The FCC has two separate proceedings on the topic of Access Fees by local exchange telephone companies (LECs). The first is a proceeding on Access Charge Reform that was noticed on December 24, 1996. The comment period for this docket (CC Docket No. 96- 262) closed on February 14, 1997. CPT filed comments in both the initial and reply rounds. The second proceeding is a "Notice of Inquiry" into the status of the "enhanced service provider" (ESP) exemption for Internet Service Providers (ISPs). The initial comments on this proceeding are due March 24, 1997, and reply comments are due April 23, 1997. The FCC set up two email addresses to receive informal comments on the proceeding. For the access charge docket, the address is access@fcc.gov. For the notice of inquiry, the address is isp@fcc.gov. The FCC has a very useful Web page on both proceedings at http://www.fcc.gov/isp.html. CPT's Web page on Access Charge Reform is: http://www.cptech.org/afr/afr.html.

Background:

Ever since the AT&T breakup, the FCC and state regulatory bodies have pursued a policy of using hefty per minute charges on long distance calls to keep down the monthly fixed cost of having telephone service. For the "interstate" market, these are called "common carrier line" (CCL) charges, and in recent years, they averaged about 5.7 cents per minute for originating and terminating long distance calls. These charges are imposed on the long distance telephone company by the LEC, and passed on to consumers in the form of higher prices for long distance services. Internet Service Providers and other data processing or value added computer services don't pay network access fees because they are considered "end users" by the FCC, and covered by the Enhanced Services Provider (ESP) exemption. (See Robert Cannon's paper on the ESP exemption at http://www.cais.net/cannon/memos/espart.htm)

For many years, several local service telephone companies have tried to get state regulators or the FCC to impose per minute usage fees on modem users. When Netscape and other software companies announced software for Internet telephony, an association representing small independent distance telephone companies asked the FCC to ban the Internet telephony software or regulate its use. The large long distance companies and many (not all) of the LECs told the FCC that the ESP exemption should be eliminated for ISPs. CPT and others objected. The CCL charges are so high they would create havoc in the dial-in market for Internet Access. If ISPs were required to pay the CCL charges for originating an Internet connection, the charge would be $1.67 per hour. This would eliminate all flat rate dial-in subscription plans.

Beginning in 1995, CPT told the FCC in several pleadings that the CCL should also be eliminated or reformed for ordinary long distance voice traffic. The CCL is highly inefficient. By using hefty per-minute charges to support the non-traffic sensitive (NTS) costs of local telephone service, long distance companies and others cannot offer innovative services or billing options. CPT was willing to trade increases in the fixed monthly costs of local telephone service for the elimination of the CCL, or to see it reformed in some way that was not so inflexibly linked to per minute usage charges. The CPT position on this issue was controversial among some consumer groups. Gene Kimmelman from Consumers Union initially argued that the usage based CCL was essential to keep the fixed costs of local telephone service low. Kimmelman asserted that the CCL provided a mechanism for cross subsidies between rich and poor consumers. Long distance service was discretionary, the argument ran, but having a telephone in the home was an essential service, and prices should be as low as possible. CPT countered that income was not the only factor that determined long distance usage -- family size and proximity being the main non-income factors. In the universal service docket, CPT presented data showing that as a percent of the monthly bill, differences in consumption of toll and discretionary services were not very different between rich and poor consumers, and that black consumers consumed more toll and discretionary services than do whites.

(From http://www.cptech.org/telecom/us.html)

CPT argued the elimination of the CCL will lead to much lower long distance rates. Moreover, CPT argued that it was increasingly necessary to phase out the CCL as we use the "public switched telephone network" PSTN for new services, such as residential connections to the Internet, for which the per-minute CCL charges were a poor proxy for affordability.

There are also many other issues that are connected to the access charge and ESP proceedings. The FCC and local regulators are writing rules that allow firms to lease LEC facilities in order to compete for local telephone service, and the entire system of funding universal service is also being rewritten. In each of these areas regulators must decide if per-minute or other usage based charges are the appropriate basis of fees for use of the PSTN.

To appreciate the complexity, it is important to understand that most of the cost of local telephone service is for the fixed costs of the so-called local loop from the home to the LEC "central office." "Traffic sensitive" costs exist, but they aren't as high as one might think. Before Internet traffic became important, the "average cost" of using a switch was about .17 cents per minute, or about 10.2 cents per hour, for some LECs, or about 6 percent of the CCL charge for originating a call. Internet usage has increased the total demand for network usage, but it has also changed the patterns of demand. Where voice peaks are typically around 4 pm, the Internet peak usage is often well after 9 PM -- when voice usage is very limited. The daily "load" on the switch is greater, but this is good news, because longer daily loads result in lower average costs per minute. Moreover, LECs can now deploy technology being marketed by Nortel, Lucent and others, which can completely bypass the LEC's circuit switches and trunks, and transport data from the local loop directly to the ISP in a packet switched network. This radically changes methods of cost allocation in networks because an open data connection doesn't consume bandwidth in the absence of file transfers. (Just staring at the screen doesn't consume bandwidth in a packet switched network).

CPT wants the FCC and other regulators to facilitate the migration to affordable full time data (24x7) connections to the Internet. We believe the most practical path today is to use the copper wire local loop, first for ISDN, and later for various xDSL technologies that provide greater bandwidth. CPT has tried to get regulators interested in ISDN pricing, because this is the only digital technology that can be deployed in the mass market right now.

The FCC has to decide how to charge consumers for higher bandwidth connections. Some LECs, such as SBC, now double the subscriber line charge for ISDN BRI service. If the FCC eliminates the CCL charges, it must replace at least some of the lost revenue to the LECs. There are many competing proposals -- such as higher fixed monthly charges for the consumer, or new charges for long distance companies, based upon a flat rate for each "line," or something based upon value added or gross revenues. AT&T and some other companies want the FCC to impose a new charge on the use of residential second lines. There are also issues relating to life-line subsidies for the poor, or the degree to which businesses and residences make different contributions to the "joint costs" of the network.

The ESP/ISP inquiry is also complex. Do dial-in Internet users impose excessive costs on the network, or does the new Internet traffic actually lower average costs for everyone? CPT, BBN's Fred Goldstein, the Information Technology Industry Council and others have provided the FCC with evidence that dial-in users are not using the network in ways that exceed peak capacity requirements for voice users, that LECs are making substantial profits from deployment of second lines, that LECs have off the shelf methods of dealing with congestion at the terminating ISP end, and that LECs benefit from certain economies in delivering derived channels to ISPs.

If ISPs are required to pay for incoming calls, should consumers pay less for making local calls? Should regulators eliminate usage fees on ISDN calls made to ISPs if the ISPs are paying for incoming calls? How would ISPs be charged for incoming calls? On the basis of minutes per connection? Are off-peak usage fees economically inefficient? What does it cost to meter usage? Should fees be based upon a percent of revenues per subscriber? Should regulators distinguish between value added and basic services? Should ISPs be charged separately for Internet telephony? Who would monitor such usage? Would ending the ESP exemption have a significant revenue impact on the LECs? What would it do to the development of the Internet? Isn't the subtle and complex nature of data usage such that it is entirely inappropriate to fund the fixed costs of the local loop through usage based charges?

There are also a number of issues relating to LEC strategic behavior. If usage fees become a profit center, will the LECs have an incentive to deploy technology that bypasses traffic sensitive resources (circuit based trunks and switches)? Will excessive access fees permit the LECs to eliminate independent ISPs through predatory pricing?

Many of the LECs and the long distance companies are pushing for per-minute fees on ISPs. PacBell and Bell Atlantic/Nynex are among the most aggressive LECs seeking per minute fees on ISPs. There are also some disagreements among LECs. For example, BellSouth told the FCC that with the current CCL charges, it would be a mistake to eliminate the ESP for the ISPs, and BellSouth has also not adopted the "the sky is falling" position being advanced by PacBell and Bell Atlantic/Nynex.

The ISPs themselves are just getting organized politically. The main ISP trade association, CIX, is badly co-opted on this issue by the large telcos who have joined CIX. In the absence of an effective ISP voice, a number of computer, software and consumer electronics companies have created the Internet Access Coalition ( http://www.internetaccess.org), which has developed rapidly into an effective advocacy effort. This is the group that sponsored the excellent study by Lee L. Selwyn and Joseph W. Laszlo, "The Effect Of Internet Use On The Nation's Telephone Network," which is available on the Internet at ( http://www2.itic.org/itic/eti_toc.html).

The enormous expression of interest by individuals who sent email for the February 14, 1997 deadline in the Access Charge docket (access@fcc.gov) was an important step in impressing the FCC staff and commission members about the views of the Internet community.

It will also be important to comment on the Notice of Inquiry that will examine the IPS's ESP exemption. Email for this round can be sent to isp@fcc.gov. It will also be helpful to file formal written comments. The first round of comments are due by March 24, 1997. It will be particularly helpful to have in the record information on topics such as:

1. How the Internet is used for civic discourse, to exercise free speech, and to promote education. (One might make comparisons to television).
2. How the Internet promotes economic development in the United States.
3. How flat rate local calling has contributed to the high level of residential penetration of Internet services in the United States.
4. What types of information should the FCC obtain from the LECs about network usage and costs.
5. What information the FCC should gather from the LECs and network vendors regarding deployment of higher bandwidth technologies, or the introduction of network solutions for 24x7 residential digital data connections to the Internet.
6. Are the LECs engaging in anticompetitive practices with respect to independent ISPs and other enhanced service providers?

CPT will provide additional reports on this important issue.

James Love
Consumer Project on Technology
love@tap.org; 202.387.8030
http://www.cptech.org

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