On August 30, 2022, the California Public Utilities Commission (“CPUC” or “Commission”) issued an Order Instituting a Rulemaking to consider issues related to licensing of interconnected VoIP (“I-VoIP”) providers.  In particular, the CPUC will examine its authority to regulate nomadic I-VoIP providers, specifically to (a) collect state Universal Service Fund (“USF”) surcharges; and (b) adopt licensing requirements for nomadic I-VoIP providers.  The Commission will also evaluate the obligations of fixed I-VoIP providers, including penalties for non-compliance with current licensing rules.  Comments are due by October 14, 2022, with reply comments due by October 31^st.

We urge all interconnected VoIP (and one-way VoIP) service providers to pay close attention to the Rulemaking proceeding, as it portends a potential sea change in the way State Utility Commissions across the country have, thus far, chosen to “regulate” VoIP services.  The boundaries of the Federal Communications Commission’s (“FCC”) 2004 Vonage Order, which preempts states from regulating nomadic VoIP (with limited carve outs), are certain to be pushed to their limits (and beyond) by the CPUC, which has a well-earned reputation as a progressive, aggressive, and leading voice when it comes to exerting state regulatory powers to regulate in the public interest.  If the first domino falls, it portends more dominos will follow.  What happens in California will very likely have a long-lasting impact on the rest of the country and, indeed, may even influence the FCC as it considers a pending Petition which seeks a declaration that facilities-based VoIP is a Title II telecommunications service subject to the full panoply of regulation under the Communications Act. 

Background

• CPCN or Simplified License Required: Wireline providers in California require either a Certificate of Public Convenience and Necessity (“CPCN”) or, any company lacking “monopoly power” may seek a “registration” license (“Simplified License”).
• Surcharges Required: In 2011, the California legislature adopted Section 285, which requires I-VoIP providers to remit USF and related public program surcharges.
• Informal Registration: In November 2011, the CPUC directed I-VoIP providers that did not hold a CPCN or Simplified License to complete an informal registration and secure a “Utility ID” (for purposes of contributing to the public programs) (“Section 285 Carriers”).[1]
• Limited CPUC Authority: In 2012, the California legislature enacted Section 710, which limited the CPUC’s authority to regulate I-VoIP providers; that limitation expired on January 1, 2020.
• New Authority over I-VoIP: With the expiration in 2020 of the statute barring the CPUC from regulating VoIP in California, the CPUC opted to require facilities-based I-VoIP providers to secure either a CPCN or a Simplified License (the CPUC takes the position that VoIP service providers fall within the definition of “Telephone Corporation” under Section 234).
• Elimination of Information Registration: At the same time, the CPUC eliminated the informal registration form, leaving Section 285 Carriers and Nomadic I-VoIP providers with no means to register for purposes of remitting USF and public program surcharges other than by securing a CPCN or Simplified License.
• Current Regulatory Oversight: To date, the Commission has not actively regulated Section 285 Carriers.

Issues under Consideration

The CPUC invites comment on a number of issues impacting the licensing and surcharge remittance obligations of I-VoIP providers, in particular, Section 285 Carriers and nomadic I-VoIP providers.  The Rulemaking includes staff proposals for addressing each issue raised. Key questions and staff proposals include:

Issues Applicable to Fixed I-VoIP Providers:

Current Utility IDs – Deactivation

• • Staff proposes that the CPUC require deactivation of Utility IDs for Section 285 Carriers (fixed I-VoIP providers)

Licensing Requirements – Required for Fixed I-VoIP

• • Staff proposes that fixed, facilities-based I-VoIP providers continue to be required to secure a CPCN or Simplified License
  • Staff suggests that there’s no need for a separate registration form since fixed I-VoIP providers are required to secure a CPCN or Simplified License.

Amending Current Licenses

• • The Commission asks whether Section 285 Carriers (fixed I-VoIP provides) can operate under their existing wireline authorizations.
  • Staff notes that an expansion of authority may be required depending upon the type of service provided and the authorization originally granted.

Licensing Review Process – Expedited Review Proposed

• • Staff proposes an expedited review, with quarterly batch approvals; during the interim period (18-24 months), providers would continue to operate and report surcharges under their existing Utility IDs and submit a written notice to the CPUC

Additional Requirements:

• • Staff proposes that fixed I-VoIP providers be required to comply with all obligations imposed on providers with wireline operating authority (performance bonds, annual financial and operational reports, tariffs, PUC user fees, etc.)

Penalties and Enforcement:

• • Staff proposes penalties and late charges for on fixed I-VoIP providers that (1) have not reported or remitted surcharges since obtaining their Utility IDs before securing a CPCN or Simplified License; or (2) acquired a fixed I-VoIP provider without Commission approval.
  • Staff proposes that any fixed I-VoIP provider that has operated without the required authority be subject to enforcement action and possible fines.

Issues Applicable to Nomadic I-VoIP Providers:

Surcharge Remittances:

• • Staff recommends evaluating comments from interested parties to determine whether nomadic I-VoIP providers must pay USF and public purpose program surcharges.

Licensing Requirements:

• • Staff recommends evaluating comments from interested parties to determine whether the CPUC should adopt licensing requirements for nomadic I-VoIP providers.

Issues Applicable to All I-VoIP Providers

Information Request from all I-VoIP Providers:

• • Staff recommends that providers submit detailed information about their operations to the CPUC within 30 days of the ALJ’s ruling

In addition, staff proposes the delegation of authority for performance of certain registration form and website updates. Staff further proposes a process for filing of performance bonds for all license holders.  Staff proposes an application fee for conversion of a Simplified License to a CPCN where necessary.

Likely and/or Potential Outcomes and Impacts on the VoIP Industry

Affected VoIP Providers Will Be Required to Obtain Wireline Authority: The Order proposes to require VoIP registrants that do not hold separate wireline authority in the state to apply for and obtain authority within an 18-24 month timeframe of a final rulemaking decision. The Order proposes to require all VoIP registrants to notify the Communications Division to deactivate their VoIP Utility ID, and permit the Communications Division to automatically deactivate VoIP Utility IDs for carriers that do not either request deactivation or apply for separate wireline authority.

VoIP License Applications Will be Subject to Extensive and In-Depth CPUC Review Process: The Order proposes an expedited process to accept applications by VoIP registrants for new or expanded operating authority on a quarterly basis. The applications would be considered in “batches” based on each carrier’s Utility ID, with an ability to seek a waiver to file an application as part of an earlier batch. While hope springs eternal, our experience with the CPUC suggests that it has limited capabilities to act an expedited manner or, alternatively, its idea of expedited is not in accordance with common understanding of the term. 

• NOTE: The Order says “expedited process to accept applications,” its silence on what the review process will entail is telling!

Non-Compliant VoIP Providers Will be Exposed to Significant Penalties Proposed for Unauthorized Operations: The Order proposes fines of $1,000 per month for carriers operating without appropriate authority in California.

Nomadic VoIP Service Providers May be Subject to Increased Regulatory Scrutiny, Testing the Limits of the Heretofore Accepted Understanding of What Constitutes a “Nomadic” Service (as Opposed to Fixed): The Order seeks information regarding how nomadic interconnected VoIP service providers should be treated under the new framework, including what licensing and surcharge requirements should apply.

Affected VoIP Service Providers Will be Subjected to the CPUC’s Onerous Transfer of Control Rules and Procedures: The Order would subject VoIP providers to the same transfer of control approval requirements that apply to a CPCN/Simplified Registration holder (i.e., an application required for acquirers that do not already own a certificated carrier; advice letter process for acquirers that own a carrier in California). It also proposes penalties for companies acquiring VoIP providers without first obtaining CPUC approval. The Order is somewhat ambiguous regarding whether the CPUC would apply such penalties retroactively or only on a prospective basis. Moreover, the CPUC process for approving transfer of control applications typically takes 12 months or longer easily surpassing virtually every other state commission that requires formal approval of such transactions and is longer than the FCC’s Team Telecom review in many cases.

Affected VoIP Service Providers Will be Required to Secure a Performance Bond: The Order proposes requiring all carriers holding authority in California to submit their performance bonds via a Tier 1 advice letter, including providing a hard copy of the bond to the Communications Division and providing supporting documentation each year demonstrating that the bond is still in effect (e.g., continuation certificate; payment invoice, etc.).

This is not the time to sit on the sidelines while the boundaries of the future regulatory construct applied to interconnected VoIP services by the 50 state public utility commissions gets its first real test!  What happens in California most likely will not stay in California, folks!  This isn’t Las Vegas we’re talking about. 

Indeed, we urge all non-interconnected or one-way VoIP service providers to consider participating in the rulemaking proceeding, because the history of regulatory creep is a long and arduous one.  The outcome of the rulemaking proceeding initiated by the CPUC will be the bell weather other states, and even the FCC, are likely to follow.

Deadlines

If your company has questions, concerns or is interested in learning more about the rulemaking and its potential impacts, or you are interested in filing comments, please contact the attorney assigned to your account or reach out to Jonathan Marashlian at jsm@commlawgroup.com or 703-714-1313. 

[1] While the Rulemaking is unclear, it is our understanding that the term “Section 285 Carriers” in the CPUC’s Order includes only Fixed I-VoIP providers (excluding nomadic carriers).