FCC To States: Hands Off Of Voip

Lynne Kiesling

On Tuesday, which Ray Gifford has named VOIP State Freedom Day, the FCC issued a ruling (press release) that precludes state public utility commissions from regulating VOIP:

The Federal Communications Commission declared today that a type of Internet telephony service offered by Vonage Holdings Corp. called DigitalVoice is not subject to traditional state public utility regulation.

The Commission also stated that other types of IP-enabled services, such as those offered by cable companies, that have basic characteristics similar to DigitalVoice would also not be subject to traditional state public utility regulation.

The release then goes on to point out one of the most important features of this decision, which is the resolution of regulatory uncertainty that has been simmering for over a year as VOIP has become more attractive and more popular. The FCC makes a good interstate commerce-based argument that the patchwork of state regulations would impose many unnecessary transaction costs.

Good. ‘Bout bloody time. Or, as the Wall Street Journal editors put it this morning:

We’re all for federalism, but if there ever was a candidate for national regulation under the Constitution’s Commerce clause, this is it. Our telecom network spans the country and is operated by national companies, yet it is still regulated by 50 mini-dictators known as state utility commissions. Charged with protecting the “public interest,” these busybodies have a license to micromanage every firm that’s ever conjured up a dial tone. The resulting web of regulation has retarded innovation and growth.

State regulators still have the right to set local phone rates, and many exercise the prerogative by keeping prices artificially low. Phone companies are forced to make their business customers subsidize their residential customers, at the same time making enough money to reinvest in their services. Businesses simply pass their own higher costs along to consumers via higher-priced goods and services, while everyone gets stuck with stone-age phone service.

Phone companies can also be required to make annual or quarterly reports to 50 separate bodies on their revenues and assets in each state; can be subject to 50 different quality of service requirements, 50 different rules on how to send bills, and 50 different tariffing regulations. California, which has never seen a rule it didn’t like, requires phone workers to wear a special badge.

And as Braden Cox put it over at Technology Liberation Front:

This is a good start toward the recognition that a national industry deserves an institution accountable to national interests. This is a win for federalism, the principles of which recognize that federalism is not just “state rights” but is a consideration of what institutional arrangement will best serve the national interest over time. This is a win for consumers, although I envision that so-called consumer “watchdog” groups will gripe about this decision. These same groups bemoan the fact that the U.S. is slipping in the per capita penetration of broadband subscribers. But perhaps, just perhaps, one of the reasons (and there are many) for high penetration rates in Korea and Japan is that they don’t have 50 state PUCs trying to run the show!

All good points.

Here’s a pushing the envelope thought question: what if I reword the WSJ editorial to say this:

We’re all for federalism, but if there ever was a candidate for national regulation under the Constitution’s Commerce clause, this is it. Our electric power network spans the country and is operated by national companies, yet it is still regulated by 50 mini-dictators known as state utility commissions. Charged with protecting the “public interest,” these busybodies have a license to micromanage every firm that’s ever conjured up an electron. The resulting web of regulation has retarded innovation and growth.

Does this FCC ruling give us any useful guidance for understanding and applying federalist principles in the context of a dynamically changing electric power industry? I think it does, although we’re not quite at the same place as telecom. Indeed, though, I would argue that the 50-fiefdom regulatory model has stunted innovation and growth more in electric power service than it has in telecom.

I also think Braden’s point about federalism is sufficiently important for electric power policy that I’m going to reiterate it:

… federalism, the principles of which recognize that federalism is not just “state rights” but is a consideration of what institutional arrangement will best serve the national interest over time.

And of course the institutional arrangement that best serves the national interest over time changes over time, as economic activity, technology, and demographics change. In many ways the state utility commission regulatory institution is not an adaptive institution; it does not adapt to unknown and changing conditions, and it does not enable its regulated (and their customers) to adapt to unknown and changing conditions in ways that take advantage of local/private knowledge and conditions.

Federal regulatory institutions aren’t necessarily evolutionary, adaptive institutions either. But perhaps the balance has swung toward a federal approach in network industries because federal institutions have more potential for keeping their regulatory approach to simple, transparent rules that can adapt to changing and unknown circumstances. I would actually argue that’s a reason why the Telecom Act of 1996 was such a dog, and this was precisely the dimension on which I criticized the Federal Energy Regulatory Commission’s Standard Market Design proposals in 2002. But maybe the potential to keep the rules simple exists more at the FCC and FERC than in the state commissions.

Maybe.


3 thoughts on “FCC To States: Hands Off Of Voip

  1. Hey, not my words! In any case, I think the “mini-dictator” problem is more institutional than individual, which is why it’s so hard to change.

  2. This may be good news. If it keeps regulation low and lets this new technology continue to innovate and find its way in the market, great. If it is just two bullies snarling over who gets to take my lunch money, then its not-so-good news.

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