Passing the databuck

Telephone companies have been urging federal regulators to impose a fee on ISPs of roughly $2 per hour of use, increasing a basic monthly phone fee by $20 for 10 hours of online usage. They have already put the proposal before the Federal Communications Commission, which could decide the issue by the end of the year. "Several of them have expressed a substantial degree of interest (in the proposal)...and some measure of urgency," an FCC staff member said.

The telcos insist this is not a wild-eyed money grab but a fairer sharing of the costs incurred by the rapid spread of Internet use. The Internet providers, in turn, accuse the telcos of trying to
undermine the competition. They point out that most of the regional Bell companies are offering or planning to offer their own Internet access services, and the new fees would put the traditional ISPs at a huge competitive disadvantage.

The dispute is symptomatic of the upheaval caused by the Telecommunications Act of 1996, which was designed to foster competition in the $100 billion telephone industry. Fine, said the local phone companies -- then how about ending the special treatment accorded Internet companies and other so-called enhanced service providers?

The heart of the issue is, how much should anyone pay to use the local phone network? The answer is far from simple, given the maze of internal subsidies embedded in the local phone system. Back in the days of Ma Bell, regulators allowed AT&T to inflate the price of long-distance calls in order to subsidize the home phone service offered by its local Bell subsidiaries. That way, the Bells could keep down the price for home phone lines even in high-cost areas under a policy known as universal service.

That internal subsidy collapsed when a federal consent decree broke up the AT&T monopoly in 1984. As a partial replacement, the FCC created "interstate access charges" that local phone companies could collect on any long-distance call that began or ended on their network. Today those charges make up almost half the cost of a long-distance call.

ISPs, however, were exempted from these access charges even though they offer a kind of interstate service themselves. At the time, the Internet was an esoteric computer network known only to university and Defense Department geeks. Given the Internet's emergence as a mass communications medium, the phone companies want the FCC to reverse itself. "The explosive growth of the use of the Internet and various online services increases the urgency to address the anomalies caused by the continuation of the [enhanced service provider] exemption," the U.S. Telephone Association said in comments to the FCC earlier this year.

Internet access is the fastest-growing use of the telephone network, according to the U.S. Telephone Association. That's been a mixed blessing for local telcos: more homes are ordering second phone lines, boosting the telcos' revenues, but the average phone call is lasting longer and longer. This increase in "holding times" is a potential problem because the local switches can handle calls on only about 10 percent of the lines at a time. The longer one group of customers stays on the phone, surfing the Web, for example, the more likely other customers will be to hear a busy signal instead of a dial tone when they pick up the phone.

NYNEX, the Bell based in New York, has already seen a phenomenal
increase in holding times, said Ken Rust, director of regulatory affairs. And with the Internet growing in popularity and more companies offering flat-rate fees for unlimited access (as AT&T and MCI now do), the burden on the local switches will only increase. "If a service provider of any kind takes up network and switch capacity, it costs us money to maintain that capacity and grow it if need be," said Ted Creech, a spokesman for BellSouth. "So how are we going to be reimbursed for those costs?"

The telcos' push for access charges comes at a turbulent time for their industry. AT&T says it wants to capture 30 percent of the local telcos' revenue; numerous cable companies are fine-tuning technologies to offer phone service over their coaxial wires; and new entrepreneurial phone companies like MFS Communications Co. and Teleport Communications Group are wooing high-volume business customers in large and mid-sized U.S. cities.

Such unbridled competition threatens to wreak havoc with cheap universal service, local telcos warn. Expensive business phone lines, tolls on intercity calls and access charges have all been used to subsidize universal service. As new competitors drive down the price of those services, the telcos ask, where will the subsidies and support come from for universal service? How about some help from the ISPs?

Telco officials say Internet providers have created a lucrative loophole, effectively acting as middlemen between the local and long-distance networks, thus preventing the local telcos from collecting access charges on what amount to interstate calls. Freed of such charges, the ISPs can obtain the long-distance lines needed to connect to the main meeting points of the Internet at flat rates. Those flat rates can, in turn, be translated into low, flat monthly subscription fees to their customers.

The Interactive Services Association, a trade group for Internet and online companies, told the FCC that the telcos are improperly trying to spread the cost of universal service onto Internet providers. Robert L. Smith, Jr., executive director of the ISA, notes that access charges were intended for voice traffic, not the data that travels over the Internet. But the distinction between voices and data is being blurred by the increasing integration of the voice and data portions of the telecommunications network. Once voices are digitized and transmitted as data packets just like Internet traffic, why should one stream of bits pay more or less than another?

Internet users are very sensitive to price, Smith responds, and the growth in demand has been spurred largely by the flat-rate offers. Access charges, he said, would be a serious blow to that market.
Some Internet companies suspect that the telcos -- just as they are about to launch their own Internet access programs -- are worried about new software which enables users to talk to each other over the Internet for free. Indeed, a group of phone companies has petitioned the FCC to regulate Internet phone service, which could result in access charges being levied on cyberspace "calls."

Which way is the FCC likely to go? Twice before, it has reaffirmed the ISPs' exemption from local access charges. It has also shown a strong commitment to preserving universal service and might do whatever is necessary -- including spreading the freight to ISPs -- to protect it. Last week, at a conference in Montreal, FCC chairman Reed Hundt came out strongly against regulating phone service over the Internet and implied that he did not yet favor access charges on ISPs. But he acknowledged that the Internet was posing problems for the telcos, observing that the typical Internet surfer made much heavier use of the phone network than other customers.

"I don't know what the full answer to this problem is. But I'm inclined to believe that our best guidance is to let technology, competition and access reform make the problem go away," Hundt said.