FCC May Seek Fees on Phone Service Over the Internet

After years of keeping their hands off the Internet, federal regulators are laying the groundwork to impose stiff fees on companies that want to provide low-cost long-distance telephone service over the worldwide computer network.

The controversial plan, which is pending before the five-member Federal Communications Commission, would cool nascent efforts by AT&T; Corp., Qwest Communications Inc. and others to market ultra-cheap long-distance calls over the Internet, The Times has learned.

The FCC proposal contradicts a White House pledge last year to keep the Internet free of government red tape. The plan would force some Internet companies to pay subsidies to local telephone carriers that help underwrite phone service in rural and inner-city areas, in much the same way existing long-distance phone companies provide such subsidies.

In recent months, more than half a dozen carriers have begun offering long-distance calling over the Internet at rates as low as 4.9 cents a minute. That’s about half the cost of dialing long-distance over traditional voice networks.

Internet telephony, which was once so technically arduous that it appealed only to computer nerds, is attracting a growing following. The latest technology allows individuals to dispense with computer gear and place calls over the Internet using an ordinary telephone, with voice quality approaching that of the traditional phone network.

The ease of Internet dialing has attracted widespread interest, especially from multinational corporations and immigrants seeking to circumvent the comparatively high cost of dialing internationally via the traditional system.

An Internet call travels over telephone lines, but bypasses the local telephone switch and is routed by the same computerized switches that handle Internet data traffic.

Analysys, a leading telecommunications consulting firm based in London, predicts that by 2003, about 25% of all international phone traffic--or 45 billion minutes of voice calls--will bypass the public telephone network and be carried over the Internet. That compares with less than 1% of voice traffic carried over the Internet today.

But the FCC says it is concerned that by routing calls over the Internet, major telephone carriers such as AT&T;, MCI Communications Corp. and WorldCom Inc. avoid paying their fair share of special subsidies.

Indeed, telephone calls sent over the Internet are currently not regulated by the federal government. Internet service providers, or ISPs, are exempt from paying subsidies to the so-called universal service fund as well as access fees to local phone companies for completing long-distance calls.

“When a carrier that has telecommunications equipment is also an Internet service provider, it could be in a position to avoid paying universal service fund subsidies and long-distance access fees,” said an FCC official who requested anonymity. “We need to level the playing field.”

In a speech given Monday to the Information Technology Assn. of America, FCC Commissioner Susan Ness said that “it is entirely appropriate to take a fresh look” at the FCC’s hands-off-the-Internet policy. Ness said the review is made necessary by “fundamental changes that are happening in telecommunications regulation and the explosion of new [Internet] based services.”

The Internet proposal is expected to be approved by the FCC within the next 10 days and be forwarded to Congress. An agency spokeswoman said Wednesday that the proposal has not yet been reviewed by all of the commissioners and is not finalized.

It is already being applauded by many local phone companies who have long complained that they are losing millions of dollars in revenue to ISPs, which use the resources of the public telephone network but don’t financially support it.

“Our contention has always been that if it looks like phone service, then it is, regardless of the technology that is used,” said Robert McDowell, general counsel of America’s Carriers Telecommunication Assn., a 230-company organization that in 1996 asked the FCC to crack down on ISPs offering Internet telephony.

“We need to bring the law up to date and lift the ISP exemption that keeps Internet access providers from having to pay these charges,” McDowell said.

The FCC staff proposal was prompted by a request from the Senate Appropriations Committee that the FCC reexamine its universal service subsidy rules.

Nonetheless, it has sparked an outcry from some Internet companies that believe it may lead to higher costs for all Internet users as well as more draconian government regulation.

“Opening the door to regulation of the Internet based on how one technology is different from another is a dangerous proposition,” said Jill A. Lesser, deputy director of law and public policy for America Online Inc.

Joe Garrity, director of regulatory affairs for Qwest, which in February began offering long-distance Internet calling for 7.5 cents a minute, said the proposal clearly is overreaction.

“This is definitely going to have an economic impact on us,” he said.

At least one FCC commissioner, Harold Furchtgott-Roth, has also signaled his concern about the idea of defining Internet firms as telephone-service providers.

“It’s our belief that we must follow the law and recognize that the universal service provisions applies specifically to telephone carriers,” said an aide to Furchtgott-Roth. “Anything else is a step in the wrong direction.”

A reclassification of some Internet service providers as telecommunications operators would require them to contribute to the universal service fund for telephony services, possibly through a per-minute levy on Internet traffic.

It is unclear how the FCC staff proposes that ISPs identify and segregate telephone calls it now commingles with ordinary Internet traffic.

Telephone rates for multiline business and residential users have already been raised this year by more than $2 billion annually to subsidize universal telephone service.

But rural lawmakers remain concerned that Internet service providers can draw money out of the universal service fund to wire schools for high-speed Internet access and other special purposes, but don’t have to pay in. They say the current arrangement could drain the fund and saddle rural telephone users with monthly bills of $50 or more for phone service.