Court Nixes Big Telecom Payout for ISP Traffic

     (CN) – Internet-traffic payment rates between local telecommunications carriers are governed by Federal Communications Commission regulations, not by prices set at the state level, the 9th Circuit ruled Tuesday.

     A federal appeals panel in San Francisco reversed a California District Court’s order directing AT&T to pay Pac-West more than $7 million for Internet service provider traffic originating with AT&T and ending with Pac-West.
     The California Public Utilities Commission had improperly computed AT&T’s bill using Pac-West’s state-filed tariffs rather than rates described in the FCC’s rules on “Intercarrier Compensation for ISP-Bound Traffic,” according to the three-judge panel.
     In telecom parlance, both companies are known as “competitive local exchange carriers (CLEC).” After the passage of the Telecommunications Act of 1996, such carriers were allowed for the first time to compete for local telephone customers. Before the rise of dial-up Internet in the late 1990s, these telephone companies operated by a relatively simple compensation scheme referred as “reciprocal compensation,” which relied on the principle that the number of calls between customers of each company would basically even out.
     When dial-up hit in a big way, however, all that changed. Internet service providers receive plenty of calls, but they never call back. As such, the originator of the call has to shoulder all the costs, unlike the old reciprocal world order in which calls usually originated and ended with different companies at an equal rate.
     Not surprisingly, this new reality provided the unintended bait for a classic case of “regulatory arbitrage,” whereby companies attempt to exploit a regulatory loophole. CLECs, including Pac-West, took on as many ISP customers as they could, terminating a lot of calls but originating almost none. “The record evidence establishes that Pac-West terminated more than 115 times as much traffic from AT&T as AT&T terminated from Pac-West,” according to the ruling.
     To discourage such inequalities, in 2001 the FCC drafted the ISP Remand Order, which, after going through several rounds of federal litigation, created a compensation plan that capped the “intercarrier rate for ISP-bound traffic” at $.0007 per minute of use.
     After Pac-West tried to bill AT&T for ISP-terminated traffic, and AT&T refused, the California Public Utilities Commission ruled in 2006 that AT&T owed Pac-West about $7.1 million. Because the companies had no interconnection agreement, the commission found that federal rules did not apply. As a result, instead of charging the company the FCC-approved rate, it billed at Pac-West’s state-level rate.
     AT&T promptly questioned the commission’s reasoning in a District Court action, arguing that the commission’s order was preempted by the FCC’s regulations and demanding its money back. The District Court ruled for Pac-West and the commission, finding that the ISP Remand Order did not cancel out the commission’s decision.
     The 9th Circuit reversed that ruling on Thursday, finding that the FCC’s clear intent was to “exercise its jurisdiction over local ISP-bound traffic exchanged between two CLECs.”
      “Although the ISP Remand Order could be clearer, we are convinced that the [commission] and the district court erred in holding that it does not apply to ISP-bound traffic exchanged between two CLECs,” Judge Marsha Berzon wrote for the unanimous panel.
“The district court and the CPUC erred in holding that the ISP Remand Order’s interim compensation regime did not apply to the ISP-bound traffic exchanged between AT&T and Pac-West,” Berzon added. “Because we hold that the ISP Remand Order does apply to the ISP-bound traffic at issue here, the CPUC’s decision to rely on Pac-West’s state-filed tariffs to set the rate in question is preempted.”

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