Telco's rights, regulations, and tariffs

By "Fred R. Goldstein"
Date: Wed, 13 Mar 1996 10:43:56 -0500

First off, I'll introduce myself as a telecommunications and network consultant of around two decades experience, not a lawyer, speaking as an individual and not in an official capacity for anyone. For years, I've been debunking the "modem tax" chain letter (MCTL) that has been floating around the net since around the time (1988) that the FCC decided against the tariff changes that it was based on. I've been following this "voice on the net" topic for a while, and have recently become aware of the FWD project. Some of you may have seen my articles in Telecom Digest, now that the telcos are starting to point their lawyers, guns and lobbyists at Internet Service Providers and once again ask the FCC to reclassify ISPs as long-distance companies.

Let me summarize: Whatever you do among consenting net users between your Sound Blasters is probably safe and legal, provided again that it doesn't run afoul of your ISP. But whenever you TOUCH the local telephone network, you enter a netherworld of complex regulations. However much we may not understand them (and they're by no means totally unambiguous) or like them (and they're by no means totally likeable), they are very much in effect, have billions of dollars riding on them, and as a result, in the United States at least, Free World Dialup is *ILLEGAL*.

In 1927, in the landmark case Smith v. Illinois Bell, the United States Supreme Court ruled that the local telephone network is subject to both state and federal jurisdiction, since it carries interstate calls. The Smith decision forms the basis of the subsidy flow from long distance to local. Under the system of "separations and settlements" that grew out of it during the monopoly era, the usage of the local network is divided (by Minutes of Use, MOU) between intrastate and interstate, the interstate portion is multipled by a "subscriber plant factor" (SPlF), some relative investment numbers are factored in, and the cost of the local network is apportioned out to the long distance domain, subject to FCC regulation. What this means is that something like 30% of the cost of local telephone service is subject to FCC rules, 70% to state rules. Before 1984, this was mostly a handoff between Bell companies. Nowadays, the local carriers recover the federal share via explicit FCC tariffs, which all long distance companies pay into at a roughly equal per minute rate.

Your monthly FCC "access charge" (Customer Access Line Charge, or End User Common Line charge, up to $3.50/month on residential lines) is simply the FCC's way of recovering part of that interstate share. The rest of the interstate share is recovered from toll calls, via "Feature Group" tariffs levied by local carriers on long-distance carriers. Each telco computes its own interstate revenue requirements and files these tariffs. The Feature Group rates tend to run between around 3 and 5 cents per minute, and are applied at *both* ends of the call at which a local carrier is involved. So a resi-resi interstate call via Sprint Sense at 10c minute may leave 8c in the RBOCs hands and 2c with Sprint. Big 800 users connect directly (usually via leased line, but not via local telco switches) to their long distance carriers, so these calls only have one (originating) side with RBOC usage charges. Figure on high-volume 800 contracts running around 7-8c/minute, half retained by the long-distance 800 provider, half to the various local telcos (mostly Bells).

You'll note the main difference bewteen LD carriers and The Rest of Us: If telco calls you a carrier, they charge you to *receive* calls, as well as to place them. It's not a "peer" relationship. "Bill and keep" may apply among peer local carriers (say, GTE to Bell or even Teleport to Bell), but not bewteen local and interstate carriers.

FCC regs are pretty clear about this: IF you carry a telephone call across a state line and then connect it to a local exchange network, you ARE an interstate carrier and are subject to FCC-tariffed charges. If you run a PBX with tie lines and incidentally "leak" some traffic ("tail-end hop off", TEHO) into local exchange trunks, then you are subject to a surcharge of $25/month/channel (voice or per 64k of digital bandwidth) on your tie lines for having a leaky PBX. Some companies actually pay Feature Group rates (Feature Group A, ordinary lines under FCC tariff) on a few trunks in order to do legal TEHO, and they partition their traffic to keep interstate calls off the "local" trunks. While terminating FGA costs more than a local call, it's still often cheaper than toll calls.

These regulations do not distinguish between types of interstate transmission, but only apply to telephone calls (including modems, fax, etc.). So if the LD carrier uses analog radio, digital fiber optic, coax cable, low-bit-rate voice over Frame Relay, moonbounce, meteor scatter, voice-over-IP or whatever, it doesn't matter -- that's theirs to decide. When they meet the local exchange networks, the local carriers are entitled to charge them interstate access tariffs.

A little historical aside: Foreign Exchange (FX) lines (leased lines connecting a subscriber to a non-local telco CO) are not the same thing. It's perfectly kosher for a company to put in FX lines under *local* tariff and connect to them via interstate leased lines. They're only using them for their own benefit, not to provide toll. MCI was authorized to provide private lines, and FX, in 1969. Around 1975, they introduced "switched FX", where customers pooled the lines on a per-minute basis. Hmmm. They provided this in separate tariffs for both incoming and outgoing FX calls. Hmmm. They introduced a service called "Execunet" in which the incoming and outgoing FX services were linked via an MCI switch, using an authcode, and you could make calls from any phone to any other phone. Voila, toll calls! The FCC was NOT amused, nor was Ma Bell. This was held up in court for years. Around 1979, the FCC settled it by introducing "ENFIA" (Exchange Network Facilities for Interstate Access) tariffs. So MCI could legally provide toll, but the ENFIA rates were higher than local, and provided some contribution to fund underpriced local service, just like Ma Bell did. In 1984, ENFIA services were renamed Feature Groups (A-D).

The subsidy is very real, and mainly provides low-cost telephone service to rural areas with a high per-line cost of wire. The key accounting trick to fund it is the SPlF, which at something like 3 means interstate minutes of use are counted three times local minutes. The local telcos keep some of the money but pool some of it according to formulae set by the Federal-State Joint Board, a 7-member commission that governs the whole shootin' match. The new Telecommunications Act most certainly does not overturn Smith; indeed it actually raises the revenue requirements for the subsidy, so it puts upward pressure on the SPlF and causes telcos to seek out more subsidy payers!

BTW it doesn't generally work the same in other countries. In the UK, long-distance and local telcos are "peers", but then local calls there are very expensive (up to 6c/minute to call your next-door neighbor!). In Canada, LD carriers pay per-trunk charges that go up to $700/month for local interconnect. In some countries, it's just plain criminal. I don't know about Indonesia, for instance, but I'd hate to be there and on the wrong side of that government!

Now if Jeff Random decides to attach his Cirrus Modem to a local phone line and open an FWD server in the USA, then *by defintion* he has become a long-distance carrier! He MUST therefore arrange to pay Feature Group A rates. The fact that he's providing third-rate hoot'n'holler packet voice across the Internet doesn't matter -- what do you think Execunet sounded like? You probably couldn't hear a piano drop, let alone a pin!

It matters not if FWD is restricted to "noncommercial" use. Telcos don't care about that; residential subscribers usually pay higher toll rates than businesses! This isn't a ham radio phone patch, which in any case is NOT open to the public at large, and is subject to various other restrictions.

There's no analogy to the "private express" statutes that protect the USPS. The telephone business is legally *competitive*, both local and long distance. But when the local carrier files an FCC tariff, a long distance carrier who connects to that carrier must pay the tariffed rate! It's a payment for the use of the network, which also happens currently to include some serious subsidy payments for rural telecomm. This is one reason that ACTA's petition is so stupid -- software and for that matter computer hardware doesn't violate anyone's rights; it's network interconnections that have to be done by the book. (ACTA is dominated by resellers, companies that buy bulk long-distance calling and resell it at a small markup. They're the bottom-feeders of the industry, economically marginal in good times, and therefore easily threatened. But they're not nearly as influential as the major carriers.)

Where things are getting messy for the law-abiding Rest of Us Internet Users is the nasty topic of incoming Internet modem pools. Today, these are usually tariffed as business lines, with no incoming usage charges. I think that's reasonable -- under any normal circumstance, the amount of interstate bandwidth consumed by a dial-up IP user is a tiny fraction of what a LD phone call uses. The Internet doesn't separate traffic by destination, and Feature Group per-minute charges are themselves several times higher than ISP dial-in charges! But the RBOCs have again, after 8 years, asked the FCC to reclassify ISPs as LD carriers. It's not yet an FCC proposal, but it's being talked about seriously down there.

Remember, the new Telecommunications Act doesn't change the basic structure. It's still "local carriers rape LD carriers". It's just easier to become a rapist. Some of the LD carriers will therefore set up their own local exchanges in order to "peer" with the RBOCs. (But such peerage won't necessarily let them off the hook for interstate calls handed off to the RBOC.) Maybe they can offer legal FWD connections at a lower price. But it still has to pay into the Federal-State Joint Board's Universal Service Fund. North Dakota and Wyoming each have two senators too. It shows. I didn't say I *like* this system. It's obsolete, ignores current technology, and mainly makes work for lawyers while harming innovation. But for now, it's the law, and it WILL be enforced. The RBOCs have the resources to see to it.

If we use the Internet the way 99% of us do, then we have a very strong case to avoid this. We should remain *users of the local phone network*, paying normal user rates, and not be treated as LD carriers. But VON gives the RBOCs a tiny argument against us. FWD gives them a much stronger argument. This mailing list is absolutely full of the kind of ammo they would be happy to use against the entire US portion of the Internet! Most ISPs are responsible and law-abiding and therefore are unlikely go along with FWD, if they know what's good for them. Be forewarned.

Fred R. Goldstein BBN Corp. Cambridge MA USA +1 617 873 3850

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