Comments of Commissioner Carl Wood
FCC Forum on Voice over Internet Protocol
December 1, 2003

All Telecommunications Services Should Be Regulated in a
Technologically Neutral Manner

Good afternoon, Mr. Chairman and Commissioners. Thank you for inviting me to participate in today's Forum.

VoIP is an exciting new technology that will likely have profound impacts on customers, regulators and the telecommunications industry. Today, I am generally speaking on behalf of the National Association of Regulatory Utility Commissioners (NARUC) and the positions laid out in the NARUC resolution adopted November 19, 2003. I am also here as a member of the California Public Utilities Commission which has taken a position in the Vonage case supporting the regulation of VoIP providers. However, our Commission has not yet taken a formal position on VoIP beyond our legal intervention, so these comments represent my own views, not those of the CPUC.

In November of this year, NARUC passed a resolution urging both federal and state regulators to carefully consider the broad implications that arise from classifying VoIP as an information service. In a comment, I will highlight some of these policy implications and I encourage you to read the full resolution.

As you may know, the California Public Utilities Commission is currently in the process of asserting jurisdiction over VoIP providers offering service in California. Our staff has concluded that these providers are offering telecommunications services, a conclusion I concur with.

It has long been the policy of our Commission and NARUC that telecommunications services should be regulated in a technologically neutral manner. Just as the change from analog to digital technologies did not remove the legal or policy justification for regulation, the advent of VoIP technology does not in itself provide a legal or policy basis for exemption from regulation. VoIP uses a different technology to transmit voice calls. But what matters under the law is that two-way voice calls are still being transmitted over a communications network. Under both federal and state law, what defines a telecommunications service is not the technology that is used, but the fact that a message is being transmitted from point a to point b without any net change in the content of that message.

Exempting VoIP from Regulation Will Have Profound Impacts on State and Federal Public Policy Goals

In its November resolution, NARUC cites several important policy areas that Federal and State regulators must address when developing appropriate regulations from VoIP providers.

Funding of State and Federal universal service programs will be seriously jeopardized if VoIP providers are exempted from regulation. In California, for example, by 2008 nearly half of the funding base needed to support the state's mandated universal service programs may be lost if VoIP providers are exempt from contributing program funds. Similar significant losses of the funding base to support federal universal service programs can be expected. The result is that these programs will either collapse or customers on non-VoIP networks will be asked to pay substantially higher rates for local service, thereby imperiling the availability of affordable local voice service.

Exempting VoIP providers from regulation would also imperil other public policy programs including those that enable schools and libraries to connect to the Internet and those that enable affordable access to deaf and disabled customers.

I am also concerned that choosing not to regulate VoIP providers would adversely affect public safety and law enforcement activities in local communities. Telecommunications providers are required to offer enhanced 911 access to all customers in California. Exempting VoIP providers would significantly impede first responders in their activities, undermining years of state funding improvements to the 911 system in California. Likewise, law enforcement has relied upon monitoring telecommunications under appropriate legal protections as a key weapon in their arsenal to fight crime.

Small Business and Residential Consumers Want Consumer Protections

Over the past four years, I have been working to develop a basic set of consumer protections that would apply to all telecommunications companies offering service in California - incumbent and competitive wireline carriers, wireless carriers, and prepaid service providers.

The Telecommunications Consumer Bill of Rights has wide support - leading legislators, the attorney general, local law enforcement, local and national consumer groups have all voice their support and put considerable resources into helping to shape the consumer protections.

While some in the industry have criticized the proposal, the rules provide basic consumer protections, so consumers' expectations are met regardless of the type of telecommunication service they are using. Consumers can expect that carriers will provide live representatives to respond to their billing questions and problems. Consumers will receive clear and legible bills. Consumers will be marketed to in a truthful manner that does not mislead.

Many small business and residential customers are confused and upset when they learn that the level of consumer protection varies depending on the type of service they purchase. Consumers expect and want a basic level of consumer protection regardless of the technology used or type of service offered by a telecommunications carrier. It is hard to imagine that residential and small business customers will not have similar expectations when they purchase telephone service for VoIP providers.

Exempting VoIP Providers from Regulation Will Accelerate the Depletion of Scarce Numbering Resources

Federal and state regulators have been successful in slowing the explosive growth of new area codes. Each new area code forces additional costs on business and adds complexity to the lives of residential consumers. Under FCC leadership, California has developed an effective set of rules that ensure that telecommunications providers receive the numbers they need and makes telecommunications providers efficiently utilize the numbers they have.

VoIP providers currently utilize telephone numbers without having to comply with protocols under the North American Numbering Plan, thereby undercutting the concerted effort of other carriers subject to that plan, regulators, and others to carefully manage scarce numbering resources.

Exempting VoIP from Regulation May Have Profound Unintended
Economic Impacts on Rural Carriers and Stranded Customers

Many VoIP providers do not currently pay access charges. If the FCC chooses to regulate VoIP providers as information service providers then all VoIP providers will be exempted from making access charge payments.

Access charge payments represents 30% to 50% of the intrastate revenue for small, rural local exchange carriers in California. If these payments fall sharply because of the explosive growth in VoIP, then customers of small, rural local exchange companies may see sharp increases in prices or the companies may become financially insolvent.

In a somewhat similar manner, customers of larger local exchange carriers that do not switch to a VoIP provider may see their rates increase. As customers migrate to VoIP networks, the regulated company will be left with stranded investment. In order to recover that investment, carriers may attempt to raise rates for customers left on the existing legacy networks.

Many of the RBOCs have unregulated affiliates that are poised to offer VoIP. The RBOCs will cannibalize their existing customer base leaving only those customers who either cannot afford broadband connectivity or who are currently beyond the reach of broadband networks.

Many States Regulate Carriers Based on the Level of Competition

Lastly, I would like to address a common misperception that some VoIP providers seem to have: that regulation is controlled by a single switch that is either on or off. In Califonria, we have developed several levels of regulation that match the competitive nature of the markets that carriers face.

• Rural Local Exchange Carriers: These carriers are cost of service regulated. Rural carriers serve customers in areas who have no real alternative for basic telecommunications services.
• Incumbent Local Exchange Carriers: These carriers are under a form of price cap regulation that affords them greater pricing flexibility and considerably more freedom to make investment decisions.
• Competitive Local Exchange Carriers: These carriers have very limited economic regulation. These carries must demonstrate financial soundness at the time of certification and must notice customers in advance of rate increases, five days in most cases. Carriers are required to file tariffs.
• Long Distance Companies: These carriers must demonstrate a minimal level of financial resources, provide customer's with notice of price increases and in many cases are not required to file tariffs.
• Wireless Carriers: These carriers must register. The Commission is looking at ways to regulate terms and conditions of wireless service offered to business and residential customers.

After talking to many state commissioners at NARUC's annual meeting, I think it is safe to say that state regulators, while believing that VoIP should be regulated, realize that these providers may need a unique set of rules. This is not a new issue for state regulators.

Not all VoIP providers and services are the same. Some target large enterprise customers and some target residential customers seeking the equivalent of a "second line". Some VoIP services may be designed to be a complete replacement for traditional basic telephone service and others may not. As we decide how to regulate VoIP, we should be mindful of the different flavors of VoIP and be open to tailoring regulation to the different characteristics of the various services.