Key policy issues to watch in telecom

by Andy Oram
January 21, 2000

Most Internet professionals realize nowadays that key technologies and policies affecting their future will come from the field of telecommunications. But this sensitivity is relatively recent. When the landmark Telecommunications Act of 1996 was passed, few computer geeks looked at anything but the Communications Decency Act. Now they’re arguing Section 251(b) with telecom carriers and discussing what’s intrastate versus interstate with the FCC.

If you’d like to be on top of the situation the next time a telecom revolution hits the Internet, educate yourself in the issues listed here.

I’ll provide a summary and a few links on each issue to get you started.

Access charges for ISPs

One of the most important forces bringing the economic and democratic benefits of information technology to the public is the low cost of Internet access. Comparisons of various countries show the inescapable link between costs and Internet penetration; in addition, flat-rate pricing for both local phone service and Internet access are major factors in promoting its use.

Both Internet providers and customers are therefore outraged whenever phone companies suggest that Internet providers be forced to pay them per-minute access charges. These access charges are currently paid by long-distance phone companies so they can use local phone lines. Some phone companies have claimed that the Internet is also long-distance and therefore should pay the same charges.

To understand the debate about access charges, you have to know a bit about what you actually pay when you use a phone and how it is divided among various companies. The complicated rules—developed first in the 1920s and formalized by the 1934 Communications Act and then by further FCC regulations—had the noblest of goals. The rules were meant to ensure that rural areas and poor people would have access to basic telephone service, by having their costs subsidized by those who could afford it (businesses, urban areas, and long-distance callers). Later, the rules also tried to enhance competition by ensuring that different phone companies could use each others’ facilities under fair rules that to some extent reflected real costs. Access charges are substantially higher than the actual costs of using of the lines, and provide most of the local telephone companies’ profits

In the late 1990s, local phone companies started to claim that Internet access was tying up an unfairly large share of circuits because customers would leave their connections open to their ISP for hours at a time. Voice over IP also led to demands that ISPs be treated like long-distance phone companies and pay access charges.

When applied to traditional long-distance companies, access charges are arguably fair because long-distance calls start and end on the local loop that the local phone company has paid for. (Nevertheless, the FCC has been reducing the charges steadily over the past few years.) Internet providers have a totally different system: they lease or buy lines like any other business and then route calls over a separate backbone.

In trying to fit the Internet into an old telecom regulatory framework, the FCC has left it in a somewhat contradictory position. When a customer uses the Internet, the call is considered “interstate.” (This bit of mumbo-jumbo allows the FCC to regulate some forms of service; (see Who regulates?). But the FCC decided back in the 1980s to deliberately shield the Internet from the complex and expensive regulations concerning phone charges, and they have firmly upheld this doctrine ever since. Thus, they have kept ISPs free from access charges. A related issue that remains to be resolved is reciprical compensation, which concerns contractual obligations in the common situation where a customer of one local phone company dials up an Internet provider using a different local phone company.

Local phone competition

Like many other countries in both the developed and underdeveloped areas of the world, the United States is trying to open up competition after decades of recognizing local phone service as a “natural monopoly.” Internet providers and users are intensely interested in promoting competition because new, competing phone companies are friendlier to ISPs than the older monopoly (or “incumbent”) companies. These incumbents, mostly Baby Bells, were ordered in the Telecom Act to take concrete steps to make their networks available to other phone companies. In many states, competition has been mandated by law even longer. But complaints from dozens of competing phone carriers around the country shows that fairness is an elusive virtue, difficult to pin down.

By law, the Bells have to offer access to the local phone network in three ways:

Unbundled network elements usually involve interconnection as well, so that the competitor can form a complete network path by combining its own elements with the elements purchased from the incumbent.

The Telecom Act required incumbents to allow interconnection “at any technically feasible point within the carrier’s network.” The FCC identified nine such interconnection points, and later added another one that competing carriers particularly yearned for. This was the right to connect at a terminal near the customer premises—as close as a competitor can get to someone’s home or business without stepping inside to string a new phone line. This new connection point opens up opportunities for competing phone companies, because it greatly lowers the costs of signing up scattered residential customers, and for ISPs as well, because they tend to find better deals with competitors than with incumbents.

The FCC also approved an odd kind of unbundling in November 1999: it forced phone companies to offer the high frequency spectrum on their lines to competitors. This will allow customers to keep their current phone service with the incumbent but use a competitor for ADSL or other broadband services.

So what has kept competitors from taking advantage of these comprehensive regulations, so many years after the local market was considered open to competition? The incumbents claim that competitors are unwilling to make the big investments necessary, or that long-distance companies are conniving to make the incumbents look bad so the regulators don’t let the incumbents expand (see Long-distance phone competition).

Competitors have a very different story, backed by reams of documentation. They claim that the incumbents drag their feet when competitors ask for space for equipment or lines to reach new customers. The list of crimes with which incumbents are accused goes on and on, extending to such details as leaving customers out of phone books when they switch to competitors, and failing to provide competitors with the information they need to fix phone lines (leaving the customer, of course, to complain that the competitor has lousy service).

Long-distance phone competition

December 1999 marks a historic moment in telecommunications history: 15 years after the break-up of AT&T, the first Baby Bell was allowed to offer long-distance service. This lucrative market was held out as a carrot to the incumbents in the Telecom Act, but incumbents couldn’t jump in until they proved (by meeting a long list of requirements defined by the FCC) that they had opened their local market. In December the FCC, following approval by the New York state utilities commission but in contradiction to warnings from the Justice Department, told Bell Atlantic that it had met their requirements and could offer long-distance service. Critics immediately claimed that the FCC had bent the rules and given Bell Atlantic a sweetheart deal; AT&T and Covad have sued to stop the deal.

The section of this article on local phone competition summarizes why it’s so hard to achieve competition in local markets. But incumbents have spent billions of dollars trying to meet the FCC requirements and have petitioned the FCC to allow them into long-distance in various states five times before Bell Atlantic’s New York success. For several years, the FCC has been under pressure to open the long-distance door from Congressmen and Senators who are friendly to local phone companies (and anxious to show the public that the Telecom Act was achieving one of its key goals, opening local competition).

Voice over IP

From the 1980s onward, the FCC drew a neat distinction between phone service and “enhanced service” (which has come to mean Internet or other data service) in rulings called Computer I, Computer II, and Computer III. The greatest threat to this distinction is Internet telephone, also called voice over IP. While debates are still unresolved about the relative efficiency of using IP instead of traditional circuits for phone calls, there is no doubt that people using voice over IP are avoiding steep charges that they would have to pay for traditional long-distance calls (especially on international calls).

The challenge to this comfy arrangement came first from a bunch of long-distance phone companies called ACTA, which said ISPs were providing competition and should rightfully be regulated as long-distance companies. These companies have wised up considerably since then, coming to understand that voice over IP is a great opportunity for them rather than a threat. But the challenge was picked up later by local phone companies seeking access charges.

The current state of voice over IP regulation is unsettled. An extremely detailed but unofficial FCC report to Congress suggests they might impose traditional charges on services that are clearly competing directly with traditional companies, while exempting innovative Internet services. Essentially, if you talk by voice with someone using your computer, you would remain an enhanced service and wouldn’t have to face access charges or other telephone regulations. But if you and your colleague picked up a standard telephone handset and dialed each other through a gateway service that uses IP, you would be considered traditional long-distance users and be subject to the access charges that long-distance carriers pay.

Cable modems

If you don’t see why cable TV should be discussed in an article about telephony, you haven’t received a marketing call yet from your local cable company offering bundled phone service. In many areas your local cable company is AT&T and will be calling you soon. (They still have to spend a lot of money upgrading cable lines they inherited by buying TCI and MediaOne.)

Cable companies usually contract with a single Internet provider; Excite@Home and Road Runner are the well-known ones in the United States. In early 1999, America Online and several other ISPs insisted this single source for Internet service was anti-competitive, and started an “Open Access” movement to force cable companies to allow all ISPs onto cable lines. After a lot of rhetoric and some claims that access by multiple companies is technically unfeasible, AT&T has started to give in. Its offer to open its lines is quite vague, though, and has been challenged as inadequate by critics.

If you have read the rest of this article, you can tell what’s difficult about opening access to cable lines. It’s exactly what legislatures and the FCC have been trying to do with incumbent phone service for some 15 years. The costs spent on vats of ink spilled by high-paid lawyers in this process could probably go toward wiring much of the underdeveloped world. Many ISPs have stayed away from the cable battle, choosing to concentrate on the main issue of promoting phone competition.

The law is also on the side of the cable companies. The Telecom Act mandates open access only to telephone companies (as part of their common carrier requirements), not to cable companies, and the FCC insists on a hands-off policy. But if cable modem service continues to be more attractive than high-speed phone service (like ADSL), it will become a large enough part of the market to be worth re-examining in a regulatory light.

Mergers in the public interest

Telecom mergers are some of the biggest in history, and have made headlines regularly since the Telecom Act and similar actions in European countries made mergers much easier. For instance, there used to be seven Baby Bells. Now there are four, and one of them (Bell Atlantic) is trying to merge with GTE, the eighth major incumbent from the time of the AT&T breakup. MCI and Worldcom (a product of multiple mergers) generated heat on both sides of the Atlantic when they merged; now they are trying to merge yet again with Sprint. As mentioned in the Cable modems section, AT&T has grown by swallowing the U.S.’s two biggest cable companies and using them to enter the local phone market.

Large companies in the U.S. must file advance notice of mergers with the federal government. Their applications are reviewed by either the Federal Trade Commission or the Department of Justice Antitrust Division, and may be opposed under the antitrust laws. The FCC, using its control over the transfer of licenses, has traditionally added its voice in mergers involving communications industries. And the FCC’s rules are quite broad: it determines whether a merger is “in the public interest” before giving approval. The MCI-Worldcom merger was held up for some time by this regulation, and the FCC demanded some extra concessions (also required by the European Union). Some in Congress, again, are grumbling about the time taken by the FCC to approve mergers (it became front page news in January 2000 when Senator McCain turned out to be one of them) and some are suggesting they take this job away from the FCC.

The E-Rate and universal service

While freeing megacorporations to grow and merge promiscuously in the Telecom Act, the consolation prize that Congress handed to the poor was a subsidy of two and a half billion dollars a year to bring Internet access to schools, libraries, and rural health clinics. Immediately after passage, this modest addition to the universal service fund was excoriated by long distance phone companies (who want to list it as a separate fee on their bills) and by Republican Congressmen who coined it the “Gore tax.” (So far as I know, Gore had nothing to do with it—the section was introduced into the Telecom Act by Senators John Rockefeller and Olympia Snowe.) The E-Rate’s political fortunes sunk still lower by admittedly wasteful bureaucracy in the organizations set up by the FCC to administer it.

Beset by such powerful threats, the E-rate has pulled off an incredible comeback. Although the FCC decided it didn’t need full funding in its first year, it is back to two and a half billion dollars in the second. And despite all the Cassandras, schools have learned how to negotiate the application process and have put the money to the uses for which it was earmarked. The public has shown surprising sympathy for the “Gore tax,” and even the most vocal critic (Senator Conrad Burns of Montana) claimed he wanted to continue the subsidy but just fund it out of general revenues instead of telephone fees.

Digital wiretapping

Five years is a long time between the passage of a law and the release of regulations implementing that law. This is what happened to the Communications Assistance for Law Enforcement Act (CALEA), a law giving police forces the ability to wiretap digital phones. The law was passed by Congress in 1994 but the FCC didn’t issue a final rule on it till 1999. (Nor does that mean the law is being enforced yet: manufacturers still have to build equipment that follows the regulations, and phone companies have to upgrade their networks.)

While the main goal of the law seemed straightforward—to extend traditional forms of surveillance to mobile and other digital phones—old models can’t be upgraded to new technologies so easily.

For instance, the FBI wanted phone companies to tell them the locations of mobile users being wiretapped. In traditional landline phones, of course, the police already know where the person is, and he’s not going to move around during the conversation. Location information is thus a new requirement, but the FBI claims that it simply updates a capability they have always had.

Other issues over which the FBI wrangled with civil liberties groups were even more detailed: for instance, whether the police could continue monitoring a conference call after the person who was the subject of the wiretap hung up, and whether they could get digits entered after a call is connected under the category of “call-identifying information.” (Digits entered after the connection is made might be part of the call, if the user is dialing through a gateway, but they could also be bank account numbers or other data that the police might not have a warrant to obtain.)

The CALEA debate shows that each new system can be either an aid to protecting privacy or a force for further intrusion; it depends on how the technology is designed. Many critics of the law said that it created new forms of surveillance for law enforcement, as well as a precedent for making all forms of technology open to intrusions on privacy.

Phone companies tended to side with the civil liberties groups, mostly because they were worried that the 500 million dollars budgeted by Congress for the transition would not pay for all the capabilities demanded by the FBI. In general, the FBI got what it wanted from the FCC. But the issue is far from settled. Not only are there court challenges, but the continual introduction of new technologies—like voice over IP—continually reopens the debate.

Similar demands for digital wiretapping capabilities are just beginning in Europe. Once again, lawmakers have to decide what capabilities to give police in a new medium and how to balance law enforcement with rights to privacy. Since the results are also starting to be applied to the interception of email and other Internet transmissions, current debates will have consequences going far beyond mobile phones.


For years the radio spectrum has been allocated for specific purposes to TV channels, radio stations, cellular phone companies, and other miscellaneous uses ranging from the critical (air traffic control) to the trivial (taxi dispatchers).

A radical alternative to analog broadcasting is spread-spectrum packet radio. This kind of transmission is digital and allows multiple users to share data as if on a local area network. Trials have shown that packet radio can represent an incredibly cheap route to Internet service. The service is most appropriate in geographic areas where radio waves can travel relatively free from physical interference (trees, tall buildings) and using low-powered transmissions that don’t interfere with other users of nearby bandwidth.

The FCC allocated a few bands of spectrum to spread-spectrum transmission, but they proved ineffective. In January 1997, in response to a petition from Apple Computer, the FCC allocated further bandwidth, but its range made it fit in most cases only for packet radio within a single building or small campus. Over the past decade, visionaries in the computer field have been asking the FCC to allocate a large band of the spectrum to packet radio, a kind of transmission that allows multiple digital users to share data as if on a local area network. But FCC responses to bandwidth petitions tend to be slow and less generous than requested, because the process is weighted toward incumbent users of the spectrum.

A recent initiative for “ultra-wideband” radio transmissions is now before the FCC. One of its prominent backers, Dave Hughes, also criticizes the E-Rate for narrow language that excludes the use of universal service funds for wireless Internet access.

Municipal networks

Many cities, especially small ones in largely rural areas, worry that the information revolution will pass them by. They are tired of poor service from telephone or cable companies, or find that the private companies are dragging their feet concerning the stringing of new wire to allow high-bandwidth data access. So these cities are doing it all themselves.

This civic effort can arouse legal problems, though. Municipalities have means of raising money (tax-free bonds) that private companies don’t. Often the city is also in the dual position of competing with and regulating a private carrier. Using these differences as a wedge, private companies have challenged the municipal networks in a few states. The private carriers say that the effect of the municipal network initiatives is to prevent them from providing their services. This reasoning is a bit like killing your father and your mother and begging the court for mercy because you’re an orphan. The cities wouldn’t bother creating their own networks if private carriers had been offering adequate service in the first place!

The resolution of this issue is still far off. In most places, municipalities do what they want without a challenge. Some of the challenges to municipal networks take the form of state bills (which may or may not pass); some take the form of lawsuits. The FCC has declared its support for the municipalities but claims it cannot overrule a state law.

Who regulates?

When telecom professionals get tired of reviewing phone-company-versus-phone-company battles and phone-company-versus-ISP battles, those of the most refined taste sample the subtlest cases of all: lawyer-versus-lawyer-battles. In particular, the states have clashed with the FCC a couple times in arguing who gets to regulate a particular communications service.

One of the tasks mentioned at the very beginning of this article (setting the rate for the sale and leasing of incumbent phone lines to competitors) was finally resolved in favor of the FCC after percolating up through the courts for a couple years.

The FCC has also ruled that, even though Internet access is to be billed as local (see Access charges for ISPs), high-speed digital access such as ADSL is interstate and thus can be regulated by the FCC.

Several cities have tried to resolve the Cable modem issue through the franchises they grant; a couple states have weighed in on the issue too. But the FCC has pre-empted them all and insisted that it has to handle the matter in order to provide a single national standard.

Whoever ends up regulating some aspect of telecommunications, the debates are worth taking some time to follow. I hope I have shown in this article that the activities of regulators have major effects on the Internet and on ordinary people, whether they pick up the phone to call their hair salons or whiz across the time zones on high-speed modems.

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Andy Oram is an editor at O’Reilly Media. This article represents his views only. It was originally published in the online magazine Web Review.