Digital can of worms
Voice-over-Internet Protocol (VoIP) technology is known as a disruptive technology in the telecommunications industry — and for good reason. As a less-expensive alternative to traditional telephone service, it is attracting cost-conscious and tech-savvy users. However, as an unconventional telephone service, it skirts regulations and taxes that traditional telephone companies must comply with and pay.
For local governments, VoIP presents a host of problems. Cities and counties stand to lose billions of dollars in rights-of-way and franchise fees if VoIP remains unregulated and displaces traditional telephone service. Additionally, the technology does not connect seamlessly to emergency call centers; law enforcement agencies cannot tap into it; and users do not have to pay into the Universal Service Fund (USF), which subsidizes telephone service in rural areas. However, struggling to make ends meet, some cities and counties are choosing to use VoIP to save money and, in some cases, improve telephone service.
The Federal Communications Commission (FCC) is asking for comments on VoIP regulation, and Congress is likely to revise the Telecommunications Act to incorporate VoIP, possibly making whatever the FCC decides immaterial. While that percolates at the national level, local authorities are sorting through the benefits and the pitfalls of the technology.
Going soft
Although VoIP service might appear similar to conventional phone service, the technology behind it is quite different. VoIP transmits telephone communication over broadband networks — cable, digital subscriber lines, fixed wireless or powerlines — rather than traditional telephone lines. Voices are converted into data packets that travel over the Internet to their destinations.
A VoIP phone, unlike a conventional phone, is “soft.” A number is assigned to the phone, but it is not necessarily attached to the location from which the call is made. For example, a VoIP subscriber who lives in New Jersey may have a Las Vegas area code. Furthermore, a VoIP phone can be unplugged and carted to other areas of the country where it can reconnect to broadband services while maintaining the same number.
Although the soft technology makes portability possible, it causes problems for E-911 service. VoIP technology is incompatible with traditional circuit-switched telephone technology, on which emergency call centers rely. If a VoIP user calls 911, not only could dispatchers mistake the caller’s location from the phone number, the call may not be routed directly to the local emergency call center. “Emergency services are a hot item that’s not been resolved,” says Gary Resnick, a city commissioner in Wilton Manors, Fla., who also is a member of the FCC’s Intergovernmental Advisory Committee. “If residents in cities are going to be dialing E-911 from a VoIP phone, it becomes significant, because if there’s no response or the response is delayed because their call is not going to the emergency center, that’s a potential liability for the cities and a potential disaster for the residents.”
Resnick wants some form of government-mandated regulations that recognize the concerns communities have about the unbridled use of the new services. Wilton Manors has advised residents who subscribe to VoIP that the city cannot be held responsible for calls coming to E-911 emergency services from VoIP phones.
The Arlington, Va.-based National Emergency Number Association (NENA) is trying to resolve the issue. It formed a technical committee in August to study potential threats and improvements to E-911 service. “We’re looking at how to update the E-911 system both to accept those kinds of calls and messages in an efficient manner as well as whether IP ought to be used as a basis for a revised E-911 system nationwide,” says Roger Hixson, NENA’s technical issues director.
Because VoIP is based on advanced computer protocols, it actually could improve E-911. NENA is exploring a migratory plan that combines current VoIP technologies with existing 911 requirements. “Over the course of 2004 we’ll be turning out quite a bit of information on what functionality and capability needs to be considered in both the migratory solution and a longer-term solution of fully integrating IP devices in the 911 calling and emergency messaging process,” Hixson says.
Vonage, arguably the nation’s largest non-facilities-based VoIP provider, is working with NENA. “Everyone is so concerned with us finding the solution today that they forget this is the data world, and we can provide a level of 911 service that no one ever dreamed about,” says John Rego, the Edison, N.J.-based provider’s CFO.
With VoIP, he speculates, an E-911 caller could automatically provide location and other information to the dispatcher, then forward relevant medical records via embedded data links on the phone. That information could be used by the emergency personnel or forwarded to the hospital. “It’s a futuristic view of what 911 could be. That would take 18 to 24 months … but it’s something that we’re working on already and something that we took rather seriously,” Rego says.
The Communications Assistance for Law Enforcement Act (CALEA), which gives law enforcement officials the ability to tap suspicious phone lines, also is a concern with soft technology. It is not possible to tap a data packet, so law enforcement agencies have to follow several technical steps to divert or duplicate VoIP calls so they may be intercepted. Additionally, the technical rules that describe how CALEA must work were written for old telephony technology and do not apply to the new soft-switched gear that runs VoIP networks. CALEA rules must be revised to reflect a new Internet world where instant messaging, VoIP and even chatter among online gamers over broadband connections could be suspect.
USF responsibility — or not
In addition to concerns about E-911 service and the inability of law enforcement agencies to tap VoIP communication, some local governments are concerned about the future of rural telephone service, which is supported by the USF. Funded both nationally and locally, the fund assesses a fee to phone users in populated areas to provide telephone service to rural and remote areas of the country where, without help, no local provider would willingly invest in the infrastructure.
Because VoIP is not regulated as a telephone service, its users do not pay into the fund, which some local governments say they should have a social responsibility to do. “In my community, if we didn’t have to pay universal service fees anymore, nobody’s going to be hurt,” says Arvada, Colo., Mayor Ken Fellman. “But if you have a relative in South Dakota, and you can’t call them on the phone anymore, you might be.”
USF’s funding comes from interstate and international calls, and, with long distance prices falling, it is already dwindling. The FCC has been vague in its long-term support for the fund, and there even have been suggestions that it is no longer needed.
USF, like CALEA, might just need a refocus: instead of funding only traditional wireline telephone service in rural areas, the fund might promote universal broadband service, giving end users, no matter how rural, multiple voice carrier choices via the Internet. The Department of Agriculture’s Rural Utilities Service program offers low-interest loans to communities and service providers delivering broadband into rural areas and could spark widespread broadband deployment for VoIP.
Revenue loss
Some cynics suggest that the local governments’ public safety outcry and social responsibility mandates are smoke-screens covering a more base fear: losing revenues from telecommunications services that governments have become accustomed to collecting. State and local governments charge telephone companies fees for using the public rights-of-way for telephone lines; charge franchise fees to operators working within their communities; and assess various fees for regulated telecommunications providers. Because VoIP runs on broadband, there is some disagreement about whether it is an information service — like high-speed data, which is not regulated or taxed — or a telephone service, which is regulated and taxed. The current disagreement allows VoIP providers to circumvent many of those fees.
No doubt about it, money is a valid concern, says Tillman Lay, senior counsel for the Washington, D.C., office of Miller Canfield Paddock & Stone. “Many local governments have local utility taxes that apply to telephone, gross receipts taxes, or some of them just have telephone taxes,” says Lay, who represents multiple communities on telecommunications issues. “What you have at stake for local government is a telephone tax base that is over $22 billion per year. That’s a loss of state and local government fund telephone taxes, not just local governments.”
While some of that money — such as local access fees, franchise taxes and rights-of-way fees — will always be there because some providers always will be based in the community, some of it will evaporate with unregulated VoIP, or non-facilities-based VoIP providers, which do not own or operate the networks over which the service travels. “I don’t really think a service like VoIP should be regulated,” Lay says. “I think it would be nuts to do that. At the same time, people in their zeal to deregulate shouldn’t substitute regulation for antitrust competition. There are other things … sometimes even taxes … that we place on industries not because of competition, but for public policy reasons.”
Towns using VoIP
Despite the questions VoIP raises, some communities are moving their fixed wireline services onto VoIP and are saving money as a result. In Brockton, Mass., for example, Telecommunications Director George Walsh estimates that a newly installed municipal VoIP system is saving the town $14,000 a month over what it previously paid for phone services. “The payback on putting in a system was almost immediate,” Walsh says.
Brockton has a deal with its local cable provider, Philadelphia-based Com-cast, to use a private fiber-fed broadband network throughout the city for the VoIP service. Because Brockton already uses the network for its data transmission, it will not have to pay any more to use the network for VoIP.
In Campbell County, Ky., VoIP replaced an antiquated phone system and is saving the county between $75,000 and $100,000 a year “just [by] getting rid of the amount of phone lines we have,” says Andy Kuykendall, the county’s information technology director. “I look at it this way; I’m actually helping save our taxpayers money.”
Campbell County is using Littleton, Colo.-based Time Warner Telecom for its broadband connections. With VoIP, Campbell County is able “to provide features that a lot of our departments never had: voice mail, or the ability to transfer calls seamlessly,” Kuykendall says. “We got a great amount of improvement, and we’re also saving money.”
Even tiny Isle, Minn., with fewer than 1,000 residents, is using VoIP as part of a tradeoff with a fixed wireless provider, Minneapolis-based Genesis Wireless, that uses the town’s water towers for its antennas. As part of the deal, the company outfitted Isle government offices with VoIP and put wireless antennas on laptops and VoIP phones in police cars. “We have a hands-free telephone in [each car],” says Police Chief Gene Hill. “We click on the icon for the telephone, dial the phone number and have a headset and you talk like you’re talking on a regular telephone.”
In those instances, the governments may be saving enough money to offset any future revenues lost from subscribers who stop using the normal telecommunications structure. “We’re far in front of the game introducing it on a cost-savings basis — and that’s the only thing we’ve been looking at: cost savings,” Walsh says. “We haven’t looked at the implications in the future of eroding the tax base. But I think both the federal and state governments would have to make some decisions about that as well.”
‘Give us a chance’
With less than a quarter million VoIP users nationwide, there is still time to hash out the issues and develop some form of economic or non-economic service regulation that helps communities maintain a revenue base and provides continued funding for societal needs. What will the federal government do about the disruptive technology? Carriers, like Vonage, would prefer it do nothing. “You have to give us a little bit of a chance to put something together,” Rego says. “Why don’t you let the nascent industry grow up a little bit? Let the innovators go out and innovate.”
That is a risk people like Juan Otero, principal legislative counsel for the Washington, D.C.-based National League of Cities, are not willing to take, and he is tired of taking a rap for being anti-technology. “Local governments constantly are cast as the Luddites in the technology debate,” Otero grouses. “We welcome the technology. Technology is the railroad of the 21st Century. No one takes issue with that.”
However, by leaving VoIP services unregulated, the federal government cuts into the rights of communities to tax VoIP providers in their communities, he says. “It’s not about expanding current taxing authority but taking away the taxing authority that we currently have,” Otero says.
Jim Barthold is a Delanco, N.J.-based freelance writer.
