The Internet at the FCC:

Cybernauts vs. Ma Bell

by Robert Cannon(1)


In February 1996, the United States Congress passed the Telecommunications Act of 1996, the most comprehensive revision of telecommunications law in 60 years. Except for a controversial provision seeking to censor pornography on the Internet, the Act made virtually no mention of the Internet. Nevertheless, the reforms implemented by the U.S. Federal Communications Commission pursuant to the Telecommunications Act will have a tremendous impact on the future of Internet. This paper reviews the FCC's access charge reform proceeding which addresses the way in which the Internet interfaces with the public switched telephone network.


Table of Contents Introduction

Access Charge Reform The Past: The Computer Trilogy Computer I

Computer II & III

The Access Charge Exemption

Summary of the Past
  The Present: Access Charge Reform Access Charge Reform Notice of Proposed Rulemaking

 The Notice of Inquiry

Current Status of the Order
  The Interconnection Order
  Conclusion: The Future

I. Introduction

On February 8, 1996, President Clinton signed into law the Telecommunications Act of 1996,(2) the most sweeping reform of U.S. telecommunications law in sixty years. Tremendous in size, this Congressional Act resulted in over 90 administrative rulemakings by the Federal Communications Commission (FCC). Some, rightfully or wrongfully, have referred to this Act as the Great Deregulatory and Pro-Competition Telecommunications Act [others have referred to it as the telecommunications attorneys full employment Act]. On the whole, however, this document failed to address one of the most expansive and explosive areas of telecommunications: the Internet.(3)

The Telecommunications Act was heralded as bringing in the new information age. A multitude of commercials could be seen on American TV, promising how the Act would bring new choices to consumers. How would this be achieve? By putting the final death nails in the old telecommunications monopolies, by opening up all markets to competition, and by reducing restrictions on cross ownership so that now a corporation could own not just your local phone service, but your long distance service, your cable service, your Internet service, a TV station, maybe a radio station, and a newspaper as well.

But what does the Telecommunications Act have to do with the Internet? Congress did not address the Internet and the FCC does not and has never regulated the Internet, right? Wrong. The FCC has regulated computer communications for over 25 years. With one small regulation, the FCC has had tremendous influence over the growth and shape of the Internet. This paper will explain what that regulation is, how it effects the Internet, and how the regulatory status of the Internet before the FCC may be altered.(4)

II. Access Charge Reform

      A. The Past: The Computer Trilogy
Back in the 1960s, when the Internet was largely a toy of the Department of Defense and researchers, the FCC realized that communications over telephone lines increasingly involved computers. In order to determine what to do with computerized communications, the FCC initiated the Computer trilogy. What followed was a complex and cryptic regulatory scheme.
        1. Computer I
In 1971, the FCC released the Computer I Order.(5) In this Order, the FCC attempted to separate computers which are involved in the means of communication from computers which were involved in the content of the communications, performing data processing services. It defined data processing as the "use of a computer for the processing of information as distinguished from circuit or message-switching."(6) Computers involved in the means of communications would be regulated as telephone carriers under Title II of the Communications Act of 1934, as amended. Computers providing data processing services over telephone networks would not be regulated under Title II. Any form of communication which fell between the two clearly defined categories, well, the FCC would just have to work it out on a case-by-case basis.(7)

Even though data processing services were not regulated as telephone carriers, the FCC found that it had jurisdiction over these services. This jurisdiction was based on the ancillary jurisdiction of Title I.(8) This means that the FCC has jurisdiction over the Internet - but it is, so far, limited jurisdiction. As stated in People of the State of California v. FCC,

Title I is not an independent source of regulatory authority; rather, it confers on the FCC only such power as is ancillary to the Commission's specific statutory responsibilities. In the case of enhance [telephone] services, the specific responsibility to which the Commission's Title I authority is ancillary to its Title II authority is over common carrier services.(9)
The FCC has only concluded that it has jurisdiction over data processing services where they are transmitted over the telephone networks.(10) The Commission has yet to find that it has jurisdiction over the Internet per se or over the Internet where it does not utilize the telephone network (where it is transmitted over cable, wireless, or computer networks).(11)

The rationale behind Computer I had more to do with the economic power of telephone companies (telcos) than it did with computers. As the relationship between computers and telephone communications grew, so did the threat that the large telcos would use their economic might to cross-subsidize data processing services and crush a thriving and competitive data processing market. Therefore, the FCC ruled that large telcos could only offer data processing services through separate subsidiaries. This, the FCC believed, would promote competition, more efficient services, and innovation.

2. Computer II & III
It was not long before Computer I proved itself inadequate. The FCC faced a potential of endless case-by-case determinations, deciding which hybrids of computerized communications should be classified as telephone carriers and which should be classified as data processing. Therefore, the FCC initiated the Computer II proceeding.

Computer II, released in 1980, largely affirmed and built on the foundation of Computer I.(12)Computer II, however, redrew the distinctions between communications and data processing services by introducing the concepts of "basic service" and "enhanced service." Basic service, which is regulated as telephone service under Title II, is the offering of "a pure transmission capability over a communications path that is virtually transparent in terms of its interaction with customer supplied information."(13) Enhanced services, on the other hand, are "services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, protocol or similar aspects of the subscriber's transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information. Enhanced services are not regulated under Title II of the Act."(14) Enhanced services include data processing services and hybrid forms of communications.(15) The Enhanced Service Provider (ESP) status is the status of ISPs which connect to users over the public telephone network.(16)

In the Computer II proceeding, the FCC continued to be concerned with the protection of a thriving and competitive market from the economic dominance of large telcos and monopolies. The Computer II proceeding implemented what was knows as "structural safeguards" which maintained the policy that large Telcos could only provide enhanced services through separate subsidiaries.(17) In addition, the broad scope of the Enhanced Service Provider status permitted the Commission to avoid case-by-case analysis. "A policy of identifying regulable enhanced services would, in the Commission's view, be a reversion to the futile Computer I case-by-case approach that inhibited technological innovation and diverted Commission resources from more beneficial activities."(18)

3. The Access Charge Temporary Exemption
As Internet services were growing, the telephone network was splintering. One's long distance service was no longer the same as one's local telephone service. In order to address how these telephone services would relate to each other, the FCC initiated the access charge proceedings. "'Access charges' are fees collected by the local telephone companies for the origination or termination of any interstate or foreign telecommunication".(19) In other words, it is the fee paid by long distance networks to interface with the local telephone networks. Included in the proceedings was consideration of how Enhanced Service Providers would fit within this regulatory scheme.

In 1983, the Commission determined that Enhanced Service Providers would be exempt from the access charge requirements of long distance carriers(20) even if an Enhanced Service Provider may be providing long distance communications services to users.(21) Thus, Enhanced Service Providers are "end users".(22) As end users, they would acquire telephone service just line any other business.(23)

Once again, the rational for the Commission's actions was based on maintaining the competitive Enhanced Service Provider market. According to the Commission,

At the time we adopted the original access charge plan, however, we concluded that the immediate application of that plan to certain providers of interstate services might unduly burden their operations and cause disruptions in providing service to the public. Therefore, we granted temporary exemptions from payment of access charges to certain classes of exchange access users, including enhanced service providers. . . . We reiterated our view that rate shock, which provided the original basis for the special treatment of enhanced service providers, justified a temporary but not a permanent exemption . . .(24)
The Enhanced Service Provider industry was in a unique period of change. Telcos were entering the Enhanced Service Provider market for the first time without the use of separate subsidiaries.(25) Computerize information networks such as Compuserve and America Online were coming online and capturing the public attention.(26) Thus, the Commission concluded that this volatile and competitive market justified the continuation of the Enhanced Service Provider exemption from access charges.
4. Summary of the Past
In sum, the significance of the Enhanced Service Provider status of ISPs is the following:

(1) Enhanced Service Providers/ISPs are not telecommunication common carriers;

(2) Enhanced Service Providers/ISPs are not regulated as telephone carriers under Title II;

(3) The FCC has jurisdiction over the Enhanced Service Providers/ISPs pursuant to the ancillary jurisdiction under title I; and

(4) Enhanced Service Providers are "end users" of the telephone network and do not pay the access charges of long distance carriers.

B. The Present
On Christmas Eve, 1996, the FCC released the long awaited Access Charge Reform Notice of Proposed Rulemaking.(27) In the context of the Telecommunications Act of 1996, access charge reform was seen as crucial to encouraging competition, reducing prices to consumers, and having the network reflect the true cost of telecommunications. As in previous access charge proceedings, the notice included consideration the continued viability of the Enhanced Service Provider status of Internet Service Providers (ISPs).
1. Access Charge Reform Notice of Proposed Rulemaking
The lengthy Access Charge Reform Notice dealt with the most pressing issue - revision of access charges between long distance carriers and local telephone carriers. But the FCC knew that it could not address the issue of access charges without addressing the Enhanced Service Provider status of ISPs and their exemption from access charges. However, as quickly as the FCC put the issue on the table, it took it back. As a part of the notice, the FCC stated its tentative decision that the ESP exemption from access charges would be maintained.(28) The rationale was one of timing. The FCC stated
As we have explained throughout this Notice, the existing access charge system includes non-cost-based rates and inefficient rate structures. We see no reason to extend this regime to an additional class of users, especially given the potentially detrimental effects on the growth of the still-evolving information services industry. Although our original decision in 1983 to treat ESPs as end users rather than carriers was explained as a temporary exemption, we tentatively conclude that the current pricing structure should not be changed so long as the existing access charge system remains in place.(29)
In other words, the FCC wants to resolve the larger systemic issues in access charge reform of how long distance carriers relate to local carriers before it imposed an antiquated regulatory regime on the Internet. Issues related to the Internet would be taken up during the Notice of Inquiry proceeding (discussed below).
2. The Notice of Inquiry
As a part of its Access Charge Reform Notice, the FCC included a Notice of Inquiry(30) which addressed the way in which the Internet interfaces with and burdens the public switched telephone network.(31) In this part of the proceeding, the FCC anticipated discussion of
  • the relationship of the Internet to the public switched telephone network "in a world of digitalization and growing importance of data technologies,"
  • "whether, after [the FCC] complete[s] reform of access charges as contemplated in this proceeding, [the FCC] should consider any additional actions relating to interstate information services and the Internet,"
  • how access the Internet will be provided universally and affordably, and
  • the revision of the Enhanced Service Provider status of ISPs.(32)
  • a. Network Reliability and Interoperability Council
    In the Notice of Inquiry the FCC made mention of an entity which, until recently was not well known in the Internet community, the Network Reliability and Interoperability Council (NRIC). The NRIC studies the efforts to ensure a reliable telephone network, with sufficient redundancies which can provide service even during natural disasters.(33) FCC Chairman Reed Hundt has requested that the NRIC report on the impact of the Internet on the telephone network (it is unclear whether, by tasking the NRIC with the job of studying the effect of the Internet on the telephone network, the FCC meant to characterize the Internet as a natural disaster). In many other areas of telecommunications, the FCC manages to get industry off to the side, in groups such as these, where industry can resolve differences off the record and without regulatory intervention. The FCC in the NOI indicates that it would be pleased if the NRIC could reach such off the record resolution of Internet/telephone network issues as well.(34)

    It should be noted, however, that the NRIC is comprised primarily of members of the telephone industry. The Chairman at the time of the fall, 1996, meeting was Ivan Seidenberg of NYNEX. None of the members who are on record at the Fall meeting could be said to directly represent the interests of the Internet community.(35) Therefore, as the cliche goes, it would appear that the FCC has asked the fox to watch the hen house. If resolution of the relationship of the Internet to the telephone network is to take place off the record, it cannot be done in an entity representing only one side of the debate.

    b. Telco Argument: Internet Burdening Telephone Network
    In the Fall of 1996, four telcos filed reports with the FCC stating that the Internet is causing a substantial burden on the telephone network.(36) FCC Chairman Reed Hundt warned this conference last year that "[t]he increasing levels of Internet use are also beginning to affect the telephone network."(37) The American Carriers and Telephone Association warned the FCC in March 1996 that this congestion "will clearly be detrimental to the health of the nation's telecommunications industry and the maintenance of the nation's telecommunications infrastructure."(38) This concern for the Internet straining the telephone network is cited by the Access Charge Reform Notice as a motivating force for considering modification of the Enhanced Service Provider status.(39)

    The telcos argument is that the telephone network was designed to serve a different purpose with different assumptions. The network was originally designed to serve relatively short voice transmissions. Since not all users accessed the network simultaneously, the network was designed to satisfy the needs of the percentage of users expected to access the network during peak hours. In other words, if there are 100 potential users of a system, during the peak only 14 such users could be expected to be online at peak times.(40) Therefore the network only had to be designed to accommodate the 14 percent of users making relatively short calls.

    This statistic is significant for network design. We can assume that every U.S. home has at least one phone. We can assume that for each house, one phone line is required to connect the house to the network. These lines go to a telephone switch which sets up and routes the call. Although every house must have one phone line, there need not be a switch for every line. Instead, the phone company only has to build sufficient infrastructure to get the expect 14 percent peak of users into the network.(41) This assumption greatly reduces the amount of infrastructure investment a telco is required to make. But note that when a call is placed, the infrastructure becomes dedicated to servicing that transmission and will not be available again until that call is terminated.(42)

    But what happens when there are 200 users accessing an ISP, making one hour calls.(43) The Telcos argue that it bogs down the system. The network resources are tied up with Internet calls, blocking the ability of others to use the network. This, the telcos claim, is resulting in busy signals, brown outs, and network congestion. The Telcos argue that this is a threat to the public interest and our public safety, with users potentially unable to make emergency calls because of the load.

    The telcos argue that this has created a finacial burden. As stated above, ISPs are treated like business end users and are exempt from the access charges which long distance carriers pay.(44) The ISPs' business lines are metered and ISPs are billed only for outgoing (originating) calls. But virtually all calls are incoming (terminating) from users to the modem banks. The ISPs do not pay the telcos receiving these calls. Thus, because of the lack of access charges and because of the lack of fees collected for incoming calls, the telcos argue that the current revenues derived from local services provided to ISPs do not come close to recovering the cost of providing service. Hence a cross subsidization is occurring between users of ISP services and all other users.(45) The telcos are therefore calling on the FCC to address this disparity by eliminating the access charge exemption, thereby permitting telcos to charge ISPs higher rates.(46)

    Furthermore, the telcos argue, in order to respond to the increased demand on the network, they have had to make substantial infrastructure investments.(47) Since the telcos are not making money off of ISPs, they argue that they are receiving no return on the investment they are making in response to Internet demand. They argue that this is unfair.(48) In order to pay for the infrastructure investments, the telcos argue that everyone has had to subsidize the essentially "free" usage by Internet users.(49) Furthermore, they argue that with a negative return on investment, the telcos will have no incentive to further invest and upgrade the telephone network.(50)

    This is an important part of the debate. For all of their analysis of the problem the Internet is causing, the bottom line solution which the telcos argue for is that they should be given more money.(51) There are technological solutions to having 100 people attempt to access an ISP simultaneously. Instead of addressing these solutions in their reports, the telcos argue first and foremost for the elimination of the Enhanced Service Provider status and the ability to increase fees paid by ISPs.(52)

    c. Response to the Telcos
    i. Economic Return
    How does the Internet community respond to the telcos claim that they are losing a tremendous amount of money as a result of Internet traffic? They respond by pointing out that it is unprecedented in history for such a large industry to whine and complain so much about increased business and increased revenues. In fact, in the quarter in which the Telcos complained so bitterly to the FCC that they were loosing so much money, they reported earnings. And what was the explanation for this profitable quarter? Increased revenued driven by the expanding online industry and the demand for second residential lines dedicated to users' computers and other high tech equipment.(53) According to Bellcore, the cost of upgrading the telephone network in order to accommodate the increased demand is approximately $245 million nationally. According to the Information Technology Association of America, the "additional residential access line sales stimulated by the growth of on-line services generated revenues that exceed this figure by a factor of six."(54)

    But how can it be that there is such a gap between the telcos conclusion that the Internet is driving telcos into the poor house and the Internet industry which argues that the Internet is in fact making the telcos rich? The answer is creative math. When the telcos conducted their studies they did two things. First, they selected geographic settings where Internet congestion is at its worst - for example, Silicon Valley in California - hardly representative of Internet usage as a whole. Second, the telcos only looked at the cost of providing service to ISPs as compared to the benefit derived from ISPs. Left out of this equation is residential users. As the financial reports of the telcos acknowledged, the residential user is where the real benefit was derived. The substantial increase in second residential lines, services such as call waiting, and special lines such as ISDN helped drive profits up for ISPs. No where in the reports filed with the FCC is the benefit from Internet residential users acknowledged. When the whole picture is examined, the Internet has been a positive financial force for the telcos.

    There is another way in which Internet users are increasing returns for Telcos. The telephone network must be built to meet peak usage. Once the network is built out to meet peak usage, the cost of the network is fixed; during peak or off-peak, the cost of the network as a whole is the same. Whether one person or one hundred people are using the network, it still cost the telco, for example, $5 million to build the network. The key for the Internet is that the peak for voice and the peak for online traffic is not the same. The peak for voice is roughly business hours whereas the peak for online traffic is late in the evening. Prior to online traffic, a significant part of the telephone network was idle during late evening. Now, online traffic is utilizing existing infrastructure which would otherwise have been idle and producing an economic return for the telcos. Thus, for the exact same network expenditure, online traffic has expanded the period during which the telco is deriving peak return.

    Thus, imposing access charges on ISPs is not necessary in order to give telcos profits - that is already occurring. Furthermore, applying access charges to ISPs would be harmful to the Internet. The solution is not simply giving telcos more money. As John Curran of BBN Planet stated before the FCC, "[i]t is hard to imagine a more effective strategy for decimating the online information industry than removal of the access charge exemption for ISP's and resulting cost propagation to the end-user which will occur."(55)

    Furthermore, the telcos argument begs the question of who should pay for the cost incurred providing service to Internet users. The Internet is a new communications medium with tremendous efficiencies. The cost and resources required to transmit data on the Internet is substantial less than the costs and resources required to transmit the same data over the dedicated switch telephone network. On the Internet, one pipe can transmit hundreds of different transmissions. On the phone network, hundreds of pipes are required to transmit hundreds of transmissions. The reason that so much telephone resources are tied up is not because of Internet technology but because of telephone technology. The dedicated switched technology of the telephone network is antiquated, requiring dedication of resources and capacity even when not needed or demanded. Making Internet users pay for this inefficiency makes no sense. The technology exists today which could incorporate the efficiencies of Internet technology into the phone network and take data traffic off of the voice network.(56) The telcos are presently making a profit as the result of Internet traffic. Isn't it only rational that the telcos which are profiting from Internet traffic should use those profits to alleviate any congestion which the telcos' own technology causes?(57)

    ii. Burden on the Telephone Network
    What about the telcos claim of congestion which threatens the reliability of the U.S. telephone network? First, it is important to decipher what the telcos appear to be saying. On the face of the telco's reports, it would appear that the telcos were complaining about congestion on the entire network. However, upon a close reading, they really appear to be complaining about telephone traffic between an ISP and the telephone central office which services that ISP.(58) That point in the network faces a concentration of Internet traffic. There is not the same concern for congestion between residential users and their central offices because at these points Internet traffic is dispersed.(59)

    The Network Reliability and Interoperability Council, the entity set up by the FCC to address reliability issues, concluded in the Fall of 1996 that no such congestion problem exists. According to the Council, "no carrier has reported an event associated with Internet use that meets the threshold for reportable outages" and, again, "with the Internet's present mix of applications, its growth does not pose any unusual network outage hazards.(60) Consumer groups and Internet trade associations have also challenged the telcos claims.(61) Furthermore, the telcos aggressive entrance into the ISP market cynically contradicts their own claims that Internet traffic poses a substantial risk to the survival of the telephone network.(62) In addition, as stated above, since peak voice and peak online traffic periods are not the same (and online peak is utilizing otherwise idle network infrastructure), the possibility of system congestion is significantly reduced. Finally, as noted above, even if there is a problem with congestion on the telephone network, the telcos have both the technology and the profits with which to alleviate that congestion.

    iii. Economic Dominance
    There is also continued concern for the economic power of LECs unfairly dominating the market. As noted earlier, the FCC created the Enhanced Service Provider exemption out of concern that the telcos would use their economic dominance to cross-subsidize the Enhanced Service Provider industry, under-cutting and driving out competition. Today telcos are once again in the position to use their economic strength to unfairly destroy competition in the ISP industry. PacBell apparently placed in every one of its bills to its customers advertisements which offered 5 months of free Internet service with the purchase of a second phone line.(63) As Jamie Love of the Consumer Project for Technology stated, this shows "the outrageous hypocrisy of running this promotion and a PR battle that asserted Internet users were causing unbearable network congestion."(64)

    The Internet has seen tremendous growth in the United States as the result of ma-and-pop companies setting up shops providing cheap and ubiquitous Internet access. This growth was made possible by the decentralized environment of the Internet.(65) The FCC's Enhanced Service Provider status maintained this environment by keeping dominant telephone carriers from using their economic strength to wipe out competition. The Internet community and the Federal Government must ask themselves whether it is wise to let the Goliaths of Corporate America come in, eliminate small ISPs, and, having done so, jack up subscriber fees and dictate the new standards for the Internet. If AT&T, for example, is permitted to gain a position of dominance in the Internet market, then it will be AT&T that decides what prices are set for service, and not the Internet community.(66) It will be AT&T which determines what standards should be set, and not the Internet community. It will be AT&T that determines the future domain name policy, and not the Internet community. The Internet was created on the paradigm of decentralized governance and organization. This will only continue if corporate America is prevented from eliminating the small players on the Internet and prevented from forming a new oligopoly, where your Internet access choices are no broader than your long distance chooses: AT&T, MCI and Sprint.

    iv. Conclusion
    This is not a situation where the Internet community is objecting to paying for the cost of providing service to Internet users. In order to properly develop, the architects of the Internet must account for the actual costs Internet usage causes. However, it is less than clear what, if any, burden the Internet is causing on the telephone network. Certainly it is undesirable to have the Internet subsidizing the maintenance of the telcos antiquated communications system. Therefore, the FCC's regulatory reform should promote the new medium in a way which assists in the implementation of a new high bandwidth network, assists in the goal of providing universal access, and which does not reward economic and technical inefficiencies.
    3. Current Status of the Order
    The comment period for both the Notice of Proposed Rulemaking and the Notice of Inquiry have closed (the FCC received over 400,000 e-mail messages in response to these proceedings). Given the FCC's argument that it wishes to reform the access charge system before it imposes it on Enhanced Service Providers and the FCC's general loathing of taking any action seen as negative for the Internet,(67) the Enhanced Service Provider exemption from access charges will likely be maintained in the short term. Resolution of the Notice of Inquiry will take substantially longer and it is likely that the FCC will look for private resolution of the Internet / telephone company debate.
    C. The Interconnection Order
    There is a second FCC proceeding which is important to take note of in this context. In August, 1996, the FCC released the Interconnection order.(68) This Order, implementing Section 251 and 252 of the Telecommunications Act, dramatically altered the telecommunications landscape by eliminating the last vestiges of the telephone monopoly. It did this by opening local telephone markets to competition. In order to do this, the FCC sought to do three things: (1) until true competition exists, create an artificial competitive market by controlling prices until real competition was in place; (2) unbundle the current telephone infrastructure so that new entrants in the market could take advantage of the pieces of the infrastructure useful to their new service; and (3) give telcos the right to interconnect(69) to all other telcos.

    What are the implications for the Internet? None. The Interconnection order gave interconnection rights to telecommunications carriers alone. ISPs which are not telecommunication carriers gained no rights.

    So why talk about the interconnection order? The answer is that the real solution to the Internet / telephone network debate may lie in interconnection. The telephone network must move away from antiquated switched network technology. Technology currently exists which would taken advantage of the efficiencies of the Internet protocols, but telcos have refused thus far to implement these technologies. If Telcos are unable or unwilling(70) to advance the Information Infrastructure, then ISPs should be permitted to do so. Again, the Interconnection Order gives telecommunications carriers the right to interconnect to whatever elements of the local network they need. If part of the telephone network is antiquated, ISPs could employ technology which bypasses those inefficiencies and uses only those parts of the telephone network which are necessary to make the call. If the Internet were permitted to Interconnect, the Internet would be permitted to resolve the congestion, bandwidth and access obstacles.(71)

    III. Conclusion: The Future

    Currently, the Internet is dependent upon the telephone network for individual users' Internet access. There is no indication that this will change in the near future.(72) It is true that cable companies are offering Inherent service. The wireless spectrum is also increasingly made available for new and emerging purposes, including wireless Internet connections - the FCC this winter released the SUPERNet Order which dedicated a portion of spectrum to unlicence use by computer devices for the purpose of setting up wireless computer networks and Internet connections. In addition, direct access to the Internet through computer networks is an increasing phenomenon. As all of these alternatives to telephone access to the Internet increase, the significance of the Internet / telephone network debate may decrease. There are no access charges, no interconnection issues, and no Internet caused congestion on the phone network where there is no need for the telephone network. However, representatives from both wireless and cable industries appearing before the FCC indicated that it will be some time before these alternatives are widely deployed. Until such time, the Internet Community must continue to deal with the telephone network.

    The final comment is that the Internet community must continue to pay attention to Washington. The decisions of the FCC have had a significant impact on the development of the Internet. They will continue to have an influence in the future. Every United States netizen has the right to have his or her voice heard before the FCC and the federal government - we should all endeavor to ensure that the small voices of the Internet are not drowned out by the Goliath-like voices of the telephone industry. The Internet is a rebirth for democratic discourse. Use the value of this great medium to ensure the future of this medium.


    1. Robert Cannon, a Washington, D.C. attorney, is a contributor to the Cyberspace Law Authorities Report, a monthly report keeping the Internet community apprized on developments in Internet and on-line law and policy.

     © Copyright Robert Cannon 1997.

    2. An excellent version of the Telecommunications Act of 1996 can be found on the World Wide Web at <>.

    3. The one area where the Act did address the Internet, the Communications Decency Act which sought to regulate the transmission of pornography, will not be address here. For information on the history of the Communications Decency Act, how it would work, and the status of the constitutional court challenge in the Supreme Court, see "The Communications Decency Act Litigation Update Web Page" at <>.

    4. For an overview of the major FCC rulemakings effecting the Internet, see Kevin Werbach, Digital Tornado: The Internet and Telecommunications Policy, FCC Office of Policy and Planning Working Paper No. 29 (March 1997) (accessable through the FCC web site <>).

    5. See Regulatory and Policy Problems Presented by the Interdependence of Computer and Communication. Servs. and Facils, Order, 28 FCC 2d 267 (1971), aff'd in part sub nom. GTE Serv. Corp. v. FCC, 474 F.2d 724 (2d Cir.). An agency order sets into place a new regulation or a new policy for an agency. It is issued at the conclusion of a regulatory proceeding in which interested parties are given notice of the proceeding and the tentative conclusion of the agency, and the opportunity to file comments before the agency concerning the regulation. The agency must consider all comments received and give a "rational" explanation for either adopting or rejecting the arguments. Such orders are usually appealable to federal court.

    6. Computer and Communications Industry Association v. FCC, 693 F.2d 198, 203 n. 6 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1983) [hereinafter "CCIA"] (citing Computer I Tentative Decision, 28 FCC2d at 295).

    7. See CCIA, 693 F.2d at 203.

    8. See 47 U.S.C. 151 (1996).

    9. 905 F.2d 1217, 1240 n. 35 (9th Cir. 1990) (citations omitted) (this case was the federal court appeal of Computer III).

    10. See CCIA, 693 F.2d at 213 ("In Computer II the Commission found that the exercise of ancillary jurisdiction over both enhanced services and CPE was necessary to assure wire communications services at reasonable rates. Regulation of enhanced services was deemed necessary to prevent AT&T from burdening its basic transmission service customers with part of the cost of providing competitive enhanced services").

    11. See also Telecommunications Act of 1996, sec. 509, codified as 47 U.S.C. 230 (stating policy of limited federal jurisdiction by stating "[i]t is the policy of the Federal Government . . . to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation").

    12. See Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Final Decision, 77 FCC 2d 384 (1980), Memorandum Opinion & Order, 84 FCC 2d 50, further reconsideration, 88 FCC 2d 512 (1981) aff'd, CCIA, 693 F.2d 198 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1982), cert. denied, 461 U.S. 938 (1983).

    13. CCIA, 693 F.2d at 205 n. 18.

    14. 47 C.F.R. 64.702(a).

    15. CCIA, 693 F.2d at 205 n. 18 ("Enhanced service is any service other than basic service").

    16. See also Access Charge Reform Notice, paras. 284 & 377 (stating that information services as referred to in the Telecommunications Act of 1996 are ESPs).

    17. CCIA, 693 F.2d at 207-209. See also Amendment of Sections 64.702 of the Commission's Rules and Regulations (Third Computer Inquiry Phase I Order), 104 FCC 2d 958 (1986), on reconsideration, 2 FCCR 3035 (1987), Phase II Order, 2 FCCR 3072, on further reconsideration Phase I Order , 3 FCCR 1135 (1988), on reconsideration Phase II Order, 3 FCCR 1150 (1988), rev'd, California v. FCC, 905 F.2d 1217 (9th Cir. 1990), cert. denied 115 S.Ct. 1427 (1995) (Computer III, further revising separation requirements for telcos).

    18. CCIA, 693 F.2d at 209-210.

    19. See 47 C.F.R. § 69.2 (1997).

    20. Long distance telephone carriers are also known as "interexchange services" (IXC).

    21. MTS and WATS Market Structure, Order, 97 FCC 2d 682 (1983) (referring to origination and termination of interstate communications by Enhanced Service Providers as "leaky PBX" scenario) [hereinafter "MTS and WATS Market Structure"].

    22. See also MTS and WATS Market Structure at 4; 47 C.F.R. 69.2(m) (1996) ("'End User' means any customer of an interstate or foreign telecommunications service that is not a carrier...").

    23. ISPs generally pay "local business rates and interstate subscriber line charges for their switched access connections to local exchange company central offices. Enhanced Service Providers also pay special access surcharges for private lines under the conditions set out in our rules." Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, Order, 3 FCC Rcd 2631 2 n. 8 (1988) [hereinafter "Amendments of Part 69"]. Included in the cost of a business line is a flat rate access charge. This flat rate is significantly less than the metered access charge rate paid by long distance telcos.

    24. Amendments of Part 69 at 2.

    25. See note 6 (citing Computer III proceeding in which restrictions on telephone carriers providing enhanced services were loosened).

    26. See, Id. at 1, 13.

    27. See Access Charge Reform, Notice of Proposed Rule Making, Third Report and Order, and Notice of Inquiry, CC Docket 96-262 (Dec. 24, 1996) [hereinafter "Access Charge Reform Notice"].

    28. Access Charge Reform Notice, at para 282.

    29. Access Charge Reform Notice, at para 288.

    30. A "Notice of Inquiry" is a proceeding before the FCC in which the FCC is conceding, in essence, that it lacks sufficient information upon which to proceed. It is a procedure which takes place prior to a rulemaking. The FCC is asking if it should create a new regulation and if so, what should the regulation be. Therefore it takes longer to go from an Notice of Inquiry to a final rule than it does to go from a Notice of Proposed Rulemaking to a final rule.

    31. Access Charge Reform Notice para 311. The FCC also held "The FCC Bandwidth Forum" on January 23, 1997, as an additional means of furthering this debate. A transcript of this debate is available on the FCC web site. See also FCC Bandwidth Web Page ; Digital Tornado, supra note 4.

    32. Access Charge Reform Notice, at para 311 - 316.

    33. See The Network Reliability and Interoperability Council (accessed January 28, 1997) ("The [NRIC]'s charter was revised by the FCC in April of 1996 to advice the FCC on how new Section 256 of the Telecommunications Act -- 'Coordination of Interconnectivity' -- should be implemented"); Reed Hundt, Opening Remarks, FCC Bandwidth Forum (January 23, 1997)(describing function of NRIC).

    34. Access Charge Reform Notice, at para 317.

    35. See Minutes of the October 31, 1996 Meeting of the NRIC(accessed January 28, 1997); Hundt Asks Network Reliability and Interoperability Council to Monitor Impact of Internet Growth on Public Networks, FCC News Release (November 1, 1996) ("It's members include CEO-level representatives of telecommunications service providers, equipment manufacturers, telecommunications standards-setting organizations and consumer organizations"); Reed Hundt, Opening Remarks, FCC Bandwidth Forum (January 23, 1997) (the NRIC has "been primarily run by the incumbent telephone companies").

    36. See Letter from Joseph J. Mulieri, Bell Atlantic, to James D. Schlichting, FCC, June 28, 1996; Letter from Kenneth Rust, NYNEX, to James Schlichting, FCC, July 10, 1996; Letter from Glenn Brown, US West, to James Schlichting, FCC, June 28, 1996; Letter from Alan Ciamporcero, Pacific Telesis, to James Schlichting, FCC, July 2, 1996.

    37. Chairman Reed Hundt, Federal Communications Commission, Speech to INET '96 Conference (June 28, 1996) (delivered by Blair Levin, FCC Chief of Staff).

    38. In the Matter of the Provision of Interstate and International Interexchange Telecommunications Service via the "Internet" by Non-tariffed, Uncertified Entities, ACTA Petition (March 4, 1996).

    39. Access Charge Reform Notice, at para 286.

    40. Report of Bell Atlantic on Internet Traffic § 2 (March 1996)("For the four week study period, the average length of all ISP calls was 17.7 minutes. This compares to approximately 4 to 5 minutes as the average for all other calls on our network"); Pacific Bell ESP Impact Study at 2 (July 2, 1996) (stating "Average busy hour traffic levels across all lines at Pacific Bell is 3 to 5 CCS (1 CCS = one- hundred call seconds, or 1.67 minutes of talk time). Central office switches are engineered to handle, on average, 3 to 5 CCS busy hour load for each line in an office.").

    41. US WEST Communications ESP Network Study at 2 (June 28, 1996) ("The network is nominally engineered for a POTS line at 3.32 CCS (or 5.64 minutes) per line. This allows one line unit within a switch module to service approximately 500 POTS lines.").

    42. See also Digital Tornado, supra note 4, at 58 (reviewing assumptions utilized to design telephone network).

    43. "NYNEX's current data show that the number of businesses and lines using this configuration is increasing about 10% per month . . . Our analysis of the data identified holding times of 20 to 40 minutes for this type of traffic, compared to 5 to 10 minutes for voice traffic." Letter from Kenneth Rust, NYNEX, to James Schlichting, Chief Competitive Pricing Division, Federal Communications Commission (July 10, 1996).

    44. Report of Bell Atlantic on Internet Traffic § 5 (March 1996)("The ISPs in our traffic study generated on March 13 (the same day selected for the graphs attached to this report) 608 minutes of use per line over the 24 hour period. Based on payment of $17 per month per line, the ISPs pay 56 cents per day, or $.0009 per minute of use. This contrasts with Bell Atlantic's interstate switched access charge of approximately 2 cents per minute. In effect, ISPs are paying 1/22 of the equivalent per minute rate paid by IXCs during a business day. At these levels, ISPs would have little incentive to adopt voluntarily alternative forms of access.").

    45. Report of Bell Atlantic on Internet Traffic § 4 (March 1996). See also Id., § 4 ("Utilizing the 40,000 average ISP circuit count (roughly 50% analog and 50% PRI) and the estimated monthly cost per circuit ($75 cost per month per analog line and $50 per month per PRI), the total estimated cost of serving ISPs in 1996 is $30 Million. Assuming average revenue from ISPs for these lines was $17 per month per line, total revenues from this segment in 1996 for public switched network service would be $8.2 Million. Thus there is a cross subsidy of approximately $22 Million for 1996. Assuming an annual growth rate of 40% for illustrative purposes, this cross subsidy would grow to approximately $120 Million in five years. "); Timothy K Steven, Director-Carrier Services, Bell Atlantic Network Services, and James E Sylvester, Director- Technology Planning, Bell Atlantic Network Services, Superhighway Traffic Taxes Current LEC Networks, Telephony Magazine, July 29, 1996 ("Current estimated monthly costs per ISP circuits are $75 per analog line and $50 per primary rate ISDN circuit for a total estimated annual cost of $30 million. On the other hand, revenues from these circuits are estimated to be $8 million.").

    46. Letter from Alan Ciamparcera, Pacific Telesis, to James Schlichting, Common Carrier Bureau (July 2, 1996) ("ESPs effectively pay 12% of what interexchange carriers pay for comparable interstate switched access service"); US WEST Communications ESP Network Study at 2 (June 28, 1996); Report of Bell Atlantic on Internet Traffic § 5 (March 1996); Timothy K Steven, Director-Carrier Services, Bell Atlantic Network Services, and James E Sylvester, Director-Technology Planning, Bell Atlantic Network Services, Superhighyway Traffic Taxes Current LEC Networks, Telephony Magazine, July 29, 1996; Pat White, Bell Atlantic, FCC Bandwidth Forum (January 23, 1997) (arguing that only 15% of households access the net and asking why people who do not need the net should be required to subsidize the net). This issue has been addressed previously by the FCC. In Amendments of Part 69 of the Commission's Rules Relating to Enhanced Service Providers, 3 FCC Rcd 2631 para 2 (1988), the Commission was concerned "that the charges currently paid by enhanced service providers may not contribute sufficiently to the costs of the exchange access facilities they use in offering their services to the public" (this was the famous "modem tax" proceeding of the 1980s). Nevertheless, on the grounds that imposing such costs would inflict a price shock detrimental to the industry, the FCC decided to maintain the exemption from access charges.

    47. Report of Bell Atlantic on Internet Traffic § 3 (March 1996)(stating that Bell Atlantic has had to make an "above average" investment in infrastructure as a result of Internet usage); Pacific Bell ESP Impact Study at 2 (July 2, 1996); Timothy K. Stevens and James E. Sylvester, Superhighyway Traffic Taxes Current LEC Networks, Telephony Magazine, at 1 July 29, 1996 ("For the nine Cost studied, this above-average growth necessitated an additional $17.8 million investment in trunks alone"); US WEST Communications ESP Network Study, at 1 (June 28, 1996).

    48. Access Charge Reform Notice, at para 286.

    49. Report of Bell Atlantic on Internet Traffic (March 1996) .

    50. See Timothy K. Steven, Director- Carrier Services, Bell Atlantic Network Services, and James E. Sylvester, Director-Technology Planning, Bell Atlantic Network Services, Superhighyway Traffic Taxes Current LEC Networks, Telephony Magazine, July 29, 1996. Of course what this fails to explain is, if the telcos have no incentive to invest in their infrastructure, why are they doing it currently? No one is requiring them to make the large investments they are making and there stockholders would certainly have an opinion if they are currently wasting money. Since the telcos are in fact investing large amounts of money in the network, it should be presumed that they believe that they are or that they will get a return on that investment.

    51. See note 46.

    52. Bell Atlantic was probably the best at examining technical solutions to the congestion problem. See Timothy K. Steven, Director-Carrier Services, Bell Atlantic Network Services, and James E. Sylvester, Director-Technology Planning, Bell Atlantic Network Services, Superhighyway Traffic Taxes Current LEC Networks, Telephony Magazine, July 29, 1996(proposing technical solutions). Nevertheless, Bell Atlantic summarizes their report by stating "Bell Atlantic, through submission of these data, encourages the Commission to consider elimination or modifications of the ESP exemption." In other words, give us more money. Report of Bell Atlantic on Internet Traffic (March 1996) .

    53. Internet Demand Helps Power Regional Bell Earnings, CNN-Features (Sci-Tech), Pointcast (January 21, 1997) (reprinting Reuters article).

    54. According to the Information Technology Association of America report:

    BOCs receive substantial revenues from users through monthly charges for additional access lines and ISDN lines, and through usage-sensitive fees, as well as from the ISPs/ESPs themselves for the various basic and vertical services and features that they use. This study concludes that, nationally from 1990 through 1995, the local exchange carriers have collected more than $3.5-billion in revenues from additional residential access lines for subscribers who use them solely or primarily for calling ESPs/ISPs.

    In 1995 alone, some 6-million residential subscriber lines were used exclusively or primarily for online access. Total (nationwide) revenues from additional residential access lines whose installation was driven by the subscriber's use of on-line services reached $1.4-billion in that year.

     Compared with Bellcore study estimate that reinforcing the PSTN will cost some $35-million per year per BOC (for a total of $245-million, nationally), additional residential access line sales stimulated by the growth of on-line services generate revenues that exceed this figure by a factor of six.

    Information Technology Association of America, The Effects of Internet Use on the Nation's Telephone Network, Executive Summary (1997).

    55. John Curran, BBN Planet, Written Presentation for the FCC Bandwidth Forum (January 23, 1997).

    56. See Digital Tornado, supra note 4, at 66 ("The best answer to the current switch congestion problem will be to remove Internet traffic, or at least heavy Internet users, from the existing circuit switched network").

    57. See Jamie Love, Consumer Project on Technology, FCC Bandwidth Forum (January 23, 1997) (making an argument similar to this, arguing that telcos ought to use their profits to attract Internet users to a more efficient ISDN data network).

    58. Report of Bell Atlantic on Internet Traffic §§ 2, 4 (March 1996) ("the heaviest concentration of traffic loads are occurring in the central offices that serve the ISPs"); US West Communications ESP Network Study at 1 (June 28, 1996) ("ESPs use their lines up to six times more than other users during the office busy hour, and up to nine times more than other users during their hunt group"); Pacific Bell ESP Impact Study at 2 (July 2, 1996) (complaining specifically about ISP's burdening the telephone central office they are associated with).

    59. James Love, Consumer Project on Technology, Prepared Comments on the FCC forum on Access to Bandwidth (January 23, 1997)("there is no evidence that current residential modem usage is placing greater demands on the public switched network than non-modem usage").

    60. Hundt Asks Network Reliability and Interoperability Council to Monitor Impact of Internet Growth on Public Networks, FCC News Release (November 1, 1996). See also Minutes of the October 31, 1996 Meeting of the Network Reliability and Interoperability Council para 36 - 37(accessed January 28, 1997) ("Internet traffic does not tend to produce sudden strains on the network as would a network overload . . . it is not likely that the Internet as it is presently being used could cause a reportable outage. So the NRSC believes the Internet traffic is not an imminent risk to Network reliability . . . Internet growth does not pose any unusual network reliability hazards . . . Internet growth represents a capacity management challenge").

    61. See Information Technology Association of America, The Effects of Internet Use on the Nation's Telephone Network, Executive Summary (1997)(accessed January 28, 1997); James Love, Consumer Project on Technology, Prepared Comments on the FCC Forum on Access to Bandwidth (January 23, 1997)("there is no evidence that current residential modem usage is placing greater demands on the public switched network than non-modem usage"); FCC Starts Examination of Internet Traffic, Communications Daily (January 24, 1997) (reporting that the Internet Access Coalition had released a report on January 22, 1997 "contending that many in telephone industry had overstated problem and that any congestion could be fixed with funds on hand and not by assessing ISPs with new charges").

    62. Information Technology Association of America, The Effects of Internet Use on the Nation's Telephone Network, Executive Summary (1997) (accessed January 28, 1997) ("If increases in on-line service traffic posed a significant threat to their networks, the BOCs would not be exacerbating the problem by offering unlimited Internet access for a flat rate."); James Love, Consumer Project on Technology, Prepared Comments on the FCC Forum on Access to Bandwidth (January 23, 1997)

    63. Mike Trest, ATMNet, FCC Bandwidth Forum, (January 23, 1997); James Love, Consumer Project on Technology, Prepared Comments on the FCC Forum on Access to Bandwidth (January 23, 1997)

    64. James Love, Consumer Project on Technology, Prepared Comments on the FCC Forum on Access to Bandwidth (January 23, 1997).

    65. John Curran, BBN Planet, Written Presentation for the FCC Bandwidth Forum (January 23, 1997)("This growth has not been without its difficulties but due to the decentralized nature of the network, it has been possible to rapidly expand the Internet infrastructure in a very short time through independent efforts of hundreds of companies. The fact that we have been able to grow the Internet several orders of magnitude in recent years is a testament to the success of the decentralized management structure of the Internet").

    66. Netcom stated in the past year that it reduced its monthly subscriber fee to the flat rate of $19.95 in response to AT&T's price setting. Netcom later in the year announced that it would be leaving the residential service business as it was unaffordable at the rates set by AT&T. See also Smaller ISPs Bailing Out of Web Hosting, Inter@ctive Week (February 1, 1997).

    67. See Access Charge Reform Notice, at para 317; Reed Hundt, Opening Remarks FCC Bandwidth Forum (January 23, 1997)("Don't misunderstand us; we do not in any way intend in this forum to be empowering government to do that which it does not need to do. Please understand the opposite to be the case, because the opposite is true.").

    68. See Implementation of the Local Competition Provision in the Telecommunications Act of 1996, CC Docket No. 96-98, FCC 96-325 (released August 8, 1996) petition for review pending sub. nom., Iowa Utilities Board et. al v. FCC, No. 96-3321 and consolidated cases (8th Cir. filed Sept. 6, 1996).

    69. "'Interconnection' is the linking of two networks for the mutual exchange of traffic. This term does not include the transport and termination of traffic." 47 C.F.R. § 51.5 (1996)

    70. See Digital Tornado, supra note 4, at 83 ("These [telephone companies] have huge investments in their existing circuit-switched networks, and thus may be reluctant, absent competitive pressure, to explore alternative technologies that involve migrating traffic off those networks.")

    71. See Mike Trest, ATMNet, FCC Broadband Forum, (January 23, 1997) (advancing this argument); John Curran, BBN Planet, Prepared Statement for FCC Bandwidth Forum (January 23, 1997) ("A healthy market absent artificially established access charges will also bolster the development of alternative interconnect strategies such as bypassing the local switch altogether via open interconnect and adoption of new local loop technology such as satellite and cable."). See also Digital Tornado, supra note 4, at 33 (stating different ways ISPs can currently take advantage of the Interconnection Order).

    72. Stagg Newman of Bellcore quoted and agreed with Bill Gates where Bill Gates recently stated that in the year 2000 90% of users will access the Internet over the telephone network. Stagg Newman, Bellcore, FCC Bandwidth Forum (January 23, 1997). Also at that forum were representatives of the cable and wireless industries, offering new high bandwidth connections to the Internet. When pressed by the FCC to estimate when service to the 2 millionth customer would be deployed, the industries had no idea and indicated that it would not be in the near future. FCC Bandwidth Forum (January 23, 1997).