A Costly FCC Proposal

If you are a routine user of dial-up services for Internet access, sit down before you read the next sentence. The Federal Communications Commission (FCC) has ruled that a call to an Internet Service Provider (ISP) should be treated as long distance.

At first blush that means that the seven digit local call that many of us use to connect our home workstations, laptops and WebTVs to the Internet will now be charged long-distance rates. While today’s long distance marketplace is competitive, most of use could never afford to use the Internet routinely if we had to pay long distance rates. The FCC understands this, so what could possibly explain its decision?

This FCC ruling is one in a series of complicated actions stemming from the failure of the Telecommunications Act of 1996 to provide a significant jump-start for telecommunications in the U.S. For consumers, the act was intended to deliver advanced telecommunications services at lower costs. Perhaps the situation is different in other areas of the country, but since the act was passed, my cable bill has risen and the only apparent improvement has been the addition of The American Standard Poodle Channel. Significant improvements in telecommunications services for consumers and enterprises have been slow in coming.

Instead, the giant telecommunications companies have been engaged in a tragic dance of lawsuits, misinformation and lobbying. When the FCC ruled in February that a local call to the Internet should be treated as an interstate transmission, it surely knew that Internet sessions seldom remain confined to a local phone company’s territory. This obvious fact is important because it affects the complicated fees exchanged between local phone companies and those that use their networks to deliver one end of a long-distance call.

These fees, technically called "reciprocal compensation," ensure local phone companies are compensated for providing the local infrastructure that other services use to complete their calls. As an example, when a Bell Atlantic customer calls a customer of a small phone company, Bell Atlantic pays a small fee to complete the call. Small phone companies started signing up Internet Service Providers to inexpensive contracts because, while ISPs receive many local phone calls, they place almost none. The result is a huge imbalance in reciprocal compensation -- to the detriment of the dominant local phone companies.

Long distance calls are exempt from this reciprocal compensation scheme. That’s why it was so important for the Baby Bells to make sure that calls to ISPs are treated as long distance. By getting the FCC to rule that calls to ISPs are long distance, the regional Bell operating companies will save hundreds of millions of dollars. With that much money at stake many dominant local phone companies didn’t wait for the FCC -- in more than 20 states they reached individually negotiated agreements to lessen the impact of reciprocal compensation. With the new ruling in place, several companies have already announced their intention to go back to the individual states and attempt to undo those agreements.

It’s impossible to imagine the FCC proposing that Internet users pay per-minute charges for getting access to the Internet. Such a decision would result in a flood of e-mail from consumers and immediate Congressional outrage. In fact, the chairman of the FCC, William Kennard, said the FCC decision "doesn’t affect the way consumers get dialup access to the Internet. Nothing we’re doing here should be construed as regulating the Internet."

Perhaps, but consider this: Reciprocal compensation is one of the regulatory props that makes competition in the local telecommunications marketplace possible. If ISPs are no longer able to find affordable and competitive local phone services, one of their key infrastructure costs will climb inexorably. In the absence of local competition, subscribers -- both individual subscribers and corporate ones -- will face higher and higher costs for access to the Internet.

The FCC is taking great pains to portray their decision as one that will not affect Internet users. It’s hard to believe. On one hand, anything that serves to reduce competition in the local access market will drive up costs for Internet users. In addition, even if the FCC does not intend to allow per-minute charges for local access, how can they prevent it? After all, now that the FCC has said that calls to ISPs are interstate in nature, how do you keep the phone companies from building an interstate charging scheme? --Mark McFadden is a consultant and is communications director for the Commercial Internet eXchange (Washington). Contact him at mcfadden@cix.org.