In re FCC 11-161

The Federal Communications Commission (FCC) (defendant) issued an order overhauling its intercarrier-compensation regime. Under 47 U.S.C. § 251(b)(5), local exchange carriers (LECs) are required to “establish reciprocal compensation arrangements for the transport and termination of telecommunications.” The old regime under this section required LECs to pay each other for exchanging local call traffic. These payments were negotiated by the carriers or set by a state telecommunications regulatory commission (state commission). For long-distance calls under the old regime, long-distance carriers needed LECs’ networks to both originate and terminate long-distance calls. Under the old regime, the calling party paid all the costs of the call. The person making the call paid his long-distance carrier, and the long-distance carrier paid the LECs needed to originate and terminate the call. This system was based on the idea that the calling party reaped the benefit from a call. Under the new intercarrier-compensation regime adopted in the order, the FCC ruled that all traffic must be exchanged under a “bill-and-keep” system. Under this system, carriers would not bill each other for exchanging call traffic but would share the costs of each call. The FCC reasoned that carriers would recover necessary costs from their own subscribers. The FCC found that the bill-and-keep system was just and reasonable, the statutory standard for telecommunications rates. Further, the FCC’s order applied this new regime to all traffic between LECs and long-distance carriers, even local calls and other intrastate traffic. In asserting authority over all traffic, the FCC preempted state-commission authority over intrastate calls. State commissions had historically asserted authority over intercarrier compensation for intrastate calls. Several petitioners, including telecommunications carriers and state commissions (plaintiffs) appealed the order in federal court. Among other things, the petitioners argued that the FCC’s new regime could not apply to traffic between a LEC and a long-distance carrier because the payment between those carriers only went one way—from the long-distance carrier to the LEC—and thus was not reciprocal.