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Archives: 2015-16 Legislative Session

January 27, 2004 Hearing Information

Informational Hearing

 

Voice Over Internet Protocol - Is It Where
Telephone Service Is Headed?

 

State Capitol, California Room 4203
January 27, 2004
1:30 p.m.

 

Opening Comments
  • Senator Debra Bowen, Chairwoman
    Senate Energy, Utilities, & Communications Committee
Background Overview
Regulatory Perspective
Customer Perspective
Industry Perspective
Public Testimony


Voice Over Internet Protocol

Background

 

Overview

The constant innovation that characterizes the Internet has given rise to many new forms of communications and information sharing, the latest of which is known as Voice over Internet Protocol, or VoIP.

VoIP is a technology that allows people to make telephone calls using high-speed Internet connections, such as digital subscriber line (DSL) or cable modems, that carry those telephone calls over the Internet and connect to the traditional public telephone network to complete the call only when necessary. Like downloading a webpage or sending an instant message, VoIP is in many ways just a different use of a high-speed Internet connection.

However, there is a crucial difference between using the Internet to make telephone calls and surfing the Internet for information. Surfing the Internet is an activity for which there is no direct competition. Using the Internet to make telephone calls makes VoIP a technology that competes with the decades-old traditional telephone technology that has a long-standing and hard-fought legal and regulatory structure.

That regulatory structure includes assessing telephone user taxes and fees to pay for a number of services, including the 911 emergency response system and programs to ensure universal telephone service throughout California. Allowing VoIP to develop and grow without requiring its users to help pay for similar programs would be a significant shift in California’s telecommunications policy landscape.

 

Benefits For VoIP Users

 

VoIP has been receiving a lot of attention lately, in part because it can save customers money thanks to its more efficient use of networks and because VoIP calls don’t pay telephone company charges for completing calls on the traditional telephone network.

Avoiding those costs is part of the reason why VoIP providers such as Time Warner Cable and 8x8, Inc. can offer a package that includes unlimited phone service, caller ID, call waiting, and voicemail within the United States and Canada for as little as $19.95 per month. Additional cost savings accrue because VoIP calls aren’t subject to state telephone surcharges and local taxes.

 

How Popular Is VoIP?

 

Some of the attention to VoIP is premature, given that there are probably less than 100,000 VoIP customers across the nation today, compared to the 180 million wireline telephone customers and 150 million wireless telephone customers in the U.S. Vonage, the industry leader, had 34,000 customers nationwide at the end of last year, while Time Warner Cable, the cable VoIP leader, had less than 10,000 VoIP customers nationwide. Access to VoIP is also limited by the fact that current technology only allows it to work on high-speed DSL or cable modem Internet connections, which only 20% of the nation's telephone customers are paying to use.

VoIP usage is expected to grow in the future, given the potential cost savings to users and the opportunity to access advanced features. Business customers provide the bulk of telephone service revenue, so they’re likely to be the first large group of folks to switch to VoIP, since many of them already have the high-speed connections and relatively high bills. The Meta Group, a technology consultancy, surveyed 270 U.S. corporations and estimated that nearly 30% of them may move to VoIP within two years.

Traditional telephone companies have announced plans to move into the VoIP business as well. AT&T will offer VoIP services to residential and business customers in 100 markets this year and SBC already offers VoIP services to business customers. Time Warner Cable has applied to the California Public Utilities Commission (CPUC) for the authority to offer VoIP service statewide, while Comcast Cable, which has a number of technology trials underway, is looking at offering commercial service in 2005. The CPUC staff believes VoIP penetration rates will hit the 10% mark by next year.

 

State Jurisdiction

 

The first issue raised by the introduction of VoIP is whether states have any regulatory jurisdiction over the technology and the providers of the technology.

Late last year, Minnesota and California both asserted authority over VoIP providers. The CPUC staff, citing the Public Utilities Code, asked VoIP providers to apply for the authority to provide telecommunications services. VoIP providers, citing overriding federal law and regulation, declined to comply with the CPUC’s request.

Minnesota unsuccessfully attempted to regulate Vonage last year, saying the company had to register as a telephone service provider and pay telecommunications taxes, but in October 2003, a federal judge ruled the state had no jurisdiction over VoIP providers. The judge ruled VoIP service was an "information service," not a "telecommunications service." The distinction is an important one, because "information service" was defined in the landmark federal Telecommunications Act of 1996 to mean the capability of transforming and processing information via telecommunications. Unlike traditional telephone service, VoIP service transforms and processes information (e.g. the telephone conversation) and is therefore an "information service," according to the court. As the Federal Communications Commission (FCC) doesn’t allow regulation of information services, the court found Minnesota had no jurisdiction over VoIP.

The CPUC is contemplating opening a proceeding to better understand VoIP services and the appropriate regulatory treatment for the providers. Also, the FCC has before it several cases where VoIP providers have asked for clarity in the rules governing how they provide service.

Earlier this month, FCC chairman Michael Powell and U.S Senator John Sununu (R-New Hampshire) announced their intention to keep VoIP technology free of any government regulation.

 

Impacts On State & Local Policies & Programs

 

California has a long-standing public policy of supporting universal telephone service to make sure everyone in the state has access to basic, affordable telephone service. To meet those goals, California has a number of public policy programs that are paid for by a surcharge on telephone bills. Those programs provide discounted telephone service to low-income residents, as well as to people who are deaf and handicapped, and they also subsidize the cost of providing telephone service to rural customers. California also funds its 911 emergency service system with a surcharge on the telephone bill.

To the extent that VoIP service reduces the number of "traditional" telephone calls and reduces the amount of traditional telephone bills, those public policy programs will be underfunded, which will in turn trigger an increase in the surcharge paid by people still relying on traditional telephone service. Using conservative market penetration rates, the CPUC staff has estimated that continuing to exempt VoIP services from existing telephone surcharges will cut funding for telephone public purpose programs by 19%-43%.

Failing to impose public purpose program surcharges to VoIP calls gives VoIP service providers a 5% pricing advantage over regular telephone calls, while exempting them from local utility taxes increases that pricing advantage to as much as 13%.

 

Service Quality

 

Californians have come to expect high service quality from telecommunications companies, thanks in part to the regulatory framework created by lawmakers and the CPUC, and to telephone companies which have come to realize quality is an effective marketing tool.

Telephone service reliability is extremely high and telephones work even when electrical power is interrupted. Telephone customers who have a service problem can go to the CPUC, which has the jurisdiction to resolve issues. California’s 911 emergency service system is among the nation’s best, providing the calling number and location of landline callers to emergency response personnel.

Each of these service quality issues are question marks when it comes to VoIP service. The quality of the voice transmission varies depending on the amount of congestion on the VoIP network, and the CPUC’s standards for telephone service won’t apply to VoIP providers if they aren’t subject to state regulation. Furthermore, a customer who has a problem with their VoIP service won’t be able to go to the CPUC for help, and 911 emergency service quality is closer to that provided by wireless telephones, where location information is currently generally unavailable, than to traditional landline service.

 

Questions For Policymakers

 

While the telecommunications industry believes VoIP will become a pervasive replacement for traditional telephone service, that isn’t the case today.

The benefits of allowing infant industries and technologies like VoIP to grow and take root are obvious. As an infant industry, policymakers have allowed the VoIP industry to develop in the complete absence of regulation. Requiring VoIP providers to comply with the state rules applicable to traditional telephone companies would impose costs that don't exist today and complicate efforts to provide the VoIP service. The non-traditional manner in which VoIP service is delivered makes it difficult to simply fit VoIP into the existing regulatory structures that pay for 911 emergency service, assess federal, state, and local taxes and surcharges, and assess inter-company charges to complete calls.

As VoIP service grows in popularity, it will jeopardize a number of long-term state telecommunications public policy goals. The day may come when the technological innovators will be joined by established telephone companies in using VoIP or related technology to achieve similar cost advantages and provide similar services. At some point, policy makers will need to weigh the benefits of VoIP technology against the collateral harm the technology will do to meeting those public policy goals.

The question is whether it makes sense for policy makers to establish a set of regulatory ground rules early, or whether they should wait until the technology establishes a larger foothold in the marketplace.

The benefit of crafting regulatory ground rules early lets VoIP providers and potential VoIP providers know what system they’ll be required to operate under before they create their business models – and before funding for the state’s 911 and other public purpose programs is significantly damaged. The downside is the regulations could inhibit the development and deployment of the technology, denying consumers lower rates and useful services.

Striking the balance between appropriate support for public purpose programs and appropriate regulation of VoIP providers, within the limits imposed by federal law, is the challenge for policymakers.

Committee Address

1021 O Street, Room 3350
Sacramento, CA 95814
Phone: (916) 651-4107
Fax: (916) 642-8979

Staff

Chief Consultant:
Nidia Bautista

Consultant:
Sarah Smith

Committee Assistant:
Melanie Cain

 

Minority Consultant

1020 N Street, Room 234
Sacramento, CA 95814
(916) 651-1501