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After years of promise and hype, Voice over Internet Protocol (VoIP), the ability to make telephone calls over the Internet, has emerged as a mainstream service for businesses and, increasingly, for consumers. Lower cost, competitive quality, and ease of use are responsible for VoIP’s accelerated adoption. However, the very features driving VoIP’s rollout have brought to the fore the stresses that the Internet and modern telecommunications technology have put on the 70-year-old regulatory framework that governs them. As legislators and regulators consider the confrontation between technology and law, VoIP has made it clearer than ever before that the creaking regulatory structure needs something more than peripheral patchwork. VoIP offers services at lower cost, more-efficient use of transmission capacity, or bandwidth, and advanced service features intrinsically unavailable through traditional telephone service. These benefits are possible because the Internet protocol creates discrete and electronically labeled digital “packets” of data constituting a voice telephone call, transmits them with less demand on capacity, inserting the packets wherever in the transmission lines there is bandwidth for them, and reassembles them at the call destination. No longer must a telephone line be held open and continuously dedicated to one call, as is the case with traditional, circuit-switched calls. Not only is use of bandwidth more efficient, but also, since the data packets may contain any content that may be digitized, VoIP can offer broadband (so-called because it requires greater use of bandwidth) services such as the attachment of documents, graphics, video, music, and electronic messages to a phone call. The possibilities are revolutionary. The benefits of VoIP are also dependent on the hands-off regulatory approach that has allowed the explosive growth of the Internet to date. The problem facing legislators and regulators is whether it makes economic sense to continue to treat VoIP as an unregulated Internet service even as it becomes indistinguishable from competing traditional telephone service, which is highly regulated. Just as important are public service aspects of that regulation, which have an impact on telecommunications services for rural and disadvantaged areas, hospitals, libraries, emergency medical services, law enforcement, and a host of other domains. A regulatory proceeding at the Federal Communications Commission is examining the issue. Why does the problem exist? The governing legislation, the Communications Act of 1934, Pub. L. No. 73-416, 48 Stat. 1064 (1964), 47 U.S.C. �151 et seq., enshrined a view of telephone service as a natural monopoly in the nature of a public utility. At the time, AT&T was the monopoly phone service provider for both long-distance and local service. Telephone communications (telephony) are governed by Title II of the Communications Act, as amended. Under Title II, telephone companies are considered common carriers or carriers. Common carriers are required to offer communications service to any member of the general public requesting service, to interconnect with other carriers when in the public interest, and to charge rates that are “just and reasonable” and nondiscriminatory. The underlying idea, still bound into the nervous system of telecommunications law and regulation, is that phone service is an essential public service, like electricity or water; that when the handset is lifted, there must be a dial tone; that when 911 is dialed, the call must go through; and that anyone who pays a modest and regulated bill each month is entitled to service. Under the Communications Act, telephone service is to be guaranteed by regulation, not by competition. The only significant amendment to the Communications Act since its passage was the 1996 Telecommunications Act, Pub. L. No. 104-104, 110 Stat. 56 (1996). However, the Telecommunications Act was primarily concerned with the legacy of the 1984 AT&T divestiture and how to ensure that long-distance carriers like AT&T, MCI, and Sprint and the divested AT&T affiliate Incumbent Local Exchange Carriers (ILECs) like the predecessors to Verizon and SBC would be able to compete in each other’s markets. The Telecommunications Act did not anticipate the rise of the Internet or competition among ILECs, cable companies, and satellite operators to provide broadband service. The FCC has traditionally distinguished between services in which the transmitted information arrives unaltered, the paradigm of which is voice telephony, which is regulated by Title II regulation, and services in which the transmission is processed, or altered, by a computer during transmission, which are unregulated, because they were not traditionally viewed as an essential public service. The distinction dates from 1966, when the FCC began to examine the fault lines of telecommunications and computer technology in a series of so-called Computer Inquiries. 28 F.C.C. 2d 267 (1971), aff’d in part and rev’d in part sub. nom. GTE Service Corp. v. FCC, 474 F. 2d 724 (2d Cir. 1973), decision on remand 40 F.C.C. 2d 293 (1973). In the Computer Inquiries, the FCC established a distinction between basic services, those in which the transmitted information was not processed or altered in transmission, which would be subject to common carrier regulation, and enhanced services, in which processing altered the transmission, which would be exempt from common carrier regulation. (In the Third Computer Inquiry, 104 F.C.C. 2d 958 (1986), the FCC attempted to relax its structural separation requirements and replace them with nonstructural safeguards. The U.S. Court of Appeals for the 9th Circuit overturned the FCC, ruling that no justification for the relaxation of the structural separation requirement had been shown. California v. FCC, 905 F. 2d 1217 (1990)). Common carriers were required to provide “maximum separation” between ordinary communications services and data processing services in order to prevent them from using revenues from their regulated but market-dominant common carrier activities to subsidize and unfairly compete in data processing activities. The Telecommunications Act preserved the distinction, separately defining telecommunications, which essentially corresponds with basic services, and Information Service, which essentially corresponds with enhanced services. The former is subject to common carrier regulation; the latter is not. OBSOLETE DISTINCTION The application of digital, data processed technology to telecommunications service has rendered the distinction obsolete. VoIP is being presented to businesses and consumers as a “transparent” alternative � that is, indistinguishable from traditional voice service for its users, but lower costing and with advanced features if wanted. However, VoIP and all other Internet transmissions are considered by the FCC to be Information Service and, therefore, not subject to common carrier regulation. Avoidance of common carrier status has exempted Internet service providers (ISPs) that offer VoIP service from the range of Title II obligations, including access charges paid by long-distance carriers to ILECs to terminate their calls at offices and residences; Universal Service Fund charges, a tax imposed on common carriers by the Telecommunications Act to subsidize telecommunications service in rural and disadvantaged regions; compliance with the Citizens’ Assistance With Law Enforcement Act, which requires common carriers to enable wiretapping activity by law enforcement agencies; emergency 911 calling service; and even, since ISPs receive calls from their customers rather than make them, the end-user per-minute charges that business and consumer telephone customers pay to common carriers. These exemptions explain, leaving aside its more efficient use of bandwidth, the lower cost structure that VoIP telephony has enjoyed. It is no wonder that VoIP is growing explosively and that ILECs and other carriers are scrambling to offer their own VoIP service to compete with the ISPs. Legislators and regulators have been justly wary of stifling the Internet and have recognized that much of its growth is due to the lack of regulation, low entry barriers, and low cost structure that Internet service has enjoyed. But as businesses and consumers adopt VoIP, concern is rising that the ensemble of public service/public utility aspects of telephone service may be lost along with common carrier status. FCC JURISDICTION The FCC determined in a 1999 regulatory proceeding that Internet service is intrinsically interstate and therefore subject to FCC jurisdiction (the FCC’s jurisdiction is founded on the Constitution’s interstate commerce clause) in an attempt to avoid a patchwork of state and local regulation. CC Docket No. 96-98 (Declaratory Order), CC Docket No. 99-68 (Notice of Proposed Rulemaking) (Feb. 25, 1999). Although twice rejected by the U.S. Court of Appeals for the D.C. Circuit, this determination for the time being remains in place. On Feb. 12, the FCC commenced a regulatory proceeding to decide whether, and how, to regulate VoIP telephone service. The FCC’s Notice of Proposed Rulemaking states that Internet services should continue to be minimally regulated, but should assure important social objectives such as 911 service and law enforcement. In the meantime, pending bills in the U.S. Senate and the House of Representatives are attempting bandage protection and regulation of VoIP. Senate bill S. 2281, the VoIP Regulatory Freedom Act of 2004, and the identically named House bill, H.R. 4129, both assert exclusive federal jurisdiction over VoIP service and preclude state or local regulation. Both bills prohibit access charges and limit the FCC’s jurisdiction over VoIP to specific enumerated domains such as Universal Service Fund charges. These efforts are well-intentioned, but Congress and the FCC are missing the point. Patchwork remedies will not suffice. Sooner or later, legislators and regulators will have to face up to the need to discard a legacy telecommunications regulatory structure that technology has rendered obsolete and enact new telecommunications law and regulation that is platform- and technology-neutral. When that happens, the portions of common carrier style regulation that competition has supplanted should not be re-enacted. Necessary public service aspects of telephone service should be re-enacted to the extent necessary to assure continuation of those services, but not in a way to favor one technology or platform over another. It may not happen soon, but that it must happen is more apparent every day. When the eventual new telecommunications law is examined in retrospect, VoIP will probably have been its catalyst. Owen D. Kurtin and Arthur S. Katz are partners at the New York office of Sonnenschein Nath & Rosenthal. This article first appeared in the ALM newspaper New York Law Journal .

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