The Firefight Ahead Over Net Phone Calls – Can FCC Chairman Michael Powell protect Internet telephony from the regs that govern traditional phone service?

With setbacks last year on two major initiatives — relaxing rules governing the Baby Bells and broadcasters — Federal Communications Commission Chairman Michael K. Powell has yet to make his full mark as a deregulator. Now, Internet telephony’s takeoff gives Powell a third chance to put his conservative philosophy into place. But it won’t be any easier this time.

By Catherine Yang
Edited by Mike McNamee

http://www.businessweek.com/technology/content/feb2004/tc2004023_7512.htm

On Feb. 12, Powell, who declined to comment for this story, is likely to signal that he will use a light regulatory touch to spur the growth of low-cost Web phone calls. "Regulation can be poison," the FCC chairman recently declared. The FCC is expected to approve a petition by Pulver.com to operate its Voice-over-Internet Protocol (VOIP) service free of some traditional phone regs. That should please conservative purists on Capitol Hill and at the White House, who hope Powell will take the same hands-off approach toward broader rules for the Net phoning framework.

But Powell’s plans are already riling everyone from the FBI to state regulators and rural phone companies. "There will be blood," predicts James Rowe, executive director of the Alaska Telephone Assn.

FBI officials are prowling the halls of the FCC, warning Powell and his colleagues against exempting Net phone companies from requirements to build wiretapping capabilities into their systems. Unless G-men can listen in on Web calls, they warn, Internet calling will become the communications medium of choice for terrorists. Powell says he will protect the FBI’s ability to hear Web calls.

The FBI may be the least of Powell’s troubles. Traditional phone companies and powerful Western and rural politicians are lining up to protect universal service — the system of cross-subsidies that makes phone service affordable for low-income and rural Americans. Powell has held back reform of those subsidies. "It’s the big pink elephant that sits in the corner of the room," says Bob Quinn, AT&T’s (T ) vice-president for federal regulatory affairs.

DEREGULATION’S FOES. Powell may require Internet phone companies to pay into the universal-service fund. But he’s expected to exempt some of them from access fees — what long-distance carriers pay local phone companies to complete their calls — that are marked up to support rural phone service. If the FCC gives Web phoners a free pass, more calling will migrate to the new, lower-cost service — and rural subsidies will shrink. "This could be the end of universal service," says Ken Pfister, vice-president for strategic policy at Great Plains Communications in Blair, Neb.

Powerful rural lawmakers aren’t likely to let that happen. Senate Appropriations Chairman Ted Stevens (R-Alaska) — who led this year’s successful rollback of Powell’s looser limits on TV station ownership — says he plans to rewrite the 1996 Telecommunications Act in 2005. One goal: requiring Net phone providers to support universal service.

Powell, who says he’ll stay at the FCC at least through the election, insists that he can keep the feds’ hands off Web calls while still protecting universal service, 911 service, and FBI wiretaps. But doing that will take a deft political touch — something that the FCC chief hasn’t demonstrated so far.

Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.