Rules For Phones On Internet

Battle Brews Over Rules For Phones On Internet

July 28, 2004

By Stephan Labaton and Matt Richtel

WASHINGTON, July 27 - Deregulation is the mantra of the main players in Internet-based phone service, a new technology that could increase competition and further drive down phone prices.

But behind the scenes, a fierce battle is emerging among rival companies and between federal and state regulators over the shape of new government regulations and control of the service, which has the potential to be the most significant development in telecommunications since the breakup of the AT&T monopoly 20 years ago.

It may take years for the technology to grab a big share of the consumer phone market, but telephone and cable companies are moving in quickly. Last week, Verizon Communications, the nation's biggest telecommunications company, announced that it is introducing the service across the nation.

Even AT&T, which announced its decision to retreat from the residential phone market last week, has indicated that it will continue to sell Internet phone service to consumers.

Supporters of the service generally agree that shielding Internet calls from traditional telephone regulations would allow the technology to flourish, leading to reduced costs for new providers and lower prices for consumers.

But disagreements abound over whether rules on 911 emergency service and payments to the universal service fund should apply to Internet phones. Meanwhile, issues that have dominated the phone industry battles over the last decade - like interconnection fees paid to local phone companies - have spilled into the debate.

Both Congress and the Federal Communications Commission have begun to draft changes to the old telecommunications rules, but the efforts are largely a dress rehearsal for next year.

House and Senate committees have marked up significantly different measures, and sponsors say there is too little time left in the legislative session to complete work on the bills. The Senate bill, adopted by the Commerce Committee last Thursday, would regulate Internet phone calls more stringently, in a manner similar to current regulation of traditional telephone services. The House version would impose less regulation on the service.

The businesses most interested in this debate - telephone and cable carriers, software providers and equipment makers - have begun to position themselves for what promises to be one of the most important political battles of the next Congressional session, beginning in January.

Federal and state regulators have been fighting over the role of the states in overseeing the technology. The biggest phone companies, the major software providers and Michael K. Powell, chairman of the Federal Communications Commission, have pushed for reduced state controls in this field.

But the states contend that they have a critical role in protecting consumers and ensuring access for the underserved and the disabled. They also maintain that the regional Bell phone companies, which dominate the local market, are trying to use Internet-based calling to get around existing phone regulations that have valuable social purposes.

Meanwhile, the long-running fight over billions of dollars in access fees paid by long-distance providers to the Bells has moved into the debate. It remains to be sorted out how much and which carriers will have to pay other carriers to connect phone calls.

Federal law enforcement officials have also gotten into the discussion because they say the new technology threatens to undermine their efforts to tap phone calls. They argue that the law that requires phone companies to give them instant access to phone networks needs to be changed to include Internet-based phones.

Further complicating matters is the fact that Internet phone services will still have to rely heavily on traditional phone networks to complete a huge volume of calls between users of the new service and users of the traditional phones.

Mr. Powell has tried to lay down important markers for the debate, though he may not be at the commission next year when it takes up many of the issues. He has maintained that Internet calling ought to be put into a regulatory framework different from that of the traditional phone system because the Internet technology is more like data transmission, which is more loosely regulated.

At a summit earlier this month in Silicon Valley, he criticized state regulators, saying that they had mistakenly concluded that Internet phone service, in resembling traditional phone service, "looks like a duck," and therefore should be regulated "like a duck."

"I say maybe the ugly duck is a swan," he said, "and you might want to leave it alone."

State regulators, however, say they play a watchdog role over telecommunications companies that may be trying to avoid important social obligations built into the existing regulatory system.

"It's difficult to really know whether the purported cost savings are coming from a form of regulatory arbitrage as opposed to real technological advances and that's the big question," said Loretta M. Lynch, a member of the California Public Utilities Commission.

She said that state officials are concerned that a rewrite of the rules could destroy the ability of the states to combat consumer fraud and eliminate the special funds used to provide services in neglected areas. For all the hopeful talk about the new technology, she said that the Bell and cable companies could dominate the new system since they would continue to control the wires into homes.

"It would be a huge gift to these companies to say they don't have to play by the rules," Ms. Lynch said.

On the corporate front, the lobbying efforts have included a mish-mash of blue-chip companies and entrepreneurs whose innovations fueled the technology but who worry about being relegated to obscurity. Among the players there are policy divisions and significant distrust.

"We don't have the pocketbooks of Bell South or SBC," said Jeff Pulver, chief executive of Pulver.com, a consulting and lobbying firm for Internet-based phone businesses. He said he is unsure of the motives of the major phone companies, even when they say they are on his side.

The smaller players, Mr. Pulver said, worry that the Bells will push for limited regulation - vowing unity with the little providers - and then ultimately take over the industry. Mr. Pulver and some small companies say they want state regulators to make certain that telephone networks remain widely accessible for Internet phone services. At the same time, the small providers differ on several policy points.

For instance, Mr. Pulver does not think the government should require Internet phone companies to offer 911 emergency service or pay into the universal service fund, which he says ought to be the responsibility of the major carriers.

Jeffrey A. Citron, chief executive of Vonage, an Internet phone company with 200,000 customers, however, said he supports some regulation for 911 service, although he stops short of saying whether it should be required. He believes the industry should contribute to the universal service fund, and supports rules that would make it easier for the government to tap into Internet phones.

As for the phone companies, Thomas J. Tauke, a lobbyist for Verizon, said that on many basic issues, the major companies "are in the same ballpark."

"The general consensus is that voice-over-Internet protocol is not a telephone service," Mr. Tauke said, "and shouldn't be regulated like a telephone service."

But there are also differences in approach among the phone companies. AT&T, for example, has asked that any call that moves over the Internet at any point be subject to fewer restrictions and fees.

R. Steven Davis, senior vice president for public policy at Qwest Communications, a regional Bell company, called AT&T's position too extreme. Mr. Davis said Qwest would support somewhat more regulation. By contrast, he said, SBC Communications has taken the position that any call that touches the traditional phone infrastructure should be subject to standard regulations.

Some equipment makers, meanwhile, are trying to steer a middle ground between all of the combatants and allies.
"I've had meetings with AT&T and some of the regional bell operating companies," said Charles Crowders, a vice president for government affairs at Avaya, the largest maker of Internet telephone equipment. "They'd love to see us take one position or another," Mr. Crowders said, "but they understand we should be neutral. We're the Switzerland" of the debate.