The Internet Under Fire ILEC Actions Prompt FCC Review of Internet Jurisdiction;
Showdown on Access Treatment of IP Telephony May Follow.
A couple of unilateral actions by incumbent local exchange carriers
(ILECs) have placed a number of extremely testy questions before the
Federal Communications Commission (FCC). The following discusses
some pending actions that promise to have a dramatic impact on the
regulatory treatment of Internet service providers (ISPs) and certain kinds
of traffic carried over the Internet.
ILEC Federal ADSL Tariffs
Over the summer, GTE Corp., BellSouth Corp., Pacific Bell and Bell
Atlantic Corp. filed federal tariffs that introduced high-speed Internet
access services provisioned over asynchronous digital subscriber line
(ADSL) technology. The services differ from ILEC to ILEC--they reflect
different rates and rate structures (with minimum monthly payments
ranging from about $40 to several hundred dollars). Some are targeted
only for business users, while others also are available to residential users.
They all, however, share two critical elements in common: They propose
to provide dedicated, high-capacity lines to end users for Internet access;
and they are filed with the FCC, which means that the services they
introduce are jurisdictionally interstate.
These seemingly innocuous filings generated a firestorm of protest from
competitive carriers, several of which filed oppositions asking the FCC to
reject the tariffs and prevent the services from taking effect. The FCC
declined to do so, and instead allowed the four tariffs to take effect,
subject to investigation. The FCC solicited public comment on the GTE,
BellSouth and Pacific Bell tariffs in September, and on the Bell Atlantic
tariff in October. At press time, numerous parties had filed seeking
withdrawal of the tariffs, and the FCC had committed to issuing an order
on the matter sometime in October.
Why all the fuss? As usual, it's about money--in this case, the amounts
that ILECs owe to competitive LECS (CLECs) for mutual compensation
for ISP-bound traffic. As discussed in previous columns, when a
customer on an ILEC network makes a local call to a customer on a
CLEC network, the ILEC pays compensation to the CLEC for carrying
and terminating the call. In most states, this compensation ranges from
about half a cent to a little over a penny a minute (in about 10 states,
ILECs and CLECs simply swap traffic back and forth, without charging
each other--a practice called "bill & keep").
While this penny-or-less level of compensation seems small, it has had a
major impact on CLECs that have acquired ISPs, or that provide
telephone service to ISPs. These ISPs generate a huge amount of
terminating traffic when their Internet service subscribers call in to the
ISPs for dial-up Internet access. In most cases, the traffic is from Internet
subscribers who use the ILEC for local telephone service and call in to
the ISP located on the CLEC network. As a result, ILECs wind up
paying more--sometimes millions of dollars more--terminating
compensation to CLECs than they receive from CLECs.
The ILECs have complained that this imbalance of payments is
unreasonable, but at press time, 21 state regulatory commissions have
upheld the current payment system, and no state regulator or court has
found to the contrary.
Ironically, none of the ILEC ADSL tariffs would have a direct impact on
the mutual compensation payment system discussed above--the federal
ADSL tariffs all provide dedicated high-capacity lines to ISPs for
flat-rate, monthly charges, while the mutual compensation arrangements
discussed above only apply to dial-up calls to ISPs that are measured in
minutes. But all of the ADSL tariffs do raise the issue of whether the
transport of traffic from an end-user customer to an ISP is interstate or
intrastate traffic, and this issue may have a direct impact on the mutual
compensation structure for dial-up calls to ISPs. Specifically, the mutual
compensation structure discussed above applies only to local traffic, and
does not apply to interstate access traffic.
By filing their ADSL tariffs with the FCC, ILECs effectively are arguing
that traffic delivered to an ISP, which then initiates Internet inquiries over
the World Wide Web, inherently is interstate, similar to long distance
voice calls that an ILEC hands off to an interexchange carrier (IXC). The
ADSL tariffs generated so much resistance because CLECs are
concerned that a decision on the tariffs will trigger a chain of legal
arguments that goes as follows.
First, the FCC will find that dedicated connections to ISPs inherently are
interstate in nature. Then, such a decision will be interpreted by ILECs to
imply that dial-up calls to ISPs also are inherently interstate, and cannot
be classified as local calls. Next, ISPs will use this argument to withhold
payments of mutual compensation for ISP-bound dial-up traffic to
CLECs. Finally, ILECs will use any FCC decision on dedicated ISP links
to appeal the 21 state decisions finding that dial-up calls to ISPs are local
calls, subject to mutual compensation.
At press time, a number of parties have filed comments with the FCC
stating that, whatever the FCC finds about the pending federal ADSL
tariffs, it should make clear that its decision will have no effect on the
jurisdictional status of dial-up traffic to ISPs, and will not disrupt the
mutual compensation decisions of the 21 state regulatory commissions. As
noted above, the FCC is expected to issue an order on the ILEC ADSL
tariffs sometime this month. What the FCC says in that order, and how it
says it, will shape litigation over mutual compensation for dial-up ISP
traffic before the states and federal courts for the next year.
ILECs Threaten IP Telephony Charges
Recently, two ILECs have made announcements that will trigger a debate
every bit as fierce as the one currently raging over ISP mutual
compensation. BellSouth and U S WEST Inc. have issued statements that
they will begin imposing access charges on carriers that provide voice
over the Internet telephone service, a.k.a. voice over Internet protocol
(VoIP) telephony. At press time, nobody knew exactly what that meant,
or how the ILECs intend to impose such access charges, but these
announcements raise technical and regulatory issues of mindboggling
complexity.
For the last year, the issue of access charges on IP telephone service has
been major litigation waiting to happen. Like ISP mutual compensation,
the issue boils down to money. Currently, the FCC defines services
delivered using high-level protocol conversion as "enhanced" or
"information" services. IP conversion falls into this definition.
For more than a decade the FCC has found that parties providing
enhanced services do not have to pay the same ILEC access charges that
IXCs providing long distance telephone service have to pay. When the
FCC initially established this access charge exemption, the big enhanced
service application was data processing, in which data processors hauled
raw data (like payroll information) over regular phone lines to centralized
computer databases for processing. The FCC wanted to promote the
growth of such high-tech industries, and found that exempting these data
processors from ILEC access charges was one way to do it. More
recently, the FCC revisited this policy as it affected newer technologies,
such as the Internet. It once again found that to promote the growth of the
Internet and other high-tech services, it should maintain the access charge
exemption for enhanced service providers.
IP telephony raises a new set of issues that have not been considered by
the FCC before. Specifically, more and more carriers are considering
using the Internet to carry plain old telephone service (POTS). (A quick
browse of Internet web sites will show dozens of carriers claiming to offer
Internet telephony as a direct substitute for traditional domestic and
international telephone service.) To date, this has not been a high-profile
issue, because VoIP technology has been of a substantially lower quality
than traditional telephone service, and was considered a narrow niche
market for computer enthusiasts.
Technology marches on, however, and the quality of Internet telephony
has been improving dramatically over the last year. A number of
commentors are saying that by the end of the year or so, the quality of IP
telephony will be indistinguishable from traditional telephone service.
Once we get to that point, IP telephone carriers will be able to compete
directly against ILECs and other providers of traditional telephone
service.
This is where the debate over access charges comes in. Currently carriers
providing long distance telephone service have to pay originating and
terminating access charges to the ILECs if they want the ILECs to deliver
the call to end-user customers on the ILEC networks. For the biggest
ILECs, this generally amounts to about 1.5 cents or 2 cents per minute on
the originating side and a slightly smaller amount on the terminating side.
If IP telephony carriers are exempt from paying access charges, they can
save 3 cents to 4 cents per minute on their long distance traffic. Therefore,
for carriers selling long distance service, the access charge exemption can
mean the difference between being able to offer long distance calls at 6
cents per minute instead of 10 cents per minute. ILECs worry that
dramatic growth in the IP telephony market could mean a dramatic
decline in their access revenues.
Any attempt to change the existing access charge exemption rules will not
be easy, however, because it raises a number of very tough policy and
technical questions. For example, IP telephony can carry voice traffic
over packet-switched networks. Once telephone conversations are
converted into data packets, how can they be distinguished from other
data traffic for which the access exemption will continue to apply? If it is
not possible to separate voice and data packets, does the FCC still want
to eliminate the access charge exemption for enhanced services? If it
does, will that result in substantial increases in the cost of traditional
Internet usage?
Furthermore, if access charges apply to IP telephony, should they only
apply to "telephone-to-telephone" communications, or also to
"computer-to- telephone" or "computer-to-computer" transmissions? If
they are limited to phone-to-phone, what's to prevent computer users
from hooking up simple microphones to their desktops to hold IP
telephony conversations? How should bundled voice, data and video
communications be treated for access charge purposes?
At press time, the FCC had not initiated any formal action to address the
IP telephony access charge issue. In light of BellSouth's and U S WEST's
statements, however, it will not be long before somebody files a
complaint, petition for declaratory ruling or petition for rulemaking with
the FCC. (Of course, the FCC also could initiate a proceeding on its own
motion as well.) It is likely that this issue will be queued up in some kind
of formal proceeding before the FCC by the end of this year or early
1999. |
