The good news for large telecommunication companies did not end on Election Day. On Friday, the DC Circuit Court of Appeals vacated and remanded for further review the FCC’s 2015 Declaratory Ruling that required AT&T and other long-distance providers to pay local switching access charges to CLECs, working with over-the-top Voice over Internet Protocol (VoIP) providers serving end user customers. The Court found that the Commission’s Declaratory Ruling was inadequate because it failed to provide a functional difference between local switching to an end office and lower priced tandem switching.

Over-the-top VoIP or "nomadic" VoIP is defined as a service that is owned and offered separately from a specific broadband connection to the public switched telephone network (PSTN) and operates with any broadband connection.  

The dispute which led to the Declaratory Ruling began in 2012 when the FCC 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 was used as justification by AT&T to refuse to pay local switching charges to Level 3 and Bandwidth.com for the call management services those CLECs were performing on PSTN-VoIP calls sent to subscribers of Internet VoIP services who obtain broadband Internet connectivity from a third-party ISP.

The CLECs protested, claiming that the functions they were performing – 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 access charges should apply.

AT&T disagreed and argued that because the over-the-top customer is not served by a dedicated loop, the CLEC and its VoIP partner are not connecting a trunk and a loop, and thus are not performing the core function of an end office switch.

On February 11, 2015, the Commission released a Declaratory Ruling in Docket 10-90. And in a big victory for CLECs, found they were correct and entitled to assess local switching charges when working with over-the-top ISPs.

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 [Inter-Carrier Compensation 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)

Further infuriating AT&T, the Commission also concluded that long-distance providers must retroactively pay CLECs local switching charges for every disputed “over-the-top” access minute going back several years. Therefore AT&T decided to appeal the Ruling to the DC Circuit.

In its decision, the Court criticized the Commission for failing to appropriately distinguish between local and tandem switching.

Because both tandem and end-office switches process “intelligence associated with call-setup,” the Declaratory Order’s functional equivalence analysis fails to distinguish between them. If end-office switches traditionally perform functions A (call set-up) and B (interconnection between trunks and loops), while tandem switches perform functions A (call set-up) and C (interconnection between trunks), it is wholly arbitrary to say (without more) that the call set-up activity of VoIP-LECs is the functional equivalent of end office switching but (implicitly) not the equivalent of tandem 13 switching. Which is it—one, the other, or both...The Commission’s muddled treatment of functional equivalence requires vacatur and remand. (DC Circuit Court, Case No. 15-1059, AT&T vs. FCC, November 18, 2016 Opinion, at pp. 12-13.)

Moreover, since the Declaratory Ruling was vacated (never took effect), the Court found that the Commission’s requirement that long-distance providers pay retroactive local switching charges was moot.

Where does this issue go from here? Since the Declaratory Ruling was approved on a 3-2 partisan basis with all three Democrats approving, any rewrite will probably have a very different conclusion with Republicans in charge. Thus, if I were a CLEC, I wouldn’t be counting on seeing local switching revenues on long-distance calls using over-the-top ISPs any time soon.

By Andy Regitsky, CCMI