The 9th Circuit Takes Action Affecting the Payment of Reciprocal Compensation for ISP Traffic in California
In a decision released on April 7, 2003, the U.S. Court of Appeals for the Ninth Circuit overturned two rulemaking decisions of the California Public Utilities Commission (CPUC) regarding the payment of reciprocal compensation for calls to Internet Service Providers (ISPs). In the same decision, the court upheld the CPUC’s approval of a specific arbitrated interconnection agreement that provides for the payment of reciprocal compensation for ISP-bound traffic.
In D.98-10-057 and D.99-07-047 (the “CPUC ISP Orders”), the CPUC exercised its general rulemaking authority to establish a policy that ISP traffic should be treated as “local traffic” subject to standard reciprocal compensation provisions in interconnection agreements.1 Various parties challenged these decisions through rehearing at the CPUC (decisions upheld), in federal district court (decisions upheld) and before the Ninth Circuit in this appeal.
The Ninth Circuit ruled that the CPUC cannot regulate ISP-bound traffic through the exercise of its "generic" rulemaking authority because under federal law that traffic is "interstate" and subject to the FCC’s jurisdiction. The court held that the CPUC's only authority over interstate traffic is its authority under Section 252 of the Communications Act to approve new arbitrated interconnection agreements and to interpret existing agreements.
In its ruling, however, the Ninth Circuit upheld the CPUC's decision (D.99-06-088) approving an arbitrated interconnection agreement between Pacific Bell and Pac-West Telecomm that expressly included ISP-bound traffic in the reciprocal compensation provision. The court held that because the FCC has yet to resolve whether ISP-bound traffic is "local" within the scope of the reciprocal compensation provisions in Section 251 of the Act, the CPUC’s decision was not inconsistent with federal law. The Ninth Circuit rejected appellants’ argument that the CPUC was improperly influenced and relied on evidence outside of the record in reaching its decision.
The court’s ruling effectively vacates the CPUC ISP Orders because they resulted from the CPUC’s exercise of its general rulemaking authority. However, the Ninth Circuit's decision states that because the status of ISP-bound traffic as "local" for reciprocal compensation purposes is unsettled under federal law, the CPUC still may interpret reciprocal compensation provisions for "local traffic" to include ISP-bound traffic in the context of a specific agreement (presuming the agreement at issue predates the effective date of the FCC's Bill-and-Keep Order). The CPUC simply may not do so through a generic rulemaking as it did in the CPUC ISP Orders.
As a result, the status of an interconnection agreement that does not specifically reference ISP traffic in the reciprocal compensation provision is unclear. In response to the Ninth Circuit’s decision, a CPUC spokesperson observed that “…the commission may still lawfully determine that ISP-bound traffic should be treated as local for reciprocal compensation purposes," although this determination "…must be done on a case-by-case basis, looking at the specific interconnection agreements in question." (TR Daily, April 8, 2003.)
Footnotes:1 In April 2001, the Federal Communications Commission (FCC) implemented a phased-in bill-and-keep regime for ISP-bound traffic on a prospective basis (“Bill and Keep Order”). It did so without pre-empting any state commission decisions regarding compensation for ISP traffic for the period prior to the FCC's action, such as the CPUC’s orders at issue here. The U.S. Court of Appeals for the D.C. Circuit remanded the decision to the FCC in order for the FCC to further consider the source of its authority for the decision, but did not vacate the decision. The remand is pending at the FCC.