Diverse State Rules Said Leading to VoIP ‘Regulatory Arbitrage’

“The rush [by the FCC] to preempt VoIP” regulation is “short sighted,” said Mich. PUC Comr. Bob Nelson. Citing 911, he said “a lot of issues remain to be dealt with,” and federal preemption “could create increased incentives for VoIP providers to use arbitrage.” Regulatory arbitrage occurs when govt. rules encourage companies to enter a business -- or to do so in a particular place -- to exploit advantages over others treated differently. The possibility of arbitrage means intercarrier compensation issues should be addressed, said N.C. PSC Chmn. Tony Clark.

But Cal. PUC Comr. Susan Kennedy said the FCC should preempt state VoIP regulation “almost entirely.” A mosaic of different state regulations could stymie the development of an important new service, she said. States should retain a role in consumer protection issues with VoIP, she said, including 911, CALEA, privacy and universal service.

It’s probably good to have 50 state regulatory regimes rather than national rules, Nelson said: “If one state makes a mistake it’s just a problem for that state, not for the whole country.” NARUC Legislative Dir. Brian Adkins said the diversity of state retail rate regulation, for example, is “a triumph of federalism… Federalism works. States can dip their toes in and see if there is a backlash.”

But the diversity of state rules means multistate telcos generally must comply with the toughest regulation, resulting in higher costs in less-regulatory states and compliance with rules those states don’t feel are necessary, he said. He said, for example, monthly wireless rates in Colo. probably must go up $3-$4 to comply with new consumer protection rules adopted in Cal. On a later retail rate regulation panel, Qwest Vp-Public Policy Charles Ward said the “mosaic of regulations” makes it difficult to roll out a service throughout Qwest’s 14- state region, despite compelling reasons to do so: “It makes us a less-effective competitor and means new services are delayed.”

The result is “regulatory muggings” by some state commissions that end up affecting a carrier’s entire multistate network, Clark said. In some cases, he said, states hold an entire region hostage, particularly on merger approvals.

It’s probably too early for any regulation of VoIP, said Colo. PUC Chmn. Greg Sopkin. He said telecom regulation is based on carriers’ market power: “I'm not sure we're to the market viability point in VoIP.” He said VoIP has only about 350,000 subscribers nationwide, and already the market is telling VoIP providers that they “must provide 911 capability.”

On a panel made up mainly of commissioners advocating deregulation, S.D. PUC Chmn. Bob Sahr said commissioners may be advocating too much consumer protection regulation. He said consumers, for example, should be able to decide whether they want to pay extra for 911 service. But VoIP providers “don’t seem to have a problem with basic consumer protection things,” Sahr said: “I can’t imagine that 75 cents will slow down the rollout of VoIP.”

PUC regulation of VoIP consumer issues probably is unnecessary because every state has other consumer protection agencies that are adequate for other industries, said Fla. PSC Comr. Charles Davidson: “Do we need PUCs in addition for telecom?”

There are “enormous economic consequences of regulation,” Cal.’s Kennedy said, and regulating VoIP would “reverse 80 years of public policy” not to impose monopoly regulation on new technologies: “I wouldn’t impose anything unless you could prove a need. But they're not monopolies and they don’t have market power.”

There may need to be a unified national scheme for handling VoIP universal service obligations, N.C.’s Clark said, because the alternative would be regulatory arbitrage. Simply preempting state regulation would mean no VoIP provider would pay into the Universal Service Fund (USF), said Mont. PSC Chmn. Bob Rowe, and that would mean “a rush to VoIP.” Even in a VoIP environment, the USF must be protected, Kennedy said, because “it’s never okay to let the rural states fall behind.” VoIP could cut USF contributions by 50-60% in “the next few years” unless there’s a solution, Kennedy said. She again suggested basing USF contributions simply on the quantity of telephone numbers used.

If current trends continue, there “will be a lot less retail rate regulation in the future if -- and it’s a big if -- competition continues to grow,” Communications Daily Senior Editor Herb Kirchhoff said on a panel that the USTA built around Kirchhoff’s reporting on state rate regulation (copies are available by e-mailing dwarren@warren-news.com). Although wholesale rate regulation is probably “here for the long term,” trends indicate retail rate regulation will be largely history by the end of the decade, Kirchhoff said. He said only 6 states retain rate of return regulation, and 38 use price caps vs. 6 just 10 years ago.

Retail rate regulation “should be done in a year,” Ward said, though there will likely still be “some hangers on.” If the test -- whether everyone has a realistic choice of service providers -- has already been passed, Qwest’s Ward said, because of wireless. NARUC’s Adkins, however, said it’s still difficult to assess the impact of intermodal competition.

Telco regulation is “becoming less effective,” Ward said, because it’s “less true that regulators can control the market by controlling the largest competitor.” He said market dynamics are taking over: “The business imperative is providing good service at a good price so we can compete. Regulation isn’t helping that.” Since Qwest is a high-fixed-price business, even a loss of 1% or 3% of market share has a huge impact on profit, Ward said, so the carrier must be responsive to the market.

Local franchise authorities are becoming important as telcos move into video in competition with cable, speakers said. “Local franchise regulation is clearly in conflict with a competitive market,” Ward said. Adkins said local franchise regulation is “very much on federal policy makers’ minds.”