The Federal Communications Commission (“FCC”) recently gave notice that it plans to initiate a long-awaited proceeding to consider regulation of voice-over internet protocol (“VoIP”) services.  The move coincides with steps by various state public utilities commissions to regulate VoIP or IP telephony providers as regulated telephone carriers.  Collectively, these developments may signal the approaching end of unregulated status for VoIP services, potentially impacting VoIP-based service providers, local exchange carriers and consumers.  The following presents a survey of this changing legal landscape. The Federal Level On November 6, 2003, the FCC issued a News Release officially stating that it plans to launch a broad-based inquiry into the regulatory treatment of IP telephony services.  This was followed on December 1, 2003 by a public forum to air key regulatory issues to be addressed.  The forum was attended by industry representatives, VoIP providers and state commissioners.  The FCC’s News Release states that shortly after the forum, the FCC plans to initiate a formal rulemaking proceeding to collect public comment and consider the adoption of regulations applicable to VoIP services.  For more information, see www.fcc.gov/voip. FCC commissioners did little at the public forum to tip their hand as to which way the Commission was leaning with respect to whether it was inclined to regulate VoIP and, if so, to what degree.  Reiterating his personal aversion to regulating the Internet, FCC Chairman Michael K. Powell stated: “as one who believes unflinchingly in maintaining an Internet free from government regulation, I believe that IP-based services such as VoIP should evolve in a regulation-free zone.”  Chairman Powell, however, seemed to leave the door open for some degree of regulation, stating “no regulator, either federal or state, should tread into this area without an absolutely compelling justification for doing so.”  The Chairman appropriately summed up the FCC’s objective: “the time has come to confront this issue more directly, rather than having the regulatory framework for the Internet develop in a piecemeal fashion or by dangerous accident.”               FCC Commissioner Jonathan S. Adelstein succinctly summarized the key regulatory challenges that the FCC faces.  First, Commissioner Adelstein explained that classifying VoIP services as information services would severely undercut law enforcement efforts, as has been pointed out by the Department of Justice (“DOJ”) and the FBI.  According to the DOJ and FBI, caller identification and call content could evade lawful electronic surveillance if VoIP is not properly regulated.  Second, Commissioner Adelstein expressed concern over how VoIP affects the provision of E911 and other emergency services.  And finally, the Commissioner stressed that it is “crucial to understand how VoIP affects the Universal Service Fund.”  According to Commissioner Adelstein, “if VoIP providers are not required to contribute, it creates an opportunity for regulatory arbitrage and further undermines the already troubled funding mechanism.”  The drain on the Universal Service Fund (“USF”) that would result by excluding VoIP from regulation and concomitant USF contributions will undoubtedly be a major regulatory issue in the FCC’s proceeding.  It is obvious that any regulatory framework ultimately adopted by the FCC will need to, at a minimum, adequately address each of these three concerns.   The FCC has previously spoken on the issue of how VoIP should be regulated.  In its 1998 Report to Congress, the FCC proposed to treat phone-to-phone IP service as telecommunications subject to conventional regulatory treatment.  The FCC tentatively determined that phone-to-phone IP telephony services bear the characteristics of “telecommunications,” not of unregulated information services.  According to the Report, if a company’s phone-to-phone IP service meets the following conditions, it would be subject to conventional regulation:   §         holds itself out as providing voice telephony or fax transmission service; §         permits customers to use regular telephone/fax machine equipment to place and receive calls; §         allows customers to call regular NANP telephone numbers; and §         transfers information without changing its net form or content.  This framework could serve as the starting point in the FCC’s newly-initiated inquiry into the regulatory treatment of IP telephony services. The State Level Growing concern over the regulatory status of IP telephony has led several state commissions in recent months to address this issue.  At least three state commissions have taken steps to place IP telephony under regulation as a conventional telecommunications service, with more expected to do the same. Minnesota—In early September 2003, the Minnesota Public Utilities Commission (“MPUC”) issued an order requiring Vonage Holdings Corporation (“Vonage”) to comply with Minnesota state law governing providers of telephone service (i.e., obtain certification to provide intrastate service and file an intrastate tariff).  Not surprisingly, Vonage sought an injunction to prevent enforcement of the MPUC order from the Federal District Court of Minnesota.   In what could be called a major victory for Vonage, on October 7, 2003 the Federal Court issued the requested injunction against the MPUC ruling.  According to the Court, there are different forms of IP telephony.  The first, phone-to-phone IP telephony, enables real-time voice transmissions to originate and terminate using ordinary telephone equipment.  The second, computer-to-computer IP telephony, allows customers to use software and computer hardware at their premises to place calls between two computers connected to the internet.  And finally, phone-to-computer or computer-to-phone IP telephony, is essentially a hybrid of the first two applications.  The Court’s decision in the Vonage case, however, only addressed computer-to-computer, phone-to-computer, and computer-to-phone calling (since Vonage’s service offerings only entail these applications).  Significantly, the more controversial application involving phone-to-phone VoIP calling was not addressed by the Court.     California—The California Public Utilities Commission issued a letter to six major VoIP providers (including SBC IP Communications, Inc., 8x8, Inc. and Vonage) on September 22, 2003 requiring each company to file an application for authority to conduct business as a telecommunications provider.  While the VoIP providers have generally sought to work with staff in approaching the issue, they have not applied for authority to operate as telecommunications providers.  A legal confrontation may lie ahead in this important state. Wisconsin—On September 11, 2003, IP telephony services provider 8x8 received a letter from the Public Service Commission of Wisconsin informing it that 8x8’s Packet 8-based services would be subject to the same rules as traditional phone service providers.  The Commission informed the company that its bills within the state for voice calls would be void and that it must comply with traditional telephone service provider certification requirements. New York—After receiving a complaint from Frontier Telephone of Rochester, Inc. against Vonage alleging that Vonage is providing telephone service in New York without complying with the Public Service Law and telecommunications regulations, the New York State Public Service Commission released a notice on October 9, 2003 requesting public comment regarding the regulation of VoIP providers as telephone service providers.  As is in many states, a decision has yet to be released with respect to this issue. Florida—Florida was among the first states to decide against regulation of VoIP when the legislature declared in its May 2003 Tele-Competition Innovation and Infrastructure Enhancement Act that the provision of unregulated VoIP is in the public interest.  The Act, however, states that “the rights and obligations of any entity related to the payment of switched network access rates or other intercarrier compensation, if any, related to voice-over-internet protocol service” are unaffected by the new rules.  Regulation of access charge payment is left to the Public Service Commission’s discretion.    Because of the wide range of state approaches to the regulation of this new industry, it has become clear in recent months that for the foreseeable future VoIP services on the state level are going to remain under a “patchwork quilt” regulatory scheme.                Industry Impact  Although the future outlook on the regulation of VoIP is unclear, the legal and regulatory decisions reached by the FCC and state commissions in the months ahead stand to directly and broadly impact the telecommunications industry.  VoIP-based service providers, local exchange carriers, consumers as well as others can be affected.  The days of VoIP existing in a regulation-free zone may be about to end.            Should the FCC and state commissions ultimately declare VoIP classifiable as a regulated telephone service, a slowing in the growth and use of VoIP offerings is likely as VoIP providers struggle to absorb and pass along the costs of regulation and USF contributions.  On the other hand, even if VoIP continues to be treated as distinct from conventional telephone service, regulations specific to VoIP may be established to ensure that the USF contribution base is not eroded, national security is protected, and E911 services are not compromised.  The rulemaking proceeding that the FCC is about to initiate could precipitate a level of public participation before the agency unseen in recent years.  Service providers with a stake in the looming regulatory battle should carefully weigh whether to make their views known. December 2003 Back