VoIP telecom regulation

A New Kind Of States' Rights

July 21, 2004

By Donny Jackson

For more than a century, most telecom regulation has come from the states. That changed somewhat with the passage of the 1996 Telecommunications Act, which granted the FCC greater powers.

Still, states continued to play a key role in the voice-calling arena, particularly after the FCC released its Triennial Review Order last year. Key components of the TRO called for state commissions to oversee detailed studies of the telecom marketplace and determine where CLECs were impaired. The aggressive, nine-month timeline created mountains of work for state commission staff members, but the TRO represented a high watermark for state commissions' authority.

It was short-lived. Today, state commissions' future role in regulating real-time voice calling is in doubt, and even its present role is in limbo.

The future is in doubt because most believe voice over IP is the future of voice calling. For states, that's a problem, because the distributive networks used to carry Voip calls cross state boundaries.

With this in mind, most FCC commissioners have indicated they believe Voip is inherently interstate, meaning it falls within the jurisdiction of the FCC, not the state commissions — a sentiment echoed in two Voip bills pending in Congress. Meanwhile, most carriers have told the FCC they do not want states to have any economic regulatory authority over VoIP.

Questions about the present revolve around the March decision by the U.S. Court of Appeals for the District of Columbia Circuit that ruled the FCC erred by delegating states so much authority in the TRO. Meanwhile, some even are beginning to argue that intermodal competition from wireless, cable and other alternatives has grown so much that all voice regulation has outlived its usefulness (see story on page 64).

Realistically, however, the battle is not about complete deregulation but whether states should be able to regulate Voip and whether sufficient grounds exist for pre-empting states from their traditional role in regulating legacy telephony networks.

“The U.S. is unusual, because it's one of the few jurisdictions in the world that has significant bifurcated regulation,” Parsons said. “I tend to believe in states' rights, but telecom policy probably is much better set at a national level rather than by 50 states.”

Most industry officials refer to Voip as a breakthrough that changes everything in telecom by making many key notions of traditional telephony networks obsolete. Most notably, concepts of time (minutes used) and distance (local, intrastate and interstate) don't matter in an IP world, they say. Furthermore, IP calls travel over distributed networks, meaning even a call to a next-door neighbor theoretically can be routed through a server in a different country, not to mention a different state. With this in mind, Voip calls should be treated as interstate communications, making them the jurisdiction for the FCC, most members of the FCC have said.

For Voip providers, the implications are significant. Technologically, Voip allows providers to become nationwide players with relatively little time and money compared to their circuit-switched counterparts.

Hiring lawyers and government lobbyists is a necessary evil in most industries, but establishing a single federal office — even an expensive one — in Washington, D.C., is not nearly as costly and cumbersome as trying to staff and house offices in all 50 states, plus the nation's capital.
“You don't want to deal with 50 regulatory bodies,” said telecom analyst Andy Regitsky, president of Regitsky & Associates.

“It's hard to keep that many chiefs happy.”

This barrier to entry caused by state regulation is only exacerbated in the marketplace, which is wary of any company subject to the whims of 50 state commissions, according to Vonage CEO Jeffrey Citron. After winning a court battle that prevented the state of Minnesota from treating it like a telecom carrier, Citron said Vonage quickly received $35 million in investment capital that allowed the company to expand quickly and become the poster child for independent Voip providers.

But Citron said the investment spigot probably turned off for Voip start-ups last month, when the state of New York classified Vonage as a telecom company that is required to meet the E911 standards of traditional telephony providers.

“So what happens?” Citron told the Association of the Bar of the City of New York last month. “All the capital that's going to voice-over-IP? Done. No more. No single investor in their right mind will deploy any capital — none, not one dollar — to a start-up company going after voice over IP.”
And it's not just smaller players that fear the regulatory scheme currently imposed on telecom carriers. Comcast CEO Brian Roberts recently testified before the Senate that the 1996 Telecom Act's deregulation of cable operators' network upgrades was the driving force for $85 billion in investment by the cable industry.

In addition, he acknowledged that one of his priorities for this year was getting the Supreme Court to consider overturning an appeals-court decision that cable-modem services include a telecom component.

With this in mind, Sen. John Sununu, R-N.H., has introduced legislation that would prohibit state and local governments from regulating or taxing Voip applications. While the bill is gathering a general base of support, arguably the staunchest opposition comes from the National Association of Regulatory Utility Commissioners, which represents most state regulators.

“This bill pre-empts state regulation,” Sununu said. “I don't imagine the association representing state regulators could ever embrace legislation that did that.”

Indeed, a 12-page comment in the FCC's IP-services proceeding penned by NARUC general counsel Brad Ramsay defends state commissions' regulatory role in Voip based primarily on a fundamental premise: Voip is not a revolutionary new service but the merely the latest advancement in a long tradition of real-time voice calling.

“The public telephone network has constantly evolved since the first phone was put into service over 100 years ago,” the NARUC filing states. “Digital switches and fiber rings are profoundly different than cord boards and a single strand of copper, but the core service used by customers remains fundamentally the same. New methods of delivering telephone service do not alter the fact that service must continue to be reliable and affordable.”

Furthermore, treating Voip calls differently than legacy circuit-switched calls would violate the FCC's goal of maintaining regulatory parity between functionally equivalent services, according to NARUC. It's a similar argument to that used by the state of Minnesota in appealing last year's court loss to Vonage.

“Vonage provides nothing more than a new technology requiring protocol conversion to maintain compatibility with a customer's existing CPE, and it facilitates the networking of an otherwise ordinary telecommunications service,” the Minnesota brief stated. “From the end users' standpoint, there is no net change in the form or content of the telecommunications they receive; any protocol conversion is transparent.”

At least one pro-state official requesting anonymity said, “The FCC has the edge here” if it decided to pre-empt state regulators.

Andy Lipman, a telecommunications attorney with the law firm of Swidler Berlin Shereff Friedman, agreed.
“While I'm certain the states would challenge [pre-emption], I think the FCC would prevail,” Lipman said.

But does the FCC want to stir the potential hornets' nest that would result from pre-empting state commissions? The fact that the FCC did not make a case for pre-emption in its order denying AT&T's declaratory petition exemption from access charges on phone-to-phone calls that use IP in transit is a sign that this is not a confrontation FCC commissioners are eager to start.

“There are snakes in the weeds here carrying poison [referring to the states], and the FCC still has its shin guards on,” said a source close to the situation, who requested anonymity.

But many still contend the state commissions can be more of a hindrance than an asset as the industry tries to resolve long-standing problems regarding UNEs and intercarrier compensation. Some argue Congress should clarify the matter by amending the Telecom Act in a way that grants the FCC clear pre-emption authority in appropriate areas. But it seems unlikely in the near future, because Congress faces more political pressure than the FCC.

“That's always been the biggest problem with bill and keep — the politics of it,” Regitsky said. “Do you want to take on the state commissions? Do you want to let them make arguments that pre-empting them and going to a bill-and-keep system will increase local rates — especially in an election year?”

Legg Mason telecom analyst Blair Levin said such questions are so perplexing that the FCC or Congress taking action to exclude states from regulating Voip is far from certain.
“I don't think it's a given,” Levin said. “States will end up with some role. What you saw California do with wireless [in terms of consumer protection] could happen with VoIP.”