While federal policymakers are focused on the net neutrality battle, state policymakers are waging an unusual and relatively quiet battle over the future of voice service. An increasing number of Americans are swapping traditional landline telephone service for Internet-based VoIP service. This migration has prompted state regulators to consider whether, and to what extent, they may regulate this new service. Last May, New Hampshire’s Public Utilities Commission reaffirmed an earlier finding that VoIP is “telephone service” subject to PUC oversight. The Kansas Corporation Commission has taken similar action, and Iowa and Vermont regulators are similarly considering following suit.
It is unsurprising that state regulators want to bring VoIP within their portfolio. What is perhaps surprising is the negative response this effort has received from state legislators. This past summer, the New Hampshire Legislature declared unambiguously that that VoIP service is beyond the commission’s purview. New Hampshire thus joins two dozen states that have preempted state regulation of VoIP service, including California, which famously declared VoIP off limits to the California Public Utilities Commission last year. Similar bills have been introduced this year in at least five other states.
State regulators are worried that if VoIP lies outside their jurisdiction, they will be unable to enforce consumer protection, universal service, and carrier of last resort obligations that states traditionally place upon telephone companies. As customers switch to VoIP service, they are also worried about losing revenue from telephone taxes. Legislators are concerned that regulating Internet services will be costly and will retard innovation by subjecting new nationwide services to a plethora of state-by-state regulatory regimes.
This flurry of intrastate squabbling would be unnecessary if the Federal Communications Commission would simply do its job. The Commission is our nation’s telecommunications expert and can answer the basic question of how to classify VoIP service under the Communications Act. But as I discussed in a recent Free State Foundation Perspectives piece, it refuses to do so.
In 2003, VoIP provider Vonage asked the commission whether VoIP service falls under Title I of the act, which would preempt state regulation, or Title II, which would allow states to regulate intrastate VoIP calls. The commission responded that classification was unnecessary because even if VoIP fell under Title II, the “impossibility” exception would preclude state regulation. The commission explained that because a customer could use Vonage account from any computer, it was impossible to determine whether a particular call was interstate or intrastate — which means under the act it should be treated as interstate communications beyond the reach of state regulators.
But intrepid state regulators soon found a gap in the Vonage decision. The impossibility exception applied to “nomadic” VoIP services placed from computers, but the same logic did not apply to “fixed” VoIP service. Like nomadic VoIP, fixed VoIP delivers calls primarily over the Internet. But unlike nomadic VoIP, fixed VoIP uses a normal telephone that plugs into a wall jack. To the customer, therefore, fixed VoIP looks like traditional telephone service; the only difference is the way the call is delivered. More importantly, because the telephone remains in the customer’s home, the caller’s location is easy to identify, meaning fixed VoIP calls can be classified as interstate or intrastate.
While this distinction sounds like jurisdictional hair-splitting, this detail is potentially significant. Comcast’s fixed-VoIP Digital Voice service is the nation’s third-largest voice provider. And even traditional telephone companies are converting to VoIP technology. Moreover, it may soon be possible to determine with certainty the location even of nomadic VoIP calls. Further clarity is essential to determine the continuing relevance of state regulators as the industry evolves.
Representative Greg Walden has long trumpeted the need for shot clocks and other FCC reforms, and reiterated that call at AEI last Tuesday. The confusion stemming from the FCC’s delay in classifying VoIP shows the need for such reforms. The agency should act without delay to classify all VoIP services under Title I. Distinguishing between fixed and nomadic VoIP providers distorts competition by subjecting similar services to different regulatory regimes.
More fundamentally, state regulation of intrastate telephone service is a relic of a bygone era when consumers thought of local and long-distance service as separate commodities. Today, most customers receive nationwide calling service from a single provider and do not distinguish between interstate and intrastate calls. The voice market is increasingly competitive, pitting fixed and nomadic VoIP providers against traditional phone companies, wireless providers, and even software companies such as Apple and Microsoft. Grasping at straws to remain relevant, state regulators seek jurisdiction over whatever pieces of this new market they can reach. But federalism should flow from a conscious appreciation of the strengths and weaknesses of state decision-makers—not from loopholes created by inartful drafting and perpetuated by agency delays. Subjecting VoIP to public utility regulation by state commissions would distort competition among VoIP providers and retard the benefits of this increasingly vibrant marketplace.