Regs

[Steve]

The F.C.C. Faces Internet Regulation

Seth Schiesel
NY Times 11/2/98


The emergence of the Internet is making intellectual contortionists
out of people who try to regulate the communications industries in a
fair and consistent manner. 

It is not the regulators' fault. It is just that the Internet is
seeping into the cracks between decades of communications rules that
were built, very carefully, to administer industries based on two-way
phone calls and one-way television transmissions, not the raucously
flexible Internet. 

The latest example of the difficulty came Friday at the Federal
Communications Commission. On the surface, the FCC was faced with a
fairly straightforward petition from GTE Corp. for approval of
pricing plans for a new sort of high-speed data connection --
digital subscriber lines. 

But beneath the surface were questions on regulatory jurisdiction
over the Internet and the nature of competition in the local
telephone business, plus concerns over whether new types of local
phone companies would continue to get more than $500 million a year
from the incumbents. 

The commission ruled narrowly. It approved GTE's prices but declined
to respond to the broader, more important, questions, saying it
would start answering them within a week. 

Much of the difficulty, not only on Friday but throughout the
commission's attempts to grapple with cyberspace, stems from its
intention to avoid regulating the Internet in the first place. The
problem is that the telephone and cable television industries, on
which the Internet relies to reach homes, remain regulated to
varying degrees. 

That regulatory dissimilarity raises hard questions. Should using a
phone line and a modem to reach an Internet provider be considered a
local call or a long-distance call -- something different from a
regulatory standpoint? Should a regulated phone company be regulated
differently when selling Internet service? On the Internet, should
cable television companies have to play by the same rules as phone
companies? 

Billions of dollars, the development of communications industries
and the future of how Americans are linked to cyberspace ride on
those questions. And so far, the FCC's attempts to answer them, raise
still more questions. 

"The Internet has grown up in the unregulated environment, which is
different from the old paradigm of regulation," William Kennard, the
commission's chairman, said in an interview Friday. "There are some
areas where the old paradigm intersects with the new paradigm, and
that is where we are presented with some challenge." 

Most people link to the Internet using a standard telephone line. To
the modem-using consumer, it generally seems like a standard local
phone call. The dial-up data communication travels over the systems
of the user's local phone company, which then hands it off to an
Internet access provider like America Online. The Internet company
then arranges for the transit of information, via long-distance
lines, from the user to any one of thousands of sites around the
world. 

So does that make America Online, or Joe's Internet Shack, a
long-distance carrier? It is not a whimsical question. The largest
source of revenue for local phone companies -- tens of billions of
dollars a year -- takes the form of so-called access fees from
long-distance providers. When AT&T carries a call from Atlanta to
Chicago, for instance, it must give a few pennies every minute to
the local phone companies, BellSouth and Ameritech, for the use of
their networks in originating and completing the call. 

Were Internet companies forced to pay those per-minute fees, that
would probably be the end of monthly all-you-can-use Internet
pricing for consumers. So the FCC, wanting to expand the Internet,
reaffirmed earlier this year that Internet companies receive a
special exemption from long-distance access fees. 

An essential aspect of that policy is that by granting an exemption,
the commission has determined that Internet communication is an
interstate service. (In phone regulation, the FCC generally has
authority only over interstate questions.) And as a practical
matter, interstate communications are almost always considered
long-distance calls. 

When new companies emerged a few years ago to compete with the Bells
and GTE, they negotiated deals with the incumbents so that when a
person using Phone Company A made a local call to someone using
rival Phone Company B, Company A had to pay Company B a per-minute
"reciprocal compensation" fee for the use of its network equipment.
The assumption was that the fees flowing back and forth would be
roughly in balance. 

But many of the new local companies have made a business out of
courting Internet service providers, which need lots of phone lines
for all those dial-up modem calls from their customers. And because
these are almost entirely incoming calls, the "reciprocal
compensation" fees have been anything but reciprocal. Instead, they
have flowed largely to the upstarts from the incumbents that own the
residential phone lines on which so many of those modem calls
originate. The result has been more than $500 million in annual
payments from the Bells and GTE to new providers. 

Not surprisingly, the Bells and GTE no longer want to play by these
rules. And one of the arguments the incumbents made in connection
with the GTE filing was that reciprocal compensation fees should not
apply to local modem calls. They reasoned that the FCC's
longstanding rules consider Internet calls to be long-distance calls.

It is this thorny part of GTE's filing that the commission said it
would take up separately, beginning this week. 

The conundrums do not stop there. Local phone carriers are required
to sell access to pieces of their networks to other local companies
that want to use them. Partly that is because many of those systems
were built when the phone giants were monopolies and could use
monopoly profits to build the networks. But now, the big local phone
companies are asking the commission to exempt them from this resale
requirement when they build new systems to bring high-speed data
communications to homes. They say that if they have to resell access
to those systems to their competitors, there will be no incentive to
build them. 

The FCC desperately wants to support the introduction of advanced
data services. Yet it is afraid that the Bells and GTE would still
have an unfair advantage over new competitors if they could bundle
the new services with the traditional phone service that is a legacy
of their monopoly days. 

And then there is the separate regulatory structure for the cable TV
companies, some of which are venturing into the business of
connecting their customers to the Internet with cable modems. Not
only are cable companies not bound by the rules of phone rate
regulation; they are not compelled to offer competitors access to
their networks. 

The local phone companies, of course, have questioned the fairness
of the perceived regulatory advantages the Internet offers cable
companies. And those issues were raised again in industry comments
filed last week at the FCC, which is considering whether to approve
the acquisition of the cable giant Tele-Communications Inc. by the
No. 1 long-distance company, AT&T. 

Copyright 1998 The New York Times Company 




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