State Regulation of VoIP Services: Get Ready, It’s Coming

Next month, in a hearing room at the Missouri Public Service Commission, state regulators will try to make the case that Comcast’s “Digital Voice” VoIP service should be regulated as a competitive telephone service.

If they succeed, the Missouri Commission may not only take a significant step toward establishing VoIP – or at least some types of VoIP – as a regulated service in Missouri, the commission may also set the precedent to allow the commission to collect significant penalties from Comcast. The regulators maintain that penalties should be assessed against Comcast for its provision of a regulated “telephone service” without proper state authority. And as much as the Missouri proceeding could result in a decision with significant business and regulatory consequences in Missouri, it may be only the tip of the iceberg as many more state regulatory commissions move to assert jurisdiction over VoIP providers.

Although VoIP has long been viewed by some as “unregulated,” federal regulation applicable to VoIP providers has been steadily expanding. The Federal Communications Commission has already extended three of its central regulatory programs to interconnected VoIP service providers. Interconnected VoIP service providers must comply with the federal wire-tapping requirements under the Communications Assistance to Law Enforcement Act (CALEA). They must comply with federal emergency dialing requirements so that subscribers can access the 911 networks. And they must collect and make substantial contributions to the Federal Universal Service Fund that provides subsidies to companies serving telephone subscribers in high-cost service areas (such as rural areas with low population density) and telephone subscribers with very low incomes. The FCC has even recently asked for comments from the industry about whether VoIP providers should pay regulatory fees to the FCC.

By contrast, VoIP providers haven’t been subject to many of the state rules and regulations that apply to traditional phone companies, such as state certification requirements. But that may be changing. In 2003, the Minnesota Public Service Commission tried to regulate Vonage as a telephone company. In its defense, Vonage claimed that its operations were “information services,” so that its operations were subject only to FCC regulation and that as a result, states had no regulatory authority over Vonage’s VoIP services. Without determining the nature of the service, two federal courts and the FCC agreed on the grounds that, at least for nomadic VoIP services (which utilize a compact VoIP modem to allow portable use of the service), it is not possible to separate the interstate components of the service from the intrastate components.

While the Vonage decision forestalled the application of state regulation to nomadic services, it left unresolved the question of state regulation of fixed VoIP services. In the absence of a clear decision, many fixed VoIP providers simply took the position that the Vonage decision applied to them as well. Recent FCC and federal court decisions suggest, however, that the Vonage decision may not extend so far and that state regulation of VoIP may be permissible. For example, the FCC has stated that if a VoIP service provider has the ability to identify interstate from intrastate traffic, it would become subject to state regulation. Appeals to legislators to limit the authority of state commissions over VoIP providers have to date yielded few results. For the great majority of VoIP services that could be considered “fixed,” significant state regulation may be around the corner.

In light of these changes, many VoIP providers are considering what state regulation might mean. The answer will likely be drawn substantially from the regulations that now cover wireline competitive telephone carriers. Competitive phone companies are generally required to obtain authorization from state regulatory agencies prior to providing service, file tariffs or price sheets of their generally available rates, terms and conditions, and comply with various state reporting requirements.

The news is not all bad for VoIP service providers because state regulation offers certain benefits. Certification as a competitive telephone carrier allows VoIP providers to gain additional valuable rights. For example, certified VoIP providers would be able to require interconnection of their networks directly to those of other carriers, to obtain certain rights to deploy facilities inside Bell company switching offices, to obtain telephone numbers from the telephone numbering administrator, and to lease certain transmission circuits at cost from the Bell telephone companies. In many cases, a VoIP service provider certificated as a carrier could exercise certain privileges on its own that it currently must obtain through another phone company providing wholesale service. Certificated carriers also have a forum at state regulatory agencies to help resolve certain disputes with other phone companies, with an eye toward minimizing the disruptive consequences that might be felt by their customers, something Vonage might have found quite valuable in the midst of its patent dispute with Verizon.

In short, interconnected VoIP service providers are already subject to new and expanding federal regulatory requirements. State regulatory commissions are pushing to assert their jurisdiction in new ways on VoIP service providers, and reaching into their bank accounts to impose penalties and to collect regulatory fees. But the impact of that new regulation may not be as bad as advertised, and indeed, may be only one additional sign that VoIP has moved beyond an emerging service and is well down the road to being established as a broadly accepted addition to the telecom marketplace.

Michael W. Fleming, Edward S. Quill, Jr., and Brian McDermott are partners in the Telecommunications Group of Williams Mullen, PC. They have practiced before the Federal Communications Commission, the United States Department of Justice, and numerous state regulatory commissions representing the interests of competitive carriers. Michael W. Fleming can be reached at +703 760 5248 or mfleming@williamsmullen.com.