Free essay voip

In This High Stakes Fight, USF Subsidies May Be First Casualty

Thus far, state regulators appear largely hesitant to regulate an emerging new technology such as Voice over Internet Protocol (VoIP). Even so, VoIP's continued rollout is posing significant challenges for state regulators. However, most of these challenges could be rendered moot if -- and when -- the FCC simply declares VoIP to be an "information service" and therefore under the sole jurisdiction of federal regulatory authority.

Apparently, that's easier said than done.

The FCC finds itself once again caught between the proverbial rock and a hard place. If it issues an order precluding states from exerting any sort of regulatory control over VoIP providers, the Commission may well be fomenting the end of universal service subsidies as we now know them.

What is clear is that a growing number of influential groups and thought leaders are pressing policymakers to maintain a hands-off approach on VoIP. One such group, the conservative-leaning Progress and Freedom Foundation (PFF) is steadily beating the deregulatory drum, insisting that regulation of VoIP is unnecessary.

There is no basis whatsoever for the economic regulation of VoIP, PFF President Raymond Gifford tells TPR. Even the application of public safety regulation, such as 911 or E-911 mandates, may be premature. "If the VoIP provider makes clear to his customer that VoIP has certain limitations with respect to E-911 coverage, then the customer can make an informed decision," he says.

"That's the way the free market system is supposed to work."

It is the view of Gifford and the PFF that VoIP can be "a catalyst to dismantling the creaky cross-subsidization mechanisms for local rates and access charges," Gifford says. "VoIP is a 'killer app' of the old regulatory categories."

Gifford on Monday (Oct. 25) delivered a speech at a telecom event in Arlington, Va., jointly sponsored by the National Association of Regulatory Utility Commissioners (NARUC) and the National Exchange Carriers Association (NECA). He used the opportunity to rail against the current universal service regime.

"Let's be plain about what universal service is, in all its implicit and explicit forms," he told his audience. "It is a tax. Further, it is a tax that relies on there being a closed system of telecommunications that can be taxed and wherein prices can be manipulated to achieve the desired social ends of universal service."

Gifford referred to Federal Judge Richard Posner's 1971 essay, "Taxation by Regulation," in which Posner describes one of the purposes of regulation as being an adjunct to the tax system, i.e., a means of raising revenues from one group to redistribute to another.

"A necessary precondition for taxation by regulation, Posner discusses, is that the system be closed. Thus regulation must prevent entry into the regulated market and, just as important, prevent escape into substitutable services or to other technological platforms which by definition will be cheaper or technologically superior, and perhaps both," Gifford said.

Gifford argues that when competition was first introduced into the telecommunications mix way back with the Modification of Final Judgment (MFJ) --i.e., AT&T's divestiture of the Bells -- the "closed system of taxation by regulation, of universal service was doomed."

"Never mind that it might take 30 years for that doom to be fully realized," he said. "The point is that the competitive dynamics unleashed by the MFJ, which gave rise to the competitive access providers (CAPs) and in turn the [1996 Telecom Act], made it possible for payers into the universal service closed system to escape onto less-taxed platforms. Currently, the competitive and technological dynamic leads outside the traditional sphere of taxable telecommunications services and accelerates the pace of regulatory escape. And as this escape inevitably happens, the ability to employ the various explicit and implicit taxation mechanisms that constitute universal service is lost."

Gifford maintains that VoIP is today the "clearest manifestation of regulatory escape." If VoIP can achieve interstate status, it will escape a portion of the universal service system; Gifford says. If it can achieve information service status, "then it escapes almost completely."

"When you see services like Skype and Free World Dial-Up that bypass not only the PSTN [Public Switched Telephone Network] but also the North American numbering system, you know these are harbingers of the end of the closed regulatory universe, no matter what the states or the FCC does," Gifford says.

Even so, activity at the state and federal levels continues to occur. FCC Chairman Michael Powell is on record having publicly stated his desire to treat VoIP with a "light touch." But Powell may first have to engage in some rather heavy-handed actions if he hopes to dissuade some state regulators from trying to rein VoIP into their respective regulatory corrals.

At Supercomm 2004 in Chicago this past summer, Powell bemoaned the current state of telecom regulation, describing it as something that grew out of a business model created more than a century ago when "there was one wire" into every home -- "twisted pair" copper wire that was strung for thousands of miles and at enormous expense -- for a single purpose.

Broadband-based technologies like VoIP are about to change all of that, he said. "The PSTN is probably the finest engineering experiment, for the single thing that it does, that the United States has ever produced," he said. But the PSTN is fast being supplanted by emerging technologies like VoIP. "The technology has disconnected the architecture from the application," he said. "Platforms can be application-agnostic. I don't think people understand what a new paradigm that is."

Powell has acknowledged that he is troubled by those states that have taken a very aggressive regulatory posture toward VoIP. He noted that some of these same states also have been very aggressive in enforcing the 1996 Telecom Act, requiring incumbent local exchange carriers (ILECs) to provide their competitors with access to the ILECs' local loops at radically reduced prices. In Powell's view, such conflicting behavior by these states suggests that the policy dispute over VoIP is "more about power" than anything else. However, state regulators have told the FCC and Congress that, in reality, the dispute is about money.

States that are trying to regulate VoIP are doing so because they fear that if the technology is allowed to flourish outside the traditional telecom arena, the subsidy pool in the Universal Service Fund (USF) will begin to evaporate. This, in turn, could threaten the future of telecom service to highcost areas. If the FCC finally rules that VoIP is in fact an "information service," as such, it would not be subject to USF participation. This, and the fact that VoIP service providers do not have to pay federal excise taxes and other fees associated with traditional telephone services, contributes to VoIP's image as a cost-effective alternative to ordinary wireline telephony.

More than two dozen states have already embarked on inquiries into VoIP. Some of them clearly appear more intent on regulating the technology than are others. Consider the following:

Alabama: The Rural Carriers Weigh In

Several rural local exchange carriers have asked the Alabama Public Service Commission (APSC) for a declaratory ruling that subjects VoIP providers to APSC regulatory control. Interestingly, the rural LECs' petition wants VoIP providers to be classified as "transportation companies." It also wants them subjected to traditional tariff obligations that would require them to pay intrastate access fees.

The rural LECs filed their joint petition on July 23, 2003. The APSC on Aug. 29, 2003, established a declaratory proceeding (Docket 29016). Comments and reply comments were filed in October and December 2003, respectively. Thus far, no decision in the proceeding has been made.

California: If It Walks Like A Duck ...

The California Public Utility Commission (CaPUC) in September 2003 told top executives at the various VoIP providers doing business in the state --including Vonage, Net2Phone, Packet8, VoicePulse and SBC Communications -- that as far as the CaPUC is concerned, VoIP is an intrastate telecommunications service. That interpretation means that California's VoIP providers have to be certified by the CaPUC.