November 2004

Sidebar: Voice Over IP Drives The Regulatory Debate

BY Bill Hunt

During the past two years, public interest in and acceptance of Voice over IP has increased exponentially. VoIP has moved from a hobby for Internet enthusiasts to a mainstream product offered to residential and business customers. Enhanced service providers, cable companies, RBOCs, and other carriers are deploying IP technology and racing to bring VoIP products to the marketplace.

VoIP’s acceptance has chief executives asking their CTOs, “Why don’t we have VoIP?” and consumers are asking themselves the same question. The Yankee Group forecasts that the number of VoIP-equipped households will grow from approximately 1 million this year to 17.5 million by 2008. Meanwhile, the New York Times observes that the move to VoIP could be “the most significant development in telecommunications since the breakup of the AT&T monopoly 20 years ago.”

The reasons for this upsurge are clear: VoIP dramatically lowers the cost of communications, while delivering new enhanced services that fundamentally change the concept of “plain old telephone service.”

In addition to transforming communications, VoIP has also become a catalyst for an overdue debate on regulatory reform. That examination ranges from social policy goals such as universal service and access to emergency services to the basic economic question of how much carriers will compensate each other to exchange VoIP traffic.

When considering these issues, it is important for regulators to separate the economics of network interconnection and compensation from social policy goals so that social goals do not become an excuse for impeding the deployment of VoIP. With respect to the regulation of VoIP, we should begin with “a light touch” that only imposes regulation when a clear and present need has been defined in the marketplace. Any regulation should be based on practical experience and not conjecture about “worst case scenarios.”

While regulators and industry members will have time to thrash out what the appropriate regulatory regime will be, it is imperative that the economic issues be resolved immediately so that companies can fight each other in the marketplace instead of commission hearing rooms. Fortunately, there are two vehicles available to bring economic peace in a short period of time.

On August 16, a broad coalition of nine service providers from across the telecommunications industry outlined a proposal to the Federal Communications Commission. The group, known as the Intercarrier Compensation Forum, spent 14 months negotiating a comprehensive set of reforms that will bring the rate carriers pay each other to zero.

The ICF plan has three primary components:

• A new, unified compensation framework that would be phased in through 2011. The unified regime would eliminate access charges, replacing them with a single termination rate for all traffic, and establish a bill-and-keep system;
• New, explicit technical rules governing interconnection of all types of carrier networks;
• New regulations that stabilize and broaden the base of universal service funds used to subsidize delivery of communications to rural locales and other areas that are costly to serve.

The ICF believes its plan represents the best approach to resolving the complex and interlocking issues associated with intercarrier compensation reform. The ICF proposals were the result of more than a year’s worth of negotiations and compromises by many companies representing all sectors of the industry. As any observer of the telecom industry can attest, that is a major accomplishment in itself, and it bodes well for an ultimate solution. Local, long-distance, rural, wireless, competitive, and Internet providers have participated in the group and contributed significant input. For various reasons, some companies withdrew from the coalition before its proposal was finalized, but input from all industry segments has been retained in the ICF plan.

Initial response to the plan is encouraging. Chairman Powell has indicated that he is “very supportive of those companies that were able to stay in the process and work toward a cross-industry consensus.” Members of the NARUC Intercarrier Compensation Task Force “welcomed the release of the ICF proposal,” according to Iowa Utilities Board Commissioner Elliott Smith. And Scott Cleland, chief executive of Washington research firm Precursor, called the plan a “flashlight path for the FCC,” and “the regulatory equivalent of a Yugoslavian peace plan among long-warring factors.”

But even if adopted wholesale today, the ICF plan does not address the economic treatment of VoIP traffic until Step Four in the implementation plan. Federal regulators will need to move quickly to resolve the status of VoIP with respect to intercarrier compensation so that VoIP does not become a battleground for carriers during the interim period.

The FCC has begun to weigh in on the compensation issues associated with VoIP-based communications. In February, the FCC deemed VoIP services that both originate and terminate in an IP format — such as the FWD service — as “information services” that should remain unregulated. In April, the FCC issued another key decision, ruling that AT&T’s use of IP to transmit phone calls which originate and terminate on the PSTN as a telecom service and that access charges would apply to such calls. However, phone-to-computer (or computer-to-phone) voice traffic remains unresolved.

Independent of the ICF, Level 3 filed a “forbearance petition” with the FCC, asking it to reaffirm that access charges do not apply to IP-based voice calls made between computers and phones. Such traffic has historically been exempt from access charges under the FCC’s ESP exemption. As required by law, the FCC must act on the Level 3 petition by December 23, though the agency can extend the deadline by three months.

The petition is significant because it will reaffirm that access charges do not apply to VoIP traffic. Despite existing rules, a number of carriers are threatening to seek access charges from carriers exchanging VoIP traffic. The Commission should short-circuit this sort of regulatory capitalism, where parties use the regulatory regime to promote their own economic interests to reaffirm the existing public policy that access charges do not apply. In doing so, they would implicitly be supporting the concept that IP telephony is a distinctly unique mode of communications. They would also provide a growing market with the certainty it needs to commit to VoIP and other new IP-based technologies.

VoIP has made giant strides in 2004, and will continue to do so in the coming year, as mainstream adoption accelerates in both residential and enterprise markets. However, to ensure VoIP’s long-term viability as a competitive option, regulators should act quickly to settle the economic issues surrounding how carriers will exchange VoIP traffic. Both the Forbearance Petition and the ICF plan provide that certainty and will clear the path for the development and introduction of new VoIP services that will benefit consumers and businesses alike.

Bill Hunt is Vice President for Public Policy with Level 3 Communications, Inc. The author’s views with respect to the Level 3 Forbearance Petition are his own and do not reflect the collective view of the ICF. For more information visit the company online at www.level3.com.

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