DECEMBER 2004 FCC Preempts State Utility Regulation of VoIP Services

In a decision with major implications for cable operators, phone companies and other telecom players, the Federal Communications Commission (FCC) ruled last month that state utility commissions don't have the authority to regulate voice-over-IP (VoIP) service like traditional phone service.

As expected by agency observers, the FCC told states to back off in their attempts to treat Vonage Holdings Corp.'s DigitalVoice service as a conventional landline service. Such states as Minnesota and New York have sought to make Vonage comply with traditional phone rules, which would force it to file pricing plans, offer 911 emergency services and pay into local universal service funds. With its early November ruling, the FCC preempted these moves, declaring that only it has the power to regulate services like Vonage's.

Acting on a petition filed by Vonage against the Minnesota Public Utilities Commission last fall, the FCC found that DigitalVoice is an "inherently interstate" service that can't be broken down into local, interstate and international segments. The Commission noted that Vonage's customers can use their phones from a broadband connection anywhere in the world, making it tough, if not impossible, to figure out whether a call is local, interstate or even international in nature.

"We conclude that DigitalVoice cannot be separated into intrastate and interstate communications for compliance with Minnesota's requirements without negating valid federal rules and policies," the agency said in its 30-page written order, which is available on its Web site (www.fcc.gov). "In so doing, we add to the regulatory certainty we began building with other orders adopted this year regarding VoIP... by making clear that this Commission, not the state commissions, has the responsibility and obligation to decide whether certain regulations apply to DigitalVoice and other IP-enabled services having the same capabilities."

Notably, the FCC made the Vonage preemption order broader than expected to cover other VoIP players, including cable operators. Commission staffers had originally proposed a narrower order that would have excluded cable IP telephony by limiting relief to "nomadic" services that steer traffic over the public Internet, rather than private networks like the cable industry's. But intensive lobbying by the National Cable & Telecommunications Association (NCTA), Time Warner Inc. and Cox Communications Inc. in the last few weeks before the ruling apparently paid off.

"In particular, the provision of tightly integrated communications capabilities greatly complicates the isolation of intrastate communication and counsels against patchwork regulation," the agency said in its written order. "Accordingly, to the extent other entities, such as cable companies, provide VoIP services, we would preempt state regulation to an extent comparable to what we have done in this order."

What this means is that cable operators seeking to offer VoIP will no longer need to gain each state's approval to enter the telephony market. So, unlike such cable telephony pioneers as Cox, Time Warner and Cablevision Systems, MSOs will no longer have to apply for competitive local exchange carrier (CLEC) status, file pricing plans, offer 911 emergency services, pay into local universal service funds or meet several other state regulatory requirements.

Not surprisingly, cable officials, who had fretted that a narrow preemption ruling might hurt the industry by giving Vonage and similar third-party providers a regulatory edge over cable, hailed the FCC's move. They predicted that the order, by removing possible state barriers to market entry, would lead to a faster rollout of IP telephony by MSOs.

"I think that's a given," said NCTA General Counsel Neal Goldberg. "We're very pleased that the Commission saw it in its wisdom to extend the order to other VoIP companies... We're quite sure that it covers all cable operators, at least the ones that we're familiar with."

In a prepared statement issued just after the ruling, NCTA President-CEO Robert Sachs expounded on that theme. "By establishing a national framework for the regulation of VoIP services, the FCC has taken a significant step towards promoting competition in enhanced voice services," Sachs said. "We believe the Commission's decision will further incent companies to invest in this exciting new technology."

The FCC's ruling comes at a time when both cable operators and the regional Bells are already stepping up their commitment to VoIP. On the cable side, Comcast Corp., Time Warner Cable, Cox, Charter Communications and Cablevision have all accelerated their deployment of IP telephony recently. In the third quarter, for instance, Cablevision alone picked up more than 74,000 VoIP customers.

The Commission's decision may also spur the introduction of other IP-enabled services, especially IP video services, by cable and phone companies. In a little-noted section of the order, the agency placed its preemption shield in front of all IP services sharing three "basic characteristics" -- a need for a broadband connection from the user's location, a need for IP-compatible equipment in the home and a service offering with a suite of integrated capabilities and features that enables users to "manage personal communications dynamically."

"Indeed, the practical inseverability of other types of IP-enabled services having basic characteristics similar to DigitalVoice would likewise preclude state regulation to the same extent as described herein," the Commission said in its written order. Such basic characteristics, it said, include those that would enable users to "originate and receive voice communications and access other features and capabilities, even video."

What this could mean is that cable operators and phone companies deploying IP-enabled services wouldn't have to comply with traditional cable regulations, including franchise borders, franchise fees, channel set-asides, must-carry rules, public access and leased access. That might particularly benefit such large regional Bells as SBC Communications and Verizon Communications, which are gearing up to launch IP-based services nationwide over new, fiber-rich networks as early as next year.

But the answers to such regulatory questions are not yet clear because the Commission didn't tackle the implications of its video pronouncement in its preemption order.

While it settled the key regulatory question of who has jurisdiction over VoIP, the FCC's preemption order did not address the more basic issue of how VoIP should be regulated. As it acknowledged in its order, the Commission still must decide whether VoIP should be classified as an unregulated information service under the Communications Act or a regulated telecom service. Agency officials have said they hope to finish a separate rule-making proceeding on that broader issue by the spring.

FCC Chairman Michael Powell has made it clear that he favors a light regulatory touch for all things Internet, including VoIP. In a statement issued after the ruling, Powell lauded VoIP as "an Internet application that takes its place alongside e-mail and instant messaging as an incredibly versatile tool for communicating with people all over the world." He argued that subjecting "a global network to disparate local regulatory treatment by 51 different jurisdictions would be to destroy the very qualities that embody the technological marvel that is the Internet."

But that doesn't necessarily mean that the FCC will decide to treat VoIP as an unregulated information service. Much may depend upon what the Supreme Court does with a controversial case concerning the regulatory classification of cable modem service. The high court is slated to meet Dec. 3 to decide whether to take the "Brand X" case, which could expose cable operators to open access requirements for high-speed data service.

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