Hello? Where's My Revenue?

by Roy Mark

VoIP and the IP services to follow are sending cash-strapped states to Capitol Hill with hats in hand. Who will pay?

The only people testifying more than ChoicePoint on Capitol Hill these days seems to be state telecom regulators losing their Internet taxing powers. The inherent interstate nature of the Web undermines their entire model.

Worse, official Washington seems to be embracing the notion.

Conceived as the states' stake in the federal government's quasi-monopoly arrangement with the pre-breakup AT&T, public utility commissions (PUCs) are powerful political entities.

Their regulatory and taxing authority over the plain old telephone system (POTS) sends tens of millions of dollars every year to state coffers. They are the last-mile regulators.

That fat cash flow, however, appears to be coming to an end.

Last year alone, the Federal Communications Commission (FCC) ruled that IP telephony is exempt from state and local taxes. To drive home the point, Sen. John Sununu (R-N.H.) introduced a bill to exempt all IP services from being taxed.

The legislation failed, but the concept carried over.

Later this year, the FCC is expected to complete its lengthy review of the regulatory status of all IP services. Ominously for the states, the inquiry began with an assumption of a light regulatory touch by the feds only.

If that's not bad enough news from Albany to Sacramento, Congress is kicking the tires of a possible rewrite of the 1996 Telecommunications Act. That cannot be good news from a deregulatory-minded Congress.

That giant sucking sound you hear is the coming loss of state dollars and controls to the federal government when it comes to the Internet.

"Local government believes that federalization of all IP services would not serve the public interest and would violate the principle of network neutrality," Ken Fellman, the mayor of Arvada, Colo., recently told a Congressional subcommittee.

Diane Munns, president of the National Association of Regulatory Utility Commissioners, told the same panel, "Ultimately, decisions about jurisdiction and oversight should be linked not to the particular technology used, but to the salient features of a particular service."

In other words: Voice over IP , which to state regulators is a phone service no matter the delivery platform. State PUCs know a little bit about wireline telephone service, having made it the third-most heavily taxed commodity in the U.S. behind alcohol and tobacco.

Wireless telephone service has fared no better with the states. The typical cell phone user faces almost a 17 percent total tax piled on top of the monthly bill.

"We believe that like services should be treated alike, and certainly services that compete with one another in the eyes of the consumer should face the same government obligations," Munns said. "Local governments want to ensure that we can continue to require that social obligations of providers be met and that consumers are protected."

Among those obligations that states say they can handle better than the federal government are emergency 911 services and the Universal Service Fund (USF), a tax placed on every landline phone connection to promote communications in poor, rural and underserved parts of the country. The USF tax currently does not apply to VoIP services.

"Despite news articles that would lead one to believe everyone in the United States has a computer with a broadband connection, the simple fact is only 30 million Americans have broadband," John Perkins, the Consumer Advocate of Iowa, told Congress. "It is essential not to forget the vast majority of Americans, especially in rural areasstill rely on POTS to communicate. In our rush to embrace these new technologies, we should keep them in mind."

Currently, both federal and state laws create distinctly different regulatory treatment for telephone, cable, satellite, wireless and Internet services. The 1996 Telecom Act mandates rules to foster competition within each technology. VoIP and the other IP services that will follow flatten that "silo" model.

Without a silo, what's a PUC to do?

"In all of this, it falls to policy-makers not to forecast the next wave of innovation but to look out for consumers and set fair rules of the road that foster competition and allow the market to allocate resources efficiently," Munns said.

Surprisingly, not all state regulators are fighting what appears to be the inevitable loss of state telecom revenue and power.

According to Charles Davidson, a member of the Florida Public Service Commission, too many states are "attempting to burden the new technologies with old rules designed to forge competition in the monopolized wireline telephony market."

Davidson added that those states are seeking to preserve a regulatory model that is "increasingly obsolete."

"Uncertainty as to the regulatory treatment of IP-enabled technologies -- and efforts to pigeonhole new technologies into old regulatory constructs -- will serve primarily to delay the development and deployment of these technologies," he said.

Just more bad news for the PUCs.

This article was originally published on Friday May 13th 2005