FCC Holds VOIP Forum

December 1, 2003. The Federal Communications Commission (FCC) held a forum on Voice over Internet Protocol (VOIP) issues. All five Commissioners sat through both the morning and afternoon sessions.

Chairman Michael Powell again stated that the FCC will issue a Notice of Proposed Rulemaking (NPRM) "to inquire about the migration of voice services to IP-based networks and gather public comment on the appropriate regulatory environment for these services". See, FCC release of November 6, 2003. However, at the VOIP forum, he declined to offer a prediction about when the FCC will release this NPRM.

The Commissioners generally called for a light regulatory touch, and focused on five regulatory issues: E-911 mandates, wiretapping and surveillance under the CALEA, access by disabled people, universal service subsidies, and access charges. No Commissioners spoke in support of price regulation of VOIP services.

The FCC often hosts forums, roundtables and other gatherings. Frequently, one or more Commissioners attend the beginning of the program, make brief remarks, and then leave. This forum was atypical in that all five Commissioners attended, remained for the entire program, and participated in questioning the other participants.

The FCC also announced the formation of Internet Policy Working Group.

The FCC will keep the record open for two weeks. Written comments must be 1,000 words or less.

Opening Statements by Commissioners. FCC Chairman Michael Powell read a statement [PDF] at the beginning of the program. He said that "As one who believes unflinchingly in maintaining an Internet free from government regulation, I believe that IP-based services such as VOIP should evolve in a regulation-free zone. No regulator, either federal or state, should tread into this area without an absolutely compelling justification for doing so. Innovation and capital investment depend on this premise.  The entrepreneurs seated before us depend upon this premise. In my view, we should come to this forum with a sense of regulatory humility - mindful that it is entrepreneurs, not governments, who came up with the idea of making high-quality, inexpensive phone calls over the Internet."

Powell (at right) continued that "In my view, that policy environment must begin with the recognition that the Internet is inherently a global network that does not acknowledge narrow, artificial boundaries." But, he added, "This is not to say that states don’t have important roles in the areas of their traditional police powers."

Powell also stated that "To be sure, health, safety and welfare concerns may give rise to uniquely state interests and it might be proper for them to play a role in these areas. Economic regulation, however, is entirely another matter and we should approach that area of regulation with significant skepticism."

Commissioner Kathleen Abernathy stated that the rapid pace of technological development and state regulatory actions require that the FCC now take a lead role in setting federal policy in this area. She advocated a "predominantly federal regulatory scheme" with "a light regulatory touch". She also said that the FCC must address "core social policy objectives" including universal service, 911, CALEA, and disabled access.

Commissioner Michael Copps also read an opening statement [PDF]. He said that "While none of us knows where this will all come out, we need to pull back and think anew. It’s incumbent on us to identify good policy going forward and not just shoehorn VoIP into statutory terms or regulatory pigeonholes without adequate justification. It’s no slam-dunk that the old rules even apply. But we do need to discuss the consequences of the proliferation of VoIP services on our important statutory objectives—universal service, homeland security, 911 services, accessibility by people with disabilities, and encouraging the build-out of advanced telecommunications services. We need to craft a space in which this technology succeeds because of its inherent ability, not due to regulatory arbitrage or exception. Indeed, tackling VoIP may force us to come to terms with other pending proceedings that also cry out for solution.

Commissioner Jonathan Adelstein said in his opening statement [PDF] that the FCC must provide for FBI surveillance of VOIP communications, E911, and other existing programs.

Adelstein (at left) stated that "we must understand the concerns raised by DOJ and FBI that classifying Vonage’s VoIP as an information service severely undercuts CALEA. They say that call content and caller identification could evade lawful electronic surveillance, and that VoIP jeopardizes the ability of federal, state, and local governments to protect public safety and national security against domestic and foreign threats. Public safety is not negotiable."

He also stated that "emergency services are not negotiable."

He also said that "We must protect the underpinnings of universal service. Congress clearly stated that all Americans, whether urban or rural, should have access to high quality services at reasonable rates. If VoIP providers are not required to contribute, it creates an opportunity for regulatory arbitrage and further undermines the already troubled funding mechanism. So if VoIP is the future, then the steps we take must protect universal access to the best services available."

Finally, Adelstein addressed access charges. He said that "We also need to determine how underlying carriers are compensated for carrying third parties' traffic. Some VoIP providers pay no access fees even though in many instances they are using local phone lines to route their traffic. We cannot afford to let the rise of VoIP to undercut the very networks that carry it."

FCC Staff Presentations. Jennifer McKee and Russell Hanser gave presentations on the current regulatory framework, and pending FCC proceedings, respectively.

McKee reviewed the FCC's Second Computer Inquiry, with its definitions of basic and enhanced services, the Telecommunications Act of 1996, with its definitions of telecommunications and information services, and the FCC's 1998 Stevens report, which addressed VOIP.

The FCC defined "basic service" as a pure transmission capability offered on a common carrier basis for the movement of information. Basic services are subject to common carrier regulation under the Communications Act, including interconnection, privacy, CALEA, universal service, and disability access. The Computer II decision stated that "enhanced service" involves computer processing, interaction with customer supplied information, and interaction with stored information. And, it stated that enhanced services are not subject to Title II regulation.

The 1996 Act defined "telecommunications" as the "transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received." It defined "telecommunications service" as the "offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available to the public, regardless of facilities used."

The 1996 then defined "information service" as the "offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications." The 1996 Act provided that telecommunications services are generally subject to Title II regulation, while "information services" are not subject to Title II regulation.

Finally, in April of 1998, the FCC wrote a report to the Congress, as required by §623(b)(1) of a CJS Appropriations Act, in which it made some tentative conclusions about VOIP. It concluded that computer to computer VOIP is not a telecommunications service. However, phone to phone VOIP may be treated as a telecommunications service, if the provider holds itself out as providing voice telephony services, and meets certain other criteria. The primary concern of Sen. Ted Stevens (R-AK), and others, was universal service contributions. See also, TLJ story titled "FCC Claims Authority to Tax Internet Telephony", April 13, 1998.

Russell Hanser then reviewed the three proceedings currently pending at the FCC regarding VOIP: an AT&T petition, a Pulver.com petition, and a Vonage petition.

See, outline [PDF] of these two FCC staff presentations.

Panel Presentations. The Commission then heard from two panels. The first panel was assigned the task of presenting technical and market issues. The second panel was assigned the task of addressing policy issues. However, both panels discussed both technical and policy issues.

The first panel was comprised of Kevin Werbach (Supernova Group), Charles Giancarlo (SVP/GM of Cisco Systems), Jeff Pulver (Pulver.com), John Hodulik (UBS), and John Billock (COO of Time Warner Cable).

The second panel was made up of Michael Gallagher (National Telecommunications and Information Administration), Carl Wood (Commissioner of the California Public Utilities Commission), Charles Davidson (Commissioner of the, Florida Public Services Commission), James Crowe (CEO of Level3), Tom Evslin (CEO of ITXC), Jeffrey Citron (CEO of Vonage), and Gregg Vanderheiden (University of Wisconsin).

Kevin Werbach, who worked at the FCC when the 1998 VOIP report was written, gave an overview of devices and applications that have VOIP capabilities. He also argued that the greatest threat to VOIP is not regulatory action, but regulatory inaction. The risk, said Werbach, is that legacy regulations would be applied to VOIP. See, PowerPoint presentation.

Jeff Pulver, discussed his Free World Dialup service. See, PowerPoint presentation.

John Billock of Time Warner Cable (TWC) discussed the deployment of VOIP by cable operators. He also stated that TWC "is committed to supporting important public policies associated with its delivery of IP voice services. As I mentioned earlier, Digital Phone supports and offers access to Enhanced 911 services.  In addition, Time Warner Cable will support the goals of Universal Service by contributing to both state and federal Universal Service Funds in connection with the Digital Phone service. Finally, the IP voice solution deployed by Time Warner Cable supports the capability to assist law enforcement agencies by permitting the capture, where necessary, of both call identifying information and call content." See, prepared testimony [MS Word].

Cisco's Charles Giancarlo discussed Cisco's IP phones and services. He made the points, as did other presenters, that VOIP is tied to broadband access, and that is is just one of many services that may be provided with broadband service. He also said that while currently telephone charges may be based upon time, the basis for charging for broadband service will be bandwidth and the services to which one subscribes.

John Hodulik, the Wireline Telecommunications Analyst at UBS Securities, gave an investment community viewpoint. He wrote in his prepared testimony [MS Word] said that "Ironically, the existing regulatory framework is promoting the adoption of VoIP as well as any focused strategy could reasonably be expected to do. When VoIP providers say they worry that regulators could slow the acceptance of the technology and their growth, they are acknowledging the underlying regulatory benefits they have relative to the traditional telcos."

"If the regulatory imbalance remains, the incentive for incumbent carriers to shift traffic to IP-based platforms will remain strong. The Bells have made it clear with recent announcements regarding VoIP that they will follow the path of least resistance. Over time, this will put undue stress on the existing regulatory framework, making the existing intercarrier compensation regime and Universal Service funding mechanisms untenable."

Hodulik continued that "From a network standpoint, voice and IP services can be commingled relatively easily. However, this marriage pits the micro-managed regulatory world of voice, where returns are almost guaranteed, with the hands-off, market driven world of IP where companies are left to sink or swim on their own. From a capital market’s standpoint, much of the uncertainty is because there appears to be a regulatory void when it comes to VoIP. The FCC needs to take a leadership position, creating one set of rules that distinguish between the different types of VOIP Until this is completed, investors will remain wary about funding new ventures that provide the service."

He called for "a regulatory framework that will stand the test of time, allowing investors to anticipate the winners and losers based on strategy and execution rather than unforeseeable changes in Washington." He also called for a "national standard". He wrote that "A patchwork of differing state regulations does nothing to provide clarity and, frankly, makes no sense considering the lack of geographic distinction on the Internet where there are no LATAs or state boundaries."

He concluded that "VoIP has created not just the need but also the opportunity for regulators to rethink the traditional framework that governs telephony in the United States. I believe this forum should be as much about creating parity as it is about fostering the growth of VoIP. Regulating VoIP similar to the traditional telephone network is not the answer. The answer is to fundamentally reassess regulation of the traditional telephone network before the value-creating portion of that infrastructure and the regulatory framework that governs it, becomes obsolete."

The second panel included two state regulators with different views. Carl Wood is a Commissioner of the California PUC who was appointed by former Gov. Gray Davis. Wood stated that the CPUC is currently in the process of starting regulation of VOIP providers.

In contrast, Charles Davidson is a Commissioner of the Florida PSC who was appointed by Gov. Jeb Bush. He argued for a "hands off approach". He argued that wireline telephony regulations derive from an era of monopoly providers and geographically based providers, while VOIP has no market leader, and is not tied to any locality.

Davidson argued that VOIP is interstate. Wood argued that "there are issues of interest to states" such as consumer protection. Davidson argued that for nascent, emerging technologies, the market can protect consumers.

Davidson also argued that VOIP should be free from economic regulation, but not other regulation, such as 911 and universal service. He also stated that a VOIP service should be subject to access charges if it meets a "but for" test. That is, if a call cannot be made or completed, but for reliance on the PSTN, then it should be subject to access charges.

Gregg Vanderheiden of the University of Wisconsin argued that regulation is necessary to provide access to disabled people. He said that market incentives do not lead companies to provide for disabled access.

James Crowe (Level3), Tom Evslin (ITXC), and Jeffrey Citron (Vonage) all stated in their various ways that the current system of access charges is a hopeless, nonsustainable, broken system, and that VOIP should not be subject to access charges. Crowe argued that VOIP should be subject to 911 regulation and the CALEA, and contribute to universal service. Evslin too said that VOIP should contribute to universal service.

Citron argued that law enforcement entities should go to the Congress for CALEA authority. He also said that progress is being made on emergency services absent regulation.

Evslin cautioned that regulation could drive VOIP providers offshore or to peer to peer technologies.

Court Opinions. No one from the FCC's Office of General Counsel gave a presentation at the VOIP forum. However, there are two major recent court opinions that are pertinent to FCC regulation of VOIP.

First, on October 6, 2003, the U.S. Court of Appeals (9thCir) issued its opinion [39 pages in PDF] in Brand X Internet Services v. FCC, vacating the FCC declaratory ruling that cable modem service is an information service, and that there is no separate offering as a telecommunications service. The FCC adopted a Declaratory Ruling and Notice of Proposed Rulemaking [75 pages in PDF] at its March 14, 2002 meeting. This is FCC 02-77 in Docket No. 00-185 and Docket No. 02-52.

The Declaratory Ruling (DR) component of this item states that "we conclude that cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service." The opinion of the Court of Appeals vacates this DR.

See also, story titled "9th Circuit Vacates FCC Declaratory Ruling That Cable Modem Service is an Information Service Without a Separate Offering of a Telecommunications Service" in TLJ Daily E-Mail Alert No. 754, October 7, 2003; and story titled "Reaction to 9th Circuit Opinion in Brand X Internet Services v. FCC" in TLJ Daily E-Mail Alert No. 756, October 9, 2003.

Second, October 16, 2003, the U.S. District Court (DMinn) issued its Memorandum and Order [PDF] in Vonage v. Minnesota Public Utilities Commission, holding that Vonage is an information service provider, and that the Minnesota Public Utilities Commission (MPUC) cannot apply state laws that regulate telecommunications carriers to Vonage. The Court wrote that "State regulation would effectively decimate Congress's mandate that the Internet remain unfettered by regulation." The District Court in Minnesota ignored the 9th Circuit.

See also, story titled "District Court Holds that Vonage's VOIP is an Information Service" in TLJ Daily E-Mail Alert No. 760, October 17, 2003.

These opinions could affect the FCC's ability to use definitions to accomplish its regulatory goals.

Congressional Comments. No Senators or Representatives participated in the forum. However, several Senators wrote letters regarding the issue. Sen. Ron Wyden (D-OR), a member of the Senate Commerce Committee, and its Communications Subcommittee, wrote that "As a strong supporter of the Universal Service and E-911 programs, I am concerned that the way in which VOIP is regulated may affect support for these vital programs, and I urge that this be thoroughly explored. However, it would be a tragedy if misunderstanding and fear were to prevent VOIP from reaching its full potential."

He also wrote that "the inherently interstate and international nature of the internet argue for caution in imposing regulations" and that "uniform treatment of VOIP would help the technology serve customers".

Sen. John Sununu (R-NH), another member of the Senate Commerce Committee, wrote that "I share your interest in ensuring that this platform is not saddled with undue regulatory burdens at either the federal or state level." He continued that "There is concern that if states approach VoIP in the same manner they regulate the current local phone systems, the external benefits of the technology, including increased levels of connectivity and significant network efficiencies, could be lost, which would hurt individual companies and more importantly consumers. Further, there is a risk that this kind of action may lead to obligations that are wholly inappropriate for this platform and might undermine the ability of this new technology to develop and succeed."

Sen. John McCain (R-AZ), the Chairman of the Senate Commerce Committee, wrote that "The existing regulatory uncertainty over the treatment of these services, however, threatens to quickly create an unhealthy environment for continued investment and development of competition in this area."

Options Available to the FCC. Powell and Martin both discussed with panel participants, in broad strokes, some of the options open to the FCC if it seeks a "light regulatory touch". One approach would be definitional. However, Martin noted that the 9th Circuit opinion presents an obstacle. Another approach would be forbearance. However, Powell noted that the FCC cannot forbear on behalf of the states.