[December 1, 2003]

FCC Begins Hearings On VoIP Rules

(USA Today) Riddle: When is a phone call not a phone call?

 Answer: When it travels over the Internet.

That, at least, is what a new crop of voice-over-Internet protocol (VoIP) providers will argue before the Federal Communications Commission on Monday at what could be a watershed forum.

The hearing kicks off a months-long proceeding in which the FCC is expected to decide what, if any, rules and fees should apply to phone calls over the Internet or Internet protocol networks. The debate has huge implications for the rapidly shifting telecommunications industry. VoIP calls - which now can be made with regular phones - are expected to gradually supplant traditional voice calling over the next 20 years.

But state regulators and some local phone companies say these upstarts are getting a free ride by dodging regulatory burdens, such as taxes, universal service fees to subsidize rural phone service, access fees to local phone companies to deliver calls and 911 emergency calling requirements.

"If it's functionally equivalent to existing services, there's no policy reason to treat it differently," says James Ramsay, general counsel for the National Association of Regulatory Utility Commissioners.

VoIP companies say they aren't providing phone calls in the traditional sense but voice applications via the Internet. The U.S. government has not regulated the Internet for fear of squashing new technology.

"Whether it's Web surfing, sending e-mail or talking, why should it matter?" says Jeff Pulver, founder of VoIP start-up Vonage. "If the incentives aren't there for people to be innovative, we'll see a retreating of companies like Vonage."

FCC Chairman Michael Powell, a free-market advocate, is strongly signaling that he's inclined to agree, though certain rules may apply to VoIP providers.

"I think the burden should be placed on why you need a regulation as opposed to just, 'Let's treat these small entrepreneurs like big, hairy telephone companies,' " Powell said in an interview, adding that he and other commissioners have made no decision. Analysts say the FCC will likely rule that VoIP is an "information service," rather than a "telecommunications service," and thus subject to fewer rules.

Vonage, Packet8 and other VoIP providers have snared 135,000 home phone customers. As cable operators enter the business, that is expected to swell to 4 million by 2007, says researcher In-Stat/MDR. An additional million make IP calls via PCs or phone cards.

Standard phone networks link the parties for the entire conversation. Net-based calls are broken into digital data packets to cross the Web. A "gateway" reassembles the packets into voice and hands it off to a standard phone company to complete the call. That lets Vonage charge $40 for unlimited calls and, like other data services, avoid regulation.

So far, most regulatory battles have been in states. About 15, including New York and California, want to impose rules that could force VoIP providers to mail paper bills, give ample notice before cutting off service, pay state taxes and intrastate access charges, and provide Enhanced 911 service that locates emergency callers. In October, though, a federal judge denied Minnesota's attempt to regulate Vonage.

Ramsay says 911 and proper notice before cutting off service "is what the public expects from a phone service."

While Vonage provides makeshift Enhanced 911, it says it can't fully comply because local phone companies will not let it connect to their systems. And it says its customers know it is not traditional phone service.

"We're concerned about 50 states forming a patchwork of regulations," says Vonage CFO John Rego. Because calls travel over the Net, he says, they should be considered interstate calls and overseen by the FCC only. The FCC is expected to agree, officials say, and pre-empt the states from regulation.

Whether the agency imposes federal rules is thornier. The Bells are not calling for regulation, partly because they plan also to offer VoIP. But they say VoIP providers should pay them interstate access fees - about a half-cent a minute - to complete calls on their networks, just as long-distance companies do.

Vonage typically pays the Bells or Bell rivals sharply reduced fees to carry data traffic at the other end of a call. Some of its calls are handed to long-distance companies, which pay traditional access fees.

Similarly, AT&T has started carrying some long-distance calls over Internetlike VoIP networks and paying cut-rate fees to connect at the other end. In this case, the customer has no idea VoIP is involved.

"They're basically using our network the same way" as standard services do, David Young, Verizon's technology policy director says of both AT&T and Vonage. Letting them dodge access fees, he says, will encourage providers to game the system by shifting calling traffic to VoIP networks.

But Powell says, "There isn't perfect parity in any regulation. If you took that view, you could never progress." It's not clear how the FCC will rule, but officials say providers such as Vonage or Net2Phone, which transmits calls from PCs to phones, may get more leeway on access charges than AT&T and others that look more like standard phone services to consumers..

In any case, analysts expect the FCC to overhaul the access charge system next year. That could eliminate all the fees phone companies pay each other to end calls. Instead, they might simply bill customers directly to fund their network costs. In its VoIP proceeding, the FCC will also examine:

•Universal service fees. This is the 10% surcharge on long-distance charges. Customers of VoIP providers don't pay the fees directly because the calls traverse the Internet. As VoIP gains customers, rural lawmakers worry that the $6 billion universal service fund could shrink, hobbling this subsidy for providing phone service in the hinterlands.

Powell notes that as more consumers use VOIP service, there may be less need to subsidize traditional networks. "The fund is based on running copper wires long distances," he says. Also, the FCC is expected to overhaul universal service, possibly by imposing fees of $1 per number or connection. That would force VOIP customers to contribute.

•911 service. The FCC eventually is expected to require VOIP carriers to provide Enhanced 911 that includes location information. "We're not going to have a country in 15 years where everyone is using voice-over IP but you can't call 911," Powell says. The FCC will likely give the firms ample time to comply with 911 rules and let them do so in innovative ways.

•Wiretapping rules. The FBI worries that labeling VOIP an "information service" will exempt providers from obligations to design their networks so they can be easily wiretapped by authorities. The FCC is expected to say VOIP companies are bound by the requirements but may comply in non-traditional ways.

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