A number of long-pending access charge and other intercarrier compensation issues were finally clarified in the last couple of months.

Qwest v. Farmers Reconsideration Order

On November 25, 2009, the FCC decided the long-pending reconsideration petition filed in November 2007 by Qwest Communications Corp. in its “traffic-pumping” complaint case against Farmers and Merchants Mutual Telephone Co. (“Farmers”). Farmers, an incumbent local exchange carrier (incumbent LEC, or “ILEC”), had entered into arrangements with “free” conference calling services under which the services sent their traffic to numbers located in Farmers’ local exchange in return for fees paid by Farmers based on the volume of terminated traffic. Qwest carried long distance calls bound for the conference calling firms and paid Farmers terminating access charges to deliver those calls.

Qwest brought a complaint against Farmers for the excessive interstate access rate of return earned by Farmers. In its 2007 decision in Qwest Communications Corp. v. Farmers and Merchants Mutual Tel. Co. (“Qwest”), the FCC held that, because Farmers’ interstate tariff was given “deemed lawful” status under Section 204(a)(3) of the Act, Farmers was insulated from damages liability.

Qwest’s complaint also alleged that, irrespective of Farmers’ access rate level and earnings, Farmers’ imposition of any access charges was improper because the conference calling firms were not “end users” as defined in Farmers’ access tariff. Qwest claimed that Farmers therefore did not provide access services under its tariff in terminating calls to the firms. In its 2007 Qwest order, the FCC found, based on Farmers’ representations that the conference calling firms purchased tariffed end-user access services and paid the subscriber line charge, that the firms were access customers of Farmers and thus end users under Farmers’ access tariff.

Qwest filed a petition for reconsideration and a motion to compel production of documents, arguing that Farmers had back-dated contracts and invoices to make it appear that the conference calling firms had been purchasing tariffed services. Qwest requested that the FCC accordingly find that the firms were not customers under the tariff, but rather, were business partners with Farmers in its scheme to manipulate the FCC’s rules. The FCC granted the motion to compel and initiated additional proceedings to consider Qwest’s evidence.

In the November 25 reconsideration order, the FCC found that the evidence demonstrated that the conference calling firms were in fact not end users under Farmers’ tariff and that Farmers thus was not entitled to impose terminating access charges on Qwest for terminating Qwest’s traffic to the firms. The FCC noted that, in addition to evidence that the firms did not purchase tariffed services from Farmers, Farmers’ net payment of fees to the firms for the traffic they generated also showed that the firms were not access customers of Farmers. Farmers’ contracts with the firms also prohibited Farmers from providing the same services to any competitor, which is “antithetical to the notion of tariffed service.” Based on redacted confidential information, the FCC found that Farmers’ back-dated contracts and billings of the firms were attempts to create the appearance of compliance with its tariff after Qwest’s complaint was filed.

The FCC accordingly held that Farmers’ practice of charging Qwest tariffed switched access rates for its termination of traffic violates Section 201(b) of the Act. The FCC noted, however, that Farmers might still be due some payment for its termination services to Qwest, which could be determined in Qwest’s supplemental complaint for damages. This order, as well as the similar order issued by the Iowa Utilities Board (“IUB”) in the related traffic pumping complaint case brought by Qwest (discussed in the September Bulletin), reflects a willingness on the part of regulatory agencies to drill down into the details of carriers’ arrangements with their customers to determine their compliance with tariff and regulatory requirements.

IUB Reconsiders Qwest Decision

On December 3, 2009, the IUB granted rehearing as to one aspect of its September 21 order in the related traffic pumping complaint case brought by Qwest (Qwest Communications Corp. v. Superior Tel. Cooperative, et al.). In the September 21 order, the IUB had found Great Lakes Communications Corp. (“Great Lakes”) and other defendant LECs liable for improperly assessing intrastate access charges against Qwest and other long distance companies.

The IUB also directed the North American Numbering Plan Administrator and the telephone number Pooling Administrator to commence proceedings to reclaim all blocks of telephone numbers assigned to Great Lakes. As reported in the November Bulletin, Great Lakes and other defendant, sought a preliminary injunction in federal district court against number reclamation, and a Magistrate recommended that an injunction be granted. Following the Magistrate’s recommendation, Qwest filed a motion with the IUB to withdraw its reclamation directive so that the parties would not have to litigate the issue before the IUB, the court, and the FCC. In its December 3 order, the IUB determined that, although it has “sufficient authority to order reclamation in this case,” it agreed with Qwest that “litigating this issue in multiple forums is not efficient.” The IUB accordingly granted Qwest’s motion and a similar request by Great Lakes and substituted a request to the FCC to conduct a “for cause audit” of Great Lakes’ use of numbering resources in place of its prior reclamation directive.

Eighth Circuit Affirmance of Nebraska PSC UNE Order

On December 29, 2009, the U.S. Court of Appeals for the Eighth Circuit largely affirmed an order of the Nebraska Public Service Commission (“PSC”) setting rates that competitors must pay to lease unbundled network elements (“UNEs”) of Qwest’s local telephone network in Nebraska. The PSC previously set UNE rates for Qwest’s “local loops” connecting end-user customers to its network for three different zones reflecting geographic cost differences. The PSC used the prescribed total element long-run incremental cost (“TELRIC”) methodology to derive the UNE rates. The PSC subsequently developed a new method for allocating Nebraska universal service funding, the “long-term universal service funding mechanism.” This method targeted subsidies to high-cost rural, out-of-town areas and provided that subsidies for certain UNEs be portable from ILECs to competitive LECs (“CLECs”). In a third proceeding, the PSC reflected the new universal service allocation methodology in its UNE rate zones by deaveraging the zones into in-town and out-of-town zones.

Qwest sought review of the deaveraged UNE rates in federal district court under Section 252(e)(6) of the Communications Act on the grounds that the revised rates were not based on TELRIC, as required by FCC regulations. The district court upheld the revised rates. On appeal, the Eighth Circuit affirmed, holding that neither the Act nor FCC rules require that deaveraging existing rates that comply with the TELRIC standard requires a new TELRIC cost study. The deaveraging method did not nullify the results of the TELRIC cost studies upon which the local loop UNE rates were originally based. The court also held that there were no objective criteria in the record showing that the deaveraged rates were not cost-based. Finally, the court held that the deaveraged in-town rates were not so low that they would discourage facilities-based competition. The court found that the in-town rates comply with TELRIC, and that is all that is required. The court nevertheless remanded the order to the district court with instructions to remand the case to the PSC for the limited purpose of determining a workable method of delineating the boundary between in-town and out-of-town zones. This decision suggests that courts will give substantial deference to state commission UNE rate setting that is arguably based on required criteria.

ISP-Bound Traffic Remand Order Upheld by D.C. Circuit

On January 12, 2010, the FCC finally won judicial approval, on its third attempt, for its approach to setting intercarrier rates for local interconnected calls to Internet service providers (“ISPs”). Section 251(b)(5) of the Act requires the establishment of reciprocal compensation arrangements for calls originated by customers of one LEC that are handed off to an interconnected LEC for delivery to its customers. The originating LEC pays the terminating LEC reciprocal compensation. Where one of the LECs is an ILEC, Section 251(c) of the Act obligates the ILEC to negotiate reciprocal compensation rates with the other LEC pursuant to Section 252 of the Act, which authorizes state regulatory commissions to arbitrate disputes.

Since 1999, the FCC has been concerned that the assessment of reciprocal compensation for the termination of ISP-bound local calls, also referred to as dial-up Internet traffic, was distorting the telecommunications and Internet service markets. A CLEC could sign up ISPs as customers and thereby charge an ILEC reciprocal compensation for local dial-up Internet calls originated by the ILEC’s subscribers and handed off to the CLEC for termination to an ISP. Because ISPs do not originate calls, the one-way flow of compensation was not “reciprocal,” leading to inefficient entry by CLECs intent on serving ISPs, rather than providing viable local telephone services competing with the ILECs’ local services.

In order to ameliorate what it viewed as arbitrage behavior by CLECs serving ISPs, the FCC imposed a rate-cap scheme, including a cap of $0.0007 per minute, in 2001 on the compensation paid by originating LECs to terminating LECs on dial-up Internet calls, which was significantly below the reciprocal compensation rates negotiated by the LECs under Sections 251 and 252. The D.C. Circuit reversed and remanded the FCC’s 2001 order in 2002 because the FCC had not satisfactorily explained its authority to cap ISP-bound traffic termination rates. In 2008, the FCC reimposed the ISP-bound terminating rate-cap system, which was appealed by Core Communications, Inc. (“Core”), and various state regulatory agencies.

In affirming the FCC in its January 12 opinion, the D.C. Circuit held that, because dial-up Internet calls ultimately reach servers in other states and foreign countries, such calls are “interstate communications that are delivered through local calls.” They are therefore governed by Section 201(b) of the Act, which authorizes the FCC to regulate interstate telecommunications rates, as well as the Section 251/252 regime governing interconnected local calls supervised by state commissions. A savings clause in Section 251(i) of the Act provides that nothing in Section 251 limits the FCC’s authority under Section 201. Accordingly, the court concluded that the FCC has the authority to set rates for the termination of dial-up Internet calls.

The court rejected the argument that, because the FCC has no jurisdiction over local calls, it cannot set termination rates for local dial-up Internet calls, pointing out that any call to the Internet must be considered interstate telecommunications under the FCC’s traditional “end-to-end” call jurisdictional analysis. The court also rejected the argument that the different treatment accorded to dial-up Internet traffic subject to the low rate cap and other interconnected local calls subject to reciprocal compensation rules, is arbitrary and capricious, explaining that the FCC provided a solid rationale for that difference. The court pointed out that, under the typical reciprocal compensation regime, the traffic flows are balanced, while dial-up Internet traffic is one-way. That difference provides tremendous arbitrage opportunities that must be addressed.

In finally upholding the FCC’s authority to cap termination rates typically paid by ILECs to CLECs serving ISPs, the D.C. Circuit’s opinion is a significant victory for ILECs seeking to control costs and a loss for CLECs like Core. The opinion notes, however, that access charge rates for intrastate long distance calls are not covered by the Section 251/252 regime or Section 201, leaving a potential jurisdictional gap in any future FCC attempt to implement a broad-based intercarrier compensation regime.