States Need a Telecom Reality Check

Published July 8, 2004

Nothing spooks legislators more than the loss of tax revenue, and nothing threatens public utility commissioners more than the loss of power.

VoIP–voice over Internet Protocol–does both.

That’s why since January, legislators and regulators have been scrambling to get a handle on how to tax and regulate VoIP, sometimes called Internet telephony, even as they struggle to define precisely what it is.

VoIP means being able to place phone calls over the Internet. For consumers with cable modems or DSL, VoIP lets them connect their home phones directly to a PC and call anywhere in the U.S. and Canada for a flat rate of $15 to $30 per month. Vonage and IDT Corp.’s Net2Phone are two of many companies offering such services. Their customers no longer rely on the local phone company for their dial tone, making VoIP a formidable competitor to wireless and traditional copper-wire telephone service.

Integrated Voice and Data

VoIP allows businesses to place all their internal voice communications, domestic and international, onto their global corporate IP network. When an employee in New York calls a colleague in Los Angeles, London, or Hong Kong, that call travels the same network the company uses for everything from email to videoconferencing–it’s just another Internet application. It works not just for Fortune 100 companies, but for small and mid-sized enterprises with secure, partitioned IP networks, sometimes called “extranets,” connecting their customers, suppliers, and partners.

VoIP makes cell phones and wireless devices like BlackBerry more attractive, too. Who hasn’t complained about the time and attention it takes to type an email message into one of these palm-sized gadgets? VoIP allows the user to speak the message instead! An Internet server using VoIP converts voice to text and routes it to the desired e-mailbox.

VoIP lets voice become an element in every Web-based application used by businesses and consumers alike. Applications delivered via VoIP will become increasingly more difficult, if not impossible, to separate from the broader data applications they are inherently part of.

FCC, States Differ in Approach

To its credit, the FCC has urged minimum regulation of VoIP. Federal regulators acknowledge debate is needed over how specific costs–911, universal service funding, and lifeline-type services–will be assessed on VoIP customers, but otherwise they see the wisdom of allowing this nascent market to play out before swinging the tax-and-surcharge hammer.

But the FCC’s restraint has not stopped PUCs in Arizona, California, and New York from claiming jurisdiction over VoIP service providers. The regulators’ aim is not to extend the social safety net, but to expand their own power by imposing regulations where none are justified. After all, this is a major infusion of competition into a one-time monopolized industry. It should make current regulations unnecessary.

Many state regulators appear not to recognize the market has fundamentally changed. They seem bent on using the same approach for VoIP regulation as they used for single-line dial tone since the monopoly era. The end result can only be regulatory frustration, a long string of contradictory and increasingly complex court actions, and rulemaking delays that put investment and innovation on hold indefinitely. If these regulators have their say, few consumers will see the benefits of new services, more choices, and lower costs.

Fear is a powerful motivator, and the proponents of heavy-handed regulation know it. They claim widespread adoption of VoIP will cost the states $26 billion in lost tax revenue. Soon to follow: the usual barrage of claims that VoIP is taking money from schools, police, and firefighters. What you won’t hear is how VoIP allows for cheaper phone service, more choice, more e-commerce innovation, and a stronger U.S. telecom industry.

Today’s regulatory landscape is out of sync with today’s technology. Rules treat competitive companies as if they were monopolies and are wielded to block entry and hinder competitors instead of the opposite. PUCs demand that rates, taxes, and surcharges be set as if the market were driven by demand for single-line dial tone, when in reality, consumers want customized integrated applications that bring together phone, wireless service, Internet, and entertainment. VoIP will play a vital role in making these integrated packages robust and economical.

The FCC recognizes the new environment calls for dramatic reshaping of regulatory policy, and it has recommended the federal government refrain from levying burdensome taxes and surcharges on VoIP. Employers, consumers, and taxpayers would be well-served if their state agencies did the same.

Steven Titch is managing editor of IT Update, a publication of The Heartland Institute. His email address is [email protected].