PUBLIC UTILITIES COMMISSION
STATE OF CALIFORNIA
505 VAN NESS AVENUE
SAN FRANCISCO, CALIFORNIA 94102
SUSAN P. KENNEDY TEL: (415) 703-3700
COMMISSIONER FAX: (415) 703-3352

 

Testimony of Commissioner Susan P. Kennedy
Senate Committee on Energy, Utilities and Communications
January 27, 2004

The VoIP Revolution: Lead, Follow or Stand in the Way
 

Internet telephony changes everything – permanently. There will be no containing this new technology. What we do as regulators and policymakers today will not alter the outcome. What we do today will determine simply whether California, and the U.S. for that matter, are in front of this train or under it. I am going to lay out why I believe that it is impossible to apply the current regulatory structure on this new technology, and why trying to do so will cause much more harm than good.

We should instead focus our efforts on changing the way Universal Service is funded and expanding the definition of this hundred-year-old concept to match the needs of the 21st century.

Let’s put a few things on the table: There is broad agreement that Universal Service is critical. We must continue to provide subsidies for telecommunications service in high-cost, rural areas. Continuing to fund access programs such as Lifeline and the Deaf and Disabled Program is critical. So let’s agree that on this issue, we’re all trying to reach the same goal. The question is: How do we get there?

Here’s the problem: VoIP blows up the entire intercarrier compensation system – which is the primary funding mechanism for Universal Service.

Universal Service (a catch-all term for all the subsidy and access programs) is funded in two ways, and it’s important to understand them for purposes of this debate: First, implicit subsidies that are built into rates. And second, explicit surcharges for Lifeline, High-Cost Fund etc. that, in California, appear as a line-item on a customer’s bill.

One hundred years ago, long distance calling was considered a luxury that only the wealthy could afford, so the long distance rates were purposely jacked up and the profits were used to subsidize local calling, which was considered essential. That same kind of subsidy is still built into rates today. The cost of basic local phone service in California is kept low by regulation – between $10 and $17 a month depending on where you live. But it costs more than that to provide service in many places, and a heck of a lot more in places Mendocino or Lassen County.

It is part of the regulatory compact that we keep basic rates low and subsidize high-cost areas by allowing companies to make up the difference (and earn any profits) by charging above-cost rates for things like long distance, interconnection charges, and add-ons like caller ID, call-waiting, etc.

Well, anyone with "free nights and weekends" knows that cell phones have already made charging more for long distance a thing of the past. VoIP does the same thing because, with the Internet, you can make calls to anywhere in the world at a fraction of the cost. And VoIP will make it impossible to charge more for things like caller ID, call waiting and call forwarding because those features will now be completely integrated with email, instant messaging and a host of other Internet-based features – all at no additional cost.

So between cell phones and VoIP the entire system of implicit subsidies for Universal Service is being turned on its head. But it’s how we collect the explicit subsidy that best explains why VoIP represents such a huge fork in the road for telecommunications regulation.

As you know, the wireline network is built around a series of computerized switches that connect one calling area to another – across the country and, through fiber optic cable, satellites, microwave radio and copper wire, to anywhere in the world (called the Public Switched Telephone Network or PSTN). The entire regulatory structure that developed dating back to the earliest competitors to Ma Bell rests on a complex system of what rates carriers are allowed to charge each other for access to their parts of the network.

The rates are calculated using enormously complex formulas based on costs (which include the implicit subsidies) and time of use (in other words, per-minute charges). The explicit subsidy – the surcharges on your bill – for Universal Service come from a percentage of those charges.

How do companies keep track of the per-minute charges? Through the switches that hand the calls off from one calling area to another. The switch acts like a meter. It tracks where the call went, how long the call lasted, and which carrier owes the other payment.

Now - Enter Cell Phones.

The cellular system uses radio waves, not wirelines to connect callers. The network of cell sites is an entirely different infrastructure. They don’t have to use the Public Switched network to transfer calls. So their calls, for the most part, are not going through the metering system to track per minute charges and thus pay into Universal Service.

Why didn’t regulators go berserk when cell phones burst onto the scene? Because at first, the only people you could call from a cell phone were people on land lines. So in the beginning most cell phone calls were going through the PSTN and paying into Universal Service. Today, the number of cell phones nearly surpasses the number of wirelines in the U.S. Many people are calling cell to cell now and not even using the wireline system for many calls.

But the cell phone industry, recognizing the danger of undermining Universal Service and wanting desperately to stay out from under the burdens of wireline regulation, agreed (not that they had a choice) to take a percentage of their total revenue and give a share to the Universal Service Fund. So the line item on your cell phone bill represents a % of their total revenue.

Now, Enter VoIP.

Any transmission over the Internet travels through a series of routers. Backbone to backbone, modem to modem, like cellular, it never has to touch the Public Switched Network (unless you want to connect to a landline customer). So you have the same problem: No switch = No meter; No meter = No Universal Service funding. And VoIP calls costs a fraction of what we pay today using the wireline network. So VoIP eviscerates both the cost-based and usage-based funding mechanisms for Universal Service.

It also eliminates the line between "telecommunications" and "Information" services – taking away the only familiar tool regulators have to deal with this problem. That’s why VoIP presents such an urgent challenge:

So from a regulators perspective – how do we deal with this?

We could try to use the "a duck is a duck" approach – a phone call over the Internet should be treated the same as a phone call over the Public Switched system. OK, how would we apply that under current rules?

The FCC has struggled mightily over the last few decades to draw a dividing line between Plain Old Telephone Service, and "Information" or "Enhanced Services". Every time they tried to write new regulations that drew the distinction, the technology changed and blurred the lines. There are hundreds of millions of dollars spent on legal challenges every year to whatever the FCC does.

But up until now technology itself gave regulators like me an imperfect but workable means to separate the two.

This is a standard phone line. It uses an analog signal to carry voice transmissions. Between this copper wire and cell phones, you’ve captured pretty much 100% of all voice communications in the US.

This is a standard Ethernet line, found in most homes, hotels and businesses that have broadband. It carries a million bits per second. Between this and DSL you’ve captured 99% of all broadband connections in the US. I can get email, instant messages, web access, download music, streaming video – even do live video-conferencing on this line.

This is a typical PDA today. Rather sophisticated for a handheld device. I can get emails, surf the web, download documents, etc.

Up until now, there has been no question from a regulator’s perspective that voice transmissions over this phone line are "telecommunications" services and transmissions over this PDA are "information" services under the 1996 Telecom Act. There is no question that all the services I could get over the Ethernet line – from instant messages to streaming video – were "information" services under the law.

But now, with the recent breakthrough in IP technology (developed by Cisco Systems, a California company), in addition to downloading music, videos etc, I can now also send & receive real time voice transmission over this Ethernet line.

And with this new PDA, I can not only get instant messages and surf the web – I can make and receive phone calls. And now, using VoIP, my DSL and my phonecalls can be totally integrated on this copper wire.

Now, from a regulators perspective, the lines are not at all clear.

How do I pick out the voice transmission traveling over this Ethernet line in order to regulate it as a telecommunications service under the law, from the streaming video traveling over the same line, that is considered an "information service" under the same law?

I have to be able to pick it out in order to regulate it, collect revenues for Universal Service, apply 911, and treat all voice services the same under the "duck is a duck" test.

But the Internet can’t tell the difference between a digitized packet carrying part of a phonecall and a digitized packet traveling over the Internet right now carrying this Senate hearing live to anyone logged onto the Internet at home.

Is it possible to identify the packets carrying voice? Technically, you could develop a system in which a router could sort through 2.5 million packets each second, open them up, look inside, and pick out the ones carrying voice. You could try to mandate special "ID tags" just for phone calls. But that is about as ridiculous and expensive as it sounds. And let’s be clear: We’re talking about regulating content that is traveling over the worldwide Internet.

You could try the cellular approach, and maybe capture revenue by any company like Vonage that advertises "telephone service" for a monthly fee. But Internet telephony is really just a software package that allows the user to add voice to all the other applications they can get through their ISP over any broadband platform – wireline, fiber optic, coaxial cable, wireless, satellite. All Vonage has to do is change their advertising or their service offering and we will be hard pressed to find a way, legally, to treat them any differently than an Internet Service Provider.

No matter how hard we try to keep up, this technology will mutate out from under our regulations before the ink is dry.

One thing is absolutely certain. If we go down the path of trying to prove that "a duck is a duck." And try to regulate VoIP under a framework that is made totally obsolete with this technology, California will spend many years and millions of dollars in legal battles with no resolution to the Universal Service problem. Because, remember, even if we succeeded in capturing the Vonages of the world under current regulation, all the carriers – SBC, AT&T, cable – are shifting their calls to VoIP – gutting the existing funding base for Universal Service.

There is another path. We have to build a new regulatory foundation – one that supports and expands Universal Service into the future, allows Internet telephony, Voice over Power Lines and other technologies to develop unimpeded, and stops forcing companies to waste of billions of dollars in an archaic regulatory structure that doesn’t work anymore.

I’ll give you one example of a better way to approach this.

Instead of Universal Service charges that are based on cost and tracked by the minute, place a single fee on every phone number assigned.

In California, we collect about $1 billion each year in surcharges for Universal Service programs (that’s only the state portion). The cost per customer ranges wildly, from about $1.20 - $2.00 on a typical wireline bill to $13.50 on my last AT&T wireless bill.

There are about 65 million phone numbers assigned in California today. If each of those numbers paid a fee of $1.50 per month, we would collect the same billion dollars. Applying a Universal Service fee based on each number in use would distribute the load across all types of participants using the telecommunications network today – paging systems, OnStar, DSL, Cable, even Vonage – any company that controls phone numbers would be included. A charge per-number would also help stop the hoarding of numbers and could prolong the life of area codes.

It is important to note that the fee-per-number suggestion only addresses part of a complex problem. There are many other issues that need to be dealt with:

• We need to expand Universal Service to include cellular and broadband.
   
• We have to solve the 911 problem with Internet telephony. But we’ve made great strides with cellular using GPS technology and that may be a model for VoIP.

The entire intercarrier compensation system has to be revamped on a national level, most likely along the lines of a "bill and keep" system the FCC is exploring right now, with some safeguards to prevent arbitrage. That means touching the Third Rail of telecommunications - the implicit subsidies for basic service and high-cost areas.

The bottom line is: California has been the cradle of revolution when it comes to innovation and technology. If we’re going to live up to that reputation, we have to be fearless in addressing these challenges.

We have a choice: Try to beat these new technologies into submission in order to harness them under regulations that were written before the first Palm Pilot ever hit the market.

Or we can take the lead in developing the new foundation for a 21st Century worldwide telecommunications network.

Why shouldn’t California be that leader?