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Appeals Court Bounces FCC Pay Schedule

The U.S. Court of Appeals for the District of Columbia handed the Federal Communications Commission (FCC) its second defeat in three years over its revised rules on how telecom carriers are paid for handling dial-up Internet calls. The court ruled Friday that the FCC was wrong in an April 2001 ruling that excluded calls to Internet service providers (ISPs) from a compensation plan designed to pay telecoms for carrying calls on each other's networks.

The FCC made the original ruling under pressure from incumbent local exchange carriers (ILECs), also known as the Baby Bells, who complained that competitive local exchange carriers (CLECs) and other middlemen, were collecting an unfair amount under regulations originally designed for voice traffic only. The FCC responded by reclassifying the dial-up Internet calls as interstate traffic and established a new "bill-and-keep" payment system in which each carrier recouped its costs from its own end-users.

The new FCC pay schedule slashed payments by the ILECs to the CLECs by 75 percent over three years and raised the specter of CLECs having to raise their rates to ISPs. WorldCom , Sprint Corp. and state regulators immediately challenged the ruling. The state regulators argued that by clasifying dial-up Internet calls as interstate traffic, the FCC eliminated the states' ability to regulate the rates charged by the Bells.

In Friday's ruling, the Court decided the FCC used the wrong statute to exclude the dial-up Internet calls from the original payment schedule and ordered the FCC to draft new rules. However, the Court did not vacate the current rules, only ruling that it found no basis for the new fee payments in the portion of the Telecommunications Act cited by the FCC.

"Many of the practitioners themselves favor bill-and-keep," Judge Stephen Williams noted in the court's opinion, "and there is a non-trivial likelihood that the commission has the authority to elect such a system."

Additional reporting by Brian Morrissey