Big Shoe Drops: California Jumps on Regulation Bandwagon

In what may be the broadest regulatory attack against broadband telephony to date, a staffer at the California Public Utilities Commission has fired off a letter to five VoIP service providers demanding that they register and be certified as telephone companies. One of the five, VoicePulse, does not offer local numbers in the state, but has been given until October 22 to comply with the demand. The action may represent a potentially devastating blow to the nascent communications technology.

California's Public Utilities Commission has jumped on the bandwagon to regulate Voice over IP companies.

VoicePulse CEO Ravi Sakaria has received a letter from John Leutza, Director of the California PUC's Telecommunications Division, demanding that the company "file an application with the Commission for authority to conduct business as a telecommunications utility no later than October 22, 2003."

According to Richard Fish, a Senior Utilities Engineer with the California PUC, five companies have been sent the letter. Besides VoicePulse, the others are Net2Phone, Packet8, SBC Communications and Vonage.

California's action comes on the heels of similar activity against VoIP providers in a number of other states, most recently Minnesota and Wisconsin.

Leutza's letter asserts the CPUC is taking action based "on our monitoring of the telecommunications market and actions being taken by other state regulatory commissions."

The letter cites four different sections of the California Public Utilities Code in making its demand:

"Section 234 of the California Public Utilities Code defines a telephone corporation as every corporation or person who owns, controls, or manages a telephone line for profit. Section 233 defines a telephone line as any asset used to facilitate telephone communication. Section 216 states that any telephone corporation that performs compensated service to any portion of the California public is a public utility. Section 2001 requires that a telephone corporation must first be certificated by the Commission to place a telephone line into service."

According to Sakaria, this is the first letter his company has received from a state regulatory agency asking that VoicePulse register as a phone company and receive formal state certification. Ironically, he notes, VoicePulse does not currently provide California phone numbers with its service, though the company does have customers in the state.

Last month, Minnesota's PUC ruled that Vonage had to be certified to operate in the state, a ruling that, so far, has not been applied to other VoIP providers. Earlier this month, regulators in Wisconsin sent a letter to Packet8 officials demanding the company register.

In each of those cases, the affected VoIP providers has maintained that it is not a phone company, but rather a data transmission company. Such a distinction is important, they believe, because state regulators do not have jurisdiction over data that travels through the internet.

"What they don’t understand is that they are trying to regulate an application called voice and not a service called telecommunications," says Jeff Pulver, CEO of and a leading proponent of Voice over IP.

Pulver believes that consumer advocates in states like California need to start getting behind VoIP and against regulation because the technology is forcing telecommunications costs down.

VoIP providers, especially Vonage CEO Jeffrey Citron, have argued that any regulation on the part of the states on their service could potentially kill further development of emerging communications technologies such as VoIP.

Last week, Vonage petitioned the Federal Communications Commission to declare that it does not technically offer telephone service, making it exempt from state regulation. The company also filed a lawsuit in district court seeking to overturn the Minnesota PUC ruling.

The CPUC’s Leutza maintains, however, that while IP telephony providers may argue before regulators that they do not offer telephone service, that is not how they market themselves.

“In none of their advertisements do I see anything that says ‘we’re almost like phone service,’” Leutza said. “They say ‘get rid of your local carrier because we’ve got this great product for you.’”

Leutza believes that a typical consumer “can’t distinguish between the traditional Public Switched Telephone Network and these new networks that IP technology driven.”

This is particularly a problem, Leutza maintains, when it comes to emergency 911 services. IP telephony providers are not yet technologically able to offer a basic 911 service that allows operators to immediately see the caller’s location for a speedy dispatch of emergency personnel.

"As soon as somebody who signs up for one of these IP services has a huge medical emergency and it takes 911 three extra minutes to get to that location and they sue, every county in the state and the state attorney general will probably go after the provider of the service for being culpable,” Leutza said.

California's action is potentially much more significant than those taken elsewhere in the country because of the state's sheer size and the fact that all VoIP service providers have a significant number of customers in the state.

Leutza says that any company offering IP telephony service in California, even those, like VoicePulse, not currently offering local phone numbers in the state, are subject to CPUC rules.

"Just because they only offer virtual phone numbers outside of California does not mean they're exempt from California's regulations," he said.

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