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A long, hot summer for VoIP?

Analyst Kevin Werbach explains how powerful interests are pushing for regulatory rules that will cripple the potential of VoIP technology.

    Will May 19, 2004, be a date that lives in infamy for proponents of VoIP?

    Two ominous developments took place on that day. The New York Public Service Commission declared Vonage to be a regulated telephone company. Meanwhile, several key companies pulled out of the inter-carrier compensation forum (ICF) that is attempting to negotiate a replacement for the outmoded access-charge regime. That brought the effort to the brink of collapse. These seemingly unrelated events illustrate the failings of the Federal Communications Commission?s current piecemeal approach to VoIP, or voice over Internet Protocol. Though no one in Washington seems to want to make VoIP subject to legacy telecommunications regulations, we may be drifting in exactly that direction.


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    The New York decision wasn't the first time a state regulator attempted to classify VoIP as telecommunications. Minnesota reached a similar result last year, while other states have pending dockets. However, the New York action was the first since the FCC?s decision that Pulver.com's Free World Dialup service was not subject to traditional regulations. In that February decision and a companion rulemaking proceeding, the FCC asserted that VoIP was subject to exclusive federal jurisdiction. In other words, the commission told the states to cool it.

    Yet New York, one of the largest states, disregarded the FCC's admonishments to sit tight while the commission sorts out the policy framework for VoIP, and it placed a VoIP provider squarely within its legacy regulatory mandates. If upheld, the decision means that Vonage, the largest pure-play voice over broadband provider, will be required to file a "certificate of public convenience and necessity" for approval to provide service in New York, and will be required to file a schedule of its rates. The decision presumably extends to any similar VoIP provider.

    A glance at the New York Public Service Commission's press release illustrates how problematic the decision is. The commission's key finding was that "Vonage owns and manages equipment that is used to provide telephone service to Vonage's customers and to connect Vonage's customers to the customers of other telephone corporations via their public networks."

    FCC Chairman Michael Powell has made positive noises about VoIP. However, the commission?s approach to the issue has opened the door for creeping regulation.
    In today's world, that is a very troubling test. My IBM ThinkPad laptop, which has VoIP software installed on it, is a piece of equipment used to provide telephone service. Does that make me a phone company? Or IBM?

    As bad as the New York decision was, the defections from the ICF were even more threatening to the future of VoIP. Representatives of all major sectors of the telecom industry have been meeting for months under the banner of the ICF, seeking to achieve a compromise proposal for reforming access charges and other fees carriers pay each other for handing off traffic.

    It is clear that inter-carrier compensation will eventually move to some form of "bill-and-keep," which means carriers don?t charge each other to terminate traffic. This is the same as the "peering" that has long governed traffic exchange at the top levels of the Internet. Unfortunately, today's telecom policy regime looks nothing like bill-and-keep; it includes several different, non-cost-based rates that carriers charge each other depending on the nature of the traffic involved.

    VoIP was a significant reason for the ICF's existence. Though the inter-carrier compensation regime has been creaking for some time, the threat that VoIP will siphon traffic out of access charges gave urgency to the ICF's reform talks. When the FCC rejected AT&T?s VoIP petition and held that the company was responsible for paying access charges, it removed a significant incentive for ICF members to hammer out a compromise.

    Sure enough, less than a month later, Verizon and BellSouth pulled out of the ICF, declaring that they couldn't support the compromise proposal on the table. The rump ICF is struggling forward and attempting to put a proposal before the FCC. But the departure of such major participants belies its claim to represent a true industry consensus.

    FCC Chairman Michael Powell has made positive noises about VoIP. However, the commission's approach to the issue has opened the door for creeping regulation. Though the breakdown of the ICF can't be laid entirely at the FCC's feet, the the commission's VoIP efforts released some of the pressure necessary for the ICF to succeed. The commission hoped that rejecting the AT&T petition would encourage ICF members to work together, but the opposite is apparently the case.

    The New York commission and the Bells that pulled out of the ICF both looked the FCC in the eyes and didn't blink. So far, there is no bulwark preventing the gamut of telecom fees, taxes, and regulations from applying to VoIP. The powerful interests that view VoIP as a threat will continue to push for rules that cripple its potential to foster innovation and new competition. If the events of May 19 are any indication, we're in for a long, hot summer.