Proposed Fees May Hike Cost of Net Calls

Cheap Internet phone calls could get more expensive under provisions added to federal legislation that sparked heated congressional debates over pay television competition and equal access to data networks.

Internet phone companies such as Vonage Holdings Corp. worry that their new service is being subjected to old rules at a time when the Republican-led Congress and the Bush administration are deregulating the telecommunications industry.

If approved, those rules could drive up prices for Internet calling, which allows customers to make cheap or free calls worldwide using technology similar to the way e-mail is delivered. That, in turn, could hamper the industry just as it is getting started.

“It’s got me to the point of absolute depression,” said Jeff Pulver, a pioneer in bringing the technology -- known as voice over Internet protocol, or VOIP -- to the mass market. He is co-founder of Vonage but left the company five years ago.

An amendment to the first major telecommunications legislation in a decade would give states authority over payments to state universal service funds and over rates that Internet phone companies pay to complete calls.

Many industry experts thought that kind of authority had been pulled out of state hands two years ago by the Federal Communications Commission.

Separately, a pending order before the FCC would force Internet phone companies to pay a steep price and wireless carriers to pay more into the $7-billion federal universal service fund, which defrays the high cost of serving rural customers and subsidizes low-income customers. The fund faces a $350-million shortfall.

Internet calling companies estimate that a $25 monthly bill would rise $1.77 with the universal service fund fee. They did not estimate what state access charges could be, though they said the average cost is 5 cents a minute and can go as high as 34 cents.

The companies said they saw the hand of rural phone carriers, which stand to benefit from increased contributions to the fund as well as higher fees for completing phone calls over their lines to customers’ homes.

“Gold-plated rural telephone companies are afraid of losing billions of dollars in subsidies they currently receive, afraid of a level economic playing field and afraid of competition from the Internet,” said Christopher Murray, a Vonage executive in charge of regulatory affairs.

Rural carriers countered that Vonage, based in Holmdel, N.J., and other Internet calling companies had been getting a free ride for several years by avoiding charges to complete calls or by paying too little for access.

“Vonage doesn’t like this because the times are catching up to them,” said Daniel Mitchell, vice president of the National Telecommunications Cooperative Assn., a trade group for rural phone companies.

Telecom analyst Blair Levin says Vonage and other Internet calling companies, including cable providers that offer phone service, have to start shouldering some of the burdens that wireless and land-line phone companies have long had.

Even Vonage has acknowledged that it should be paying into the federal universal service fund.

It objected this week, however, to a proposed FCC formula that would force the company to pay what it said would be nearly twice as much as a wireless company and 50% more than a land-line carrier. The universal fund and the method carriers use to pay one another for connecting calls have been criticized for years, and the FCC has been trying to fix both.

The amendment was sponsored by two congressmen from rural areas, Republican Gil Gutknecht of southern Minnesota and Democrat Bart Stupak of western Michigan. Their provisions were added in a little-noticed 11th-hour amendment to a House bill passed last week.

The bill, now before the Senate, is designed primarily to give phone carriers federal franchise rights to build out new networks -- superseding local government control -- to compete with cable television companies.

But the most hotly debated issue in the legislation has been so-called network neutrality, the Internet principle that the owners of the networks handling Web traffic should refrain from interfering with any data moving over their systems.

Two years ago, the FCC ruled that Vonage and other Internet calling companies engaged primarily in interstate activities, which preempted states from imposing requirements on offering service. Some have read the ruling, known as the Vonage order, broadly to ban states from regulating Internet calls.

But Levin and other analysts see the order as more limited.

“The FCC went through a long song and dance to ensure they had federal jurisdiction,” Levin said. “The VOIP guys thought they had won an incredible victory. But they were not freed up for anything. The FCC never went to the issue of access charges.”