Proposal Could Raise Rates for Internet Service

California regulators Thursday are expected to take up a proposal that could increase the cost of Internet service for consumers and reduce competition among Internet service providers, especially in rural regions of the state.

The change under consideration by the state Public Utilities Commission involves whether connections to Internet service providers should be considered local calls or long-distance. This is a key factor in determining how phone companies reimburse each other for carrying calls and ultimately has a bearing on costs passed on to Internet users.

Regulators are reviewing the issue as part of a dispute between Pacific Bell and Stockton, Calif.-based Pac-West Telecomm Inc., a competing local phone company that provides connections for many Internet service providers, or ISPs.

The case is being closely watched throughout the state because it could set a precedent affecting other carriers’ agreements with PacBell and GTE, the state’s two largest local phone companies.

Many of California’s 600 local ISPs believe a shift in the status quo would ultimately price some of them out of the market, leaving fewer choices for consumers in outlying areas.

In addition, consumer groups believe any new costs borne by the smaller phone companies will ultimately be passed on to Internet customers, probably in the form of higher monthly fees.

“I think it is a critical issue for Internet users,” said Regina Costa, telecommunications analyst for the Utility Reform Network, a consumer advocacy group in San Francisco. “What we’re going to see is increased prices and decreased access.”

PacBell spokesman Bill Mashek dismissed the warnings of higher fees as “just flat-out fear-mongering.”

Still, the PUC proposal has raised the ire of state lawmakers, who sent regulators a letter Tuesday urging them to postpone action on the item to allow broader participation in the debate.

“Approving [the new proposal] could have the effect of reducing competition among ISPs and either raising the cost exponentially of providing service to rural areas or eliminating service to rural areas altogether,” said state Sen. Debra Bowen (D-Redondo Beach) in a letter to the PUC she signed along with three other members of the Senate’s Energy, Utilities and Communications Committee.

Under the PUC’s current system, calls made to Internet service providers are considered “local” phone calls, even though the ISP then provides connections to far-flung computer networks.

In many cases, when a customer dials up an Internet service provider, his phone company (typically PacBell or GTE) is passing the call on to the ISP’s carrier (such as Pac-West or another company)--and that means PacBell or GTE must pay a fee to the ISP’s carrier.

It works the same in reverse, but many small phone companies serve only ISPs, and thus carry little traffic that would require them to pay fees to PacBell or GTE.

As Internet traffic has increased, the payment imbalance has ballooned. PacBell and other local phone companies have responded by working to convince state and federal regulators that Internet connections are not really local calls and thus should not trigger the connection fees.

Earlier this year, the local phone companies got their first major victory: The Federal Communications Commission declared that calls to ISPs are not local calls, but that ISPs remain exempt from interstate fees (meaning the connections will not be charged by the minute, like long distance).

The FCC also said that each state should resolve the question of reciprocal payments when agreements between carriers expire (such as the agreement between PacBell and Pac-West).

At the PUC’s Thursday meeting, the commission will consider two proposals--one that would reaffirm Internet calls as local calls and maintain the current reimbursement system for Pac-West. The second, an “alternate order” proposed by PUC Commissioner Josiah Neeper, would re-categorize Internet calls as long-distance and rewrite policy on the associated fees.

To force a change, PacBell quit paying connection fees to Pac-West in August 1997, and now owes the company an estimated $50 million, said Wally Griffin, Pac-West’s president and chief executive.

“This is kind of a survival issue for us, but there are others coming up right behind me,” Griffin said. “This would be a major coup d’etat for PacBell.”