VoIP Regulation and Uncertainty in the US

1. VoIPFCC Forum – December 1, 2003 Charles M. Davidson Florida Public Service Commission

2. Regulatory Uncertainty • Country is at a crossroads–policymakers must choose: either let the market work for the benefit of consumers or subject vibrant new technologies to legacy regulation. • Florida has taken a “hands-off” approach to VoIP. New legislation mandates that VoIP be free of “unnecessary regulation … regardless of the provider.” • Other states, like Minnesota and California (at least pre-Schwarzenegger) appear willing to regulate VoIP.

3. VoIP – Contextual Issues • The environment surrounding today’s emerging IP network is completely dissimilar to the environment in which the wireline telephony market developed. In that world: • Networks were built at the local level…then connected across localities…then across states…the circuit-switched network could be understood on a state-by-state basis. • In the nascent telephony market (this time last century) connecting competing phone cos. in cities across the U.S. was impossible absent a company with the resources and economies of scale/scope to “connect the dots.”

4. Contextual Issues (cont.) • American Telegraph & Telephone had the ability to provide long distance connections between local networks. • The quid pro quo…AT&T was given a regulated monopoly over most of the local and LD network in return for economic regulation of the monopoly. • A strong state role based on…physical nature of circuit-switched network, presence of local monopolies, and overall intrastate nature of local telephony.

5. Key Facts re VoIP • VoIP is a nascent technology…. • VoIP is a “borderless” technology…unlike the circuit-switched network, the IP network is “connectionless”…traffic is global and no longer defined within the limited jurisdiction of states. • VoIP is part of an IP network that is being built-out and interconnected by robust intermodal competition…there is no one dominant player. • VoIP is spurring price competition and new service offerings…(e.g., Cablevision offering unlimited enhanced VoIP service and e911 for $34.95/mo…¾ of broadband customers taking).

6. Guiding Principles • Salute Capitalism. In a competitive market, economic regulation is a disincentive to the investment that will be required to build-out the IP networks of the future. • Competition Benefits Consumers. Policy should recognize & respect that intermodal competition (i.e., phone vs. cable vs. VoIP vs. wireless) benefits consumers. • Emerging Technology. As VoIP is an emerging, competitive technology, VoIP providers should not be subject to rules designed to forge competition in established, monopoly markets.

7. Guiding Principles (cont.) • No Economic Regulation. Where VoIP is provided purely as an application over a broadband network (pure VoIP), there should be no economic regulation (i.e., regulation of prices, service quality, etc.). • Regulatory Parity. VoIP providers – whether new firms, IXCs, or LECs – should be subject to the same (de)regulatory regime. • Interstate in Nature. Because VoIP technology is borderless, VoIP services should be presumed to be inherently interstate in nature (at least absent clear evidence to the contrary in a particular case).

8. Guiding Principles (cont.) • There’s VoIP and Then There’s VoIP. Distinctions between pure VoIP providers and POTS providers that use VoIP merely as means of transport may call for policy differences. • Limited “Necessary” Regulation. VoIP providers do not have to be classified as CLECs, and VoIP need not be subjected to full range of telecom regulation in order to address public safety and welfare issues (e.g., E911 and USF).

9. Access Charges E911 Service Quality USF Issues Consumer Protection Numbering TDD Compatibility VoIP as Transport Devil is in the Details

10. Access Charges VoIP Scenarios: • Pure VoIP: VoIP Phone/Computer to VoIP Phone/Computer without touching the PSTN. • POTS: Plain old telephone to telephone with IXC using VoIP for transport in the IXC’s enterprise. • VoIP Phone to Plain Old Telephone: VoIP is used to transport portion of the call, but the PSTN is relied upon for delivery of the call.

11. Access Charges (cont.) • The entry of new providers & new types of providers is an opportunity for reform of rules, but in the meantime… • Access Charges Should Only Apply to VoIP Where PSTN is Accessed (and Only to Extent Accessed)…Intercarrier compensation/access rules would apply to that portion of a VoIP call that relies upon the switched network. • Simple “But For” Test Could Apply.If a VoIP call could not be made but for access to the PSTN, then the VoIP provider would be subject to access charges under this approach.

12. E911 • Guiding Principle # 1 – Public Safety Argues for a Ubiquitous 911 System. Consumers want 911 services. At the time of need, callers may forget they are using a VoIP phone. A child in danger should not be deemed outside the 911 system because her parent opted for a VoIP system. • Guiding Principle # 2 – Those Utilizing the 911 System Should Support the 911 System. A VoIP provider that transfers calls to the 911 system should bear its “fair share” of maintaining the 911 system. Regulatory parity argues that those who use the system should, regardless of the platform used, support the system.

13. E911 (cont.) • Guiding Principle # 3 – Afford a Reasonable Opportunity for Industry to Develop Standards.Public safety regulation ultimately applied to VoIP should allow a reasonable opportunity for providers to develop & implement solutions (e.g., for syncing VoIP with the circuit-switched e911 system). • Guiding Principle # 4 – Shared Responsibility. Industry has responsibility to fully inform consumers. Consumers have a duty to educate themselves and understand that their use of a competitive, emerging communications service may have a different 911 functionality than their plain old telephone.

14. Universal Service • The Debate: Nascent technologies should not be burdened with old taxes, but the country has established universal service policies that require funding. • The Problem: As consumers increasingly turn to substitutes for a taxed service, not subjecting those substitutes to universal service fund obligations picks winners and losers. Some competitors but not others would bear the brunt of funding the program. • The Need: Reassess how competitive market should impact universal service business plan.

15. Universal Service (cont.) • Guiding Principle # 1 – Expansive Regulation is Not Required.VoIP (like wireless) does not have to be subjected to the full range of common carrier/telecom regulation in order to require VoIP providers to contribute to the USF. • Guiding Principle #2 – Revenue Neutrality. Any extension of USF obligations to VoIP providers (or others) should not constitute new/additional revenue or a new/additional tax. Rather, it should reflect a reallocation of a burden amongst some group of similarly-situated competitors. • Guiding Principle #3 – Regulatory Parity. Those who make contributions ought to be considered for distributions.

16. Challenges for Regulators • Understand that the rules addressing the combination of established networks & regional monopolies are not suited to (and not intended to govern) emerging technologies. • Where a competitively available service may substitute for basic local exchange service, resist the urge to regulate the new service like the old and consider deregulating the old. • Resist the notion that regulators can “create” competition and innovation between market participants if they just keep tweaking the model. • In short…let the market work.