The Challenge of VoIP to Legacy Federal and State Regulatory Regimes

By

Daniel A. Lyons * 

Earlier this year, the Kansas Corporation Commission asserted jurisdiction to regulate certain voice-over-internet-protocol (VoIP) services. In California, the state legislature prohibited its Public Utility Commission from regulating VoIP service until at least 2020. And these states are not alone: from Maine to Florida, several states are considering whether their jurisdiction over traditional telephone service encompasses this new technology, through which nearly one-third of American landline households already receive telephone service. If so, nationwide VoIP providers could face up to fifty new legal regimes with which they must comply before offering service. If not, consumer migration away from traditional landline telephone service could leave state regulators with much less to regulate in the telecommunications realm.

The VoIP battle is the latest example of regulatory confusion caused by the increasingly anachronistic Communications Act. Originally drafted in 1934 and last amended in 1996 at the dawn of the Internet age, the Act allocates jurisdiction between the federal government and the states primarily based upon the nature of the service and the network over which it is provided. Today, convergence is increasingly blurring lines that the Act assumed to be distinct. This means that companies and regulators must struggle in vain to fit new technologies into outdated regulatory categories. VoIP is the latest in a long series of policy challenges that illustrate the need for a new Act that better reflects an increasingly diverse and competitive telecommunications landscape.

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More fundamentally, the VoIP battle shows the need to re-think the Communications Act's approach to telecommunications regulation. Companies simply do not offer monoline telecommunications services over single-purpose networks anymore, and the law should reflect this reality. Even AT&T, the original telephone monopoly, admits that "with each passing day, more and more communications services migrate to broadband and IP-based services, leaving the public switched telephone network and plain old telephone service as relics of a by-gone era." Vonage and other VoIP providers are hastening this transition in the traditional telephone space. Hulu and Netflix are harbingers of a similar transition in video service. Going forward, voice and video will be simply two of many applications that ride on top of the Internet, which consumers may reach through several different platforms. Notably, each of these services is primarily national in scope, meaning that regulatory oversight should be concentrated largely at the national level.

Of course, the decision to preempt state regulation should not be taken lightly. Decentralization of authority and institutional respect for state sovereignty are hallmarks of "Our Federalism" and serve important values, including policy experimentation, responsiveness to local concerns, and accountability by public figures who are close to those whom they govern. But fragmented, decentralized authority poses problems when attempting to regulate activities that are national in scope. State regulators may impose requirements that benefit their constituents but that negatively affect out-of-state residents by disrupting national economies of scale. Professor and former Judge Michael McConnell, an ardent defender of federalism, notes that "[e]xternalities present the principal countervailing consideration in favor of centralized government."

In the next Communications Act, Congress should allocate jurisdiction over the network between the federal government and the states in a platform-neutral manner, and with an eye toward the unique strengths of each level of government. States should retain some regulatory authority over issues such as rights-of-way management, undergrounding, and tower siting, which depend on local knowledge that federal regulators lack the ability and inclination to adjudicate properly. But they should not be entrusted with decisions that affect rates, market entry, or universal service. State-by-state regulation of these issues would create substantial spillover effects that could disrupt national economies of scale.

And on consumer protection issues, states should be advocates at the federal level for policies that benefit their constituencies. But final decisionmaking authority should vest primarily in the federal government, which has a national mandate and can assess the nationwide costs and benefits of a particular proposal. This unified framework would better fit the telecommunications architecture of the next century and would avoid the uncertainty and distortion inherent in the existing silo-based model.

* Daniel A. Lyons, an Assistant Professor of Law at Boston College Law School, is a member of the Free State Foundation's Board of Academic Advisors. The Free State Foundation is a non-profit, nonpartisan, free market-oriented think tank located in Rockville, Maryland.