "leaky PBX" phenomenon, and the end user would pay subscriber line charges for its local exchange lines and special access surcharges on its private line connection."
-- In Re Northwestern Bell Telephone Company, 2 FCC Rcd 5986 & 20 (1987)
 

"The Access Charge Order anticipated that eventually a telephone company will recover the interstate revenue requirement associated with the nontraffic sensitive plant linking each subscriber's premises to an end office through a flat monthly charge levied directly on that end user and, when appropriate, through interexchange carriers' payments to the Universal Service Fund."
In Re MTS and WATS Market Structure, 97 FCC2d 682 & 5 (1983)

 
 
1. Temporary Exemption

"The exemption afforded ESPs from interstate access charges in 1983 was intended to be "temporary," designed to avoid unduly burdening the then "fledgling" ESP industry and disrupting the provision of information services to the public" In Re The Provision of Interstate and International Interexchange Telecommunications Service via the "Internet" by Non-Tariffed, Uncertified Entities: Reply comments of the Telecommunications Resellers Association RM No. 8775 at 5 (June 10, 1996) (citing Amendment of Part 69 of the Commission Rules Relating to Enhanced Service Providers, 3 FCC.Rcd 2631, & 2 (1988))

 
 
1. Justification for Exemption from Access Charges:


Although the Commission has recognized that enhanced service providers (ESPs), including ISPs, use interstate access services,[9] since 1983 it has exempted ESPs from the payment of certain interstate access charges.[10]

[fn9]See, e.g., MTS and WATS Market Structure, CC Docket No. 78-72, Memorandum Opinion and Order, 97 FCC 2d 682, 711 (1983) (MTS/WATS Market Structure Order) ("[a]mong the variety of users of access service are . . . enhanced service providers"); Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, CC Docket No. 87-215, Order, 3 FCC Rcd 2631 (1988) (ESP Exemption Order) (referring to "certain classes of exchange access users, including enhanced service providers"); Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, CC Docket No. 87-215, Order, 2 FCC Rcd 4305, 4306 (1987) (ESPs, "like facilities-based interexchange carriers and resellers, use the local network to provide interstate services"); Access Charge Reform Order, 12 FCC Rcd at 16131-32 (information service providers "may use incumbent LEC facilities to originate and terminate interstate calls").

[fn10] The exemption was adopted at the inception of the interstate access charge regime to protect certain users of access services, such as ESPs, that had been paying the generally much lower business service rates from the rate shock that would result from immediate imposition of carrier access charges. See MTS/WATS Market Structure Order, 97 FCC 2d at 715.

--In Re Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Inter-Carrier Compensation for ISP-Bound Traffic, CC Docket No. 96-98, CC Docket No. 99-68, Declaratory Ruling ¶ 5 (February 26, 1999)
 
 

"the enhanced services industry is in a uniquely complex period of transition. This Commission is currently in the process of reviewing ONA plans that may have a substantial effect on the manner and the terms under which Enhanced Service Providers will originate and terminate their interstate traffic. . . We concur with the assessment of such parties that it would be prudent to defer consideration of our proposal to remove the enhanced service access charge exemption until we are more certain of the effects of ONA in this context." -- In re Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, 3 FCC Rcd 2631 & 13 (1988)

"At the time we adopted the original access charge plan, however, we concluded that the immediate application of that plan to certain providers of interstate services might unduly burden their operations and cause disruptions in providing service to the public. Therefore, we granted temporary exemptions from payment of access charges to certain classes of exchange access users, including enhanced service providers. [8] We did not intend those exemptions to be permanent, [9] and we have since eliminated several of them. For example, in CC Docket No. 86-1 we eliminated the access charge exemptions for resellers. [10] In the Notice initiating this docket, we expressed concern that the charges currently paid by enhanced service providers may not contribute sufficiently to the costs of the exchange access facilities they use in offering their services to the public. We observed that to the extent enhanced service providers are exempt from switched access charges, other users of exchange access are forced to bear a disproportionate share of the local exchange costs that access charges are designed to cover. We reiterated our view that rate shock, which provided the original basis for the special treatment of enhanced service providers, justified a temporary but not a permanent exemption, and we tentatively concluded that an access charge exemption was no longer appropriate. [11] We asked interested parties to comment on this tentative conclusion and to provide detailed data on the state of this industry. [12] We also invited comment on implementation issues arising from our proposal. [13]" In the Matter of Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, Order, 3 FCC Rcd 2631 & 2 (1988)
 
 

1. Access Charge Reform

 

 
 
 
 
 
 
 

GOAL: "Our overriding goal in this proceeding is to adopt revisions to our access charge rules that will foster competition for these services and eventually enable marketplace forces to eliminate the need for price regulation of these services." In re Access Charge Reform, NPRM, Third Report and Order, and NOI, CC Docket 96-262 & 140 (Dec 24, 1996) (emphasis added)

GOAL: " Regardless of the specific approach that we adopt in this proceeding -- market-based, prescriptive, or some combination of the two -- our goal is to foster the development of substantial competition for interstate access services. Once substantial competition is present for a particular service in a particular area, we propose to remove that service from price cap and tariff regulation for that area." In re Access Charge Reform, NPRM, Third Report and Order, and NOI, CC Docket 96-262 & 149 (Dec 24, 1996)

GOAL: "Our public interest concern is whether incumbent LECs can adversely affect price movements. " In re Access Charge Reform, NPRM, Third Report and Order, and NOI, CC Docket 96-262 & 152 (Dec 24, 1996)

FREE MARKET FAILURE: "Some parties, however, may contend that a market-based approach will allow incumbent LECs to continue indefinitely to assess inflated prices for some or most access services in some or most geographic areas. These parties would urge us to adopt a prescriptive approach to access reform. Under this approach, we would require incumbent LECs to move their prices to specified levels and allow such LECs limited pricing flexibility until they can demonstrate they face actual competition for access." -- In re Access Charge Reform, NPRM, Third Report and Order, and NOI, CC Docket 96-262 & 141 (Dec 24, 1996)

FREE MARKET OPTION: "In this section, we seek comment on an approach to access reform that relies on marketplace forces to move interstate access prices to more economically efficient levels. Under this approach, our primary role would be to remove regulatory requirements that inhibit the operation of market forces." In re Access Charge Reform, NPRM, Third Report and Order, and NOI, CC Docket 96-262 & 161 (Dec 24, 1996)

"The only 'regulatory protectionism' being sought here is by those who are currently afforded a clear cost advantage due to a regulatory quirk. Remove that advantage by equalizing the regulatory cost burdens imposed on IXCs and IAPS/ESPs and competition becomes fair and equitable, 'ensur[ing] that a firm's prowess in satisfying consumer demand . . . determine[s] its success or failure in the marketplace." This is the only regulatory relief that TRA believes is necessary here." In re The Provision of Interstate and International Interexchange Telecommunications Service via the "Internet" by Non-Tarriffed, Uncertified Entities, Reply Comments of the Telecommunications Resellers Association RM No. 8775 at 8 (June 10, 1996).

"The argument that the viability of Internet voice communications is an artificial byproduct of the ESP exemption ignores the Internet's significant cost efficiencies relative to circuit-switched networks." In re The Provision of Interstate and International Interexchange Telecommunications Service Via the "Internet" by Non-Tariffed, Uncertified Entities, Joint Reply comments of Netscape Communications Corporation and Voxware, Inc., RM No. 8775 at 19 (June 10, 1996).

"Many commenters join LDDS WorldCom in articulating the fundamental principal that all users of the public switched telephone network should be required to pay their fair share of the charges necessary to interconnect with that network. Currently, local exchange carriers are not assessing Internet telephony services the same interstate access charges and universal service contribution that other telecommunications carriers are now required to pay." In re Petition for Declaratory Rule, Special Relief, and Institution of Rulemaking by America's Carrier's Telecommunications Association, RM No. 8775, Reply Comments of LDDS WorldCom, at Summary (June 10, 1996).

"As part of the Commission's comprehensive reforms of its access charge and universal service regimes, all users seeking to interconnect with local exchange networks to utilize telecommunications service -- including VON services -- must be required to pay cost-based access charges and a fair share of universal service contribution." In re Petition for Declaratory Rule, Special Relief, and Institution of Rulemaking by America's Carrier's Telecommunications Association, RM No. 8775, Reply Comments of LDDS WorldCom, at 3 (June 10, 1996).

"The Public Interest Dictates That VON Services Must Pay Their Fair Share of Applicable Cost-Based Interconnection Rates and Universal Service Contribution. . . . Commenters stress in particular that consumers will be serverly harmed if VON services are not required to pay their fair share of the charges to interconnect with the local network. For example, USTA and Southwestern Bell state that VON services avoid contributing to the recovery of their interstate costs for using the PSTN, as other long distance telephony services are required to do; as a result, other users of the telecommunications services, including residential customers, ultimately are paying higher rates in order to subsidize providers and users of VON services." In re Petition for Declaratory Rule, Special Relief, and Institution of Rulemaking by America's Carrier's Telecommunications Association, RM No. 8775, Reply Comments of LDDS WorldCom, at 9-11 (June 10, 1996).

FCC Starts Examination of Internet Traffic, Communications Daily (January 24, 1997) (reporting that the Internet Access Coalition had released a report on January 22, 1997 "contending that many in telephone industry had overstated problem and that any congestion could be fixed with funds on hand and not by assessing ISPs with new charges").
 
 

1. Need for Reform

 

 
 
 
 
 
 
 

[In California line prices are set at about half of their costs. ESP was considered important for the development of the industry. now it is a roadbloc to the development of the network. ISPs use the network in an inefficient manner. Prices that cover cost must be part of the arrangement. We have designed technology to resolve the problem of network congestion. The technology is not the problem. While we have faster and better alternatives, we cannot compete with something customers already use and is free. If maintain ESP, then discourage investment and growth. Companies will not invest where they cannot get a return. Regulations will keep prices down while competition drives down prices further reducing the incentive to invest in this network. LECs are being required to unbundle their networks below costs or at costs. Therefore there is currently no incentive to invest in a new computer network -- Lee Bauman, Pacific Telesis, FCC Bandwidth Forum (January 23, 1997)

"Bell Atlantic wants regulators to increase tariffs selectively on ISPs, so that POTS and ISDN lines will be priced high enough that the new packet switched services will become more attractive. If I owned Bell Atlantic, I'd ask for this too. Not only will this help Bell Atlantic market a new service, but it will raise costs for unaffiliated ISPs, which compete against Bell Atlantic's own in-house ISP service.

"The Commission should be wary of proposals that would impose new fees on ISPs which compete with LECs. In California, PacBell was petitioning the FCC to eliminate the ISPs enhanced service exemption (ESP), because of the alleged congestion problems that Internet users are imposing on the public switched network. At the same time, PacBell was promoting second residential telephone lines, priced at $11.45 per month, by running promotions that read:

Order another home phone line today and get 5 months free unlimited Internet access with Pacific Bell Internet. Act now and we'll waive the usual $14.95 sign-up fee for Pacific Bell Internet.

Aside from the outrageous hypocrisy of running both this promotion and a PR battle that asserted Internet users were causing unbearable network congestion, it demonstrates the dangers facing independent ISPs. If you ran a California ISP, wouldn't it be hard to compete with a firm that was giving the service away free for 5 months?

"Indeed, several LECs are running promotions for residential second POTS lines. These are typically priced below what the company claims are its average NTS costs. The lines also do not typically generate any new toll traffic. (People don't get second lines to make two long distance calls at the same time). Since these second lines are marketed to modem users, one has to doubt the LECs complaints about network congestion. It is also reasonable that the $11.25 per month for a PacBell second line is actually above PacBell's costs."

--James Love, Consumer Project on Technology, Prepared Comments on the FCC Forum on Access to Bandwidth (January 23, 1997) <http://www.essential.org/cpt/isdn/bandwidth.htm>
 
 

2. ACTA Petition

 

 
 
 
 
 
 
 

"A petition for rulemaking by Americas Carriers Telecommunication Association (ACTA) asking that IP telephony software and hardware providers be classified as common carriers is still pending. See Common Carrier Bureau Clarifies and Extends Request for Comment on ACTA Petition Relating to "Internet Phone" Software and Hardware -- RM 8775, Report No. CC 96-10 (March 25, 1996). Although the analysis in this Report addresses many of the issues raised in the ACTA petition, we will be considering the petition in a separate order." -- In re Federal-State Joint Board on Universal Service, Report to Congress, FCC 98-67 ¶ 83 n 172 (April 10, 1998).

"Rather than forcing the issue of access reform in this proceeding, the Commission should instead initiate a more comprehensive rulemaking on access charge reform, in which all interested parties can participate and provide a complete record." In re The Provision of Interstate and International Interexchange Telecommunications Service Via the "Internet" by Non-Tariffed, Uncertified Entities, Joint Reply comments of Netscape Communications Corporation and Voxware, Inc., RM No. 8775 at 21 (June 10, 1996).
 
 

3. Bill and Keep

 

 
 
 
 
 
 
 

"For example, while the Commission is considering the imposition of "bill-and-keep" upon CMRS providers, the Internet has already adopted such a model and ISPs do not charge one another for terminating the traffic of another ISP's customer." Furthermore, the Internet subscribers that register their own domain name have, in essence, what amounts to "number portability." In re ACTA Petition for Declaratory Ruling, Special Relief and Institution of Rulemaking, Reply Comments of MFS Communications Company, Inc. RM-8775 at 3, n. 4 (June 20, 2996)

4. End Users

 

 
 
 
 
 
 
 

"While we generally have not considered differential pricing for access services to different classes of customers in prior proceedings (except for the Subscriber Line Charge), we seek comment on whether we should permit such flexibility at Phase 2. As used in this Notice, we define differential pricing as permitting incumbent LECs to charge different rates for access to different classes of customers. There are at least three classes for which differential pricing may be appropriate: residential, single-line business, and multi-line business. We invite parties to suggest additional classes, and to analyze why rates for access to such classes should be afforded differential treatment. We seek comment on whether, for incumbent LECs that use differential pricing for their access rates, we should adopt some safeguards to protect the classes of customers not subject to competition, e.g., residential and single-line business, and if so, what those safeguards should be." In re Access Charge Reform, NPRM, Third Report and Order, and NOI, CC Docket 96-262 & 212 (Dec 24, 1996)
 
 

5. Universal Service
"Section 254(d) of the 1996 Act permits the FCC to levy a surcharge to support universal service only on those who provide telecommunications service. A number of access charge components represent implicit or explicit universal service surcharges. The FCC cannot require enhanced service providers to pay these universal service surcharges, because enhanced service providers, by definition, do not provide telecommunications service." In the Matter of The Provision of Interstate and International Enterexchange telecommunications Service via the "Internet" by Non-Tarriffed, Uncertified Entities, Reply Comments of the Interactive Services Association 3 (June 10, 1996).

Jonathan Jacob Nadler, Give Peace a Chance: FCC-State Relations After California III, 47 Fed. Comm. L.J. 457, 508 (1995).

"ESP's are not subject to universal service obligations under the 1996 ACT, which are limited to 'providers of telecommunications services,' and are not permitted to participate in the universal service subsidies that access charges were designed to support. Since it would be inappropriate to force ESP's to fund "basic" telecommunications support mechanisms from which neither they nor their subscribers can receive benefit, ESPs should continue to be exempt from access charge obligations." In re The Provision of Interstate and International Interexchange Telecommunications Service Via the "Internet" by Non-Tariffed, Uncertified Entities, Joint Reply comments of Netscape Communications Corporation and Voxware, Inc., RM No. 8775 at 24 (June 10, 1996). -- In the Matter of Computer III Remand Proceeding: Bell Operating Company Provision of Enhanced Services, CC Docket No. 95-20, CC Docket No. 98-10, Report and Order, ¶ 4 (March 10, 1999).
 
 

2. Local Tariffs

[fn74] ESPs also have certain flat-rated interstate offerings available to them. See, e.g., GTE Telephone Operating Cos. GTOC Transmittal No. 1148, CC Docket No. 98-79, FCC No. 98-292, Memorandum Opinion and Order (rel. October 30, 1998), recon. pending.

Pursuant to this exemption, ESPs are treated as end users for purposes of assessing access charges, and the Commission permits ESPs to purchase their links to the public switched telephone network (PSTN) through intrastate business tariffs rather than through interstate access tariffs.[11] Thus, ESPs generally pay local business rates and interstate subscriber line charges for their switched access connections to local exchange company central offices.[12]

[fn11] Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, CC Docket No. 87-215, Order, 3 FCC Rcd 2631, 2635 n.8, 2637 n.53 (1988) (ESP Exemption Order).
[fn12] ESP Exemption Order, 3 FCC Rcd at 2635 n.8, 2637 n.53. The subscriber line charge (SLC) is an access charge imposed on end users to recover at least a portion of the cost of the interstate portion of LEC facilities used to link each end user to the public switched telephone network (PSTN).

Universal Service

Self Provisioning

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