Dial-Up 'Subsidy': Temporarily Permanent

In Washington, nothing is more permanent than a temporary subsidy. Twenty years ago, the federal government insulated information-service providers from a cash-draining regulation called access charges, a move that in time spawned the creation of 7,000 Internet-service providers.

At the time of adoption, the Federal Communications Commission said the regulation would be a temporary measure and would be phased out and eliminated.

In 1997, the FCC made the ISP access-charge exemption permanent.

In the eyes of some regulators, the proliferation of ISPs stands as one of the FCC's grandest achievements, a demonstration that bureaucratic forbearance can bear marketplace fruit.

But does America really need 7,000 ISPs, the vast majority of which transfer data at rates no faster than 56 kilobits per second?

Broadband aid

For the past few years, Republican and Democratic policymakers have turned broadband deployment — and the technology's adoption by consumers — into a mantra. Over the next few months, the FCC is expected to adopt rules broadly shielding broadband providers, including cable and phone companies, from intrusive regulation.

Yet in examining ways to promote broadband, no one at the FCC or in Congress has paused to consider whether policies that subsidize narrowband dial-up Internet access are at war with broadband policies that stress marketplace freedom.

The FCC got to this point almost by accident. The agency's policy, adopted two decades ago, exempted what were then called enhanced service providers (ESPs) from having to pay per-minute access charges to local phone companies. It was not until the Internet boomed — and ISPs (formerly ESPs) started to proliferate — that the financial impact of the access charge exemption began to materialize.

Although long-distance companies had to pay the Baby Bell phone companies an estimated $30 billion a year in access charges to complete voice calls, America Online Inc. and other ISPs paid no access charges to relay Internet traffic from around the globe. The exemption, which saved ISPs an estimated $5 billion to $7 billion annually, eventually allowed dial-up giant AOL to introduce flat-rate pricing and unlimited Web surfing.

What if the FCC changed the rules — as once promised — and required ISPs to pay access fees and pass them along to subscribers? Wouldn't the flat-rate ISP pricing model crumble? Wouldn't consumers then be in position to make real cost and quality comparisons between dial up and broadband, which so far has attracted 16.2 million subscribers — less than half of AOL's subscriber base alone?

'Not a subsidy'

Dial-up ISPs, not surprisingly, are not eager to see the access charge exemption disappear.

"I disagree that it's a subsidy, because in a lot of cases, the access charges being assessed are for services that aren't even being provided," said Sue Ashdown, executive director of the 1,600-member American ISP Association in Washington, D.C. "Certain switching plant is not being provided because the switching is occurring on the Internet."

One ISP executive said if local callers don't pay per-minute fees, then Web surfers shouldn't, either.

"People are able to make phone calls at the flat rate and I don't see a subsidy there," said Jim Pickrell, president of Brand X Internet Services, a Santa Monica, Calif., ISP with 1,000 dial-up subscribers and 2,000 digital subscriber line customers.

Access charges paid by long-distance companies have been controversial for many years. AT&T Corp., Sprint Corp. and WorldCom Inc. claim the per-minute rates are inflated. Local phone providers say current access charge levels are needed to fund universal service, the program that keeps local dial-tone rates reasonable nationwide.

May: Keep exempting

Randolph May, senior fellow and director of communications policy studies at the Progress and Freedom Foundation, a D.C.-based free-market think tank, has been an ardent supporter of immediate FCC deregulation of broadband, especially DSL service provided by incumbent phone carriers.

But May said he opposed removal of the dial-up access charge exemption as a means of advancing broadband adoption.

"The are better ways to promote broadband than to increase the cost on dial-up people though the access regime," he said.

With the advent of voice-over-Internet protocol telephony (VoIP), the access-charge debate is spreading beyond plain-vanilla Internet access.

AT&T Corp. — in a move strongly opposed by the Baby Bells — has asked the FCC to exempt VoIP calls from the access-charge regime.

AT&T's request takes the access charge debate in a whole new direction, not whether the exemption should go away but whether it should expand.

Exempting VoIP providers from access charges, just like ISPs, would continue the federal government's effort to quarantine the Internet from heavy-handed regulation, according to the group Americans for Tax Reform.

"VoIP communications are clearly not standard telephone calls, and accordingly should not be subject to standard telephone charges. If they were to become subject, the chilling effect would send shivers through the industry," AFTR president Grover Norquist said in Dec. 17, 2002, letter to FCC chairman Michael Powell.