IP telephony charges in question:

The FCC's tentative plan to regulate some Internet telephony providers could be the first step toward broader oversight of the Internet, analysts and experts said last week.

The FCC brandished a double-edged sword in a recent, attention-getting report to Congress. On one hand, it affirmed its hands-off approach toward Internet service providers, saying they should remain exempt from universal service payments. On the other hand, it suggested that another type of Internet company-providers of phone-to-phone Internet telephony-could start paying universal service and access charges.

"The FCC is a little pregnant now," said Scott Cleland, an analyst at Legg Mason Precursor Group. They're going toward a slippery slope of regulation of Internet facilities. This is an inevitable trend."

Ultimately, the FCC could bring all Internet-based voice and electronic commerce services under its regulatory umbrella, added consultant Patricia Martin of Decision Resources Inc.

All ISPs aren't necessarily out of the woods, either, the report suggests. While most indirectly support universal service by leasing lines from carriers, the big ISPs that own their own backbones do not contribute, although they lease transmission capacity to themselves. "We believe it is appropriate to reexamine that result," the report says.

For now, the FCC isn't making any non-telcos pay anything, although it plans to examine specific complaints (Telephony, April 20, page 12). Still, Internet leaders say they will lobby Congress and the White House to protect the tiny Internet protocol (IP)-based telephony sector from federal charges that could hinder its innovation and growth.

"We will be lobbying Congress," said a spokeswoman for IDT Corp., Hackensack, N.J., the largest phone-to-phone IP telephony provider. "The FCC shouldn't be regulating voice over the Internet."

Executives from IP telephony companies IDT, VocalTec Communications Inc. and ITXC Inc., along with Voice on the Net coalition founder Jeff Pulver, sent a letter to Vice President Gore April 8 asking him to create a presidential commission to evaluate whether and how to regulate voice over IP.

The FCC is unlikely to resolve the issue soon, mostly because of the political fallout it would suffer by appearing to "tax" the Internet, analysts said.

"Internet is kind of a favored child of the moment," said Jack Clarke, a New York telecom attorney. "The safest course for them is to go slow."

"The FCC is very sensitive to playing catch-up to technology. Technology moves much more swiftly than regulators," added Paul Glenchur, an analyst at Schwab Washington Research Group. "They want to avoid broad rules that become outdated in a few months."

Behind the pay/no pay hubbub is the basic issue of how to reform universal service, a program that keeps local phone service affordable in high-cost and rural areas and, starting this year, will subsidize the purchase of advanced telecom services by schools, libraries and rural medical facilities.

Financial support comes from two main sources: access charges, which are per-minute fees paid by long-distance carriers to local telcos, and contributions to universal service funds made by all telecom carriers with interstate revenues. FCC rules exempt "enhanced service providers," including ISPs, from paying access charges. The charges, which also compensate local telcos for starting and ending long-distance calls, gradually are being substituted by new flat-rate charges through 2000 as part of an ongoing FCC plan to create an explicit subsidy system.In the end, the resolution will boil down to how to classify phone-to-phone IP telephony, a voice service that routes calls from one ordinary phone to another using IP. Politicians are split because of the hybrid nature of the service, the FCC explains in its report.

Sens. Ted Stevens, R-Alaska, and Conrad Burns, R-Mont.-concerned with the level of universal service support for their rural states-believe IP telephony is a type of interstate telecom service and thus should contribute to universal service. In other words, it's just a high-tech, low-cost way to sell long-distance.

"If it walks like a duck and quacks like a duck but waddles a little bit differently than the normal duck, it's a duck," Glenchur said.

But other politicians, including Sen. John McCain, R-Ariz., are reluctant to regulate an infant industry when they and others want to encourage competition and innovation in telecom.

"We should be working toward a system of universal service that does not impede the ability of new technology to innovate," said Barbara Dooley, executive director of the Commercial Internet Exchange Association, a group of ISPs.

The FCC seems to be leaning strongly toward the "quacks like a duck" camp. Its report says that "certain forms of phone-to-phone IP telephony are interstate 'telecommunications,' and to the extent that providers of such services are offering those services directly to the public for a fee, those providers would be 'telecommunications carriers.' Accordingly, those providers would fall within [the 1996 Telecommunications Act's] mandatory requirement to contribute to universal service mechanisms."

The winners at the moment appear to be ISPs, which remain unregulated; traditional long-distance carriers, which could see a broader base for access-charge payments; and local telcos, which receive access charges, analysts said. In addition, computer-to-computer IP telephony, which uses special software and hardware to place calls between two computers connected to the Internet, is an information service and shouldn't be regulated, the FCC said.

The losers, at least potentially, are IP telephony providers, especially those whose low-cost calling is based on avoiding regulatory charges. For companies such as Denver-based Qwest Communications Inc., "their competitive edge is likely to be diminished," Glenchur said.

Imposing charges on IP telephony companies raises practical as well as political difficulties, analysts said. For one thing, cash registers would hardly ring. The industry's revenues, the basis for universal-service payments, are minimal-$10 million in 1997, according to the FCC-and much of it comes from international calling, which is beyond FCC control. Currently, Internet telephony accounts for less than one-half of 1% of all U.S. phone calls, although some studies project it could make up one-third of all domestic long-distance calls by 2005.

Another problem is that the FCC can't distinguish voice packets from data packets to determine where to levy access charges. It also could be difficult for local telcos to tell whether a given IP telephony call is an interstate call subject to federal regulation.

"It's a gray area," said Martin of Decision Resources.

GROWING SUPPORT More maintenance and repair and the growing complexity of the networking infrastructure helped boost spending on voice and data communications support services to $82 million in 1997, a 17.3% jump over 1996, reports the Telecommunications Industry Association, Washington. Spending on data support services rose 11.9% to $18.2 billion.

NEW OSS RULES PROPOSED The FCC has proposed rules to help incumbent local telcos gauge whether they are providing adequate OSSs to their rivals under the telecom act. No specific performance or technical standards are suggested, just guidelines on how telcos can provide nondiscriminatory network access.

Whether the FCC regulates Internet telephony providers, or any other telecommunications company, depends on how it defines and classifies them. Here are a few key definitions from the Telecommunications Act of 1996 and FCC rules.

Telecommunications: the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information sent or received

Telecommunications service: the offering of telecommunications for a fee directly to the public...regardless of the facilities used

Information service: the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications; includes electronic publishing but does not include any use of any such capability for the management, control or operation of a telecommunications system or the management of a telecommunications service

Telecommunications services are subject to universal service obligations; information services are not.

Basic service: the offering, on a common carrier basis, of pure transmission capacity for the movement of information-enhanced service: services offered over common carrier transmission facilities used in interstate communications [that] employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information; provide the subscriber additional, different or restructured information; or involve subscriber interaction with stored information.

Providers of basic services pay access charges; providers of enhanced services do not.