Susan Kennedy Transcript

Here is the text of Commissioner Susan Kennedy’s speech at Internet Telephony Conference & Expo from last week in Los Angeles. She did an outstanding job and had the audience laughing at 8:00 am. This is no easy feat and she backed up an amazingly charismatic presentation with content that was second to none. If there is one theme I kept hearing throughout the show it was that regulators have an amazing challenge in a world where consumers use VoIP to communicate. They don’t really understand it and are trying to regulate around it and potentially regulate VoIP as if it is the PSTN.

Here is the transcript of the speech:


Commissioner Susan P. Kennedy
Internet Telephony Conference
October 24, 2005
Los Angeles

A Consumer’s Dream; A Regulator’s Nightmare

Good morning.  I’m sure that many of you looked at the program and wondered why on Earth you’re being asked to listen to a member of the Public Utilities Commission before your coffee has kicked in.  At 7:30 in the morning, believe me, I’m wondering what I’m doing here myself. 

Most of you in this room don’t know me, and if you have good kharma in this life, you never will.  I’m a regulator.  That means: I’m from the government and I’m here to help.  I regulate electric utilities, gas companies, water utilities and telephone companies. In fact, public utility commissioners are among the most powerful regulators in any state, and depending on your position in the regulatory food chain, you either love me, hate me, need me, or fear me.

If you are a company that offers traditional phone service like SBC or Verizon you love me – because I strongly believe that the 130-year-old web of legacy regulations attached to voice telephony should be dismantled in favor of competition.  Not tinkered with; Not updated – taken out and burned.

If you are a traditional consumer advocate you hate me for the same reason – because I strongly believe that the power of choice in the hands of a consumer is a much more effective way to protect consumers than regulation.  I believe most traditional regulation today actually hurts innovative competitors and hurts consumers.

If you are a competitive voice service provider that relies on interconnection with the legacy network you need me – because for the foreseeable future you need regulation to ensure access to the PSTN, non-discriminatory interconnection rates, and fair arbitration of disputes with network owners.

And if you are a VoIP provider, you should fear me – because you are the single biggest threat to the regulatory regime upon which my whole world is based.

VoIP changes everything.  It revolutionizes communication as we know it. It liberates consumers by freeing every medium – whether it’s copper, cable, fiber or radiowave – from the silos in which communication is limited, trapped and then fed to consumers by those who own the network.  And it is shifting control of the consumer experience away from the central office and out to the edges – irreversibly placing market power into the hands of consumers.

VoIP also erases everything we know about regulation. 

For the last 100 years, the entire regulatory world has been organized around the length of a pair of copper wires; the location of a central office; where a call originates or terminates; and whether a signal was in the form of an analog wave carrying a human voice or a digitized packet carrying data.

Our jurisdiction is based on the physical lines that tell us where a local call ends and a long-distance call begins; the technical definition that separates telecommunication services from information services.  These lines serve as our operating manual – they tell us who to regulate, who pays taxes & fees, who pays access charges or reciprocal compensation, who provides 911 emergency services, 411 information, and who’s subject to the Commission’s service quality standards, financial auditing and customer protection rules. 

These lines are source of our power.  And VoIP erases them all.  With a few strings of computer code – you’ve upended 130 years of regulatory certainty.  And what you have to fear from this uncertainty is fear itself.  Because nothing motivates people quite the way fear does:
Regulators fear losing jurisdiction
Legislators fear loss of funding for social programs like universal service or tax dollars
Big incumbent telcos fear loss of access charges
And rural telcos fear loss of massive subsidies and they fear a low-cost competitor that will eat their lunch.

This fear is well-placed.

VoIP disrupts the tax base
.  Estimates are that telecommunications companies and their customers pay an average effective tax rate that is 250% higher than the tax rate for all other industries with the exception of electric utilities.  In some local jurisdictions the total taxes paid by telecom consumers is more than 25% of the customer’s bill. 

The Multi-State Tax Commission issued a report during the Congressional debate over extension of the ban on Internet taxes estimating that if the telecommunications industry migrates its services to the Internet, and the ban on telecom taxes migrates with it, the revenue loss to state and local governments would be upwards of $22 billion. That’s a lot of tax revenue.  Even more ominous than that – organizations that advocate for public services are calculating the impact of tax preemption on IP- telephony in terms of the number of teachers, policemen and firefighters that will be laid off if VoIP remains tax-exempt.

VoIP disrupts universal service funding. In 2003, my Commission issued a report to the California Legislature indicating that the migration to IP-telephony (if left unregulated) will lead to a 40% reduction in funding for universal service programs, including high-cost funds and deaf and disabled programs, by 2008.  Understand something – to policymakers – those are fighting words.

VoIP disrupts the regulatory detente that has governed relations between states and the federal government for decades.  States like California, Michigan and New York all tried to put stakes in the ground to declare jurisdiction over VoIP providers – using the “if it quacks like a duck” test.  In October of 2003, Commission staff in California sent a letter out to all VoIP providers in the State that ordered all VoIP providers to file an application with the C
ommission for authority to conduct business in the state just like a traditional telephone utility.

I managed to open a proceeding to investigate the jurisdictional questions this raised, which postponed any enforcement actions in California long enough to let the FCC step in and preempt states from regulating VoIP.  And the FCC did take the very important step of preempting most state regulation of VoIP in the Vonage decision.  But that was just the first battle in this IP insurgency.

Until Congress rewrites key portions of the 1996 Telecommunications Act, or until regulators and policymakers are overtaken by technological events, every aspect of Internet telephony will continue to be a battleground.

State regulators will continue to take incremental steps to impose price controls, taxes, fees and consumer protection rules on VoIP on the theory that “a duck is a duck,” and believing that “parity” means regulating “up” – in other words, making sure that both the traditional phone service and the new generation of telecom services operate under the same yoke of regulation.

Here in California that theory was taken to an extreme when my commission last year passed a 250-page omnibus “Telecommunications Consumer Bill of Rights” attempting to expand traditional monopoly regulation to virtually anyone providing voice services for a fee including wireless and VoIP providers.  We did this under provisions in the 1996 Act that expressly give states jurisdiction over “terms and conditions” of service.  So don’t assume that the FCC’s Vonage decision puts you safely out of reach of state regulators.

After a huge battle, we suspended those rules when Governor Schwarzenegger’s new appointees joined the Commission this year, but the battle is not over.

Another example of old crashing into new is the FCC’s order for VoIP providers to meet a sharp deadline to provide E911 services.  As well-intended as the FCC’s decision is – and I can’t say that if I was in Chairman Martin’s shoes that I could have done anything different – the practical result is that we’re forcing VoIP technologies to gerry-rig a system in order to operate within the old legacy network, instead of building a new architecture based on newer, more efficient IP-based services.   

The messiest collision on the horizon, though, is intercarrier compensation.  Until the FCC finishes a major overhaul of the way carriers compensate each other for connecting calls – and deals with the inevitable impact on rural carriers who rely on massive subsidies through access charges and universal service funding – IP telephony will likely get saddled with many of the same costs and fees that traditional phone providers pay to support the PSTN in rural areas.

Nomadic VoIP providers will be difficult to saddle.  For example a customer with a 310 phone number (in the Los Angeles area code) could be living in New York and make a VoIP call from their 310 number to another 310 number while sitting in their apartment in Manhattan.  From a technology perspective, that’s a non-issue.

But for a regulator, it’s a nightmare.  Is that a local call or a long distance call?  Do they pay “recip comp” or access charges?  Whose customer is it – California’s or New York’s?  Who decides these issues – the State commission based on the customer’s billing address or the state to which the area code is assigned?   What happens if New York decides it’s a local call and California decides it’s a long distance call?  Where does the carrier go to resolve a compensation dispute – California, New York or the FCC?

These are not the kind of problems that lend themselves to piecemeal or incremental solutions – because when you pull on one string, the fabric comes undone.

I would like to see a complete overhaul of the 1996 Act, but I will settle for a narrow approach that walls off IP telephony from state regulation and gives the FCC the time and, most importantly, the authority to sort these issues out.

I’m afraid an overall solution designed for a new world will not come from Congress anytime soon, because these issues are simply too sticky.  There are too many constituents with vested interests in preserving some piece of the status quo to allow meaningful reform to make it through the legislative process.

But we don’t have much time.  When these mergers are done and the big companies have time to focus on the competitive landscape, and when enough traffic migrates to IP platforms to impact the revenue streams of the large network owners – these compensation and interconnection disputes will become more serious.

Additionally, as more and more traffic migrates to IP platforms and away from the PSTN, more costs will be loaded on those services that do pay into the universal service fund – which will raise costs even more for consumers using those services.  This will, in turn, drive even more customers to lower cost alternatives like VoIP – which will in turn put even more pressure on the remaining services to financially support the PSTN.

This is a malignant cycle that hurts customers, hurts competition and hurts any service that uses the PSTN.  It is imperative that the FCC change the funding mechanism to one that is technology and platform neutral.  I believe the only mechanism for the foreseeable future, at least as a transition, is one that places a small monthly fee on all numbers from the North American Numbering Plan.

I know some ask what the purpose of the Universal Service Fund today, with so many low cost alternatives out there.  But don’t kid yourself.  Congress will not allow the Universal Service Fund to whither away.  That’s not going to happen.  So you had better get behind a solution you can live with before you end up like the wireless industry – they are just about the largest contributors to the fund, passing enormous costs onto their customers, yet few are able to receive funds in return.

The real regulatory battle for the future of Internet telephony will be on the issue of “Net neutrality.” Regulators are in a tough spot on this one.  I have to tell you, I am a strong believer in using all the regulatory tools at my disposal to ensure customers have access to the services of their choice.  But for the better part of this year now I have been asking everyone I come across to tell me how to write it.  No one seems to know how to do it without being dangerously vague or rigid.

I moderated a panel at VON in Boston a few months ago on this very topic, and despite the passion in the room for “Net neutrality” no two people could define something as simple as the definition of “discrimination” in the same way.

Network operators do have legitimate issues concerning bandwidth management, traffic flow and network security that could easily be considered discrimination by some definitions.  For example, blocking access to websites that are advertised in spam messages would be a form of discrimination; Asymmetrical bandwidth flows are by default a form of discrimination; Differential pricing, bundling and co-marketing agreements all favor some customers and products while others pay more.

There is no “one-size-fits-all.”  But, more importantly, it is very, very difficult – if not impossible – to write a regulation that allows for some types of discrimination but prohibits others – because any regulation that by definition involves making a judgment call (“this type of discrimination is ok”), at best becomes unenforceable and at worst becomes a maze of endless litigation. This is coming from a regulator who strongly supports the principle of Net neutrality, but who could not find a way to write it into regulation without causing much more harm than good.

That’s very different from what I would consider blatantly anti-competitive acts such as port-blocking, or the use of filtering technologies designed to block Internet phone services without the users knowledge or consent.  The FCC demonstrated in the Madison River case that it has the power to prevent anti-competitive actions by network owners (without needing new regulations), and that it is willing to use that power.

It’s a little harder to intercede where contract provisions are involved.   The Wall Street Journal had an article just last week about Verizon Wireless and Vodafone subscription contracts that bar the use of their high-speed EvDO networks for Internet calling.   I’m a Verizon wireless customer and I found that very disturbing. 

But you know what? I don’t have to stay a Verizon customer.  Cingular provides the same service where I live in the San Francisco area, and if I wait just a little while longer, Google may give me all the Web access I need while I’m in The City.

Cable companies had these exact same types of provisions a few years ago preventing customers from using home servers and attaching certain devices to their home network.  Market forces made those provisions bad for business a lot faster than it would have take to remove them a regulation.

I have come to believe that we have to approach the issue of Net neutrality like we do the right to free speech or privacy.  What constitutes speech or privacy is not necessarily defined in statute – these are principles that are enforced on a case by case basis and codified in a dynamic and robust body of case law. 

I believe the FCC should address this issue on a case by case basis until a problem materializes that consumers cannot fix on their own through the power of choice in a free market.

On the other hand, where customer choices are being limited by blatantly anti-competitive actions, regulators should be fearless about stepping in.

My commission released its proposed decisions in both the SBC and Verizon mergers last week, and in those decisions – which approve both mergers – you will find a condition that requires both companies to end the practice of forcing customers to buy traditional voice service from them as a condition of accessing DSL.  I pushed for this because I believe competitive VoIP providers are at a distinct and artificial disadvantage if a customer who wants to use their service is forced to pay twice for the privilege.

I can make the argument that a customer can simply switch to cable broadband if they want to use a competitive VoIP service, but many states like California are in the middle of trying to eliminate most economic regulation on traditional voice services – and I’m simply not willing to do that as long as these companies make it harder for consumers to go to their competition.

And we’re not trying to regulate naked DSL.  Let me repeat that.  We’re not trying to regulate DSL.  SBC and Verizon don’t have to comply with our request, just like we don’t have to approve the mergers within any reasonable period of time. And we don’t have to give them relief from legacy regulation any time soon.

Verizon’s already said they are planning to offer it – before we made it a merger condition – and I believe SBC will follow.  Because a competitive market forced them to do it – not regulators.  We’re just helping to move them along.

That’s how regulators can actually help Internet telephony thrive – by knowing when to step in and when to lie in wait.  There’s an old prayer I’ve started using to guide me.

God, grant me the serenity to accept the things I cannot fix through regulation; The Courage to step in when I need to; and the Wisdom to know who’s paying for it.

I will leave you with that.  Thank you very much.

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