Senate Moves Forward on Telecom Reform

Published August 1, 2006

The U.S. Senate Energy and Commerce Committee approved on June 28 a sweeping bill to overhaul U.S. telecommunications regulation. The House has already passed a bill.

S. 2686, the Communications, Consumers’ Choice, and Broadband Deployment Act of 2006, was passed by a vote of 15-7 after three rounds of hearings and substantial input from both Republican and Democratic members of the committee.

Tax policy analysts have been eyeing the bill for its changes in universal service and franchise reform mechanisms. Although they apply to different services, both involve government-mandated surcharges consumers and businesses pay on telecommunications and cable services. As new technologies such as Voice over Internet Protocol (VoIP) attract millions of users, and phone and cable companies increasingly compete on each other’s turf, debate over reforming subsidy schemes that date from the monopoly era has intensified.

The 159-page bill, jointly sponsored by Committee Chairman Ted Stevens (R-AK) and ranking member Daniel Inouye (D-HI), also contains provisions for video content, digital television, carrier assistance in curbing distribution of child pornography, and the rates U.S. military personnel abroad pay to call home.

At press time the bill had not been scheduled for a floor vote.

Universal Service

The U.S. government today funds universal service in two ways. The first is through the federal Universal Service Fund (USF). Phone companies pay into this fund on a revenue-based formula. Eligible carriers take distributions from the fund to pay for the deployment and provision of services in rural areas.

The USF fee appears on all consumer phone bills. Until June, VoIP service providers such as Vonage, which now claims more than 1.6 million customers, were exempt from the USF obligation. The Federal Communications Commission (FCC) in June extended USF liability to Vonage and other providers of stand-alone services designed to substitute for conventional phone service.

It remains questionable, however, even under the mandates of the Senate bill, whether the commission can engineer a way to include VoIP services that are more tightly integrated with other Web services, such as those planned by eBay and Google. The Senate bill includes point-to-point IP telephony in the USF structure without delving into finer points of how to collect USF payments on IP voice services that are either not billed as voice or not billed at all (and whether these services even count as telephony).

The second method of funding universal service, largely invisible to consumers, takes the form of a complicated formula of cross-carrier interconnection payments. This is a government-devised tariff structure that sets the rates by which carriers, from AT&T and Verizon down to the smallest cooperatives, compensate each other for transmitting and routing each other’s traffic. This formula, like the USF, is designed to redistribute funds to rural phone companies.

Call Tracking

Here, too, Internet Protocol has disrupted the regulatory scheme. Since most calls today, even those originating and terminating on conventional phones, use IP when crossing the network, it has become easier for carriers to route calls through networks that have low interconnection tariffs and avoid connecting through networks where these rates are high.

Some carriers can even mask information that identifies the origin and content of the IP data. In those cases, a carrier network will not even recognize the IP traffic as a phone call from a specific carrier, which has come to be called “phantom traffic.”

As for intercarrier compensation, the Stevens-Inouye bill calls on the FCC to create enforceable standards for network identification and accountability regarding the origination and transmission of calling traffic.

Video Franchising

Video franchises are the revenue-sharing agreements that cable TV companies sign with local governments in return for the right to offer video services to customers. As the country’s largest telephone companies begin to deploy broadband networks that can support cable TV-like services, they have been pressing for changes in the process that would allow them to apply for a statewide franchise in one fell swoop, eliminating the need to go from municipality to municipality to negotiate individual agreements, as cable companies were required to do in the past.

S. 2686 goes one step further, creating a national franchise process. New entrants would be required to pay 5 percent of their local gross video revenues to a local franchising agency, or the same percentage paid by the incumbent cable TV company, whichever is lower. The bill also calls for an additional 1 percent of revenues to be applied to the support of local public, educational, and government (PEG) channels. The bill mirrors several state legislative initiatives, but differs from most in that it allows cable companies to apply for a national franchise once a competitor enters one of their markets.

It remains to be seen whether House passage of the Communications Opportunity Promotion and Enhancement (COPE) Act earlier in June helps get S. 2686 on the calendar. COPE is a smaller telecom reform act, with video franchising as its main thrust. Although franchise reform is seen largely as a Republican-led effort, the bill passed 321-101 with strong bipartisan support. If S. 2686 passes, it will likely go into a joint House-Senate conference with COPE, said Aaron Saunders, communications director for the Senate Energy and Commerce Committee.

Steven Titch ([email protected]) is senior fellow for info tech and telecom policy for The Heartland Institute.