FCC Preempts State Regulation of VOIP Services
 
January 4, 2005
 
K. Patrick "Pat" Meehan- Tampa

The Federal Communication Commission (FCC) recently decided that Voice Over Internet Protocol (VOIP) services, a technology that transmits voice communications and other information as digital packets over the Internet, is not subject to traditional state telephone company regulations. This decision makes clear that the FCC has the sole responsibility to decide what regulations should apply to VOIP services. This declaration of federal authority over VOIP services is significant; however, there remains the more difficult task of deciding exactly what, if any, regulatory obligations currently imposed upon traditional circuit-switched voice services providers, should apply to this new and innovative service offering.

The FCC’s decision to preempt state public utility regulation of VOIP services arose from a petition filed by Vonage, one of the largest VOIP services providers in the U.S. The Vonage petition requested federal preemption of an Order of the Minnesota Public Utilities Commission, which imposed state regulations applicable to providers of traditional telephone services on Vonage’s VOIP services offerings (Minnesota Order).

In its November 12 Memorandum Opinion and Order, the FCC determined that the characteristics of the VOIP services offered by Vonage made it impossible to separate interstate and intrastate connections for the purpose of implementing a dual federal/state regulatory regime for such services without frustrating federal policies favoring the growth and development of new innovative services such as VOIP. In addition, the FCC decision established that Vonage’s VOIP services and similar VOIP service offerings by other providers will be regulated on a uniform basis at the federal level rather than a collection of inconsistent rules from more than 50 jurisdictions. The decision made clear, however, that general state laws protecting consumers from fraud and enforcing fair business practices were not preempted by this decision.

VOIP services via the Internet enable users to place a call from any location that has a broadband Internet connection. There are no “local” versus “long distance” calls like traditional wireline telephone services. With traditional wireline telephone services, a call defined as “local” is a call between two NAP/NXX’s associated with the same rate center within a particular state. When that same VOIP call occurs, one or both of the parties using those same telephone numbers could actually be located outside that particular state; in fact, they could be located anywhere there is a broadband Internet connection. The FCC explained that VOIP services are far more similar to wireless telephone services than traditional wireline telephone services with fixed geographic locations for users; this similarity is due to the mobility provided. Wireless telephone services were liberated from state telecommunication regulation by Congress in 1992.

Because VOIP services cannot be separated into intrastate and interstate components, the FCC found that the Minnesota Order unavoidably encroached upon the interstate components of such services, which are subject to the exclusive jurisdiction and authority of the FCC. In its decision, the FCC asserted its right to preempt such state regulation that would “thwart or impede” its ability to exercise its federal authority to implement valid federal regulatory policies.

The FCC concluded that preemption of state regulation of VOIP services was consistent with federal law and policies that were intended to promote the development of new innovative services like VOIP. Pursuant to Section 230 of the Telecommunications Act of 1996 (the Act), Congress stated “it is the policy of the United States to preserve the vibrant and competitive free market that presently exists for the Internet or other interactive computer services, unfettered by Federal or State regulations.” Similarly, Section 706 of the Act encouraged the deployment of advanced telecommunications, such as broadband Internet access, by promoting competition and removing barriers to infrastructure investment. The FCC concluded that the Minnesota Order, applying traditional state telephone regulations to Vonage’s VOIP services, would thwart these important federal objectives.

In interpreting Section 230 of the Act, the FCC found that it cannot permit more than 50 different jurisdictions to impose traditional common carrier economic regulations, such as those in Minnesota, on VOIP services and still meet its responsibility to insure the development of such services “unfettered by Federal or State Regulation.” Similarly, the FCC concluded that it was necessary to preempt the Minnesota Order, to advance the Section 706 goal of encouraging deployment of broadband facilities. Promoting the development of VOIP services, the FCC reasoned, will drive consumer demand for broadband Internet connections. Accordingly, the FCC found that preemption of the Minnesota Order would remove regulatory barriers that would otherwise severely inhibit development of this new innovative service. The FCC predicted that the elimination of such regulatory barriers will spur technological development and growth of broadband infrastructure, thereby fulfilling the objective of Section 706 of the Act.

To further buttress its decision to preempt state regulation of VOIP services, the FCC found that such action was fully consistent with the Commerce Clause of the United States Constitution. As interpreted by the courts, if a state law “has the practical effect of regulating commerce occurring wholly outside the state’s borders” or if the burdens imposed on interstate commerce from such regulation would be “clearly excessive in relation to the putative local benefits,” then in either case the state regulation would be a violation of the Commerce Clause and may be set aside. Finally, the FCC noted that “state regulation of services, which by their unique nature demand cohesive national treatment, is offensive to the Commerce Clause.”

The FCC found, as noted earlier, that the intrastate and interstate components of VOIP services cannot be separated. Therefore, the FCC concluded the Minnesota Order would likely have the “practical effect” of regulating beyond its borders and violates the Commerce Clause. Similarly, the FCC found that the burden imposed by the Minnesota Order, which would require tracking the geographic location of digital packets of information for the purpose of determining jurisdiction over the intrastate component of such communications, is clearly excessive in relation to any putative local benefit of such regulation. In addition, the FCC found that because VOIP services are not based upon fixed geographic locations, it cannot be excluded from any particular state and therefore could be subject to more than 50 inconsistent sets of resulting state regulation. The FCC concluded that such inconsistent state regulations could cripple development of VOIP services and eliminate the fundamental advantage of Internet-based communications. Accordingly, the FCC found that VOIP services are likely of a “unique nature” that “demands cohesive national treatment” and inconsistent state regulations would likely violate the Commerce Clause.

Although the FCC set aside the Minnesota Order, which included a requirement for 911 emergency calling capability, the FCC made clear that Vonage should continue its efforts to develop a workable public safety solution that offers its VOIP users access to emergency services. The FCC recognized that access to emergency services is a “critically important public safety matter” that must be considered and resolved.

Access to emergency services via 911 calling capability is but one of a variety of vital regulatory issues that remain to be resolved by the FCC. Although the declaration of federal authority over VOIP services is important, the more significant and complicated question for the FCC is what regulatory model to apply to VOIP services. The FCC must decide how fundamental telephone regulatory concepts such as universal service, intercarrier compensation, competitive access issues under Section 251, numbering issues, disability access, access for law enforcement and consumer protection, will be applied, if at all, to VOIP services. These issues will be addressed in the FCC’s pending IP-Enabled Services Proceeding and in other related proceedings.

Clearly, the FCC’s preemption of the Minnesota Order and declaration of intent to preempt all other attempts to apply traditional state telephone regulation to the provision of similar VOIP services is an important first step in promoting the continued development of IPEnabled Services like VOIP. The future growth and development of VOIP services, however, remains wholly dependent upon how the FCC exercises its exclusive regulatory authority.

While there were approximately 130,000 VOIP subscribers in the U.S. by the end of 2003, experts project that there will be over 20 million U.S. subscribers by the end of 2007. These growth projections will not be achieved and the public will not benefit from this new innovative communications medium if the FCC burdens VOIP services with the same regulatory model applied to traditional wireline telephone services. How the FCC reforms carrier compensation, whether the FCC provides VOIP providers access to incumbent LEC network elements at reasonable prices, whether the FCC prohibits discrimination against VOIP providers, and what, if any, universal services provisions will apply to VOIP services are among the issues that will ultimately determine the future development of these nascent services. In the end, the FCC must recognize that legacy regulatory structures may not be practical and appropriate for VOIP services that use such a non-traditional network. Instead, the FCC should devise a new regulatory model that implements the Congressional intent of promoting the continued development of the Internet and of new and innovative services such as VOIP.

For more information, e-mail Patrick Meehan at pat.meehan@hklaw.com or call toll free, 1-888-688-8500.