An important law that would protect California consumers from state-level regulation of VoIP and other IP-based services passed the California State Senate late last week on a bipartisan 30-6 vote.
The bill, SB 1161, now moves to the State Assembly, which has scheduled hearings for June 11.
SB 1161 is short and sweet. It prohibits the state's Public Utility Commission "from regulating Voice over Internet Protocol and Internet Protocol enabled service...except as required or delegated by federal law" or otherwise authorized by statute, until at least 2020.
Its goal is even more straight-forward. As the bill's author, State Sen. Alex Padilla (D, Los Angeles) put it, "It ensures that California will not become the first state in the nation to regulate the internet."
According to the Los Angeles Times, California had 11 million residential landline customers and 3.5 million residential VoIP customers at the end of 2010. VoIP services, including those offered by Vonage and Skype, as well as by cable and broadband providers, are rapidly expanding in popularity. IP-based voice applications are also being integrated into game systems, voice activation, customer service, and telemedicine.
SB 1161 is sponsored by leading Silicon Valley trade associations, including TechAmerica, TechNet, and the Silicon Valley Leadership Group.
But the bill has also been on the receiving end of strong criticism, especially from within the PUC. Commissioner Catherine J.K. Sandoval argues the bill could eliminate basic consumer protections for those who still rely on traditional landline telephone service.
Commissioner Michael Florio also opposes the law. "Nobody is talking about regulating the Internet," he said. "It's just a political slogan that has no basis in reality whatsoever."
(Other opponents include a mishmash of non-technology consumer groups including AARP, Consumers Union, and the Faith Temple Apostolic Church.)
The objections are largely rhetorical. The bill explicitly preserves existing PUC consumer protection rules, including collection of 911 surcharges, universal service funds, interconnection and inter-carrier compensation rules. The mountain of regulations covering traditional landline telephone service are unaffected by SB 1161.
The Internet disrupts the business of regulation
The PUC's real concerns are obvious if unstated. The Internet economy is flourishing worldwide, largely without government regulation. Activities such as telephony that have long been local -- and subject to arcane local regulation -- are quickly migrating to superior and often cheaper IP-based alternatives offered by a robust market of global competitors. Provincial regulators are increasingly left with nothing to do and vanishing justifications for their agencies' bloated budgets.
Indeed, one of the reasons services including VoIP have become so attractive to consumers and providers alike is the lack of micromanagement by slow-moving bureaucrats. Providers can enter the market without the permission of state or federal overseers. Entrepreneurs can enhance their products with new technologies as soon as they're available. No applications, no approvals, and no pointless delays.
Technology moves fast; regulators move slowly. The PUC, for example, took seven years to approve Caller ID. Internet users can't wait for that kind of protection.
Without the overhang of regulators like the PUC, VoIP and other IP services continue to get faster, cheaper and smaller, roughly following the improvement curve set decades ago by Intel founder Gordon Moore in what is known as Moore's Law.
Government oversight, however, is more than just wasted overhead for providers and taxpayers. It should at least be obvious to lawmakers that separate and often contradictory rules imposed by different state, federal, and international regulators won't help anyone. That's why 24 states have already passed legislation similar to SB 1161, protecting IP services from even more local interference by insular state regulators with no Internet expertise and every reason to view the success of such services jealously.
The Internet, quite simply, is disrupting the business of government. With consumers voting with their feet for VoIP, the PUC is losing customers, and with them the justification for continuing to put the squeeze on taxpayers. Despite the desperate state of California's state budget, the PUC's annual expenditures continue to swell. Last year, the agency's budget was $1.1 billion. For 2012, it climbed to $1.4 billion.
The PUC betrayed its true nature when the agency's legal division issued an analysis of SB 1161 last month. While the Communications Division concluded that "no current PUC regulatory activity or program regarding VoIP or other IP-enabled services would be impacted by this bill," the agency's lawyers had more creative ideas. The Legal Division concluded that a law forbidding the agency from extending its regulation of the Internet would require 57 new jobs and would cost the state over $1 billion to implement.
When lawmakers laughed out loud at that analysis, the agency's general counsel beat a hasty retreat. In a letter to Padilla, he claimed the report was only preliminary and had been issued by his staff without his "prior review of approval." Publication of these ridiculous numbers was a "lapse in our system of internal controls," he wrote.
Government control of the Net is never a good choice
Regulators abhor a vacuum. Rather than drawing the lesson from VoIP's unparalleled success that unregulated voice services create more competition, better services, and rapidly falling prices, the PUC sees a new industry it desperately wants to control.
There's a broader lesson here than just the greed of state officials. The Internet revolution teaches us that new technologies flourish when they are not subject to slow-moving agencies and barnacled regulations designed for an earlier era. Even when the market fails, antitrust and unfair competition laws provide a more-than-adequate safety net. Just ask Microsoft, Intel, Oracle, Google and Facebook, each of which has been forced to change business practices in response to complaints brought by governments in the U.S. and abroad.
California legislators are to be commended for saving Internet users from the misguided ambitions of local regulators. But we can't stop there. On the same day that SB 1161 passed the State Senate, Vint Cerf, one of the fathers of IP technology and now an executive with Google, delivered a similar message to Congress. "If there's one thing that we should not do," he said of efforts to regulate the Internet, "it is to centralize decision-making power." Cerf continued:
The greatest strength of the current system of Internet governance is its meritocratic democracy. Anyone who cares can voice ideas and opinions, but the ultimate decisions are governed by broad consensus. It might not always be the most convenient of systems, but it's the fairest, safest, and historically most effective way to ensure that good ideas win out and bad ideas die.
Cerf was testifying about disturbing new efforts by the U.N.'s International Telecommunications Union to usurp key components of the Internet ecosystem. But he could just as easily have been talking about every other international, federal, state, and local regulator who resents and mistrusts what Cerf calls the "bottom-up, pluralistic system of Internet governance" that is the chief source of its phenomenal success as a network as well as an instrument for economic and social transformation.
The Internet has thrived largely because it has been free of government interference at all levels, from the U.N. to your local mosquito abatement district. As consumers and citizens move more of their activities online, however, legacy regulators are finding themselves with little to justify their continued costs. And the kinds of problems regulators were traditionally authorized to solve are proving more efficiently corrected by market forces and better engineering.
Those who are rightly opposing international efforts to regulate the Internet from the top-down should be equally concerned about similar efforts coming from the bottom up. And they should apply the same skepticism to national regulators, including the FCC and its international counterparts.
Efforts to "centralize decision-making power" over the Internet are a bad idea, no matter what kind of government proposes them, and no matter how noble their motives.
So rather than forcing VoIP and other IP services into rules initially designed for the telegraph, the PUC, the ITC, and every other would-be regulator of the Internet should instead be applying the benefits of multistakeholder governance to the remaining activities they still oversee. They should be scaling back, not scaling up.