STATE OF MARYLAND

PUBLIC SERVICE COMMISSION

)

Complaint of MFS Intelenet )

of Maryland, Inc. Against )

Bell Atlantic-Maryland, Inc. ) Case No. 8731

For Breach of Interconnection )

Terms, and Request for )

Immediate Relief )

)

RESPONSE OF BELL ATLANTIC-MARYLAND, INC.

Bell Atlantic-Maryland, Inc. ("BA-MD") respectfully submits that the complaint of MFS Intelenet of Maryland, Inc. ("MFS/WorldCom") should be dismissed because Internet traffic is interstate and subject to the jurisdiction of the Federal Communications Commission (“FCC”). In fact, MFS/WorldCom’s own trade group – Association for Local Telecommunications Services (“ALTS”) – has raised precisely the same issue with the FCC because Internet traffic is interstate, not local. This Commission should therefore permit the FCC to resolve this issue.

Even if the Commission were to reach the merits of MFS/WorldCom’s Complaint, which it should not, the complaint should still be dismissed because Internet traffic is not local traffic -- traffic which “terminates” within a local calling area on another carrier’s network for which local termination compensation is due. Under clear federal and state precedent, the traffic to and from the Internet that is the subject of MFS/WorldCom’s Complaint is jurisdictionally interstate traffic, and not subject to local termination compensation under the Telecommunications Act of 1996 (the “1996 Act”) or the July 16, 1996 Interconnection Agreement between the parties (the “Agreement”).

BA-MD has strictly followed the dispute resolution provisions of the Agreement and has offered to work with MFS/WorldCom to determine a mutually agreed upon method to distinguish between Internet traffic and local traffic. The Commission should reject MFS/WorldCom’s attempt to circumvent the language of the Agreement -- which requires parties to attempt to resolve billing disputes between them before seeking regulatory intervention -- and allow the parties to move forward on a negotiated basis to resolve this issue.

A. The Commission Should Allow the FCC to Decide on the Proper Rate for ISP Traffic As Part of its Consideration of the ALTS Letter.

The specific issue raised by MFS/WorldCom -- whether ISP traffic is local telecommunications traffic subject to the reciprocal compensation obligation -- is now pending before the FCC. On June 20, 1997, MFS/WorldCom’s trade group -- the Association for Local Telecommunications Services (“ALTS”) -- filed a letter requesting the FCC to clarify that Internet Service Provider (“ISP”) traffic cannot “be handled differently than other local traffic is handled under current reciprocal compensation agreements...”[1] ALTS requested that the FCC issue this clarification “as quickly as possible...”

ALTS’ decision to turn to the FCC for resolution of this issue is convincing evidence that even the CLECs know that the ISP traffic is interstate and not local. As the following pages make clear, ALTS chose the right forum for resolution of this question, and MFS/WorldCom did not. This Commission should find that the ISP traffic is interstate and leave the determination of what compensation is due on ISP traffic to the FCC.

B. ISP Traffic is Jurisdictionally Interstate

Even if the Commission chooses to consider the merits of MFS/WorldCom’s complaint, which it should not, it will find that the relevant FCC and judicial precedent establishes that the ISP traffic at issue is not local traffic as contemplated by the 1996 Act, the FCC’s Order implementing that Act or by the parties under their Agreement. Federal and state precedent employ an “end-to-end” analysis to determine the jurisdictional nature of a call. Under this analysis, calls to and from the Internet fall squarely on the interstate side of the jurisdictional line.

MFS/WorldCom mistakenly contends that because the FCC has relieved the ISPs from paying otherwise applicable interstate access charges, all ISP traffic must be local traffic.[2] In fact, the opposite is true. The FCC's decision to exempt ISPs from the obligation of paying interstate access charges does not support the proposition that those calls are local in nature. To the contrary, the FCC has long recognized the non-local nature of ISP telecommunications traffic, and indeed it had to create the exemption from access charges precisely because ISP traffic is inherently interstate in nature. In its Access Charge Order issued 14 years ago, the FCC concluded that calls made to Enhanced Service Providers (“ESPs”) - (a group that includes ISPs) - are generally transmitted interstate:

In each case the [ESP] obtains 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. At its own location the [ESP] connects the local exchange call to another service or facility over which the call is carried out of state.[3]

In the Access Charge Order, the FCC also recognized that an ESP "might terminate few calls at its own location and thus would make relatively heavy interstate use of local exchange services."[4] It also held that ESPs are users of "access service," which it defined as the origination or termination of any interstate or foreign telecommunications traffic that is subject to or exempt from tariff regulation.[5] The Internet, of course, is presently exempt from tariff regulation.

In subsequent proceedings, the FCC has reconfirmed this understanding of the manner in which ESPs function. For example, in 1987 the FCC proposed to require ESPs to pay interstate access charges, on the theory that ESPs used LEC networks in the same manner as IXCs.[6] The FCC's proposal reiterated that "[e]nhanced service providers, like facilities-based interexchange carriers and resellers, use the local network to provide interstate services."[7] In its most recent Access Charge Reform NPRM, the FCC again recognized that ESPs transmit interstate traffic even though they are treated in the same manner as local calling area end users for billing purposes.[8] Finally, in its May 16, 1997 Access Charge Reform Order, the FCC carefully reviewed the ongoing debate about applying access charges to Internet traffic and concluded that ISPs remained “end users for purposes of the access charge system.”[9]

Two decisions by the federal district court administering the Modification of Final Judgment ("MFJ") confirm that the ISP traffic at issue is not local in nature. In the late 1980s, Bell Atlantic advanced proposals to provide information services using a "gateway" architecture similar to that used by ISPs. In its first decision addressing this issue, the court stated:

If a subscriber is considered to have accessed the gateway upon achieving contact with the [POP], there would by definition be no inter-LATA transmission and the Regional Companies could provide the service. On the other hand, if access to the network is found to occur only when the subscriber interacts with the gateway functions, stored in another LATA, an inter-LATA communication will have occurred.[10]

Bell Atlantic subsequently proposed a gateway architecture that would have located a POP (e.g., a server) in each of the five LATAs in Pennsylvania and a single gateway processor (i.e., a computer functioning as ISPs' routers now function) to serve the entire state without regard to LATA boundaries.[11] The MFJ court denied Bell Atlantic's request for authority to provide such gateway services. The court specifically held that "the conclusion is inescapable that the gateway architecture Bell Atlantic is proposing would operate on an
interexchange basis, and that it would therefore constitute an interexchange service."[12] The court’s analysis is equally applicable to the ISP traffic of MFS/WorldCom’s customers.

Finally, the opinion of the Court of Appeals of Maryland in Hecht Co. v. C&P Telephone Co.[13] shows that the same conclusion is applicable under Maryland law. In Hecht the question was whether intrastate or interstate rates should apply to the wholly intrastate private lines used by the customer. In this case the intrastate links were connected to interstate lines, and a significant portion of the traffic over the Maryland lines originated
or terminated outside of Maryland.[14] The presence of interstate traffic rendered all of the customer’s private line traffic interstate for regulatory purposes, and both the FCC and the Maryland Court of Appeals found that the interstate rates should apply.[15]

There is no substantive difference between the use of “local” links to call ISPs and the Internet and the use of intrastate private lines to send and receive calls outside Maryland’s borders. For the same reasons set out in Hecht, this Commission should find that calls to MFS/WorldCom’s ISP customers are interstate and not local.

C. ISP Traffic Does not "Terminate" at the ISP's Local POP

MFS/WorldCom contends that it is "widely recognized" that calls terminate when “delivered to the Telephone Exchange Service bearing the called telephone number."[16] MFS/WorldCom also claims that a local call to the Telephone Exchange Service of an ISP is a "separate and distinguishable transmission" from the ISP's subsequent Internet connection.[17] Neither of these claims are tenable.

It is clear that the ISP's local POP is never the "spatial or temporal end" of the traffic, as both the FCC and the MFJ court recognized. Rather, traffic that an ISP receives from its customers continues as circuit-switched traffic over the ISP's network or leased IXC lines through a router and into the Internet while traffic from the Internet makes the return trip to the end user.[18] The calls to MFS/WorldCom’s ISP customers “terminate” on the Internet, not at the ISP, and the proper end-to-end jurisdictional analysis puts these calls squarely in the interstate arena.[19]

For the same reason, the fact that the Internet traffic is accessed through a local call is irrelevant to the jurisdictional analysis because the end-to-end communication remains interexchange or international. The FCC has previously addressed a similar case in which voice messages from other states and exchanges were stored in a local voice messaging processor. Even though the end user usually retrieved messages from that processor by placing a local call, the fact that the message itself originated outside the state made the end-to-end communication subject to the federal jurisdiction.[20]

The bottom line is that, contrary to MFS/WorldCom’s claims, ISP traffic is not eligible for reciprocal compensation, because such traffic is overwhelmingly interstate, not local.[21] The FCC explicitly found that “the reciprocal compensation provisions of section 251(b)(5) for transport and termination of traffic do not apply to the transport or termination of interstate or intrastate interexchange traffic.”[22]

The Agreement between MFS/WorldCom and BA-MD intended that the reciprocal compensation obligation imposed by the provisions of the Agreement would be consistent with, and no broader than, the obligation imposed by the 1996 Act.[23] Section 1.61 of the Agreement provides that the parties will pay reciprocal compensation on "Local Traffic." Section 1.44 of the Agreement defines "Local Traffic" as "traffic that is originated by a Customer of one Party on that Party's network and terminates to a customer of the other Party on that other Party's network, within a given local calling area or expanded area service.” Finally, Section 5.7.5 states that, for compensation purposes, a call is designated as local or toll “based on the actual originating and terminating points of the complete end-to-end call, regardless of the carrier(s) involved in carrying any segment of the call.”[24] Since the ISP traffic does not terminate at the local POP, there simply is no reciprocal compensation due on this traffic.[25]

D. Other State Decisions Relied on by MFS/WorldCom Have No Precedential Value

MFS/WorldCom also argues that five state commissions have rejected BA-MD’s position and declined to treat ISP traffic "any differently than other local traffic."[26] The decisions relied on by MFS/WorldCom should be given no weight by this Commission. In those cases, MFS/WorldCom was apparently successful in convincing the state commissions that the FCC's decision to classify ISPs and other ESPs as end users for purposes of imposing access charges was equivalent to classifying ISP traffic as local traffic. As demonstrated above, the opposite is true -- the FCC was compelled to create the ESP exemption precisely because it recognized that ESP traffic was interstate, not local, in nature.

None of the decisions relied on by MFS/WorldCom addresses this distinction. In fact, none cites any statutory or decisional precedent, or contains any legal or factual analysis. Given that the most detailed discussion on this issue by any of the state commissions
is three sentences long, the decisions are of no precedential value and should be rejected by this Commission.[27]

E. MFS/WorldCom’s “Competition” Arguments Should Be Rejected

As has become typical, MFS/WorldCom paints this contract dispute with grim predictions of "severe anticompetitive implications."[28] For instance, MFS/WorldCom reasons that if BA-MD’s position were adopted, it and other CLECs would decline to serve ISPs because they would get no local termination compensation for delivering calls destined for the Internet. According to MFS/WorldCom, BA-MD would therefore gain a de facto monopoly on service to ISPs. This contention, however, has no foundation.

First, while CLECs would not receive local termination compensation, they would still receive the same type of compensation BA-MD receives from ISPs for providing this service. Second, BA-MD is not suggesting that there should never be any form of compensation for ISP traffic, or that such traffic should be permanently subject to a bill and keep arrangement. Simply because no compensation is due on this traffic under the FCC’s present regulatory scheme does not mean that appropriate compensation is permanently unavailable. ISP traffic is not local traffic subject to reciprocal compensation, but a form of interexchange traffic that the FCC has chosen (for policy reasons) to exempt from the regular interexchange access charges. Bell Atlantic has proposed in the Internet Access NOI that this traffic be subject to modified access charges that would cover the costs incurred in carrying and terminating the traffic.[29] If the FCC adopts this proposal, MFS/WorldCom and other CLECs would still be entitled to compensation for their services, but the nature and extent of such compensation would better reflect the cost-causation principles underlying the 1996 Act and the FCC’s rules.[30]

MFS/WorldCom takes its implausible anti-competitive scenario[31] one step further by arguing that once BA-MD had a monopoly on service to ISPs it could drive competing ISPs out of business by favoring its own ISP. Exactly how BA-MD would favor its ISP is never stated. MFS/WorldCom ignores the fact that any such attempt to discriminate in favor of BA-MD's affiliate would violate Sections 201, 202 and 251 of the Communications Act, and would be easily detectable in light of the accounting and non-accounting safeguards put in place by the FCC precisely to forestall such a scheme.[32]