February 2005


States Rights                                                          A month before the appeals court’s
Limited in                                                             decision, the FCC ruled that Internet
                                                                       phone services could not be governed

Regulating                   Barring an appeal to the U.S.
                             Supreme Court – and an unlikely
                             reversal – a Dec. 28, 2004 decision by
                                                                       by regulations that states use for
                                                                       traditional wireline phone companies.
                                                                       The commission left open the issue of
Internet                     the U.S. Court of Appeals for the
                             Eighth District prevents states from
                                                                       whether states could still tax Internet
                                                                       phone services. The PUC asked the
Phone                        regulating Voice over Internet
                             Protocol, or VoIP, the technology that
                                                                       appeals court whether the FCC ruling
                                                                       pre-empted Judge Davis’ decision,
                             allows phone calls using the Internet.
Service                      Add the likelihood of light regulations
                             for Internet-based phone service from
                                                                       but the court ruled that the FCC’s
                                                                       rules supported the district court’s
                                                                       permanent injunction against the
                             the Federal Communications                PUC.
                             Commission (FCC) and
                             telecommunications has a new              The appeals court decision is a big
                             “playing field.”                          victory for Vonage and other Internet
                                                                       phone providers. They argue that they
                             The industry’s “players” will have to     are different from wireline phone
                             adjust. Some already are.                 companies because VoIP services
                                                                       only supply the computer software
                             The Decision                              (and devices) used to make and
“”If the competitive                                                   receive phone calls over the Internet,
playing field is slanted     The Minnesota Public Utilities            but do not own or operate the physical
to a new technology, a       Commission (PUC) made the appeal          networks carrying the calls.
                             to the Eighth Circuit court in St.
company may have to          Louis after Judge Michael Davis of        States and wireline phone companies
change (to that              the federal District Court in             argue that VoIP providers are phone
                             Minnesota ruled in 2003 that the PUC      companies that should be regulated
technology) to               could not regulate Vonage, an Edison,     because the services they provide are
effectively compete,”        N. J.-based VoIP phone provider, as if    basically the same as those provided
                             it were a traditional phone company.      by traditional phone companies. In
                             Davis ruled that Vonage was not a         essence, their argument is: “If it looks
Bill Vandersluis, director   phone company – despite the fact that     like a duck, walks like a duck and
of regulatory affairs for    it calls itself the “broadband            quacks like a duck, it must be a
Mankato-based                telephone company” – but was              duck.”
HickoryTech                  instead an information service and not
                             subject to regulation according to        A Federal Issue Now
                             federal law. The Eighth Circuit
                             upheld Davis’ decision.                   The whole issue of regulating Internet
                                                                       phone service now moves to the
                                                                       federal level. With a reversal by the
                                                                       U.S. Supreme Court doubtful – even
                                                                       if an appeal is made, the court accepts
                                                                       few cases and overturns fewer – the
                                                                       issue is now on the plates of the FCC
and Congress. The former has already         currently allow law enforcement to         greatly reduced tax revenues seems
signaled its intent to regulate VoIP         conduct wiretaps as they do on             obvious, especially if – or when? –
lightly. The latter would have to            wireline phones. But even if these         Microsoft enters the field.
revisit the Telecommunications Act           problems are fixed, which Jerry
of 1996. While there’s a growing             Knickerbocker, government affairs          VoIP Not the Only Issue
interest in doing that, changes may          vice president for the Minnesota
come slowly and in a piecemeal               Telecom Alliance, thinks is possible,      VoIP is one of many important issues
fashion, if at all.                          there’s the much larger issue of a         facing the telecom industry. Another
                                             level competitive playing field.           issue involves intercarrier
The issue is important to all of us                                                     compensation, the access charges paid
because it goes to the heart of the          “If state regulators are pre-empted        by long distance companies for use of
American idea of fair play for all. The      from regulating VoIP providers, as it      local company networks. “Because
1930s law that set up the federal            appears they now are,” says                wireless companies can’t be regulated
universal service fund understood the        Knickerbocker, “then the only way          by states, those carriers have no
necessity of a system that subsidized        for companies to compete is in the         pressure to negotiate agreements on
the actual costs of phone service in         marketplace. And if wireline carriers      this issue,” Knickerbocker says.
rural and hard-to-serve areas or part        are at a competitive disadvantage          “Local companies can go to court but
to ensure the people there would not         because their customers pay taxes and      that’s expensive and time-consuming.
be economically disadvantaged.               fees that VoIP customers aren’t            There needs to be equal leverage in
                                             paying, then wireline companies will       bargaining for each side. It’s not there
We may be headed for just that sort of       be forced to do VoIP to save as much       now.”
situation today. While the number of         of their customer base as possible.”
people using Internet phone services                                                    The FCC is also being asked to
is still small, it’s growing fast and it’s   Bill Vandersluis, director of              eliminate intercarrier compensation
quite possible, perhaps even likely,         regulatory affairs for Mankato-based       by an industry group made up mostly
that the Internet will carry most calls      HickoryTech, agrees, and points out        of large companies. They want the
in the not-too-distant future. If VoIP       the difficulties companies will have       FCC to replace intercarrier
companies don’t have to pay taxes for        doing that. “”If the competitive           compensation with a “bill-and-keep”
things like 9-1-1 and universal              playing field is slanted to a new          system where companies would have
service, or the access charges on long       technology, a company may have to          to recover their infrastructure costs
distance calls that allow companies to       change (to that technology) to             from their own customers. Large
maintain their networks – none of            effectively compete,” he explains.         companies can spread such costs over
which VoIP providers pay now –               “And that might have to happen even        huge customer bases. For small, rural
many rural people could end up on            though a company has millions              companies, bill-and-keep would force
the wrong side of a digital telecom          invested in equipment and technology       them to raise their rates drastically
divide. Without some mechanism to            that it won’t be able to recover. And a    and cut new technology investments
offset the significant costs necessary       company that jumps to the new              unless there is an additional source of
to provide rural customers with              technology leaves part or all of its old   revenues.
telecommunication services, many             revenue streams behind. Some small
won’t be able to afford what local           companies currently get more than
phone companies would have to                half their income from access charges
charge to recover their costs.               and universal service funds.”
                                                                                        Minnesota Telecom Alliance is a
Adjusting to the New Playing                 Vandersluis also thinks VoIP could         not-for-profit professional asso-
Field                                        have a big effect on federal and state     ciation representing more than 95
                                             tax revenues from telephone service        small, medium and large tele-
VoIP may be the future of telephony,         and long distance calls. “To the extent    communication companies provid-
offering number portability and many         that VoIP is a tax ‘haven’ for end-        ing voice, data, wireless, and high-
other services, but the technology is        users, there could be massive              speed broadband services to
not perfect. VoIP callers dialing 9-1-       implications for state and federal tax     Minnesota’s metropolitan and rural
1, for example, don’t reach an               collections,” he notes. With cable         communities. More information
emergency call center directly and           companies like Comcast and Time            about MTA can be found on the
their addresses don’t appear on call         Warner rolling out VoIP in addition        Internet at
center screens. VoIP does not                to AT&T, Qwest and other phone
                                             companies, the implications for

Minnesota Telecom Alliance 30 E. 7th St., Suite 1650, St. Paul, Minnesota 55101

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