A Checklist for VoIP

Published July 1, 2005

Innovation is the driving force in today’s information economy. But innovation is in danger of being stifled in the central nervous system of the information economy itself–our telecommunications infrastructure–because of the regulatory tangle that governs our 130-year-old public switched telephone network.

Voice over Internet Protocol (VoIP), or Internet telephony, promises an evolutionary leap beyond the standard telephone service we have been accustomed to, as well as a host of benefits for consumers.

The new technology transmits voice signals the same way email is sent, using the Internet’s data-transfer protocols to break conversations into digital packets that can be sent on lower-cost, more efficient packet-switched networks. That innovation makes many other innovations possible, from eliminating the distinction between local and long-distance calls, to easily maintaining several telephone numbers in a single account, to sorting and storing voice messages on your computer.

Internet telephony requires consumers to have broadband Internet connections, which would be an added bonus for the information economy as a whole. Since Internet telephone service may hold great appeal for consumers, it could become a “killer application” that spurs more rapid adoption of broadband Internet service in U.S. households, which will in turn help spur efficiency gains throughout the economy.

Perhaps the most important bonus, however, is that Internet telephony opens telephone service up to competition as never before. Just as consumers can choose from scores of email service providers, they also can choose from a growing field of Internet telephone service providers. Yet, because Internet telephony performs the same basic function for consumers as traditional telephone service (though with advanced new features), it is being tangled up in a complicated telecom regulatory system–originally designed for the era of local phone monopolies, when a single company controlled the wire tethered to your house.

Old Models Make No Sense

State public utility commissions have been taking steps to impose price controls, rules for market entry and exit, and taxes on Internet telephony on the theory that the old telecom regulations should naturally apply to a new generation of telephone services. This makes no sense, both for the obvious reason that there are not likely to be monopolies in the Internet telephony business, and because it needlessly creates a balkanized patchwork of state regulations when cohesive federal oversight of the new industry would be far more appropriate.

Internet telephony requires a new regulatory framework–a streamlined set of federal guidelines geared to the more competitive telephony marketplace it creates.

The Federal Communications Commission (FCC) recently took an important first step toward establishing the right regulatory model when it asserted preemptive federal control of VoIP services, ruling the Minnesota Public Utilities Commission could not impose state regulations applicable to traditional telephone service providers on Vonage, a VoIP services company.

But now, Congress and the FCC must take further steps to reform our outmoded telecommunications regulatory system for a new era of technological competition. Specifically, they should:

  • Develop a new system for classifying advanced telecommunications services so they can be appropriately regulated according to the functions they offer consumers;
  • Preempt state powers to exercise traditional utility-like regulations over VoIP, as the FCC did in its recent Vonage decision;
  • Monitor carefully any violations of neutrality on the Internet so that service providers do not discriminate against particular types of content, applications, or services;
  • Exempt Internet telephony services from regulations dealing with market entry, price, rate of return, reporting obligations, service quality, and terms of service;
  • Reform universal service significantly, which includes eliminating the legislative requirement that rates in high-cost areas be comparable to rates in other areas and taking other steps to lower the costs of universal service payments;
  • Require Internet telephony services to pay into the Universal Service Fund (USF), but require that those contributions support the expansion of broadband telecommunications networks, not maintain the public switched telephone network;
  • Reform the dysfunctional access charge system, whereby phone companies pay other phone companies to access their local networks;
  • Include VoIP and broadband services in the Internet Tax Moratorium, including a moratorium on federal telecommunications excise taxes;
  • Provide the industry with a reasonable period of time to develop an adequate Internet-based emergency response system (known as an “E911 system”) before requiring compliance;
  • Require Internet telephony service providers to inform customers when their services have significant limitations compared to traditional telephone services (such as power and E911 limitations); and
  • Require that Internet telephony services be accessible to law enforcement, but do not subject VoIP applications to requirements of the Communications Assistance for Law Enforcement Act of 1994 (CALEA), which governs law enforcement’s access to the circuit-switched telephone system.

Robert D. Atkinson ([email protected]) is vice president of the Progressive Policy Institute. This essay is derived from a longer report; the full text is available online at http://www.ndol.org/documents/VoIP.pdf.