But the FCC isn't quite ready to make the final decision. Regulators are struggling to avoid undermining 23 states that already have ruled ISP calls are local, minimizing the possibility of an immediate string of lawsuits over those state rules, sources say.
The debate means little to consumers, who will see little or no change in their Internet bills as a result of the decision. But hanging in the balance are hundreds of millions dollars now paid--or owed--to alternative local telephone companies by the Baby Bells and other dominant local phone companies.
Many alternative phone companies have signed contracts with the Bells in which each company pays the other for sending a caller to the other's network. Thus, if a Bell Atlantic customer calls an e.Spire customer, Bell Atlantic pays e.Spire a fee for completing the call.
When the companies originally negotiated these contracts, the Bell companies believed they would come out ahead, since they controlled the vast majority of local lines.
But some alternative local providers have staked out ISPs, which attract calls but do not make many calls out. This imbalance has provided a huge sum--on paper--in so-called reciprocal compensation fees flowing to these alternative companies out of Bell coffers.
The Bell companies have lobbied the FCC hard to rule that calls to ISPs are interstate, since Net users view content all over the world once they sign on. If the calls are deemed long distance, the big companies will no longer be subject to the reciprocal compensation fees. Some companies have even delayed paying the fees related to ISP calls, waiting until the FCC makes its ruling on the issue.
The competing local companies, along with state regulators who have already ruled on the issue, are pressing to keep the calls classified as local. Any call made to an ISP starts with the user and ends at the door of the ISP, not at whatever distant online locale the user eventually reaches, they say.
Reading the tea leaves
The Commission has made several recent moves signaling its direction on the issue. In two separate recent decisions, it said high-speed DSL Net access services operated by GTE, Bell Atlantic and other Bell companies was a long distance service.
Sources close to the commission say this is a good guideline to how the FCC will treat dial-up calls to ISPs.
But in a recent speech to state utility regulators, Kennard also said the 23 states that have already ruled on the issue should not be overturned.
"I believe that those states have been right to decide that issue when it been presented to them," Kennard said. "I do not believe it is the role of the FCC to interfere with those state decisions in any way."
This leaves the FCC with a fine line to walk, say those close to the issue. Commissioners want to take responsibility for controlling Net calls, but don't want to undermine the states. Officials are worried that once the FCC rules, the Baby Bells will immediately go to court to have the millions of dollars in past reciprocal compensation fees declared invalid.
Commission members are debating how they can take over jurisdiction for calls to ISPs, and still minimize the impact of these lawsuits, sources said.
Meanwhile, officials in Washington are getting restless. A group of influential rural senators wrote to Kennard this week, warning that forcing the Bells to pay the ISP call charges could undermine the universal service program, which subsidizes rural telephone service.
"We are very concerned about how your decision may affect our constituents," said the group, led by Senator Conrad Burns, R-Montana. If the Bells and other large telephone companies are forced to pay the millions of dollars in reciprocal compensation fees, it might undermine their ability to subsidize rural customers' service, the group said.
"Such payments may adversely affect those company's abilities to provide universal service at affordable rates to rural customers in several states," the lawmakers added.
The Commission is expected to rule on the issue of ISP calls by late next week or early the following week.