What will be the likely impacts of SB 1161?

Our first two posts regarding SB 1161 provided a brief summary of the regulatory background and history relating to regulation of VoIP and other IP-enabled services by the California Public Utilities Commission (CPUC). As readers will recall, the CPUC has yet to determine whether VoIP services are “telephone corporations” subject to its jurisdiction, but we believe the Public Utilities Code could be construed to permit regulation of VoIP and have noted that the CPUC currently regulates, as a matter of course, providers of other types of IP-enabled services. In addition, while the FCC has preempted state regulation of some forms of VoIP, it appears that fixed (non-nomadic) intrastate VoIP service may be susceptible to state regulation.
With this in mind, inquisitive readers may want to know what some of the more important impacts of SB1161 are likely to be, if it is enacted. We discuss our current views on that subject in this third post.

SB 1161 speaks in terms of limiting regulation of VoIP and IP-enabled services, but we believe that its biggest impact may well be the manner in which it limits regulation of providers.

At this time, the CPUC’s regulation of telecommunications service is quite limited. The CPUC has authorized providers to offer all services, except unbundled basic residential service (single line residential POTS) and switched access service, on a nontariffed basis with virtually no limitations on rates, terms, or conditions. Providers are required to publish rates, terms, and conditions of service on their websites; but, in our experience, many if not most providers construe the CPUC’s policy, in practice, as permitting them to deviate at will from their published rates, terms, and conditions, typically through provisions set forth in unpublished “service orders” that may or may not incorporate any portions of their published terms and conditions. Moreover, while the CPUC has authority to impose quality of service standards, it has elected only to adopt reporting standards of limited application, leaving matters regarding service quality largely to the marketplace. The CPUC’s involvement in issues relating to advanced telecommunications services has been even more limited. Thus, even if the CPUC’s authority over VoIP and IP-enabled service remains untouched by new legislation, we would not expect the CPUC to exert its authority in any type of new way that would materially affect the manner in which those types of services are provided.

By contrast, consider the effect of exempting VoIP and other IP-enabled service providers from CPUC processes for regulating market entry and structural business transactions involving changes of control. It takes up to six months to a year to obtain authority to provide local service in California. And, transfers of control and similar transactions, even where the parties are highly-experienced and well-financed, take just as long. Because CPUC approval is required before financing transactions can be completed, whether for the start-up of operations or for the transfer of assets or control, long CPUC processing times regularly jeopardize, and undoubtedly increase the costs of, these types of transactions, particularly in today’s uncertain financial market. Consequently, assuring that the CPUC cannot interfere in this area will clearly benefit the businesses of VoIP and other IP-enabled service providers, as well as other parties who may be involved in these types of deals.

Another interesting, and potentially significant, benefit of SB 1161 for service providers relates to the deployment of facilities. Telephone corporations, as defined by the Public Utilities Code, are granted a statewide franchise by Public Utilities Code § 7901 to construct facilities in public rights-of-way. Because SB 1161 neither modifies the definition of a “telephone corporation” nor excludes IP-enabled service providers from the scope of that broadly-construed definition, they should, among other things, continue to enjoy the benefits of this franchise. However, unlike non-IP-based telephone corporations, they will not be required to seek a certificate of public convenience and necessity from the CPUC before doing so. And, as long as the other permits needed for construction, such as encroachment agreements or road opening permits issued by local agencies, are nondiscretionary, which is mostly the case, it seems to us that IP-based providers’ construction activities ought to be exempt from review under the California Environmental Quality Act (CEQA), often an extremely expensive and time-consuming process. (Notably, incumbents, such as Verizon and AT&T, already enjoy exemptions from CEQA for construction activities not requiring local discretionary permits; so, SB 1161 should help level the playing field a little bit for competitors interested in building out network facilities.)

We do not see any significant downsides to IP-enabled service providers’ exemption from CPUC regulation, even for customers.

SB 1161 should not have a significant adverse effect on the ability of IP-based providers to obtain interconnection with telecommunications carriers, to obtain network facilities from incumbents, or to enjoy the fruits of other rights held by traditional carriers. Today, fixed VoIP providers who consider themselves to be regulated CLECs, or at least pose as CLECs, lease unbundled network elements (UNEs), obtain numbering resources, and undertake other activities reserved for local exchange “telecommunications service” providers. All they have to do is show their CPUC-issued CLEC operating authority. No one asks what technology they use to serve their customers or whether they actually provide local exchange service (there may be no clear answer to this latter question, anyway). Fixed VoIP providers can continue this course after SB 1161. Alternatively, they could try to assert rights to interconnection, UNEs, etc., as unregulated local exchange “telecommunications service” providers. Or, if they do not want to fight the battles that would undoubtedly ensue from pursuing those types of assertions, they could simply use a regulated CLEC partner as a conduit or middleman to obtain what they need, which is a provisioning approach that already has been met with firm FCC support. Thus, operationally-speaking, SB 1161 would not really change much of anything.

As we explain above, we also do not expect the enactment of SB 1161 to have a significant impact on provider’s relationships with customers because the rates, terms, and conditions for nearly all services, including POTS, are already virtually free, for the most part, from regulatory constraints, and we do not perceive any movement away from that direction at this point. Thus, in terms of the provider-customer relationship, the impact of the bill would seem to be exactly as the proponents assert, which is merely to preserve the status quo.

Having led readers along to this point, we are now going to disappoint and stop short without truly getting to the heart of the matter, which is whether the bill is necessary or unnecessary, or good or bad, from a public policy standpoint. We think those questions are best left to discussion over a bottle of wine.

(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 jclark@goodinmacbride.com