Feds Still Messing With Internet

The Telecommunications Act of 1996 has received its fair share of press attention, mainly focused on its broad deregulation of telecommunications services, but also because of its dictate that manufacturers of television sets incorporate the ''V-chip'' into their circuitry, and because of its thwarted attempt to censor Internet communications. Now a hitherto unnoticed provision buried deep within the law is beginning to receive some needed scrutiny: a proposal to extend ''universal service'' to include the Internet.

John Browning, writing in the February issue of Scientific American, reports that ''universal service'' has been a federal policy since the New Deal era, when the Congress appropriated funds to subsidize telephone service to rural Americans. It does so mainly by reimbursing telephone companies that can show that their costs to provide service to certain classes of customers are higher than average.

The 1996 Act created a review panel, consisting of state and federal utility regulators, charged with recommending methods for implementing the latest incarnation of the universal service requirement. This panel released its report in early November. Among the recommendations: that all Americans ''have access'' to state-of-the-art telephone service, including touch-tone and 911 service; that low-income users be ''protected'' from disconnection if they fail to pay long distance charges; and that direct subsidies for poor people be expanded. In addition, the panel recommended that schools and hospitals receive ''discounts'' on telecommunications services, including Internet services (and even necessary wiring) ranging between 20% and 90%. The panel proposed a budget of $2.5 billion to pay for these subsidies.

The current method of awarding subsidies, however, has had an unfortunate side effect, according to Browning: it has allowed inefficient telephone companies to forego upgrading their services and equipment. For that reason, the panel has proposed use of a ''proxy model'' to distinguish inefficient companies or service practices from those whose high costs are unavoidable. But, says, Browning, this approach has a drawback of its own: it will impose bureaucratic preconceptions of what are or will be ''efficient'' technologies upon a dynamic, rapidly evolving industry.

There are also questions of where the money to pay for the ''discounts'' will come from. At present, the FCC has no power to impose taxes on telephone companies or other communications providers (indeed, some telecommunications lawyers maintain that the agency has no power to order anyone to link schools to the net). However, if telephone companies are ordered to provide the discounts, they will be certain to step up their lobbying for permission to impose ''access charges'' on Internet providers—thus raising the price of Internet access for everyone.

''Of course,'' says Browning, ''such price-raising regulations are absurd and counterproductive. But they are also the inevitable consequence of systems that, like universal service, try to set prices where politicians think they should be rather than where consumers in the marketplace decide.''

To do all the things the panel recommends, Browning concludes, will require ''massive and complicated regulations and cross-subsidies that will leave just about everyone worse off—except big, entrenched telephone companies.''

—GM