The increasingly bitter dispute between ILECs and CLECs regarding when local switching switched access charges can be assessed has, at least for now, been won by CLECs. In a Declaratory Ruling released on February 11, 2015, in Docket 10-90, the FCC found that a CLEC, working with an over-the-top Voice over Internet Protocol (VoIP) provider serving end user customers, may assess end office local switching charges on long distance calls when it performs the core functions of a local switch but does not connect to a physical loop dedicated to a specific end user. 

Further infuriating ILECs, the Commission found that ILECs must retroactively pay CLECs local switching charges for every disputed “over-the-top” access minute going back several years. AT&T and Verizon are mainly affected by this ruling, since they have refused to pay local switching charges to CLECs that are not physically connected to an end user loop 

Unfortunately like so many FCC decisions today, the Declaratory Ruling was decided on partisan grounds.  It was supported by the three Democratic Commissioners and opposed by the two Republicans. Like all these split decisions, the Ruling will almost certainly be challenged in court.

The Ruling is important because over-the-top VoIP carriers are becoming increasingly popular. Such carriers provide a “local switching” service that is owned and offered separately from a specific broadband connection to the public switched telephone network. Over-the-top VoIP carriers operate with any broadband connection.

Traditionally, end office switching charges are assessed by the LEC that serves a particular customer.  In its 2011 “USF/ICC Transformation Order”, the FCC addressed the fact that increasingly end user voice service is provided over the Internet with end users often purchasing their voice services from interconnected VoIP providers, rather than LECs. According to the Commission, it

Those VoIP providers, however, still in most cases rely upon LECs to deliver traffic to and from the public switched telephone network (PSTN). The majority of VoIP providers are “facilities-based,” typically meaning that they provide the last-mile facility to the customer as well as the VoIP service (e.g., a cable provider that bundles VoIP services with video and broadband). But in some cases, the VoIP provider does not also provide the last-mile facility, and situations involving these “over-the-top” providers (e.g., Vonage) and the LECs they use to exchange traffic with the PSTN have generated disagreement about the intent of the Commission’s rule. In the [Transformation Order], the Commission stated that a LEC providing end office switching or its “functional equivalent” may assess Reciprocal Compensation Access Charges [such as local switching] for such services pursuant to the VoIP symmetry rule (FCC Declaratory Ruling at p. 2).

This seemed simple enough. However, in 2012, the FCC seemed to contradict itself when it stated that a LEC could not levy access charges for functions that are not performed by either the LEC itself on an unaffiliated VoIP partner. That statement had been used as justification by AT&T and Verizon to refuse to pay local switching charges to Level 3 and Bandwidth.com for the functions those CLECs perform on PSTN-VoIP calls sent to subscribers of Internet VoIP services who obtained broadband Internet connectivity from a third-party over-the-top ISP. 

CLECs have disputed this, claiming that the functions they provide – providing the intelligence and infrastructure that manage the interaction with the end user’s telecommunications or VoIP provider and that initiates call-set-up or call takedown - are the functional equivalents to end office switching, and local switching charges should apply. Moreover, they fashioned a clever technology neutral argument that won the day with the Commission.

CLECs argued that if they serve a TDM loop, a cable telephony loop and an over-the-top VoIP customer from the same switch, according to AT&T and Verizon, they could only assess end office local switching access charges for the TDM loop-bound and cable telephony loop-bound traffic, but not for the identical functions performed for traffic bound for the over-the-top VoIP customer. Thus they would be penalized unfairly due to the new technology. In the Declaratory Ruling, the Commission agreed with this argument:

In this Declaratory Ruling, we remove a question surrounding the VoIP symmetry rule and confirm that it is technology and facilities neutral. It does not require, and has never required, an entity to use a specific technology or its own facilities in order for the service it provides to be considered the functional equivalent of end office switching. Indeed, the record reflects no disagreement that a competitive LEC partnering with a facilities-based VoIP provider provides the “functional equivalent” of end office switching… [T]he same is true when the competitive LEC partners with an over-the-top VoIP provider to exchange traffic with interconnected carriers, and in both instances the competitive LECs may assess end office switching charges for such services (Id. at p3).

The Republican Commissioners dispute this reasoning. They argue that the FCC precedent has always been that a LEC may only collect access charges for inter-carrier services it performs or is performed by a VoIP partner. This is reflected in the Commission’s Rules. Section 51.913(b) does “not permit a local exchange carrier to charge for functions not performed by the local exchange carrier itself or the affiliated or unaffiliated provider of interconnected VoIP service or non-interconnected VoIP service.” 

Moreover, according to these commissioners, the Commission has defined the IP equivalent of end office switching as the interconnection of calls with last-mile end user facilities. Since in the minutes under dispute, the LEC and its VoIP partner are merely transmitting calls to an unaffiliated ISP for routing over the Internet, the LEC may not collect end office switching charges because it is not interconnecting with the customer’s last-mile facilities.

The two commissioners conclude that the FCC is of course free to change it rules at any time, but must do so as part of a rulemaking proceeding. Since in this case, the Commission issued its Declaratory Ruling without holding any proceeding, it has violated its own rules and its decision will be reversed by the courts.

While one could justifiably argue either side of the local switching issue, it is clear the ILECs will have a good case when they appeal this Rulemaking on procedural grounds. The Commission should have opened a proceeding even if the three Democrats knew their preferred outcome in advance.  Now we will once again be treated to years of legal wrangling. Moreover, for ILECs, this Rulemaking is ominous because it suggests that the Commission is also likely to find that their TDM unbundled network element requirements under section 251(c)(3) will also be required in the IP world.

By Andrew Regitsky, CCMI