FCC Finds Vonage Not Subject to State PUC Regulation

FCC Wireline Bureau Chief Jeffrey Carlisle told reporters the Commission acted now on the jurisdiction issue, rather than waiting for action on the broader IP- Enabled Services proceeding, because the 8th U.S. Appeals Court, St. Louis, is set to hold an oral argument Nov. 17 on the same issue. By acting now, the FCC adds its expertise to the court’s deliberation, Carlisle said. “We want to get as much clarity out as possible,” he said.

The FCC’s decision -- and the 8th Circuit oral argument -- stem from a Minn. PUC decision last year finding that Vonage is a telephone service subject to traditional regulation such a requirement to provide E-911 similar to that offered by ILECs. On an appeal by Vonage, a lower court overrode the PUC’s decision. The 8th Circuit is considering the PUC’s appeal of that ruling. Vonage asked the FCC to rule that its VoIP service is interstate and thus shouldn’t be regulated by states -- the action the FCC took Tues.

FCC commissioners said they decided it wasn’t possible to separate intrastate from interstate calls because of the nature of IP telephony, so the service had to be considered interstate. It was a “pretty basic preemption analysis” that found such calls couldn’t be separated by location because of the architecture of VoIP service, said Comr. Abernathy. “We don’t enter the business of preempting lightly,” she said. The Commission found that regulations imposed by the Minn. PUC “were inconsistent with the FCC’s deregulatory policies and that preemption was consistent with federal law and policies intended to promote the continued development of the Internet, broadband and interactive services,” the FCC said in a news release.

The FCC’s news release offered a glimpse of what some said was heavy lobbying by cable companies to gain protections similar to those Vonage received, for services they offered. The news release said the decision applied to “other types of IP-enabled services such as those offered by cable companies,” but it didn’t expand on that language. An FCC spokesman said the order, expected out within 2 weeks, will list the characteristics of a VoIP service that would be considered “similar” to Vonage and thus covered by the order. “Cable has some of those characteristics,” he said, adding he couldn’t speak further until the order came out. At issue is a situation in which a cable company acts not just as a conduit for other companies’ VoIP services but offers its own VoIP service to customers. Medley Global Advisors said in a report that “the inclusion of cable telephony into the basket of services that qualify as interstate under today’s decision… will provide cable with a stronger legal rationale for making its information service claim if challenged in court.” Comr. Abernathy said the order is intended to cover “all VoIP services that integrate voice communications capabilities with enhanced features and entail the interstate routing of packets -- whether provided by application service providers, cable operators, LECs or others.”

The FCC didn’t rule on the heated issue of whether the VoIP service was a telecom or information service. That issue will be dealt with in the IP-Enabled Services proceeding, the Commission said. The FCC also said this decision doesn’t signal an intent to let Vonage stop seeking ways to provide E-911. That and other public safety issues will be addressed in the IP-Enabled Services proceeding, along with whether VoIP providers must provide access to the disabled, pay intercarrier compensation and contribute to the universal service fund, the Commission said.

The FCC emphasized that its ruling doesn’t affect other state regulatory roles such as consumer protection.

Copps, Adelstein Concur

Comrs. Copps and Adelstein concurred in the decision. Copps objected to dealing with the Vonage petition separately from the bigger IP proceeding. The Commission has been making too many “piecemeal” decisions rather than setting a broad framework, he said. Adelstein said he was concerned about “unintended results” of the order, including jeopardizing the universal service program. Comr. Martin said he shared concerns about the effect the order could have on pending issues such as intercarrier compensation but he didn’t think that should stop the FCC from acting on the Vonage order.

Chmn. Powell responded to Copps’ concerns about the limited nature of the order, saying it would be a “formula for paralysis” to defer action until all issues could be dealt with at once. Sometimes it’s in consumers’ interest to act on individual issues like this, he said. “Today’s decision lays a jurisdictional foundation for what consumers already know -- that the Internet is global in scope,” Powell said. “To subject a global network to disparate local regulatory treatment by 51 different jurisdictions would be to destroy the very qualities that embody the technological marvel that is the Internet.” Powell said the action doesn’t mean there’s no governmental interest in VoIP: “There will remain very important questions about emergency services, consumer protections from waste, fraud and abuse and recovering the fair costs of the network. It is not true that states are or should be complete bystanders with regard to these issues.” He said the order preempts a Minn. PUC decision applying its “traditional telephone company” regulations to Vonage’s service, but “I emphasize that the Commission expresses no opinion here on the applicability to Vonage of the state’s general laws governing entities conducting business… such as laws concerning taxation, fraud, general commercial dealings, marketing and advertising.”

Abernathy said it would have been ideal if the FCC could have dealt with E-911, universal service and other important matters before addressing the jurisdictional issue. However, she said: “The decision of several states to impose utility regulations on VoIP services, and the ensuing litigation arising from such forays, makes it imperative for the Commission to establish our exclusive jurisdiction as the first order of business. This Commission runs significant risks if we remain on the sidelines and leave it to the courts to grapple with such issues of national import without the benefit of the expert agency’s views.”

Vonage CEO Jeffrey Citron called the FCC decision “forward-thinking” and said Vonage can now “focus our resources exclusively on building an even better service,” including rolling out E-911 service. “Because the FCC has acknowledged the reality of the Internet -- which knows no state boundaries and no borders -- more people will enjoy the benefits of Internet phone service,” he said.

NARUC Gen. Counsel Brad Ramsay said it’s too soon to know if his members will decide to appeal the FCC’s action. One thing to remember is the 8th Circuit case is “the exact same issue” and “would have weight as a precedent,” Ramsay said. The court is expected to issue its decision in the spring.

Action Draws Praise, Concern

Many companies and organizations issued statements praising the action. Some added that intercarrier compensation and universal service problems should be fixed next. Equipment manufacturer Nortel said the decision “will drive demand for broadband infrastructure” and urged the agency to move quickly on the broader IP- Enabled Services proceeding. Verizon said the FCC took a “positive first step” by establishing that “VoIP services such as those offered by Verizon” should be regulated on a uniform, federal basis “rather than being encumbered by a patchwork of potentially inconsistent state rules.”

The VON Coalition said “the FCC today embraced the future of VoIP by ensuring it will be free from a patchwork of multiple -- and inevitably conflicting -- state jurisdictions.” However, the coalition cautioned that this is “only one small step toward unleashing the full promise and potential of VoIP.” The FCC now must act quickly on reforming intercarrier compensation, said David Svanda, VON spokesman and ex-NARUC pres. Pulver.com said it was “encouraged” by the action, which was “the next logical step” by the FCC after its decision on Pulver’s peer-to-peer service in Feb. “Today’s decision was essential to allow the IP-based communications industry to develop and flourish,” said Pulver.com CEO Jeff Pulver. The next step is resolving intercarrier compensation and universal service issues, Pulver said.

SBC said “innovative IP-based services could be delayed or stymied altogether if 50 states are permitted to saddle these emerging technologies with a hodgepodge of inconsistent and conflicting regulations.” Said TIA Pres. Matthew Flanigan: “The Commission has demonstrated… that it understands that the IP services of today and tomorrow are very different from the telephone world of yesterday and that they deserve a new regulatory approach.” The Internet Innovation Alliance’s co-chmn. -- ex-NTIA Dir. Larry Irving and ex-Commerce Dept. deputy asst. secy. Bruce Mehlman -- said: “The FCC “had a duty to step in and protect consumers from a confusing maze of old copper-wire phone regulations applied to the newest digital data networks. This sends an unmistakable signal to consumers, investors, wary businesses and state regulators that America’s global economic competitiveness will not bog down under the weight of state and local red tape.”

ALTS Gen. Counsel Jason Oxman said ALTS was concerned that the FCC’s action not be taken by the Bells as another example of intermodal competition. VoIP isn’t “an alternative to underlying bottleneck transmission facilities,” he said. VoIP providers like Vonage don’t own facilities and work extensively with CLECs for access to underlying networks, Oxman said. Thus, the FCC should protect those underlying CLEC networks, he said: “The FCC must continue to recognize that VoIP services will only be available to consumers and small businesses if the Commission maintains its requirement that incumbent LECs make access to loops and transport available at cost-based rates.”

NTIA Dir. Michael Gallagher said the decision means “voice communications over the Net have been cleared for takeoff. The FCC has acted to keep the Internet -- an inherently global network -- unburdened by costly state regulation. As a result, a rich variety of IP services benefiting U.S. consumers and businesses will be accelerated.”

NTCA said it was disappointed with the FCC’s ruling because it gives VoIP providers “a free ride on [telecom] infrastructure without compensating the carriers that maintain these networks.” In Tues.’s ruling, the FCC has given preference to one technology, “tilting the competitive advantage in VoIP’s favor to the detriment of other technologies,” NTCA said. The Consumer Federation of America (CFA) also raised red flags, saying the decision “leaves public safety, consumer protection in limbo.” CFA said the decision “tied the hands of state regulators who have asserted that VoIP is no different than traditional phone service in terms of public safety, universal service and consumer protection.” The Office of the Ohio Consumers’ Counsel said “with traditional local telephone competition in jeopardy, the last thing consumers need is for their new choices to lack any safeguards.” States should have authority to act on consumer protections and public safety issues, but the FCC “took away any authority for them to require VoIP companies to provide customers with 911 emergency services,” the counsel said.

The FCC’s action on VoIP drew praise from Congress, including the sponsors of legislation designed to preempt states from VoIP regulation. However, a House source said the FCC’s ruling doesn’t necessarily mean there’s no need for legislation on VoIP in the upcoming 109th Congress. Sources also said the specifics of the order would determine if there’s a need for legislation. Sen. Sununu (R-N.H.), sponsor of the Senate VoIP bill (S-2281), said: “Comprehensive federal legislation is needed now to deal with expected legal challenges to this FCC decision, and to address other aspects involving this technology.” House Commerce Committee Vice Chmn. Pickering (R-Miss.), sponsor of House VoIP legislation, said: “Not only did the FCC make a decision beneficial to American consumers, but they made the correct decision as a matter of law, as VoIP is clearly an interstate application.” A House source said issues of universal service and intercarrier compensation would still have to be addressed by Congress. Senate Appropriations Chmn. Stevens (R-Alaska), who will take the Commerce Committee gavel next year, has said USF reform will be a top priority. Also, the House source said legislation that codifies state preemption would better withstand court scrutiny. House Commerce Committee Chmn. Barton (R-Tex.) said he strongly supports the FCC’s ruling. “To subject this emerging global technology to the quagmire of 51 possible sets of regulations in the U.S. alone would suffocate both quality and cost-efficient choice,” Barton said.