Internet-based phone service has the same appeal Amazon.com had when it emerged in the 1990s: It’s cheap and free from many taxes.

And just as Web retailing shook up local governments and traditional stores, the transmission of phone calls on the Net has riled telephone regulators and companies.

Web merchants thrived because of, and fought to preserve, their freedom from collecting and paying sales taxes. Likewise, Internet-based phone companies enjoy not having to pay some taxes and subsidies historically supported by inflated long-distance rates or phone-bill surcharges.

The issue boils down to this: What balance should be struck between encouraging new technology and preserving traditional rules and revenue sources?

“You can avoid these difficult questions for some period of time but not forever,” said Robert C. Atkinson, research director at Columbia University’s Institute for Tele-Information.

Internet-based phone service is relatively small. About 150,000 American homes used it in 2003, up from 39,000 in 2002, according to In-Stat/MDR, a research firm. But it’s growing fast and may prove thornier than online taxation, experts said.

“In the case of the sales tax, eventually the governments could get themselves together and there could be a state, national sales tax,” said Bob Anderson, president of the National Exchange Carrier Association Inc., which represents small local-phone companies.

It’ll be harder to strike a deal in telecommunications, because policy-makers use subsidies “to keep telephone rates the same across the United States.”

Voice over Internet Protocol, or VOIP, has been around for many years but only recently came of age.

It transmits phone calls like e-x mail, in packets that travel different routes before being reassembled at their destination. Traditional phone switches establish direct connections between phones.

Major phone and cable companies such as AT&T Corp. and Time Warner Cable have committed to the technology and say it soon will dominate communications.

“I believe IP will beat everything by the end of the decade,” said Hossein Eslambolchi, AT&T’s chief technology officer.

That momentum is raising concern chiefly in three areas of telephone regulations:

Access charges, the per-minute fees that long-distance companies pay local-phone companies to start and complete calls

The $5 billion Universal Service Fund that collects money from urban phone users to subsidize service in poor and rural areas

Public safety rules that require emergency dispatchers know the exact location of 911 callers and that let police agencies tap and trace calls

VOIP providers are not required to pay access charges or contribute to the Universal Service Fund. And it can be hard for police to listen to Net-based calls and for emergency dispatchers to know callers’ locations because they can plug into any Internet connection worldwide.

For the consumer, that translates into significant savings.

Vonage Holdings Corp., which provides VOIP service to consumers, offers an unlimited local and long-distance package for $34.99 a month. With two small fees, the tab comes to $37.54. (One caveat: Consumers must have a broadband connection, which costs extra.)

A similar unlimited package from SBC Communications Inc. costs $67.61 in Dallas when factoring in various fees tied to access charges, the Universal Service Fund, 911 and other government mandates.

Some experts celebrate that difference and chalk it up to the innovation that comes from light regulations. Others say it’s a trick made possible by selective enforcement of laws.

The Federal Communications Commission chairman advocates a hands-off policy approach so VOIP can bloom.

“We cannot contort the character of the Internet to suit our familiar notions of regulation,” Michael K. Powell said earlier this month at the National Press Club in Washington. “Do not dumb down the genius of the Net to match the limited vision of a regulator.”

The FCC is evaluating VOIP’s voice over IP’s regulatory status and is expected to launch a rule-making proceeding in the next couple of months.

Typically, the commission starts by soliciting public comments.

Many local-phone companies are wary of that argument. They say VOIP providers shouldn’t skirt the legitimate costs everyone else pays.

In Texas, long-distance companies pay SBC an access charge of 2.7 cents a minute to terminate in-state calls, say from Dallas to Houston. But VOIP companies can complete those same calls as local calls, which are charged a fraction of a cent.

“Access charges are simply the cost of terminating calls on our network,” said Bill Blase, chief executive of SBC’s Southwest region. Those charges keep basic local-phone rates cheap — about $11 a month in Dallas.

In 2001, local-phone companies collected $15.1 billion in access revenue. They got an additional $12.1 billion in subscriber line charges, which are monthly fees the FCC allowed phone companies to charge customers beginning in 1997 so they’d lower access charges on interstate calls to about 1 cent a minute today.

Some experts say VOIP presents a wonderful opportunity to further reduce or eliminate access charges, which have been prone to fraud.

“It finally makes you answer some of the questions that we have collectively refused to answer,” said Ray Gifford, president of the Progress and Freedom Foundation and a former Colorado utilities regulator.

Officials from large phone companies have been meeting in a Washington “working group” to address access charges. A solution may include replacing the per-minute fees with a flat monthly surcharge on phone bills.

But smaller, rural phone companies, which aren’t part of that group, are reluctant to accept those changes. Because they are more reliant on access charges, they may have to levy surcharges ranging from $10 a month to $50 a month, Mr. Anderson said.

“The small telephone companies have a very different set of circumstances,” he said.

Many state legislatures and regulators are also opposed to lowering access charges because it would mean higher local-phone bills.

The Universal Service Fund is also in need of repair, experts say. The fund gets much of its money from a 9 percent tax on long-distance revenue. As consumers move their calls to wireless phones and VOIP, the fund is drawing money from a shrinking pool.

“It’s inevitable that the system is going to suffer,” said Rick Whitt, MCI’s director of federal law and policy.

AT&T has suggested that the Universal Service Fund should instead be funded through a tax on every phone number. The proposal has many supporters because it levels the field for all providers — Internet-based or otherwise.

“That may be a better model to use rather than the revenue one, when you have more people buying unlimited local and long-distance,” said Michael Jewell, AT&T’s vice president for government affairs in Texas.

The proposal has fans among FCC commissioners but it’s unclear when the five-member panel will act.

Meanwhile, public safety concerns about VOIP voice over IP are rising, too.

Some worry that the technology’s inability to tell 911 dispatchers where calls are coming from will remain unfixed unless the FCC demands it.

Mr. Anderson noted that wireless-phone companies are still struggling to pinpoint cellphone callers’ locations, years after they were required to do so.

“It needs some regulatory oomph to make it happen,” he said.

But VOIP providers say competition and innovation will solve those problems faster than regulations can.

In the meantime, customers who are worried about 911 should keep a standard telephone line around for emergencies, said Jeffrey Citron, Vonage’s chairman and chief executive.

“You should employ regulation only after the market has been established and developed,” said Jeffrey Citron, Vonage’s chairman and chief executive, “and then only to the extent that it’s required.”

By: DocMemory
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