VoIP firms battle California regulators

Internet telephony companies are fighting efforts by California state regulators to apply traditional telephone rules and taxes to their services.

Six VoIP (voice over Internet Protocol) providers, including Net2Phone, 8x8 and SBC IP Communications, sent letters late Wednesday to the California Public Utilities Commission, arguing that their VoIP services are

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exempt from state phone regulations. The letters were in response to an earlier CPUC request that each company apply for a license to operate as a telecommunications carrier in the state by Oct. 22.

Rather than apply as requested, the companies sent the letters, disputing the CPUC's interpretation of their services. A CPUC representative said the agency has not taken any immediate action against the companies but is now "looking into the next steps." The issue is expected to be discussed at a CPUC meeting that's scheduled for Nov. 13, according to an 8x8 representative.

"We did file a letter, but we did not file to become a regulated CLEC (competitive local exchange carrier)," said 8x8 spokesman Huw Rees. "We said our service is not subject to the CPUC, because we're not a telephone service; we're a data service."

The clash comes as states are beginning to try to regulate new services that provide many of the same functions as the traditional phone system but with different technology. At stake is a key distinction between voice services, which have in the past used the Public Switched Telephone Network, and data services such as the Internet.

Unlike phone networks, data networks have been left largely unregulated and untaxed to help spur growth. This has raised concerns for groups such as the Multistate Tax Commission 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.

Minnesota kicked off efforts to force VoIP companies to contribute to 911 and universal service funding, ordering Vonage Holdings to apply for a state telephone operator's license in August. Wisconsin and California quickly followed, while other states are studying the issue.

State regulators were dealt a setback earlier this month, when a federal judge permanently barred Minnesota's Public Utilities Commission from enforcing phone regulations against Vonage. The strongly worded opinion found that Vonage's DigitalVoice service is not a telecommunications service but an information service.

California regulators are not bound by that decision. But there are signs VoIP regulation could find resistance in the Golden State. At least one CPUC commissioner is on record opposing VoIP regulations. In an op-ed piece The San Jose Mercury News published Monday, Commissioner Susan Kennedy wrote that "regulators should just keep their hands off" VoIP for now.

About 1 million people use VoIP in the United States through paid services such as Vonage, Net2Phone and 8x8's Packet8. Others use free services such as Skype, Free World Dial-Up and SIPphone, or voice capabilities in instant-messaging services such as Yahoo IM--although those products only work between computers and cannot connect to ordinary telephones.

In addition, about 2.1 million cable subscribers now use a broadband connection to make phone calls that use non-VoIP technology. Cable providers are now deciding whether to upgrade those networks to VoIP systems, which are a more cost-effective method than the telephone switches they now use.

Businesses are also using VoIP technologies through services such as SBC IP Communications, a subsidiary of SBC Communications, as well as networking and telecommunications equipment makers Cisco Systems, Nortel Networks, Avaya and Siemens.

The main draw for consumers is the price of a phone call. VoIP subscription services are either free or cheaper than traditional phone service by as much as $20 a month. VoIP calls are less expensive, because they avoid the toll roads of the telephone companies' private networks.

Major telephone companies are also using VoIP to route calls at significantly lower costs. For now, about 10 percent of all telephone calls use the Internet in some way. But most analysts believe that in about a decade, nearly every call will use the Internet.

In addition to battling state regulators, VoIP companies and long-distance carriers are lobbying the Federal Communications Commission for a moratorium on VoIP regulation.

"We visited the FCC last week and met with a number of FCC commissioners," said 8x8's Rees, who said the company filed a brief on VoIP regulation with the agency. "Our position is that we'd like the FCC to issue a stay...so these decisions can be discussed adequately. Regulations should be developed around the technology of this industry rather than developed around old rules that don't apply."