Legislative Proposal to Bar State Regulation of VOIP and Other IP-Enabled Services

A bill now pending before the California Legislature (SB 1161 [Padilla])  would prohibit, subject to certain exceptions and, for now, only until 2020, the California Public Utilities Commission (CPUC) and other state and local agencies from regulating VoIP and other IP-enabled services. At the time of this posting, the bill has passed the Senate and is now making its way through the Assembly. Proponents of the bill contend that it is intended merely to preserve the regulatory status quo. Opponents do not claim otherwise, but express concern that while the CPUC has not previously determined it necessary to regulate this segment of the telecommunications industry, the CPUC’s ability to do so should be preserved, lest, among other things, a marketplace failure or other circumstance requires swift remedial action to protect consumer interests.

In a series of posts, we will explore various issues relating to this legislation, starting, here, with a little conceptual and historical background to help readers understand the likely ramifications of SB 1161.

The CPUC only regulates “telephone corporations” – so why is this even an issue?  The Public Utilities Code authorizes the CPUC to regulate telephone corporations that offer their services to the public (i.e., operate as public utilities). Seemingly, this would exclude from CPUC oversight, advanced IP-based data network services and other telecommunications services that are outside the realm of traditional voice telephony. Indeed, in a memorandum published on the CPUC’s website CPUC staff opines that the CPUC’s jurisdiction extends only to a service that both “[p]rovides the capability to receive calls from and terminate calls to any customer of other interconnected service providers” and “[e]nables real-time, two-way voice communications.” In addition, the staff notes that providers of “enhanced services,” as defined by the Federal Communications Commission (FCC) and referred to as “information services” in the federal Telecommunications Act of 1996, are not “telephone corporations.”

However, even though interconnected VoIP calls must go through protocol conversion (which is the hallmark of the original enhanced service: the value-added network or VAN) and therefore, would seem to be outside of the CPUC’s jurisdiction, as described in the CPUC staff memorandum, the staff hedges in that regard, stating that the CPUC has not yet determined whether or not to assert jurisdiction over VoIP.

So, if one were concerned about state-level regulatory interference with advanced IP-based services it would make sense to seek legislation that specifically excludes VoIP from CPUC oversight. But, given the CPUC’s apparent take on existing law, why would the proponents of SB 1161 also be concerned about potential meddling with respect to other types of IP-enabled services?

One reason for such concern might not relate to the CPUC but might, instead, relate to potential actions by other state or local agencies seeking to step in and fill any void that might be left by the CPUC’s hands-off approach. Another reason, however, may relate to uncertainty as to the validity of positions set forth in the staff memorandum. A lesson learned by those who regularly deal with administrative agencies is that agency staff can sometimes be wrong and, if they are, their errors are seldom binding on agency decision makers. In fact, we believe this is one of those cases.

First, it is not true that the CPUC only regulates two-way voice services.  The CPUC has regularly exerted authority over non-voice (i.e. data) transmission services by requiring providers to obtain certificates of public convenience and necessity (CPCNs), file tariffs (prior to the recent adoption of rules allowing service to be provided without tariffs), and otherwise comply with the CPUC’s various reporting and other requirements that generally apply to telecommunications carriers. Not only that, until 1985, the CPUC exercised the ultimate form of regulatory control over this market niche by imposing limitations on competitive entry. Although competitive entry is now authorized and providers need not file tariffs, nothing else has changed that would limit the CPUC to regulating only voice service providers. And, the CPUC, in fact, continues, today, to exert its authority over advanced data network services and other non-voice telecommunications services.

Second, it is not necessarily true that all enhanced or information services (other than VoIP) are exempt from CPUC regulation. The staff’s position is not based on any clear limitation inherent in the language of the Public Utilities Code. Instead, it most certainly is based on FCC decisions issued in the early 1980’s that purported to fully preempt state regulation of interstate and intrastate enhanced services provided over the interstate telecommunications network (e.g., the PSTN). However, the scope of the FCC’s preemption was subsequently limited by a decision of the federal Ninth Circuit Court of Appeals, which held that the FCC had not adequately established its authority to preempt state regulation of purely intrastate enhanced services. This re-opened the door to continued imposition of state regulation, so long as it does not interfere with the provision of jurisdictionally-interstate enhanced services. Interestingly, even though the CPUC was the principal challenger to the FCC’s preemption decrees, its subsequent regulation of enhanced services has been very limited, consisting of little more than the imposition of now-defunct tariffing requirements on Pacific Bell and Verizon. Nevertheless, the CPUC has never concluded that intrastate enhanced telecommunications is outside the scope of its jurisdiction.

Thus, under the Public Utilities Code, the potential remains for VoIP or any other IP-enabled telecommunications services to be regulated by the CPUC.

This is not the end of the matter, though, because the FCC has “recently” (in 2004) taken action to preempt, at least to a certain extent, state regulation of VoIP services.  We will address the status and extent of this preemptive action in our next post and will follow that with a review of some of the likely impacts of SB 1161.

(Despite the use of the editorial “we,” the views, opinions, and errors in this blog are all solely those of the writer, John Clark. They are offered only to promote further thought and discussion and are not intended to be relied upon as legal advice on any matter or subject.)

For more information please contact:
John Clark: Goodin, MacBride, Squeri & Day, LLP, San Francisco, California
415 392 7900 or [email protected]