February 10, 2004 3:20 PM PST

FCC to weigh in on VoIP regulation

Federal regulators this week are expected to issue their first major decision on Internet phone services, in a closely watched decision that could reshape the telecommunications industry.

At a meeting scheduled for Thursday, the Federal Communications Commission is widely expected to contend that companies that sell phone services based on voice over Internet Protocol (VoIP) technology aren't subject to traditional telephone rules.


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The FCC is then expected to open a 12-month to 18-month public-comment period to help decide what to do next, sources familiar with agency's plans said.

The FCC has yet to disclose its position. Still, commission watchers said they believe that the outcome is not in doubt, given the outspoken antiregulation views several commissioners aired prior to the ruling. Chairman Michael Powell and at least two FCC commissioners on the five-member board have said publicly that they believe that modern telephone laws don't apply to VoIP services.

"When it comes to nascent services such as VoIP, we should employ the regulatory equivalent of strict scrutiny.

News.context

What's new:
The FCC this week is expected to rule that phone services based on voice over Internet Protocol (VoIP) technology aren't subject to traditional telephone regulations.

Bottom line:
The decision will likely pre-empt state efforts to apply traditional phone regulations to VoIP providers and could lead to new rules drafted specifically for Internet phone calls within the next 12 to 18 months.

For more info:
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We should make sure that our rules are narrowly tailored to the governmental interests at stake," FCC Commissioner Kathleen Abernathy said recently.

The FCC's decision is expected to derail state-by-state efforts to regulate VoIP providers, cementing a federal court decision issued last year that found that VoIP provider Vonage was not a telephone service and was thus not subject to phone rules the Minnesota Public Utilities Commission set.

Although the FCC won't likely slap traditional phone rules on VoIP services, the agency may still regulate Internet calls. For example, some industry groups are already lobbying for consideration of new rules that would require VoIP providers to offer access for the disabled, support 911 emergency services and allow law enforcement to intercept calls, among other things.

At the same time, VoIP providers are hopeful that the agency will, for the foreseeable future, steer clear of ordering price regulations and other "economic sanctions" that traditional phone companies must obey.

The FCC's expected decision Thursday comes in response to a petition filed last year by Free World Dialup founder Jeff Pulver, who asked the FCC to declare that his free Internet phone service isn't subject to traditional phone regulations.

"I just wanted to ask a simple question a year ago: 'Do phone rules apply?'" Pulver said. "In my wildest dreams, I didn't think it would become something as big as this."

Internet phone services have existed for years, but they have recently gained prominence, thanks to improvements in quality and ease of use. While traditional phone services create an end-to-end connection between callers, VoIP breaks up conversations in packets that are routed independently across a network and reassembled on the other end. VoIP calls are cheaper than circuit-switched calls, because they make more efficient use of network resources. But the biggest cost savings from VoIP come simply because the calls are usually not subject to taxes that apply to the old telephone system.

Regulators are already worried about revenue shortfalls, as more calls shift to IP-based systems. Consumer VoIP services from companies such as Vonage, 8x8 and VoicePulse have begun to sign up tens of thousands of residential customers. VoIP subscriptions could soar, as cable companies begin to market broadband phone services to their customers, threatening local taxes, if large numbers of people switch over and cancel traditional phone service.

As IP-based voice traffic surges, other sticky policy issues are waiting in the wings. Already, more than 11 percent of long-distance calls travel at least part of the way over IP networks, a number that's expected to jump to more than 50 percent by 2007. That trend raises significant policy issues related to connection fees paid between carriers for completing each other's calls.

Signaling the importance of the issue, AT&T last year filed a petition with the FCC, seeking to exempt its IP-based traffic from some interconnection charges. The FCC is still weighing its response in that case, and observers said they do not expect the agency to issue an answer by Thursday.

Cathy Martine, in charge of the company's VoIP rollout, says it could save AT&T about $10 billion a year. "We'll reinvest it and make our network better," she said.

The regulatory makeover is another example of how technology has outpaced FCC regulation. The FCC faces a number of glaring examples of just how Internet dialing has made its rules obsolete and, at the same time, how it threatens the way it funds public services like 911. Perhaps the best example: universal service fees, which telephone operators pay as a percentage of service revenues to subsidize rural telephone expansion.

On traditional phone networks, calls travel the same series of circuit switches, so it's easy to determine whether a call is local or over a long distance. But that's not the case on the Internet. Each of the approximately 50 packets of data that represent a single second of an Internet phone call could take a different pathway, sometimes halfway around the world, to avoid Internet traffic jams. The FCC's rules, rooted in geography, can't cope.

VoIP by any other name
One of the most important regulatory problems that face the FCC is creating a definition of a VoIP provider.

The National Cable & Telecommunications Association (NCTA), which represents cable interests, has developed a test that it is lobbying the FCC to use, and that's gaining some favor inside the beltway, sources said.

Lobbyists said there should be at least three criteria met before labeling something a VoIP provider: It gives its customers a 10-digit telephone number; it allows customers to make calls to and from the regular phone network; and its service is IP-based.

That test casts quite a wide net. It would include most U.S. telephone service providers, which now routinely use the Internet to complete long-distance phone calls, as well as cable companies that use VoIP to enter the local phone market, plus Vonage, 8x8, VoicePulse or other subscription services that connect broadband subscribers to each other and the regular phone system.

It wouldn't include the few hundred thousand VoIP devotees who use what's called Internet-to-Internet methods such as Skype, Free World Dialup and instant-messaging clients, which completely avoid the traditional phone networks.

"Only a regulatory framework that is minimally burdensome can create the right incentives and a favorable climate in which service providers can invest, innovate and deploy VoIP services," the NCTA wrote in a recent white paper, making the rounds among the telecommunications sector's elite.

What state is VoIP?
Whether VoIP is to be regulated by states or the federal government is another longer-term policy issue. On this front, VoIP providers both large and small, in addition to FCC commissioners, agree that VoIP is subject to federal controls.

Under a federal umbrella, VoIP providers would face only one policy. Currently, about a dozen states have expressed interest in crafting their own rules for VoIP, the beginnings of a possible patchwork of slightly different regulations that could slow down the pace of VoIP's spread.

With just 300,000 people in North America now paying for VoIP service, Abernathy and others feel that it would be wise to keep VoIP under the jurisdiction of the federal government, where it can be coddled with light regulations and give it enough room to expand from coast to coast.

"As VoIP providers gear up to roll out services regionally or nationally, they should not be burdened with a patchwork of disparate state regulations," Abernathy recently said.

The FCC also has shorter-term problems they have indicated they will address more immediately.

One is what to do about universal service. Both FCC Commissioner Kevin Martin and AT&T, which will use VoIP to launch a local phone service, want to base universal service not on revenue but on the number of telephone numbers that a service provider has.

VoIP luminaries want to use the FCC overhaul to redirect universal service to fund broadband expansion, an old idea that's gaining new support.

 

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