Memo to Jerry Brown: Sign SB 1161 for all Internet users

commentary California lawmakers have taken an encouraging step to keep government from tinkering with the mechanics of the Internet. As first reported by CNET in June, SB 1161, which passed last week, prohibits the state's Public Utilities Commission from imposing new regulations on "Voice over Internet Protocol and Internet Protocol enabled services," except when specifically authorized by the legislature or by federal authorities.

SB 1161, which is only four pages long, was approved in May by an overwhelming bipartisan majority of the state's Senate. On August 22, it cleared the state Assembly by a margin of 63 to 12.

The new law now awaits Gov. Jerry Brown's signature.

Strong support from Silicon Valley helped moved the legislation. Early on, SB 1161 was endorsed by major Bay Area technology trade associations, including TechAmerica, TechNet, and the Silicon Valley Leadership Group. A joint fact sheet (PDF) argued the law would ensure new innovations "aren't imperiled by years of protracted regulatory proceedings that create delay and unnecessary expense."

Regulatory incursions into VoIP and related applications are by no means theoretical. The Federal Communications Commission has in recent years been moving aggressively to regulate VoIP and other internet-based services, which include popular applications such as Skype, Google Voice and Apple's FaceTime.

For example, the FCC has already extended 911 obligations to VoIP providers and imposed data protection rules that have long applied to wired carriers. In April, the agency even began looking to levy Universal Service fees, currently charged on every consumer's phone bill, to VoIP providers and possibly other Internet companies.

The FCC's meddling is dangerous enough. But now imagine adding different and possibly contradictory rules and proceedings by each of fifty state public utility commissions. Applying existing wired telephone service rules to VoIP, for example, could mean separate state taxes, price regulation, mandated equipment, and required pre-approval for any service change.

Criticism of SB 1161 defies logic

Yet Washington insiders lobbying against SB 1161 dismiss California's legislators as being far too provincial to know what they're doing here. A recent op-ed penned by a former White House lawyer, for example, sniffed that "Few in the California Legislature likely understood the ramifications of the bill they just agreed to."

The article, which appeared Monday on Wired.com, argued that SB 1161 secretly nullified all PUC rules regulating not only VoIP but "the physical wires and towers" used for delivering Internet services. Indeed, according to the article, SB 1161 denies the PUC regulatory authority over all Internet "content and functions," including Wired.com and other websites.

The tone as well as the substance of such criticism is baffling. SB 11161 has no impact on the PUC's ability to continue regulating wired or wireless carriers or their equipment. Indeed, one section of the short bill says explicitly that SB 1161 "does not affect any existing regulation" or authority over "non-VoIP and other non-IP enabled wireless and wireless service."

In fact, the bill was specifically amended in June to underscore the PUC's continued authority over traditional phone services, and even allows the agency to continue responding to consumer complaints about VoIP service providers.

And who would actually want utility commissioners to regulate individual websites?

Self-styled consumer advocates aside, the PUC itself made the most convincing case for passage of SB 1161 earlier this year, albeit inadvertently. After analyzing the draft legislation, the agency published a bizarre and deeply divided response to the bill. The agency's Communications Division, for example, first concluded that the law would not impact any "current PUC regulatory activity or program regarding VoIP or other IP-enabled services."

But the Legal Division disagreed, issuing a report that reached the extraordinary conclusion that a bill prohibiting new VoIP regulations would somehow require 57 new PUC employees and cost over $1 billion to implement. In another twist, the agency's head lawyer later dismissed his own staff's report as "preliminary," and complained that it was released without his "prior review or approval." Its publication, he wrote, reflected a "lapse in our system of internal controls."

That's putting it mildly.

In the end, the PUC voted to maintain a neutral position on the bill. But individual commissioners have spoken out against it, making even clearer why it's so important to keep these new services out of their hands.

Last week, for example, PUC Commissioner Mike Florio revealed in an interview with Bloomberg BNA that his primary concern with SB 1161 had less to do with the agency's mission to protect California consumers than with the prospect of losing an on-going turf war between the PUC and the FCC over who gets to regulate the Internet.

"Issues can get bogged down on the federal level that can be taken to court," he said, "stopping initiatives until the court sorts out the actions. I think that's a far bigger risk to the future of some of these technologies than anything this commission would ever do."

The end of the PUC's regulatory monopoly -- and its bloated budget

There is, of course, a superficial similarity between VoIP and traditional wired telephone service. But the PUC has little expertise to offer in regulating VoIP or any other Internet service. Nor should it. State utility commissions were created to oversee, well, utilities. You know -- telephone poles, power lines, and water pipes.

With the virtualization of voice services, however, competitive concerns tied to ownership of physical assets such as utility poles and copper wires are fading. Control of physical infrastructure, thanks to technological innovation, is no longer much of a constraint on consumer choice or pricing for voice services. VoIP services are proliferating, and many of the applications are still free. Providers don't even have equipment or offices in most states.

What really worries regulators, it seems, is maintaining their own relevance. It's an understandable concern. As traditional voice communications migrate to the cloud, today's regulatory monopoly is also eroding. According to an analysis include in SB 1161, for example, wireline phone service in California declined 17% percent between 2008 and 2010, while VoIP accounts rose 46% during the same period.

Those numbers signal the eventual end of the PUC's ballooning budget, which rose from $1.1 billion in 2011 to $1.4 billion this year (PDF). This despite having fewer wired connections to oversee -- not to mention the dire state of the California economy.

Opponents of the bill also seem to miss the crucial link between the success of VoIP and other Internet services and the absence of government oversight. Applications such as Skype, Google Voice and FaceTime can evolve and spread at lightning speed precisely because they are not subject to the plodding and often pointless rules of state utility regulators. In California, it's worth remembering, the PUC took seven years just to approve caller ID.

Indeed, it's no exaggeration to say that the Internet economy has flourished in large part because innovators don't have to ask any regulator for permission before releasing or revising new software. Let alone asking all of them.

So it makes perfect sense to head off a poisonous invasion by state authorities of this remarkable ecosystem--especially with federal and local agencies already staring each other down over who gets to inflict the first blow.

That may not be clear inside the Washington policy bubble. But it is common sense, not a "failure to understand the ramifications," that has already driven 24 states to enact legislation similar to SB 1161.

In signing the new law quickly, California Gov. Jerry Brown would send a powerful message to local regulators across the country: Keep your hands off the Internet. That's a point that can't be made too often, or too emphatically.