California Joins States Insulating VoIP Providers from Local Public Utility Regulators

by on September 30, 2012 · 1 comment

On Friday, California Governor Jerry Brown signed SB 1161, which prohibits the state’s Public Utilities Commission from any new regulation of Voice over Internet Protocol or other IP-based services without the legislature’s authorization.

California now joins over twenty states that have enacted similar legislation.

The bill, which is only a few pages long, was introduced by State Senator Alex Padilla (D) in February.  It passed both houses of the California legislature with wide bi-partisan majorities.

California lawmakers and the governor are to be praised for quickly enacting this sensible piece of legislation.

Whatever the cost-benefit of continued state regulation of traditional utilities such as water, power, and landline telephone services, it’s clear that the toolkit of state and local PUCs is a terrible fit for Internet services such as Skype, Google Voice or Apple’s FaceTime.

Historically, as I argued in a Forbes piece last month, the imposition of public utility status on a service provider has been an extreme response to an extreme situation—a monopoly provider, unlikely to have competition because of the high cost of building  and operating competing infrastructure (so-called “natural monopoly”), offering a service that is indispensable to everyday life.

Service providers meeting that definition are transformed by PUC oversight into entities that are much closer to government agencies than private companies.  The PUC sets and modifies the utility’s pricing in excruciating detail.  PUC approval is required for each and every change or improvement to the utility’s asset base, or to add new services or retire obsolete offerings.

In exchange for offering service to all residents, utilities in turn are granted eminent domain and rights of way to lay and maintain pipes, wires and other infrastructure.

VoIP services may resemble traditional switched telephone networks, but they have none of the features of a traditional public utility.  Most do not even charge for basic service, nor do they rely on their own dedicated infrastructure.  Indeed, the reason VoIP is so much cheaper to offer than traditional telephony is that it can take advantage of the existing and ever-improving Internet as its delivery mechanism.

Because entry is cheap, VoIP providers have no monopoly, natural or otherwise.  In California, according to the FCC, residents have their choice of over 125 providers—more than enough competition to ensure market discipline.

Nor would residents be in any way helped by interposing a regulator to review and pre-approve each and every change to a VoIP provider’s service offerings.  Rather, the lightning-fast evolution of Internet services provides perhaps the worst mismatch possible for the deliberate and public processes of a local PUC.

Software developers don’t need eminent domain.

But the most serious mismatch between PUCs and VoIP providers is that there is little inherently local about VoIP offerings.  Where a case can be made for local oversight of public utilities operating extensive–even pervasive–local infrastructure, it’s hard to see what expertise a local PUC brings to the table in supervising a national or even international VoIP service.

On the other hand, it’s not hard to imagine the chaos and uncertainty VoIP providers and their customers would face if they had to satisfy fifty different state PUCs, not to mention municipal regulators and regulators in other countries.

In most cases that would mean dealing with regulators on a daily basis, on every minor aspect of a service offering.  In the typical PUC relationship, the regulator becomes the true customer and the residents mere “rate-payers” or even just “meters.”

Public utilities are not known for their constant innovation, and for good reason.

Whatever oversight VoIP providers require, local PUCs are clearly the wrong choice.  It’s no surprise, then, that SB 1161 was endorsed by major Silicon Valley trade groups, including TechNet, TechAmerica, and the Silicon Valley Leadership Group.

The law is a win for California residents and California businesses—both high-tech and otherwise.

Links

  1. “Government Control of Net is Always a Bad Idea,” CNET News.com, June 4, 2012.
  2. “Memo to Jerry Brown:  Sign SB 1161 for all Internet users,” CNET News.com, August 30, 2012.
  3. “The Madness of Regulating VoIP as a Public Utility,” Forbes.com, Sept. 10, 2012.
  4. “Brown Endorses Hands off Stance on Internet Calls,” The San Francisco Chronicle, Sept. 28. 2012.

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Larry Downes / Larry is an Internet industry analyst and author.  His books include the Business Week and New York Times business best-sellerUnleashing the Killer App and, recently, The Laws of Disruption:  Harnessing the New Forces that Govern Business and Life in the Digital Age. He writes regularly for CNET News.com and Forbes.com, as well as other publications.

  • Bruce kushnick

    Woah.

    It’s bad when people who never bother to get the facts right congratulate decisions that help the phone companies — and harm the state of California – and those who depend on communications services.

    The utility — the PSTN, public switched telephone networks — in California, as in every other Verizon and AT&T, received massive financial incentives to rewire the entire state with fiber optics – they collected billions in each state — and never did it, especially in California.

    By 2000, now AT&T was supposed to have 5.5 million households wired with fiber to homes – and spend $16 billion to do it – never built it, never spent the money – and the state Public Utility Commission – never removed the massive financial incentives, which they doubled down in the next decade. Then Pac Bell even took a $3 billion tax write off of the same networks copper wiring that is still in use.

    U-Verse is based on the PSTN copper wiring and it is the reason it will never get to 100 mbps and that’s in 1 direction — top speed less than 25 Mbps.– the other direction is slow and can’t do ‘cloud computing’ – and just passable VOIP.

    But you don’t care about that, it appears. You don’t care that now AT&T pulled a massive bait and switch – customers paid for a fiber optic future in California – and got a dirt road.

    Worse, AT&T announced its stopping to even upgrade the rest of the state – over 50% won’t get upgraded – which means that they can’t even use VOIP.

    And this is why California and the rest of the US are 15th in the world in broadband – because, well, it’s now clear that AT&T controls the state legislature and had undue influence over any of the regulators to actually hold them to any commitments that would have required them to actually build out the networks — even though they collected billions to do so.

    And it means that there’s also no cable competition, which was the reason why the networks were to be upgraded in the first place.

    But you focus on the ‘freedom’ of VOIP and not allowing the PUC – the same group that gave the company 100% rate increases over the last 6 years – to regulate – which means that everything is going to be an information service so the 50% of those who are not upgraded – if there service breaks – to bad – the company is no longer obligated as the old regulations were for ‘telecommunications’

    Meanwhile, the utility – the PSTN — was also supposed to be opened to all forms of competition over those wires —and in with the help of the FCC closed these networks to competitors — putting thousands of competitors out of business, not by market forces but by regulatory capture of the FCC.

    And yet, you seem believe that ALEC-based legislation designed to remove regulations from the incumbent companies is a good thing.

    But you also missed the other point – which is that AT&T and Verizon have been dismantling the utility over the last 6 years – U-Verse, which uses the utility wires, is getting a free ride as it uses the wires but dumps the expenses into the utility side of the equation, profits in another bucket, then the companies go back and get rate increases claiming losses. And ‘utility’ customers end up paying more – especially those who will never get U-Verse because the company isn’t doing upgrades. And the PUC has been helping this movement by not auditing the ‘affiliate transactions’.

    Maybe you should actually do your homework and answer — Why is AT&T still using the copper networks? — How did AT&T take control of the PUC and get 100% rate increases on phone services over the last 6 years?

    And how do customers who don’t get upgraded actually get to use VOIP as it requires broadband and AT&T is not upgrading its utility plant to supply broadband?

    The utility isn’t the enemy — It was supposed to be upgraded to all fiber and it was supposed to be open to all competitors and it was supposed to service everyone. VOIP is a service, not the network and could also be offered over a fully fiber network.

    And thanks to the power of now-AT&T to blow smoke – and convince people that they are right – California is going to have less competition, not get upgraded and have slow broadband, no cable competition in most of the state, and now, no oversight.

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