Posted: 06/1998
FCC Reports to Congress on Universal Service, Addresses Internet Telephony
By Danny E. Adams, partner Kelly Drye & Warren LLP
On April 10, the Federal Communications Commission (FCC) issued its 110-page report to Congress on universal service issues. The report was required by certain members of Congress who added a provision to the FCC's appropriations bill last November requiring a report "no later than April 10, 1998." Those legislators, led by Sens. Ted Stevens (R-Alaska) and Conrad Burns (R-Mont.), generally were concerned that some of the universal service policies adopted by the FCC last summer did not go far enough to ensure affordable local telephone rates.
The report contains no significant surprises, largely reaffirming all the FCC's original universal service policies. However, the commission's discussion of Internet telephony and the possible application of access charges and universal service payments to such offerings were highly enlightening. While it was stated in tentative language, the FCC essentially concluded that "phone-to-phone" long distance services using the Internet as the backbone should be subject to both universal service contributions and telephone company access charges.
The Internet telephony issue was risen because Stevens and Burns had submitted detailed comments on their reading of the Telecommunications Act of 1996 which concluded that "information services" sometimes also can be "telecommunications" and thereby subject to universal service payments. As leading members of the congressional "forum team" during the passage of the Telecom Act, Stevens and Burns sought to broaden the financing pool for universal service subsidies to the rural states which they represent.
The FCC had previously concluded, and reiterated in the report, that the Telecom Act terms "telecommunications service" and "information service" are essentially equivalent to the older terms "basic service" and "enhanced service." As such, the agency concluded that any individual offering is either a telecommunications service or an information service, but not both. This means that information service providers are not subject to universal service assessments.
Other Senators had weighed in on this issue, as well. For example, the FCC cited two letters it received from Sens. John McCain (R-Ariz.), John Ashcroft (R-Mo.), Wendell Ford (D-Ky.), John Kerry (D-Mass.), Spencer Abraham (R-Mich.) and Ron Wyden (D-Ore.) disagreeing with the position taken by Stevens and Burns. Faced with conflicting interpretations from key senators, the FCC engaged in a laboriously detailed review of the language purpose and history of these definitions before finally reaching a decision.
Using these definitions, the FCC's report then examined the regulatory classification of Internet services, including Internet telephony. In the process, the commission reached some interesting, and potentially far-reaching, conclusions.
First, the report found that the provision of "pare transmission capacity" for use as Internet backbone or access is "telecommunication." Thus, companies engaged in that activity are subject to universal service obligations.
In the case of entities that both own transmission facilities and provide information services over those facilities, the answer was less clear. While it previously had determined that such activity would not subject the provider to universal service payments, the FCC now indicated an intent to re-evaluate that conclusion. The rationale for the potential change in policy is that the Internet service provider (ISP) who also owns its own transmission facilities "is furnishing raw transmission capacity to itself." As part of its reconsideration of this issue, the FCC suggested it would look at whether universal service obligations in this area should be based on "facilities ownership" rather than "end-user revenues." The commission reiterated, however, the Internet access services are not to be subject to universal service payments.
The key area of Internet telephony was addressed by the report by breaking Internet calls into subcategories. These involve phone-to-phone calling using the Internet as a backbone, phone-to-computer call (or vice versa) and computer-to-computer calls. Where computer-to-computer calls are concerned, the FCC reasoned that the telephone calling is software-based and, as such, not significantly different from other access services. In fact, the ISP would not know that its service was being used for voice communications.
Phone-to-phone Internet calling, on the other hand, requires the provider to include processors that connect the telephones to the Internet. This offering also has all the other earmarks of traditional long distance telephone service. For example, it is advertised as telephone or facsimile service; it does not require non-telephone equipment for usage; it relies on the standard telephone numbering plan; and it transmits customer information without net change in form or content. At the same time, the commission indicated that this view is tentative and subject to further consideration.
Importantly, however, the FCC stated that "to the extent" phone-to-phone Internet telephony is "telecommunications service" and providers of the service rely on "circuit-switched access" from the local telephone company, it would be "reasonable that they pay similar access charges." Further, these conclusions also would mean that providers of phone-to-phone Internet telephony would be "telecommunications carriers" required to pay universal service fees.
The FCC stated repeatedly that these conclusions are tentative and subject to further review. The implication seems inescapable, however. Phone-to-phone Internet telephony utilizes the local telephone network in the same way as Feature Group A local access. The FCC long ago required that Feature Group A users pay Feature Group D rates to ensure recovery of equal access costs. If the commission is now to allow Internet telephony to escape access charges by using Feature Group A, but not allow the same result for traditional long distance companies, the market will be competitively skewed in favor of Internet telephony and carriers will migrate toward the Internet to avoid access charges.
