Report No. CC 99-2    COMMON CARRIER ACTION     February 25, 1999

      FCC ADOPTS ORDER ADDRESSING DIAL-UP INTERNET TRAFFIC
FCC Lets States Decide Whether Existing Interconnections Decisions Affected by Ruling; 
FCC Seeks Comment on Proposals to Govern Future Compensation Agreements
                   (Docket Nos. 96-98, 99-68)
                                
     In response to requests by carriers that the Commission clarify how local telephone
companies should compensate one another for delivering traffic to Internet service providers, the
Commission today concluded that carriers are bound by their existing interconnection agreements,
as interpreted by state commissions, and thus are subject to reciprocal compensation obligations
to the extent provided by such agreements or as determined by state commissions.  The
Commission declared that Internet traffic is jurisdictionally mixed and appears to be largely
interstate in nature.  But the decision preserves the rule that exempts the Internet and other
information services from interstate access charges.  This means that those consumers who
continue to access the Internet by dialing a seven-digit number will not incur long distance
charges when they do so.  In a notice of proposed rulemaking, the Commission also asked for
comment on proposals governing future carrier-to-carrier compensation for handling this traffic.

     Specifically, the Commission had been asked by parties to determine whether local
telephone companies are entitled to receive reciprocal compensation for delivering calls to their
customers that are information service providers, particularly Internet service providers (ISPs). 
Generally, new entrants to the local telephone business contend that calls to ISPs are local traffic
and, therefore, subject to reciprocal compensation.  Incumbent local telephone companies, on the
other hand, generally contend that calls to ISPs are interstate in nature and that they are,
therefore, beyond the scope of reciprocal compensation agreements.






                                                     (over)

                                                     - 2 -

     In today's decision, the Commission noted that it traditionally has determined the
jurisdictional nature of communications by the end points of the communication.  Accordingly, the
Commission concluded that the calls at issue in this proceeding do not terminate at the ISPs' local
servers, but continue to their ultimate destinations, specifically at websites that are often located
in other states or countries.  As a result, the Commission found that, although some Internet
traffic is intrastate, a substantial portion of Internet traffic is interstate and therefore subject to
federal jurisdiction.

     This jurisdictional decision does not, however, determine whether calls to ISPs are subject
to reciprocal compensation in any particular instance.  The Commission noted that parties may
have agreed that ISP-bound traffic should be subject to reciprocal compensation, or a state
commission, in the exercise of its statutory authority under sections 251 and 252 of the Act to
arbitrate interconnection disputes, may have imposed reciprocal compensation obligations for this
traffic.  In either case, the Commission noted that carriers are bound by their existing
interconnection contracts, as interpreted by state commissions.

     The Commission also stated that adopting a federal rule to govern reciprocal
compensation in the future would serve the public interest.  As a general matter, the Commission
tentatively concluded that commercial negotiations are the ideal means of establishing the terms of
interconnection contracts, and reciprocal compensation agreements in particular.  The
Commission, therefore, asked for comment on two alternative proposals for implementing such a
regime in the future.  

     The Commission tentatively concluded that inter-carrier compensation for this interstate
traffic should be governed prospectively by interconnection agreements negotiated and arbitrated
under sections 251 and 252 of the Act.  Resolution of failures to reach agreement on inter-carrier
compensation for interstate ISP-bound traffic then would occur through arbitrations conducted by
state commissions, which are appealable to federal district courts.  The Commission also asked for
comment on an alternative proposal, under which inter-carrier compensation would be governed
by a set of federal rules, and disputes would be resolved by federal, state, or third-party
arbitrators.

     Action by the Commission February  25, 1999, by Declaratory Ruling and Notice of
Proposed Rulemaking (FCC 99-38).   Chairman Kennard, Commissioners Ness and Tristani, with
Commissioner Powell concurring in the result and Commissioner Furchtgott-Roth not
participating 

                              -FCC-

     News media contact:  Emily Hoffnar (202) 418-0253
     Common Carrier Bureau contact:  Tamara Preiss (202) 418-1520
     TTY: (202) 418-2555.