IP: FCC Recommends ISPs Ante Up

[Dave Farber <farber () cis upenn edu>]

From: "Craig A. Johnson" <caj () tdrs com>


FCC SAYS INTERNET TELEPHONY PROVIDERS SHOULD PAY INTO UNIVERSAL SERVICE FUND


By Craig A. Johnson


April 2, 1998




[Note:  As of April 1, the provisions in the report analyzed below were being
circulated among all of the FCC Commissioners, who have to sign off on it.
Its final release will not be until April 10.  It is possible that the
report may undergo major revisions by then.]


The FCC will recommend, in a Report to Congress
to be released next week, that Internet service providers (ISPs) which
transmit long distance telephone traffic, contribute to the universal
service fund (USF).  This is considered by some to be an
"interpretive rule" which re-classifies ISPs as "telecommunications
providers" for the purpose of contributing to the universal service fund
(USF). The FCC states in the report that
black-phone-to-black phone" trunk calls placed on the Net should be subject to
universal service fees.  


(Some press reports are also saying that the FCC is recommending that IP
voice traffic also be swept under the access charge regulations, but that
has not been confirmed by sources.)


The FCC is due to release its Report on the implementation of the
Telecommunications Act on April 10.  This is a report requested by Congress
for which the FCC was asked  to review its implementation of the universal
service mandates in the Act. This involves an FCC review of the statutory
definitions of "telecommunications," "information services," and related
terms.  Congress asked the FCC to assess the impact of the Commission's
interpretations of these terms on the provision of universal service.


FCC Chairman William Kennard, currently being heavily criticized by
Congress on the FCC’s handling of universal service and local competition
issues, sees this partial re-classification as a way to satisfy his
Congressional critics, according to TDRS sources. The sources say, however,
that it is not likely to
accomplish that aim -- but instead will generate a "firestorm" of controversy.


They assert that the basically unprecedented step of reversing a major
policy through a report to Congress is inappropriate and procedurally
wrong.  Some suggest that the FCC is trying to issue an “interpretative
rule”
through this report, without having to go through a new proceeding,
with a Notice of Proposed Rulemaking, a comment period, and the issuance of
a final rule.  Critics say, however, that this may violate the
Administrative Procedures Act, and are determined to stop the FCC or
immediately appeal the action to an administrative court.


The FCC, since the early 1980s, has “exempted” “enhanced services” from
regulation in order to allow them to grow and thrive.  This exemption
encouraged the unfettered development of the Internet, which, as an
“information” or “enhanced” service, was free from paying access charges,
contributing to the universal service fund, filing tariffs, and state
regulations.  








In its Universal Service Order of 1997, the FCC concluded that “Internet
access” was not a “telecommunications service,” as defined under the
Telecommunications Act, but left open the question as to whether Internet
telephony could, in the future, be regulated as a telecom service.  


FCC Commissioner Susan Ness gave some hints as to the Commission’s thinking
in a speech on March 30.  She said:


“I am tentatively thinking that no information service can move a bit from 
here to there without "riding on a rail" of telecommunications. That 
doesn't mean that a company supplying such capacity to itself necessarily 
needs to be classified as a "carrier," with all the attendant consequences. 
But it would mean that the universal service support obligation would be 
shared by all transmission lines.” 


Ness asks what should be done in cases “where an information service provider
adds telecommunications services to the package it offers to
consumers.”  What if an ISP or online service provider “substitutes
self-supply for third-party supply for its transmission links? Are the
links now ‘contaminated’ and free of a universal service support
obligation?”  The FCC seems to be saying a resounding "No" in its current
report.


The report’s recommendations follow increasing pressures by Senator
Stevens (R-Alaska) and Senator Burns (R-Montana) on the FCC to alter its
approach to universal service. In a recent letter to FCC Chairman William
Kennard, Stevens and Burns wrote:


“The Commission’s continued classification of services as ‘enhanced’ or 
‘basic’ could seriously undermine the competitive regime Congress sought 
to create.  . . . [T]he Telecommunications Act provided the Commission with 
the legal flexibility in previously lacked, making it unnecessary for the 
Commission to continue applying its outdated ‘enhanced/basic’ regime.


“[T]he statutory definition does not say that the ‘telecommunications 
carrier’ must be engaged solely in offering ‘telecommunications for a 
fee.’  Indeed, the definition plainly contemplates that telecommunications 
carriers will offer services other than ‘telecommunications services.’. . .” 


The FCC's actions are partly driven by “fears of arbitrage” in the long
distance
telephone business.  The context for these fears are several recent
developments concerning telephony over the Internet.  


LCI International has announced that it will take much of its long distance
business off the public switched telephone network (PSTN) and put it onto
Internet Protocol (IP) networks, or encapsulate it in IP in a multi-purpose
fiber network.  AT&T has acquired ICG, a carrier investing heavily in voice
over IP.  Multi-billion dollar investments in the deployment of new fiber
capacity to offer Internet services, including IP telephony, by companies
such as Qwest and Level-3, also heightened concerns that  traditional
companies with huge sunk costs in infrastructure would be unfairly
disadvantaged by being required to pay into universal service funds while
an AT&T or an LCI or an ISP did not have to because it was routing its
long-distance calls over an IP network.  








Analysts say that it could be a short step from asking IP phone providers
to contribute to the USF to dinging them with access charges as well. The
Bell companies and their allies to argue that if ISPs are considered
'telecom providers' for universal access purposes, then they should treated
in the same manner regarding access charges. If the FCC
decided "forebear" from regulating ISPs as "telecommunications providers"
that pay access charges, the Bells may  file a complaint citing their
eligibility to pay into the USF.   


The new types of companies represented by Qwest are serious threats to the
Bell companies. One important consideration for the Bells is that for every
long distance provider that takes its voice traffic off of the PSTN the Bells
lose the equivalent amount in access charges. Qwest describes its
operations as follows: 


"Qwest's planned domestic network will connect 125 cities, which represent 
approximately 80 percent of the data and voice traffic originating in the 
United States, upon its completion in the second quarter of 1999. Qwest is 
also extending its network 1,400 miles into Mexico with completion slated 
for late third quarter 1998. With its cutting-edge technology, Qwest will 
deliver high-quality voice, data and video connectivity securely and 
reliably to businesses, consumers and other communications service
providers." 


Long distance companies are also concerned that new IP telephone services will
undercut them in the market because they can avoid access charges and
universal service support obligations.


And, finally, rural-state legislators are insisting that universal service in
high-cost, rural areas is underfunded, and that money has to be found to
fund it are yet another.  They would like to see a complete re-write of the
FCC’s universal service order.  They argue that anomalies in the existing
rules will cause a migration of traffic from services that bear a universal
service support obligation to services that do not carry this burden.  


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