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Internet based telephone should not be regulated

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Copper Remains Golden For Legacy Networks

August 19, 2004

By Roy Mark

When three of the four Baby Bells decided in May to walk out of a telecom industry summit crafting a new interconnection access fee system, they dealt a serious blow to reforming a 20-year-old scheme that generates $14 billion a year for the incumbent networks.

Meeting at the explicit suggestion of Federal Communications Commission Chairman Michael Powell, a tenuous coalition of Baby Bells and their local rivals, long distance carriers and rural telecom providers agreed to call a truce in their internecine wars and to produce an industry consensus rate reform solution to the FCC.

The new odd bedfellows all agreed access fee reform was necessary for long-term survival against the competitive threats to long distance and local voice traffic posed by cable, wireless and Internet-based telephone services.

Access fees are charges between traditionally defined phone companies for originating and terminating calls on the legacy copper Bell networks. Most of the fees flow one way to the Bells. Long distance provider AT&T has frequently complained that access charges are its single largest expense.

The fees also help fuel the Universal Service Fund, which subsidizes the cost of rural phone service and forces carriers to engage in fee negotiations with 50 separate state utility commissions.

The regime is based on the 20th Century telecom economics of time and distance, creating a system where it can cost more to send a call one mile than it does 10,000 miles but has fostered low, albeit subsidized, local rates for consumers.

Internet telephony-based phone services, by contrast, currently operate in a virtually fee free, regulation free world. They pay low to no connection fees since there are no current laws or regulations classifying Voice over IP (define) service. In the absence of an FCC classification or federal law, the courts have rebuffed both Minnesota and New York when they attempted to regulate Voip as a traditional carrier. Voip providers are also currently not required to pay into the Universal Fund.

In April, the coalition, calling itself the Intercarrier Compensation Forum (ICF), began to cobble together a plan calling for standardized access fees, including Universal Service Fund payments, all under the control of the FCC, principally resulting in lower long distance rates.

The Baby Bells would be allowed to recoup their access fee revenue loss by raising rates for local lines. A month later, Verizon (Quote, Chart), BellSouth (Quote, Chart) and Qwest (Quote, Chart) all bailed on the plan.

Too Much Pressure, Too Quickly

The Baby Bell walk politically crippled the initiative since without all the Bells onboard, the FCC is certainly not going to view the plan as an industry consensus solution. The ICF nevertheless moved forwarded with only SBC (Quote, Chart) in its incumbent ranks and presented the FCC with a review of the proposal earlier this week. Other members of the ICF include AT&T , MCI, Sprint (Quote, Chart), Level 3, Global Crossing, GCI, Iowa Telecom and Valor. The coalition had once had more than 20 members.

"It surprises me they got as many parties to a consensus as they did," telecom technology analyst Kevin Werbach told, predicting the proposal would carry "some" weight with the FCC, which has seen its own efforts at rate reform thrown out by the courts. To add insult to injury, on June 9, the Bush administration declined to take up the FCC's case before the Supreme Court.

Unless or until the FCC or Congress comes up with new access rules, fees are expected to rise sharply next year when the Bells will be able to charge market rates for access to their copper. AT&T has already announced it plans to pull out of certain long distance markets.

Werbach, the former counsel for new technology policy at the FCC and current assistant professor of legal studies at The Wharton School of the University of Pennsylvania, said Voip is adding to the sense of regulatory panic in Washington.

"Carriers are concerned that Voip is putting too much pressure, too quickly on intercarrier services," Werbach said.

Stuart Elby, Verizon's VP for network architecture, admitted to BusinessWeek in May that "The Voip market is bigger than we would have guessed. We were wrong."
Bells Claim ICF Plan Legally and Politically Unfeasible
Both Verizon and BellSouth said Wednesday their decision to withhold their support from the ICF plan was based on their belief that reform calling for increased local telephone rates is political suicide in an election year. They further stated the plan couldn't stand the inevitable litigation that would result from the FCC stripping states of their right to regulate access rates.

"As we have said in the past, any intercarrier compensation plan must be politically viable and legally sustainable and must adequately address Voip and universal service," Verizon spokesperson Larry Plumb said.

According to Plumb, it came time to vote on the ICF plan in May and "you had to support the proposal in its entirety and you couldn't advocate any alternatives. Since we had concerns and the Forum operates under confidentiality, we had to leave."

BellSouth spokesperson Bill McCloskey added, "They [ICF] essentially said, 'Everybody that's onboard [with the plan] now, sign in blood. If not, leave now.' We didn't think it was politically viable."

Telecom attorney Bill Wilhelm, who won VoIP's first big legal challenge when he convinced the Minnesota Supreme Court that Vonage's Internet-based telephone service should not be be classified or regulated as a telecommunication carrier, says it's all about the money, not the technology.

Wilhelm believes there is "general consensus" in the telecom industry that broadband applications should not be regulated in the same manner as facilities-based common carriers. The rub, he says, is "people want to know how they get paid" in a tightly regulated telecom world turned upside down by broadband.

"It's really anything with IP. It could be voice or video," he said. "Much of the debate over Voip is really a veiled argument about access charge reform. The problem is there are so many different parties with so many different interests."

Wilhelm said Voip underscores the irrationality of the current access system based on time and distance.
"The current subsidy mechanism relies on geographic termination of calls," Wilhelm said. "With VoIP, you don't know where the call is originating or terminating. That's one of the real problems with applying the existing framework to VoIP. What the (ICF) proposal tries to do is move away from a geographically sensitive regime to a geographically agnostic [system]."

The open question is how much, if any, of the ICF proposal will be embraced by the FCC or Congress. The Commission is currently conducting an extensive review of Voip and other IP-enabled services and promises new regulations early next year. No matter what the FCC decides, Congress appears inclined to tackle telecom reform, including access fee reform and Voip regulation, next year. The process is sure to take the entire two years of the 109th Congress.

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†AK and HI residents pay $29.95 shipping. ††Limited time offer. Valid for residents of the United States (&DC), 18 years or older, who open new accounts. Offer good while supplies last and only on new account activations. One kit per account/household. Offer cannot be combined with any other discounts, promotions or plans and is not applicable to past purchases. Good while supplies last. Allow up to 2 weeks for shipping. Other restrictions may apply.

1Unlimited calling and other services for all residential plans are based on normal residential, personal, non-commercial use. A combination of factors is used to determine abnormal use, including but not limited to: the number of unique numbers called, calls forwarded, minutes used and other factors. Subject to our Reasonable Use Policy and Terms of Service.

2Shipping and activation fees waived with 1-year agreement. An Early Termination Fee (with periodic pro-rated reductions) applies if service is terminated before the end of the first 12 months. Additional restrictions may apply. See Terms of Service for details.

HIGH SPEED INTERNET REQUIRED. †VALID FOR NEW LINES ONLY. RATES EXCLUDE INTERNET SERVICE, SURCHARGES, FEES AND TAXES. DEVICE MAY BE REFURBISHED. If you subscribe to plans with monthly minutes allotments, all call minutes placed from both from your home and registered ExtensionsTM phones will count toward your monthly minutes allotment. ExtensionsTM calls made from mobiles use airtime and may incur surcharges, depending on your mobile plan. Alarms, TTY and other systems may not be compatible. Vonage 911 service operates differently than traditional 911. See for details.

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