News

States Wrestle With VoIP Approaches

1/04/2004 7:00 PM Eastern

Telecommunications companies are jumping into voice-over-Internet protocol telephony with both feet — even though, in terms of regulation, they don't know precisely where those feet will land.

There is great debate among state utility regulators as to what VoIP actually is. Is it a telecommunications service, an information service or a mere application?

Lacking solid oversight from the Federal Communications Commission, which has opened a regulatory docket on VoIP, state utility regulators may feel compelled to craft their own policies in an effort to afford some consumer protection.

"I don't think any regulators want full, intensive regulation of VoIP," said Michigan public service commissioner Bob Nelson, who is chairman the National Association of Regulatory Utility Commissioners (NARUC) telecommunications subcommittee. "But on the other hand, consumer protections are necessary."

CONSUMERS WILL RULE

Access to enhanced 911 services and contributions to the federal universal service fund — a pool of money designed to keep the price of telephone service to rural areas low — fit into the consumer-protection category, he explained. Specific customer-service rules do not, he added.

Competition will take care of any vendor who doesn't provide good service, said Nelson.

The FCC will make national policy, but it "makes some sense, in the meantime, to experiment in light-handed regulation," Nelson said.

At a national meeting in February, NARUC passed a resolution urging the FCC to confirm its tentative decision that "certain phone-to-phone calls over IP networks are telecommunications services."

There have already been some stabs at regulation, most notably an attempt by the Minnesota Public Utilities Commission to require Vonage Holdings Corp. to apply for a license to do business in that state.

The Minnesota PUC ruled that Vonage's VoIP offering — which rides on others' cable-modem or digital subscriber line platform — is an intrastate telephone service, as defined by state law.

In October a federal judge barred the PUC from acting on that order and Vonage has asked the FCC to declare that VoIP is an information service not subject to state jurisdiction.

But utility regulators question the applicability of the label "information service." Lexis-Nexis, an online searchable database (owned by Multichannel News corporate parent Reed Elsevier), is an information service. Does that mean Lexis-Nexis should be regulated and required to pay into universal service funds, one regulator asked rhetorically?

"Computer-to-computer, phone-to-phone, if it looks like a telephone service, it is," said Nelson.

Part of the problem for state regulators may be confusion over the difference between services like those of Vonage and Free World Dialup — which use the public Internet and vehemently oppose the application of traditional telecom regulation to VoIP — and the facilities-based, packet-switched product proffered by cable operators, who've been opting to subject their services to some of those rules.

TAX BASES

Academics who are studying the VoIP rollout and regulatory activity have noted that state regulators feel pressure to design regulatory schemes similar to legacy regulation to preserve the tax base of their states.

Lawmakers in the cash-strapped states would like to maintain consistent telecom tax revenues for future budgets.

State-level regulatory activity has already picked up. In Washington state, regulators have been directed to act on a dispute between traditional telephone companies and a VoIP provider over whether the latter company should pay tariffs for using the telcos' networks. A court remanded the issue to the state Utilities and Transportation Commission.

Small, rural telephone companies are raising concerns with state regulators as well. Such carriers receive inflated fees for terminating long distance calls — a scheme designed to keep rural phone rates low, and fear losing that revenue. In some states, such as Alabama, they've petitioned regulators to open a proceeding to establish VoIP ground rules.

Telephone companies have stepped up their efforts in Ohio and North Carolina, during discussions of Time Warner Cable's applications for VoIP licenses.

The utilities asked regulators to launch larger proceedings. North Carolina rebuffed that request, but Ohio has opened "generic" proceedings on VoIP.

In Texas, processing of the Time Warner application was slowed by intercession by a group of cities that wanted a discussion of rights-of-way compensation. There, the utility regulators also stuck to just the application, approving it last month.

State officials say some rules are necessary to avoid "regulatory arbitrage."

"Regulatory parity" — the opposite of arbitrage — "is what you want," Brad Ramsay, NARUC's general counsel, said. "You don't want regulation choosing which technology should win."

NATIONAL POLICY?

Academic observers of the technology's rollout have called for a national policy on VoIP. That will be the best way to ensure the "great promise" of the technology is realized," according to a recent report issued by the New Millennium Research Council.

VoIP applications that function like telecom services can be subjected to certain telephony rules, the report recommended, but all providers should be regulated equally.

"Whether it is computer-to-computer, computer-to-phone, or phone-to-phone, providers need to be regulated similarly," said Syracuse University associate professor Lee McKnight, one of the study's authors. He advocates an "open communications policy," free of the regulatory "artifacts of the past."

He and the other authors discussed their report in a telephone press conference last week.

Though the authors advocate a federal policy, they acknowledge that VoIP is already being deployed. That will prompt state regulators to act as "laboratories of democracy," crafting attempts at regulation that will help mold the eventual national policy.

The more important question isn't how to regulate, added Glen Woroch, adjunct professor of economics at the University of California at Berkeley. Rather, it's a question of how the new technology can prompt deregulation of current telecommunications policy.

"VoIP exposes the warts in the existing system," he said.

OUTDATED DISTINCTIONS

Federal policy, including the 1996 Cable Act, draws deep distinctions between telecom and information services. But those distinctions were based on now-outdated technology.

If lawmakers continue to rely on those distinctions, we will end up with regulation that looks "silly" in the current world, added McKnight.

Application of current, sometimes oppressive regulation will only force VoIP — a highly portable technology — offshore, Woroch added.

The potential growth of VoIP in a positive regulatory environment could be monumental, he indicated. In the past four years, VoIP use has expanded globally to the point that 11% of international phone traffic is now conducted via the technology, Woroch said.

Companies like Oregon's LocalDial Corp.— a public Internet user whose activities gave rise to the VoIP docket there and Washington state — have prompted complaints from traditional telephone companies, which argue that traffic has been routed to their networks with no compensation.

While cable argues its VoIP product is not a telecommunications service, operators have been submitting themselves to traditional telephone requirements, such as tariffs, in their applications. So far, the industry has avoided the legal dust-ups prompted by the companies which contend that the Internet is free.

Cable is aggressively mounting a campaign to educate regulators about the differences between the two VoIP products. At a NARUC conference in November, Comcast Corp. set up its own room to stage hour-long tutorials on cable's product.

"I made sure all my commissioners made it there," said Bill Durand, executive vice president and general counsel of the New England Cable Telecommunications Association. Durand, who also attended the meeting, said some of the commissioners had misconceptions about the nature and quality of cable's product. Some thought it traveled on the public Internet and believed other people could easily listen in on calls.

Durand said he thinks cable will be able to win utility regulators over to a minimally invasive oversight point of view because "our business is willing to do things done by other players," such as enhanced 911.

Meanwhile, companies including AT&T Consumer Services, Free World Dialup and the Voice on the Net Coalition (VON) have gotten together to lobby against traditional telecom regulation on VoIP.

That sector's stance plays like the "bad cop" against cable's "good cop," one cable insider said. Regulators object to VON's anti-regulatory arguments, which make it appear that PUCs want to regulate the Internet.

"No one wants to regulate the Internet," said NARUC's Ramsay. "That's the political third rail."

COMCAST'S SLIDES

Nelson lauded Comcast for the informational session and recommended a reprise — and perhaps participation by other companies — at NARUC's March meeting in Washington, D.C.

Meanwhile, lobbyists like Durand are "stealing Comcast's slides" for use in his "missionary work" in state capitals.

"We have to go statehouse to statehouse," he said. The hardest sell may be the professional staff members of utility commissions, he added.

"They hear 'IP telephony' and they think typical Internet," with its computer freezes and dropouts, he explained.

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