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Thorny Issues Await F.C.C. As It Takes Up Internet Phones

Vonage In Print News

February 9, 2004

By Stephen Labaton

WASHINGTON, Feb. 8 - The effort to write the rules for Internet telephone service begins this week, and whether it succeeds may ultimately come down to a matter of money.

On Thursday, the Federal Communications Commission is set to consider approving a notice of proposed rulemaking, the first step in a lengthy process of writing regulations for Internet-based phone services. The commission is also set to issue a final decision on a petition by one of the new Internet phone companies,, which has asked the commission to rule that it does not need to pay interconnection access fees to phone companies for any calls made and received between computers through Internet connections.

Experts say that a ruling in Pulver's favor will not have a major effect immediately on the nascent industry because there are so few Internet phone users. But one analyst, Blair Levin of Legg Mason, said that a favorable ruling for Pulver could have a significant effect if a company with a huge consumer base, like Microsoft, were to begin offering computer-to-computer voice services.

The commission scheduled this week's proceedings after the Justice Department reversed its earlier position that anything less than stringent regulations would pose legal and technical obstacles to the ability of law enforcement agencies to do wiretapping for criminal and terrorism investigations.

Entrepreneurs and optimists, along with companies like AT&T and Verizon Communications, say that Internet-based telephony could revolutionize the telecommunications industry. The new technology allows calls to be placed or received through the Internet. Voice transmissions are broken down, transmitted in data packets through multiple paths and reassembled on the receiving end, much like e-mail. Users are supposed to find the service indistinguishable from traditional phone connections.

Although even the most optimistic projections predict that only about a million consumers - a small fraction of the overall phone market - may make use of the service by the end of this year, industry executives hope that Internet phones will ultimately become as common as e-mail and will significantly displace traditional wired phone connections in much the same way that cellphones have.

But that cannot happen before Washington decides how the technology ought to be regulated. And the potential obstacles are myriad, because although Internet phone service represents a technological convergence of communications and computers, the regulatory world remains neatly divided: different rules apply to phones, cable, wireless services and data transmission.

The commission proceedings, which will take many months to complete and may outlast the term of the agency's chairman, Michael K. Powell, present a thicket of policy questions. For one thing, if Internet calls are less regulated, traditional phone companies may migrate to the new technology to get relief from telephone regulations that they maintain are overly burdensome.

For Mr. Powell, the proceedings are also significant because he has come through a year of bruising political fights within the agency, on Capitol Hill and in the courts.

Last year he lost a pivotal fight at the agency over telephone access fees, and his decision last summer to loosen the rules governing the size and reach of the nation's largest media companies came under heavy assault in Congress. A federal appeals court in Philadelphia has temporarily blocked those rules. On Wednesday, a three-judge panel will hear oral arguments in what could be the most significant F.C.C. case in years.

Mr. Powell is seen as generally supporting a deregulatory approach to Internet phone technology. Some of his critics say that if the commission's notice of proposed rulemaking this Thursday is simply a list of questions to be debated - rather than a detailed statement of the agency's position - it will suggest that Mr. Powell is having trouble marshalling a majority of commissioners to carry out a deregulatory vision.

"If Powell really wants to be a hero, because he's had a tough time in the last 12 months, he'd line up three votes and put something substantive out rather than simply a mishmash," said Reed E. Hundt, who served as chairman of the commission during the Clinton administration.

Industry executives and analysts say that the biggest issue facing the agency involves the fees that Internet phone companies will have to pay to local phone carriers for connecting their customers' calls to Internet telephone customers.

The interconnection and access charges in the telephone industry have long been the cause of bitter fighting between local and long-distance carriers, and the new technology raises a host of complex and arcane issues that will ultimately play a huge role in the profitability of the new services.

In recent months, lawyers representing both the large and small phone companies have been meeting and negotiating in an effort to come up with a new access fee system. The project, if successful, could relieve the commission of the burden of coming up with a fee system on its own.

Once you solve the intercarrier compensation issues, everything else is relatively easy," said Mr. Levin, who was a senior official at the commission before he became a regulatory analyst at Legg Mason. Jeffrey A. Citron, chief executive of Vonage, one of the larger Internet phone companies, agreed.

"The problem is how do you get from one system to another?" he said. "The real problem is intercarrier compensation.

Everyone can agree no matter who you are that the intercarrier compensation scheme is broken."

The regional Bell operating companies, which have received the bulk of access fee payments from originating and ending phone calls, have also begun to recognize the need to change the fee structure, particularly as those companies gain a bigger share of the long-distance market.

"Industry access revenue is declining," said Tom Tauke, a senior lobbyist for Verizon, which is also interested in getting a share of that new market.

"It's not dissimilar from what happened during the development of wireless," Mr. Tauke said. "People said at that time, 'Why would you want to do it and cut into your business?' We're happy we did it."

The access fee question is not the only important issue before the commission. The commission will have to decide how to apply a host of other regulations to Internet phone services, like fees to support 911 emergency services and rules ensuring that phone service is universally available.

The proceedings were nearly stalled by objections from federal law enforcement agencies which have complained to the commission that any attempt to deregulate the service could pose legal and technical obstacles to their ability to monitor phone conversations in criminal investigations.

Under heavy political and industry pressure, the Justice Department, which had complained earlier that it was having problems monitoring Internet-based voice calls, abruptly reversed course last week. It rejected the position of the Federal Bureau of Investigation, which had insisted that law enforcement issues had to take priority over other regulatory questions involving broadband access to the Internet.

In a series of letters and discussions over the last few months, the law enforcement agencies insisted that the commission first resolve the issues surrounding the wiretapping of Internet phone calls.

Last month, John G. Malcolm, a deputy assistant attorney general who has played a lead role for the Justice Department on the new technology, said that as a result of legal uncertainties created by the commission, prosecutors had encountered obstacles in executing surveillance orders.
And on Jan. 28, Patrick W. Kelley, a deputy general counsel at the F.B.I., asked the commission to resolve the law enforcement issues before considering other new rules and petitions from some Internet phone companies seeking regulatory relief.

But on Feb. 4, Mr. Malcolm sent a letter to the commission that both contradicted Mr. Kelley and reversed the direction of the Justice Department.

"I consider it regrettable that articles appeared last week that were prompted by Pat Kelley's letter," Mr. Malcolm wrote, referring to newspaper articles on the controversy. "While it would obviously be our preference that the F.C.C. decide these issues prior to considering other broadband proceedings, we recognize that this is not practical, and have no desire to prevent the F.C.C. from doing its work."

This story also appeared in:
  • Lakeland Ledger, 2/9/04
  • Ft. Worth Star Telegram, 2/9/04
  • Milwaukee Journal Sentinel, 2/9/04

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