Net Phone Differences in Hands of Telecom Vet

Times Staff Writer

Local and long-distance phone companies have turned to a veteran industry attorney for help in resolving deep-seated differences over the costs associated with calls routed over the Internet.

Gary M. Epstein, who headed the Federal Communications Commission’s telephone division in the 1980s, has been leading secret negotiations since August. He is under pressure to hammer out an industry accord before the FCC begins making key rulings in the next few months on what is known as Internet telephony.

But that could be a high hurdle: Epstein is finding that seemingly natural allies are at odds -- and moving further apart.

AT&T; Corp. has staked out a hard-line position: For phone calls transmitted over the unregulated Internet, the access fees that long-distance carriers pay to Baby Bells and other local phone companies should be abolished immediately.


The MCI unit of WorldCom Inc. favors a gradual phasing-out of the fees, according to a spokesman who says an abrupt end could disrupt the phone system and bankrupt the Bells. And Sprint Corp. says in a position paper that it flat out disagrees with AT&T;, preferring that all voice calls be treated the same so that Internet telephony companies don’t wind up with unfair competitive advantages.

For their part, some local phone companies that have designed networks that cash in on a surge in data traffic view Internet telephony as a welcome technology. In that they part ways with SBC Communications Inc., Verizon Communications Inc. and other Baby Bells.

“Some of our folks see Internet phone calls as a revenue opportunity and others see it as a threat,” said John Windhausen, president of the Assn. for Local Telecommunications Services, a trade group that represents several local carriers participating in the talks lead by Epstein. “We don’t have a clear position.”

Epstein took on the mediator role at the behest of local and long-distance firms seeking to present a united front to the FCC. That tactic proved successful three years ago, when the industry tackled the system of subsidies that help bring phone service to even the most remote areas of the U.S.


Long-distance carriers had complained that they were paying a disproportionate share of the subsidies, but after negotiating with local carriers, a compromise emerged: Local companies would give long-distance providers a break on access fees in exchange for continued support for subsidies.

John Nakahata, a former FCC chief of staff who shepherded the universal-service talks, said the debate over Internet calls was far more contentious. “Gary faces longer odds that I had,” he said.

Epstein, who is being paid an undisclosed sum by the companies involved in the talks, downplayed his role: “I was hired not on a substantive basis, but to facilitate. I find the problems real interesting.”

The question Epstein is trying to help the industry answer is whether a company -- using computers to convert phone conversations into bits of data and then routing them over the unregulated data pipes of the global computer network -- should pay the same access fee as it does when it steers a call over the country’s traditional phone network.


For decades, local and long-distance phone companies have charged each other fees to route calls over each others’ networks. The fees vary depending on the type of phone traffic. The highest have been paid by long-distance carriers that must hand off their calls to local phone companies so the calls can be completed. At 1 1/2 cents a minute, the fees amount to roughly $25 billion a year.

About 15 months ago, AT&T; made a unilateral decision to stop paying the long-distance access fee for Internet calls. Instead, the Bedminster, N.J.-based phone giant has been paying what’s known as a reciprocal fee for the hand-offs at the same rate that local carriers charge each other. That has cut its payments in half.

Vonage Holdings Corp. has also balked at the access fees. The Edison, N.J.-based start-up lets customers transmit all of their phone calls over the Internet using their high-speed cable or DSL Internet connections. Both AT&T; and Vonage have filed petitions with the FCC seeking to abolish the access charge for any call transmitted via the Internet.

AT&T; sent a letter to FCC Chairman Michael K. Powell last week, essentially asking him to validate the firm’s position by confirming “that access charges and other carrier compensation will not apply retroactively” to calls routed via the Internet.


If anyone can break the impasse, experts say, it is Epstein.

A highly respected power broker, he has served in a variety of industry advisory roles, including chairman of an FCC committee working with overseas regulators to identify airwaves that would allow wireless phones to operate on the same general frequencies so that the phones could work on most continents. As a lawyer, Epstein’s clients have included Hughes Electronics Corp.'s satellite operator, DirecTV, and BellSouth Corp., the Baby Bell that provides local phone service in the Southeast.

“He’s one of the wise men of telecom,” said Blair Levin, a telecommunications investment analyst for Legg Mason.

So far, Powell has declined to take steps to pressure AT&T; and Vonage to fork over access charges the Baby Bells say they are owed for Internet phone calls. In speeches over the last two months, Powell has indicated he favors a hands-off approach to voice over Internet protocol technology, or VoIP.


“As one who believes unflinchingly in maintaining an Internet free from government regulation, I believe that IP-based services such as VoIP should evolve in a regulation-free zone,” Powell declared at an FCC public meeting in December.

Such a stance could undermine Powell’s support on Capitol Hill, where Bells like SBC and Verizon, which serve California, hold sway. They have lobbied hard for access fees. SBC, which had revenue of $40.8 billion last year, has complained that it has lost between $200 million and $450 million in revenue “due to illegal avoidance” of access fees.

Rep. W.J. “Billy” Tauzin (R-La.), chairman of the House Energy and Commerce Committee, has asked the FCC to give a “direct answer” by Thursday about whether AT&T; and others should in fact be paying the access fees.

There isn’t much hope the agency will act quite that fast.


“I don’t expect there to be a resolution this year,” said Jonathan Lee, senior vice president of regulatory affairs at Comptel, a phone industry trade group in Washington. “If there was an obviously quick solution, the FCC would have come to it by now.”