BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair SB 1161 (Padilla) - Communications: Voice over Internet Protocol and Internet Protocol enabled communications service. Amended: April 26, 2012 Policy Vote: EU&C 12-0 Urgency: No Mandate: No Hearing Date: May 21, 2012 Consultant: Marie Liu This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 1161 would prohibit the California Public Utilities Commission (PUC) or any other state department, agency, commission, or political subdivision of the state from regulating, or having the effect of regulating, Voice over Internet Protocol (VoIP) unless authorized by the federal law and expressly authorized by statute. Fiscal Impact: One-time costs of at least $900,000 from the Public Utilities Commission Utilities Reimbursement Account (special fund) beginning in FY 2013-14 for proceedings to clarify the PUC's jurisdiction in specific situations. One-time costs of at least $300,000 from the Public Utilities Commission Utilities Reimbursement Account (special fund) at an unknown time for proceedings to clarify the PUC's jurisdiction over a provider of basic telephone service that is transitioning to a VoIP-only provider. Uncertain ongoing costs, likely in the millions of dollars, in lost PUC user fee revenues to the Public Utilities Commission Utilities Reimbursement Account (special fund) as more customers choose VoIP services over basic telephone service. Background: The California Constitution grants the PUC authority, subject to control of the Legislature, to regulate utilities including private corporations that transmit telephone and telegraph messages. Voice over Internet Protocol Service is a service that allows voice calling through a broadband connection. Because of the broadband connection, VoIP service also allows users to send and receive video and data services and internet access, which SB 1161 (Padilla) Page 1 differentiates it from traditional circuit-switched telephone service (traditional telephone service). VoIP services and providers can take several forms. "Interconnected" VoIP enables calling to and from the public switched telephone network (i.e. Comcast's Digital Voice, AT&T's U-verse, or Verizon's FiOS). A subset of interconnected VoIP is "facilities-based" VoIP, which is VoIP that is provided by the same entity that provides the broadband connection. "Over-the-top" VoIP or "nomadic" VoIP is a service that is offered separately from the broadband and operates with any broadband connection (i.e. Vonage and Skype). Within the industry there is a debate on whether VoIP should be considered a "telecommunications service," which may be regulated by states, or an "information service," which the federal government preempts states from regulating. In 2004, in a decision known as the Vonage Preemption Order, the Federal Communications Commission (FCC) preempted the Minnesota Public Utilities Commission from regulating nomadic VoIP because of the interstate nature of the service. However, the FCC did not make a broader decision on classifying VoIP as a telecommunication or information service in this decision or any other decision. The FCC has not explicitly preempted the states from regulating of facilities-based VoIP, although whether preemption has been implied is subject to debate by stakeholders. The FCC has allowed or directed the states to apply certain public safety and customer protections to VoIP including: offering 911 service, collecting 911 fees, requiring number portability, collecting universal service program fees, and requiring disability accessibility. The Legislature has in response enacted several statutes to impose specific requirements to VoIP services consistent with federal law including AB 2393 (Levine) 2006, SB 202 (Simitian) 2006, SB 1040 (Kehoe) 2008, AB 1335 (Fuentes) 2010, SB 3 (Padilla) 2011, and AB 841 (Buchanan) 2011. Proposed Law: This bill would prohibit the PUC from "exercising regulatory jurisdiction or control" over VoIP and Internet Protocol (IP) enabled services except if explicitly authorized by federal law and statute. This bill would also prohibit any department, agency, commission, or political subdivision of the state from either directly or indirectly regulating or having the effect of regulating VoIP and IP enabled services. SB 1161 (Padilla) Page 2 Several existing laws would be exempted from these prohibitions including the Emergency Telephone Users Surcharge Law which requires interconnected VoIP to collect and remit 911 surcharges, the state's universal service programs, The Digital Infrastructure and Video Competition Act of 2006, and the enforcement of criminal or civil laws or any local ordinances of general applicability. This bill also specifies that it does not affect existing regulations or existing PUC authority over traditional telephone service through a landline connection including regulations regarding universal service, the offering of basic service, and lifeline service. This bill also provides a definition of VoIP and IP enabled service. Staff Comments: There is considerable disagreement on the potential impacts of this bill should it become law, including within the PUC staff, as illustrated by the staff memo to the PUC Commissioners regarding this bill (available on the PUC website). (The Public Utilities Commission considered taking a position on this bill at its May 10th hearing, but ultimately took no action.) The Communications Division of the PUC concluded that no current PUC regulatory activity or programs regarding VoIP or other IP enabled services would be impacted by the bill but also recommends a number of amendments both clarifying and substantive. On the other hand, the Legal Division concluded that this bill is written so broadly, and with some internal inconsistencies, that passage of the bill could obstruct the PUC's ability to continue to regulate non-IP telephone service and wireless service and potentially block the PUC from enforcing federal regulations on VoIP Services. Staff believes that there are several actions that the PUC will have to take to ensure that PUC does not regulate VoIP except where explicitly allowed. Specifically: The PUC currently acts as the lead agency for the purposes of enforcing CEQA and currently has an open proceeding to determine the applicability of CEQA to various telecommunication carriers. An example of a project that would involve CEQA and a VoIP provider is a VoIP-related construction project, such as a communications tower or laying cable in the ground. This bill would require the PUC to expand the scope of this proceeding to interpret if the SB 1161 (Padilla) Page 3 PUC has jurisdiction under CEQA for such a project, and if so, what is the scope of this jurisdiction so that actions required of the VoIP provider are not construed as a restriction on the VoIP services that may be offered as a result of the project. According to the author's staff, there is no intent to alter the application of CEQA with this bill. The PUC requires telephone companies to obtain a Certificate of Public Convenience and Necessity (CPCN), which in essence allows the PUC to regulate that entity. Some VoIP-only providers, such as Cox, Comcast, and Time Warner, hold a CPCN, as the CPCN entitles the provider to certain regulatory protections such as ensuring interconnection rights (i.e. connecting a call between two different providers).Conceivably this bill would prevent the PUC from allowing a VoIP-only provider from holding a CPCN as it would have the effect of regulating VoIP services. Thus, the PUC will likely need a proceeding to decide whether CPCNs held by VoIP-only companies need to be surrendered and if an alternate mechanism should or can be established. This bill explicitly states that the language does not affect "existing regulations of, or existing commission authority over, traditional telephone service?" This language was added in response to concerns made in policy committee that existing consumer protections should not be undone by this bill, which is not the intent of the author. However, there has been concern expressed by stakeholders over the interpretation and scope of "traditional telephone service through a landline connection," including by the PUC staff in the Legal and Communication Divisions. As such, the PUC would need a proceeding to determine the existing customer protections that are unaffected by this bill. To clarify at least these three issues, the PUC would need to open a rulemaking process for each. Each proceeding is likely to cost at least $300,000 for a total minimum cost of $900,000. Staff also believes that this bill will likely have fiscal impacts in the future, although it is uncertain when these costs may be incurred. Specifically: The PUC collects a user fee from telecommunications carriers who operate in California. This fee is assessed as a percentage of the carrier's intrastate revenue. The PUC currently has the authority to asses this fee on VoIP SB 1161 (Padilla) Page 4 services, but it has not done so. This fee is used for PUC activities, including activities that benefit VoIP providers, such as providing arbitration for interconnection disputes, providing access to rights-of-way, and access to utility poles. This bill would prohibit the PUC from assessing this fee on VoIP services in the future, making some of the PUC's unfunded activities permanently unfunded. While this may not be an immediate fiscal issue for the PUC, it will become a significant issue as more customers move to VoIP services instead of traditional telephone services. Revenue loses are uncertain but are likely to reach the millions of dollars. These revenues would need to be offset by cost-shifting to the remaining traditional telephone service users or be supplanted by the General Fund. Under this bill, it is unclear what regulatory authority, if any, the PUC over how a company may transition from a provider of basic telephone service to a VoIP-only provider, assuming that such a transition would not be prohibited under "carrier-of- last-resort" laws. The PUC would need to open a proceeding to make this determination, at a likely minimum cost of $300,000. Staff notes that this bill likely has a very significant fiscal impact on local governments in regards to the assessment of Utility Users Tax (UUT). Cities and counties currently tax the consumption of utility services, including telephone services that include local, cell phone, long distance, and VoIP services. Use of the tax revenues is determined by the local government assessing the tax. It is unclear whether this bill would prohibit local governments from assessing a UUT on VoIP services. It is uncertain how much of the UUT can be attributed to VoIP subscribers, but given that UUT revenues statewide exceeded $1.8 billion in FY 2010-11 and that VoIP subscribers account for about 18% of phone subscribers, this bill potentially could cost local governments tens of millions of dollars of lost revenue. According to the author's office, it is not the intent of the author to prohibit local governments from assessing a UUT on VoIP services. Staff believes the fiscal impacts listed above are the most direct and likely impacts to be seen by the passage of this bill. However, staff notes that the PUC's Legal Division staff also submitted to the Commission a preliminary assessment of the potential fiscal impacts of this bill that totals hundreds of SB 1161 (Padilla) Page 5 millions of dollars impacts to the state and local governments. This list includes potential impacts to the CPUC User fee, Utility Users Tax, collection of property tax, California Environmental Quality Act (CEQA) enforcement, numerous potential proceedings and complications of currently open proceedings, 911 services, broadband deployment, customer privacy rights, numbering administration, and disconnections. Many of these potential impacts are not reflected in this analysis. Staff recommends that these are policy issues with uncertain fiscal impacts, which the author may desire to address, as many are likely unintended impacts of the bill. Staff notes that the number of issues identified by the Legal Division highlights that this bill is likely to result in litigation, exposing the state to unknown, but potentially very significant, legal costs. Recommended Amendments: Staff notes that this bill uses a different, although very similar, definition of VoIP than is used in Section 285 of the Public Utilities Code, which defines VoIP by reference to federal regulation. Staff recommends that these definitions be harmonized.