California becomes VoIP regulatory battleground

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But six months later, Vonage, 8x8 and others have been joined by some powerhouse telephone companies--which shows just how important the battle in California has become to determining whether states should regulate Internet phone service providers.

Verizon, SBC, cable provider Cox Communications, Sprint, Level 3 Communications, AT&T and Nextel Communications are among the companies now recommending that the California Public Utilities Commission (CPUC) take, at best, an extremely light regulatory approach to most Net phone service providers, according to comments the companies made to the CPUC. The comments were made public this week.

"Do not develop detailed policy at this time," Verizon stated in its comments.

"There is no current looming threat" from voice over Internet Protocol (VoIP), so no regulation is necessary, Cox told the commission.

The opinions aren't necessarily surprising, given that all the companies stand to gain by selling Net phone services and avoiding taxes, fees and the expense of hiring regulatory compliance officers. Still, the number of high-profile telephone companies taking part shows the urgency the industry has placed on reversing the commission's February decision to assume jurisdiction over VoIP providers.

Some companies, such as Cox Communication, have immediate concerns. Cox already offers its Digital Phone service in San Diego and Orange County, and the company told the commission it plans to expand into two other California counties: Santa Barbara and Humboldt. Regulations would make it more expensive and could ultimately strain any rollout.

Domino effect
But there are broader concerns about the impact California's VoIP rules will have on other states, such as New York, that are now in the process of trying to regulate the young industry. Should California's efforts go forward, any of the two dozen other states now at various stages of creating VoIP regulations may feel emboldened to continue with their own VoIP policy making. That would create a patchwork of different regulations that could stifle growth of the industry, opponents of state regulation say. Rather, a federal policy, which is in the process of being drafted, will do the trick, according to those who oppose state regulation of VoIP services.

Still, states say they need some sort of regulation of VoIP, because they stand to lose tens of millions of dollars that come from fees and subsidies provided by telephone companies operating in their jurisdiction, if more calls flow away from traditional phone networks and onto the unregulated Internet. This has raised concerns for groups such as the Multistate Tax Commission, which fear that Internet-style services could jeopardize billions of dollars in state funding for programs, including universal telephone service, 911 emergency services and the E-Rate school technology fund.

"Functionally equivalent services must be subject to similar regulatory treatment, regardless of the technology used to provide them," states a representative for 14 wireline phone companies in rural California, in comments urging the CPUC to continue regulating VoIP providers.

Still, states are facing a stiff battle from the federal lawmaker and utility regulators, which believe VoIP's use of the Internet makes it fall within federal jurisdiction only.

While the majority of the opinions filed with the CPUC this week called for light regulatory approach, Sprint and about a dozen rural California providers argue that VoIP providers should be regulated by the state. Sprint said it favors "limited flexible regulation of VoIP providers," depending on whether they can reach traditional phone networks. Rural landline providers say VoIP providers should face the full strength of all current California telephone regulations.

The United States isn't alone in grappling with the issue. Canadian utility regulators this week made a tentative decision this week that their existing telephone rules apply to most providers of VoIP services.