Cybertelecom Federal Internet Law & Policy An Educational Project

VoIP: ACTA Petition

The ACTA petition was the first time that the FCC confronted VoIP as a policy issue. The FCC, however, never acted on the ACTA petition, and ACTA, the moving party, no longer exists. The question presented by the ACTA petition was whether the FCC had regulatory authority to regulate VoIP Internet software used by individuals to do telephony with each other, with no service provider in the middle.

Derived From: Kevin Werbach, Digital Tornado: The Internet and Telecommunications Policy, FCC Office of Plans and Policy Working Paper No. 29, p. 36 (March 1997)

In March 1996, America's Carriers Telecommunication Association (ACTA), a trade association primarily comprised of small and medium-size interexchange carriers, filed a petition with the FCC asking the Commission to regulate Internet telephony. ACTA argues that providers of software that enables real-time voice communications over the Internet should be treated as common carriers and subject to the regulatory requirements of Title II. The Commission has sought comment on ACTA's request. Other countries are considering similar issues.

The ACTA petition raises the fundamental question of whether a service provided over the Internet that appears functionally similar to a traditionally-regulated service should be subject to existing regulatory requirements. The petition argues that VON providers should be considered as fundamentally analogous to switchless long-distance resellers, and thus should pay the same rates to LECs for use of local networks to originate and terminate interstate calls. Under this analysis, the current pricing structure allows VON providers to charge an effective usage charge of zero, while long-distance carriers must pass on roughly six cents per minute in access charges for every interstate call. 

ACTA's view, however, oversimplifies the comparison between VON and long-distance voice telephony. There are many differences, beginning with quality of service. Current Internet telephony products do not provide comparable sound quality to traditional long-distance service. Most existing systems require both parties to be connected to the Internet through a personal computer at the time of the call, and the sound quality of Internet telephony products tends to be appreciably worse than circuit-switched voice telephony. At this time, Internet telephony is in most cases not a comparable substitute for long-distance voice service.

However, distinctions in quality and ease of use should not be the sole basis for regulatory decisions. Cellular telephony typically provides poorer sound quality than wireline service, but this fact does not affect the classification of cellular as a telecommunications service. Moreover, service providers are working to improve sound quality and ease of use, and several providers have begun to deploy "gateways" that allow Internet telephony conversations to be terminated or even originated on an ordinary telephone. When such gateways are used, however, the pricing structure changes. Gateway providers must pay for hardware at points of presence to route voice traffic between the Internet and the voice network, and must also pay local exchange carriers to terminate or originate calls over voice lines. Thus, gateway providers plan to charge per-minute rates for their Internet telephony services, rather than the "free" calling available through current computer-computer Internet telephony products.

Even these current products, however, do not really provide for "free" calling. Service providers and users still must pay for their connections to the local phone network, and for their connections to the Internet. If these services are priced in an inefficient manner, the issue is not one related to Internet telephony, but is a broader question about the pricing for Internet access and enhanced services that use local exchange networks. The issue of pricing for Internet access is discussed in detail in the following section. The fact that some Internet packets now encode voice rather than data does not alter the fundamental economics and technical characteristics of network traffic. If anything, a shift toward usage of the Internet for voice telephony might result in usage patterns that looked more like those of circuit-switched voice calling. The issue of how exactly Internet telephony affects network usage, and how pricing affects usage of Internet telephony, is not at all settled. Local calling throughout virtually all of the United States is priced on a flat-rated basis, yet people do not tend to stay on the phone all day.

Internet telephony is also technically different from long-distance voice calling. A circuitswitched voice call uses an entire 56 kbps channel for every call. By contrast, Internet telephony uses digital compression techniques that can encode voice transmissions in as little as 4 kbps. Internet telephony is also packet switched, which means that it does not tie up a call path for the portion of the call carried over the packet-switched Internet. Of course, when a packet-switched Internet telephony call is originated through a modem over a dial-up circuit-switched connection to an ISP, the potential efficiency benefits of packet-switched voice transmission may not be realized. In some cases, the long-distance and international voice transmission networks, which are in most cases digital today, may actually do a better job of compression than Internet telephony products. All of these possibilities, however, reinforce the notion that the cost comparison between Internet and circuit-switched voice telephony is not obvious, and is highly contingent on network arrangements that are evolving rapidly.

Finally, as a practical and policy matter, regulation of Internet telephony would be problematic. It would be virtually impossible, for example, for the FCC to regulate as carriers those companies that merely sell software to end users, or to require the ISPs segregate voice and data packets passing through their networks for regulatory purposes. Rather, VON software could more appropriately be compared to unregulated customer premises equipment (CPE), like telephone handsets, which facilitate calling but do not themselves carry calls from one party to another. Moreover, although ACTA claims that Internet telephony unfairly deprives interexchange carriers of revenues, others argue that these services provide valuable competition to incumbent carriers. The existing systems of access charges and international accounting rates, to which long-distance carriers are subject, are both inefficient artifacts of monopoly regulatory regimes. If circuit-switched long-distance carriers are paying excessive and inefficient rates as a result, the best answer is to reform those rates rather than attempting to impose them on other parties. 

The FCC should consider whether to exercise its preemption authority in connection with Internet telephony. ACTA has submitted a petition, similar to its FCC filing, to the Florida Public Service Commission. In addition, the Nebraska Public Service Commission staff recently concluded that an Internet telephony gateways service operated by a Nebraska ISP was required to obtain a license as a telecommunications carrier. If federal rules governing Internet telephony are problematic, state regulations seem even harder to justify. As discussed below in section D, there is a good argument that Internet services should be treated as inherently interstate. The possibility that fifty separate state Commissions could choose to regulate providers of Internet telephony services within their state (however that would be defined), already may be exerting a chilling influence on the Internet telephony market. Netscape, in its comments on the ACTA petition, argued that the Commission should assert exclusive federal jurisdiction and preempt states from regulating Internet telephony.