California telecom companies push bill to quash oversight on Internet regulation

By Siddhartha Mahanta

California could be the latest state to enact a law that dramatically curbs regulatory oversight of telecommunications services in the state, handing a significant victory to the industry players that have lobbied for the bill’s passage.

On its face, SB 1161 seems simple enough. The text of the bill explains that it seeks only to “preserve the future of the Internet by encouraging continued investment and technological advances” and “supporting continued consumer choice.” But to achieve that, the measure would gut the regulatory authority of the California Public Utilities Commission, a key state oversight body, over many Internet-based communications technologies.

What that means: California customers would no longer have an official regulatory body to address their concerns over the quality and affordability of these new, emerging services, which would not be bound to the same consumer protections that apply to traditional, wire-based telephone systems. To date, the commission has not signaled a strong intention to regulate this growing sector of the communications industry. By preventing it from doing so in the future, critics say, SB 1161 addresses a problem—an overeager regulatory commission—that does not exist.

Consumer advocates argue that SB 1161 would bar the CPUC from keeping close tabs on big telecommunications companies like AT&T and Verizon—two of the bill’s big backers—and safeguarding customer protections. Supporters, meanwhile, say that the CPUC and any regulations it might pass will only hinder the tech industry and stymie job creation. Proponents like tech industry analyst and columnist Larry Downes say that Governor Jerry Brown should quickly sign SB 1161 into law and begin to roll back the authority of a commission whose budget has risen by $300 million over the past year.

The state assembly and senate passed the bill in late August. Now, Gov. Brown has until September 30 to decide whether to sign the measure into law.

Voice-over IP

Two parts of SB 1161 are of particular concern for its critics. Section 710(a) would prevent the CPUC from enacting new regulations that affect Internet-based phone services, such as Skype and Google Voice. These services fall under the rubric of what’s known as voice over Internet protocol (VoIP), a rapidly growing segment of the communications market. Most of these services are free for users, and are more reliable than traditional, copper-based landline service. Meanwhile, section 710(b) of the bill would pre-empt any department, agency, commission, or “political subdivision of the state” from passing new laws or rules that regulate VoIP.

But this vaguely worded section also goes one sizable step further: it would keep localities from issuing new rules on any other Internet protocol (IP)-enabled service—potentially, a far broader de-regulatory stroke. In a memo written in June, Lynn Sadler, the CPUC’s director of governmental affairs, sharply criticized SB 1161, writing that it would  “tie the Commission’s hands if it decides in the future that there is a need to reassess its regulatory role over VoIP.”

Grasping the implications of this provision requires a basic understanding of the quickly shifting landscape for traditional, wire-based phone service. Increasingly, these networks are using IP to expedite the distribution and transmission of phone signals. Meanwhile, two of the entrenched telecommunications providers, AT&T and Verizon, have publicly announced their intentions to gradually shift their customers out of wire-based service and into more IP-enabled networks.

But if these companies begin shifting to newer, more internet-based modes of communication, state regulators would be prevented by the new legislation from stepping in to address consumer complaints. Given the growing prominence of IP in basic telecommunications services, any law that cuts regulatory supervision over this technology is likely to register a strong impact on the future telecommunications environment. In other words: as providers move towards a more IP-centric model, SB 1161 could prevent the CPUC and local jurisdictions from issuing regulations that keep the industry in check.

Under current law, a traditional telephone customer can file a complaint with the commission and receive a hearing, after which the commission votes on the validity of the complaint. But under SB 1161, that chain of oversight and responsiveness would be in peril. While the bill would allow the commission to “continue to monitor and discuss VoIP services,” it would only be allowed to issue reports to the FCC and the legislature, and take no formal action. Instead, the commission would be able to respond “informally” to complaints, and provide information on how to contact the proper state and federal authorities. A source connected with the commission who asked not to be identified described this as a substantial step down for the body.

SB 1161 does preserve the commission’s authority over state emergency telephone services, universal service programs, existing requirements for backup power systems, and the ability “to address or affect the resolution of disputes” over intercarrier compensation, or the charges paid by one carrier to another to originate, carry, or terminate telecommunications traffic. It also maintains the commission’s authority over support structures and other facilities involved in the transmission of signals—a key concession extracted from the bill’s proponents, according to an official familiar with the matter.

The commission did manage to successfully lobby for several amendments in the final version of the bill, including a provision that the bill would not impact its “existing regulation of, proceedings governing, or existing commission authority over, non-VoIP and other non-IP enabled” phone service, “including regulations governing universal service and the offering of basic service and lifeline service, and any obligations to offer basic service.” But this could mean little in a communications environment where IP-enabled communication has displaced traditional, wire-based service.

For the commission, the concern is that as non-VoIP and non-IP enabled, traditional phone services become a thing of the past, this exception would basically become meaningless over time. The CPUC would have the power to address issues related to a sector of service that is quickly shrinking.

In April, the Los Angeles Times reported that Michael Peevey, the commission’s president, had broken with the rest of the body, which opposed the SB 1161. “We should be very careful before we jump off the cliff here as commissioners and say we oppose this,” Peevey said at a meeting of the group. “My view is that Silicon Valley is the economic engine of the state…I don’t want to support anything that in any way would diminish that.”

But Lynn Sadler’s June memo asserted that concerns like Peevey’s could be overblown. “There is no current problem addressed by the bill,” Sadler wrote. “Rather, the author and supporters of the bill fear that the CPUC will impose unnecessary regulations on providers of IP-enabled services if this bill is not enacted.”

In an August 18 interview with theSan Francisco Chronicle, CPUC commissioner Mike Florio suggested SB 1161 could pose dangers to consumers, and argued that the commission has made no moves to restrict VoIP that should be of concern to the industry.

“It’s not at all clear under this bill that we’d be able to touch anything having to do with quality-of-service problems,” Florio warned. “It’s going to mean lawyers and lawsuits and a lot of time and money and energy that doesn’t need to be spent. We’ve done nothing to regulate computer applications like Skype, have no desire to do so, and that’s not what this is about.” AT&T declined to comment for this story, and Verizon did not respond to a request for comment. 

Industry analyst Larry Downes views the regulations of a body like the CPUC as costly impositions on the growth of a new technology—one that it is unqualified to regulate. In a recent column urging Gov. Brown to sign the bill, Downes pointed out that wire-based phone service in California has decreased by 17 percent between 2008 and 2010, versus a 46 percent increase in VoIP accounts over that period.

“[T]he PUC has little expertise to offer in regulating VoIP or any other Internet service. Nor should it. State utility commissions were created to oversee, well, utilities. You know—telephone poles, power lines, and water pipes.…Control of physical infrastructure, thanks to technological innovation, is no longer much of a constraint on consumer choice or pricing for voice services,” Downes wrote. The VoIP industry in California, he says, should be allowed to flourish, free of regulation.

According to TeleGeography, a telecommunications market research firm, the VoIP sector is exploding. In 2011, the firm estimated that the number of Skype calls would jump by 48 percent, while calls made through traditional phone companies would increase by a paltry 4 percent. Given those growth expectations, plus the increasing convergence between copper-based service and IP, the industry’s interest in SB 1161 is obvious.

Jim Hawley, a spokesperson for TechNet, a Silicon Valley-based trade group that supports the bill, argues that the regulatory process could be a costly, threatening burden for a young start-up trying to attract investors. “If you’re going to expand monopoly-style regulation to a vibrant new industry…the legislature should make that decision, not a regulatory body,” Hawley says.

But Regina Costa, the Telecommunications Director at The Utility Reform Network (TURN) in California, warns that SB 1161 prevents the CPUC from keeping tabs on VoIP. “What ability do state regulators have in the future to identify these problems and solve them?” Under SB 1161, the CPUC “wouldn’t have the authority to say to Verizon, ‘Your VoIP wasn’t reliable.’ Verizon could tell them to go stuff it.”

Lobbying strength

Other states have considered or passed bills that deregulate sections of the telecommunications industry or remove obligations for phone service providers to offer basic phone service for all customers—known as “carrier-of-last-resort” obligations, or a guarantee to provide low-cost, landline based telephone service to homes. As The Washington Post has reported, several states have passed laws that remove these obligations.

In California, the telecom industry has joined forces with Silicon Valley, as Fabiola Carrion, a broadband analyst with the Progressive States Network, explains. Technology trade groups in Silicon Valley, including TechAmerica, TechNet, and the Silicon Valley Leadership Group, released a fact sheet arguing that SB 1161 would clear the road of costly regulatory hurdles. SB 1161, they say in a joint website urging Gov. Brown to sign the bill, clears the road of “protracted regulatory proceedings that create delay and unnecessary expense.”

SB 1161’s cadre of deep-pocketed supporters include telecom companies such as AT&T, Comcast, Time Warner Cable, and Verizon, and trade groups representing the tech sector. According to an analysis by Map Light, a public interest group that tracks the influence of money in politics, state senators received nearly 11 times as much in campaign contributions from interest groups that support SB1161 than from those who oppose it.

Coming in at number four on the list is Sen. Alex Padilla, the Democrat from Los Angeles who introduced SB 1161 and who has chaired the Energy, Utilities and Communications Committee since 2008. Data compiled by Influence Explorer shows that the telecommunications industry has taken care of Padilla since he was first elected to the assembly in 2006. From 2006 to 2010, Padilla received just over $109,000 from the telephone utilities and telecom services and equipment industry, including a number of sizable donations from senior executives at AT&T and Verizon.

Nearly 80 percent of those contributions came from AT&T, the California Cable & Telecommunications Association, Comcast, Verizon, Time Warner, and Verizon Wireless and executives with the companies—all of whom support SB 1161. Padilla also received $5,000 from CALTEL during that same span. CALTEL initially supported the bill, but later dropped its support.  Padilla’s office did not respond to a request for comment.

As the Los Angeles Times reported in April, AT&T enjoys considerable influence on politics in California—or pays generously for it, at least.  The paper reported that AT&T spent over $225,000 on last year’s Speaker’s Cup, a $12,000-a-head weekend Democratic fundraiser boasting “world-class golf…free-flowing wine and four-star cuisine,” body wraps, and massages. The Times also reported that from 1999 to 2011, AT&T has spent more trying to influence California officials than any other corporation.

Industry motivation: an ear for the future

AT&T, for its part, has poured nearly $3.3 million into lobbying the California state house through the first six quarters of the 2011-12 legislative session, notably increasing its spending by about $70,000 and  $200,000 in the fifth and sixth quarters, respectively, after the introduction of SB 1161. Verizon and the California Cable & Telecommunications Association have also lobbied on SB 1161.

Their interest in the measure isn’t difficult to discern. AT&T currently offers a voice communications platform called U-Verse, which is delivered through VoIP. Verizon also offers VoIP over FiOS, its fiber-line based service that bundles together Internet, telephone, and television service.

Meanwhile, Verizon is also making a strong push towards IP and VoIP services. At an investors’ conference in June, Verizon CEO Lowell McAdam made the company’s position on VoIP abundantly clear. “Every place we have FiOS, we are going to kill the copper,” McAdam said, according to a transcript of the vent. “We are going to just take it out of service and we are going to move those services onto FiOS. … And then in other areas that are more rural and more sparsely populated, we have got [wireless service] built that will handle all of those services and so we are going to cut the copper off there.”

McAdam also had some pointed words about the ongoing “battle” over future regulation. “The pendulum has swung a bit more to the regulators putting their thumb on the scale and we don’t like that,” he said, insisting that new regulations slow down investment and innovation while endangering prospects for job growth.

“The regulatory environment has got to loosen up a little bit, mostly in the states and so we are working that,” McAdam said, indicating that Verizon was pleased with de-regulatory measures that have passed recently in Florida, Virginia and Texas. Such laws allow the company “to be a lot more flexible in the marketplace and…invest where customers want  us to invest and start to sunset some of the older technology.”

In other words, “if you’re a copper-based customer, you’re moving over to that network whether you’ve chosen it or not,” Regina Costa says. Rural customers, Costa says, will not benefit from wireless, which is notoriously unreliable in remote areas.

Sean McLaughlin, the executive director of Access Humboldt, a community media organization in northern California, says that SB 1161’s impact will be acutely felt in the less dense, more remote stretches of the state along the northern coast.

In these places, existing providers find it less profitable to extend broadband service. This is because laying cable across vast, sparsely populated stretches is a costly proposit0ion, with little guarantee of a worthwhile return on that investment. In response, media activists like McLaughlin have built a number of locally owned and operated broadband networks to service these stretches of northern California.

“We have remote areas that lack reliable basic phone service,” McLaughlin says of Humboldt. “We’re familiar with what it looks like when it’s not profitable” to provide service to such areas, he says.

If SB 1161 becomes law, McLaughlin worries that the county would no longer possess the authority to take charge. “SB 1161 ties hands of local governments. Not only can the PUC not make any rule that touches VoIP communications … no subdivisions of the state can do that,” McLaughlin says. SB 1161’s “whole frame is that there’s no constructive role for local governments,” he contends, pre-empting them from making any rule that would regulate IP-enabled services.

According to Christopher Mitchell, the director of the Telecommunications as Commons Initiative at the Institute for Local Self-Reliance, phasing copper-line customers into wireless falls right in line with Verizon’s long-standing plans for rural service. “Verizon is interested in wireless because it can charge so much more. So I imagine rural folks will be worse off if we allow these companies to abandon” wire-based service, he says.

Dan O’Connell, a VoIP analyst at Gartner, a telecommunications research firm, estimates that fully replacing a copper-based network will likely to take at least a decade. But companies like Verizon and AT&T want to set the regulatory stage now, through bills like SB 1161 and others like it around the nation.

“CEOs of companies like Verizon and AT&T are laying out the argument” for de-regulation, O’Connell says. “They will say, ‘We’re taking [copper] down in five years. In reality, it could be 12 or 15. Nonetheless, Verizon or AT&T want to make sure they’ll have this stuff running 15 or 20 years from now.”

Broader implications

CALTEL, a trade group that started as a firm supporter of SB 1161, has recently aligned with its opponents. CALTEL’s membership consists of local carriers that provide voice and broadband services to residential, business, and wholesale customers, coupling their own networks with copper lines leased from providers like AT&T and Verizon. Most offer VoIP service, and harness IP-enabled technology to provide service to customers.

When Sen. Padilla first introduced SB 1161 in February, CALTEL quickly signed on, believing that it would protect services using copper and IP, while ensuring reasonable rates for consumers.

But CALTEL soon reversed its position. In an August 24 letter written to Gov. Jerry Brown encouraging him to veto the bill, CALTEL executive director Sarah DeYoung wrote that “the benefit of regulatory certainty for VoIP providers” offered by SB 1161 “is far outweighed by the harmful effect that [it] would have on competitive carriers’ ability” to offer affordable, competitive, high-quality broadband service to consumers.

In her letter, DeYoung cites Verizon CEO Lowell McAdam’s comments about his company’s intentions to phase out copper service. She also excerpts portions of comments filed this past spring by both AT&T and Verizon in response to an FCC rural broadband initiative called the Connect America Fund.

In the comments cited by DeYoung, AT&T and Verizon urged the FCC to free the new, IP-based telecommunications world from the strictures of the old regime. The telecommunications titans argued that regulatory requirements like carrier of last resort obligations and universal service are  “vestiges” of a bygone telecommunications age, “designed for a different time, a different network, and a different business model to the new world of IP interconnection for voice service.” Such obligations, the companies wrote, drive up costs and “impair their ability to compete effectively with largely unregulated cable broadband services.”

As such, AT&T and Verizon say, these obligations should not apply to IP-enabled services. Their argument: because IP-based telecommunications are still in their relative infancy, regulatory requirements like carrier of last resort would place an unfair burden on their ability to grow and thrive in this market.

The California bill, CALTEL argues, would “completely foreclose” the state of California’s ability to protect broadband competition once the current providers shift over to IP technology.

A number of consumer advocates contacted by The American Independent view SB 1161 as another salvo in the industry’s nationwide de-regulatory battle. According to the Institute for Local Self-Reliance’s Chris Mitchell, the companies supporting this type of legislation hope to clear the field of service requirements that, they claim, will slow them down on their march towards an all-IP environment. “The broad stroke is that these companies are trying to reduce the amount of regulation they face and are trying to justify it by pointing to expensive investments they have made,” in new, IP-based services.

“They want to get rid of all [carrier-of-last-resort obligations] from what I can tell,” Mitchell says. “[T]hey want the ‘market’ to decide who gets access to communications technology and how.”

Originally published at The American Independent.

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