Forum voip

Byline: Donny Jackson

Once the foundation of U.S. voice-calling regulation, state governments last week saw their roles threatened by a series of events that could kill their chances of having economic oversight of increasingly significant voice-over-IP calling - and possibly mitigate their future influence over legacy networks.

Most notable was a letter signed by Rep. Chip Pickering (R-Miss.) and 61 Congressional cohorts, including a bipartisan majority of the House Commerce Committee that oversees communications issues, to FCC Chairman Michael Powell, urging the commission to assert exclusive jurisdiction over VoIP because the nascent technology is inherently interstate.

Pickering told Telephony the letter "sends a clear signal" to the FCC that Congress supports such action, which he believes will establish the type of market certainty needed to spur investment in VoIP. The goal of the letter is to get the FCC to make a jurisdictional ruling soon, before states try to apply legacy regulations and taxes - something more than a dozen states did prior to the passage of a moratorium prohibiting taxes on Internet services, he said.

"If the FCC acts quickly, we won't see that problem develop," Pickering said.

But Brad Ramsay, general counsel for the National Association of Regulatory Utility Commissioners, said Pickering's fears are unwarranted because state commissions have only shown interest in getting VoIP providers to comply with non-economic obligations such as 911.

If the FCC acts on the congressional letter's request, the $1.9 billion collected annually by 24 states for their respective state-run universal program funds would be jeopardized as consumers migrate from circuit-switched telephony to VoIP for long-distance calls, Ramsay said. He also questioned the wisdom of effectively granting a "regulatory subsidy" to VoIP providers competing with legacy telephone carriers that are highly regulated and highly taxed.

"It's a bad idea to regulate based on technology," Ramsay said. "That's regulators and lawmakers picking winners in the market. The idea is to let them compete on an even playing field and let the market decide."

In addition to the policy concerns, Ramsay said VoIP offerings are a functional substitute to traditional telephony services, so states legally should be allowed to regulate them similarly.

While acknowledging the likelihood of a legal challenge by the states, Precursor CEO Scott Cleland expressed doubt that a court would agree with Ramsay's legal argument and decline to grant the FCC deference on the matter.

"It's a good policy and political argument, but as a legal issue, that dog doesn't hunt," Cleland said. "VoIP, almost by definition - because it's routed all over the world and can be carried across state lines - is interstate."

Pickering echoed this sentiment, saying he believes the FCC has clear legal authority to assert its jurisdiction over VoIP calls. Even if states successfully litigate, there is a "strong consensus" among federal lawmakers on federal VoIP jurisdiction, and legislation would be passed that effectively would overturn any court ruling, he said.

"Hopefully, given the strong support legislatively, the states will choose not to challenge it in court," Pickering said, noting that members of the Senate are preparing a similar letter. "That would be a waste of resources because the outcome is going to be the same, either way."

Others disagreed. Cleland said "legislation is unlikely," and Libby Beaty, executive director of the National Association of Telecommunications Officers and Advisors, noted that it is "very telling" that Pickering and other Congressmen decided to ask the FCC to issue a rulemaking instead of passing a law that would achieve the same goals while drastically reducing the risk of being overturned in court.

However, all sources interviewed agreed that there is little doubt that the FCC will assert exclusive jurisdiction over VoIP. This likely will be done when the commission issues an order in response to the declaratory ruling sought by VoIP provider Vonage on jurisdictional issues and the application of access charges for VoIP calls terminated on the public switched telephone network.

If the FCC adopts such a ruling and it withstands legal scrutiny, the implications could be significant throughout the voice market. While states' authority to regulate voice calls obviously would affected, other potential risks include diminishing legacy carriers' ability to compete with VoIP providers and jeopardizing about $26 billion in annual revenue state and local governments collect via telecom-related taxes.

The Congressional letter is a "powerful statement" for independent VoIP providers seeking regulatory certainty as they try to grow their fledgling businesses, according to Brooke Schultz, Vonage's vice president of corporate communications.

"It looks like we're on the right track," she said.

But many argue that track puts traditional telephony carriers at a decided disadvantage because they must meet significant regulatory obligations and charge customers myriad taxes that VoIP providers are not required to assess (see graphic).

It's an argument the National Telecommunications Cooperative Association (NTCA) made on behalf of its 550 rural members in a filing to the Internal Revenue Service regarding the 3% federal excise tax. NTCA said it would like to see the tax - established in 1898 to help pay for the Spanish-American War - repealed but asked the IRS to apply it fairly for all voice-calling providers as long as it exists.

"While consumers may enjoy telephone service from a variety of technologies, only those receiving traditional wireline and wireless service pay the federal tax today," NTCA senior regulatory counsel Jill Canfield wrote in the IRS filing, noting that VoIP customers do not pay the tax. "Rural telephone companies cannot compete with providers who, for no other reason than regulatory disparity, are able to offer a competitive service for a cheaper price."

Many industry observers expect RBOCs to advance a similar argument for regulatory parity in an effort to escape state regulation, if the FCC declares VoIP to be interstate and if the FCC's finding that cable-modem offerings are informational services is upheld by the Supreme Court.

"That's certainly the way I would play it, if I were them," said Legg Mason telecom analyst Blair Levin, who declined to speculate whether such a strategy ultimately would succeed.

Meanwhile, states also are seeing their regulatory authority being pressured in other areas. During the last week, the U.S. Chamber of Commerce issued a report stating that unbundling - largely overseen by states - should be phased out of existence. Also, the Intercarrier Compensation Forum sent the FCC its 198-page plan to revamp the intercarrier-compensation regime, asking the commission to claim jurisdiction over intrastate access rates currently established by state commissions.

While the adoption of such recommendations would be a blow to state commissions' power, a potentially larger problem is the fact that an estimated $26 billion in annual telecom-related tax revenue for state and local governments is tied largely to state's regulatory authority. Unless laws are changed, the combination of FCC exclusive jurisdiction over VoIP and the expected consumer migration to the IP platform could cause this revenue stream to diminish steadily as public entities struggle to balance their budgets.

"Isn't that what is referred to as an unfounded mandate? Where do we make up that money?" Beaty said. "These are questions that absolutely need to be answered."

Pickering agreed but noted that it would be more appropriately handled as lawmakers begin tackling a potential rewrite of the 1996 Telecommunications Act beginning next year.

"This [Congressional letter] does not address the tax issue," Pickering said. "That will be an issue for the next Congress."