Legislation opens doors for Net phone fees

The bill, sponsored by lawmaker Fred Upton (R-Mich), is designed in part to put to rest long-running rumors that the U.S. government plans a tax on Internet access. The U.S. House overwhelmingly approved the measure with a voice vote today, touting it as a way to keep Internet growth strong.

But with a quiet addition to the measure last week, lawmakers have opened a hornet's nest of controversy in the Internet community.

The new language reads innocuously, simply noting that nothing in the bill should stop the regulators from imposing fees on "providers of Internet telephone services, irrespective of the type of customer premises equipment used in connection with such services."

In other words, the legislation, initially aimed at ensuring that consumers don't have to pay tax on their Internet access, could result in new regulation and the end of the free Net long-distance phone call, critics say.

"We're concerned because something like this made it through the house with almost zero debate," said Jan Horsfall, chief executive of Internet telephony firm PhoneFree.com. "What Congress is really trying to protect is the Old World telcos."

The bill has revived the issue of whether companies offering Net phone services should pay the same fees faced by old-world telephone companies, a controversy that has dogged the young Net phone industry throughout its short history. Many of the free Net phone services are possible only because they don't have to pay these fees, and the big telephone companies have said this isn't fair.

The spotlight comes as the Net phone industry is changing rapidly and finally attracting a mass subscriber base. Companies such as Dialpad and PhoneFree.com are quickly attracting customers to their free long-distance services, while older Net telephony firms are finally attracting interest and investment cash from giants such as AT&T, Yahoo and America Online.

The Net phone issue is new ground for Upton's bill, which was originally designed to block regulators from taxing Internet access services.

Upton wasn't responding to any specific threat from the Federal Communications Commission, the regulatory agency with the power to impose such a fee. In fact, FCC chairman William Kennard has repeatedly and explicitly denied any such intention several times over the last several years.

But Upton has said that his constituents are concerned about the issue anyway. He's cited the hundreds of emails he's received from people worried about a long-lived Internet hoax that says Congress, or the FCC, is threatening a new "modem tax" on Net services.

Last week, this largely noncontroversial bill was quietly amended, in a move Upton says simply clarified his original intentions.

"We never intended to deal with the issue of Internet telephony," said Upton spokesman Mike Waldron. "We intend to deal solely with the issue of data."

But that thorny definition is exactly the issue that has separated companies since the beginning of the Net phone debates. The phone companies say the Net telephony players are offering voice service and so shouldn't get special regulatory advantages. The Net voice companies say they're trafficking in bits and bytes like any other Net service and so shouldn't face new regulations.

The FCC looked at the issue in early 1998 but decided it didn't yet have enough information to impose new fees or declare that Net phone services should permanently be exempt.

Net voice companies now are scrambling to contact legislators, and are sending messages to their customers this week asking them to weigh in on the issue. The Web companies don't have a Washington presence anywhere near as large as the big phone companies, but they're hoping that a deluge of email from angry Net phone callers can sway a few House votes.

At the very least, any issue that pits the big phone companies against their new Web competitors should be given more than a week of discussion, the Net firms say.

"This is a sneaky way to try to get something in," said Elise Bauer, senior vice president for Firetalk Communications, a company that offers free Net calls and voice chat services. "This is like pulling wool over people's eyes."

After today's vote, the Senate still will have to vote on the measure before it takes effect. And even then, it does not actively require the FCC to impose any fees on Net phone services. Regulators would have to make their own decisions on this issue, a process that could take months or years.