Over two years ago, on August 25, 2022, the California Public Utilities Commission (CPUC) initiated Rulemaking 22-08-008 to consider major changes to the licensing status and regulatory obligations of interconnected Voice over Internet Protocol (VoIP) providers operating in the state. On September 13, 2024, Commissioner John Reynolds, the Administrative Law Judge (ALJ) overseeing the rulemaking proceeding, issued a Proposed Decision that would significantly alter the regulatory landscape for VoIP service providers in California. If adopted by the Commission later this year, the decision would impose a new regulatory framework on nearly all VoIP service providers operating or planning to operate in the state. The changes would introduce substantial requirements across three main categories of VoIP providers—Nomadic, Fixed, and Limited Facilities-Based VoIP—effectively raising barriers to market entry and increasing the compliance burden on existing operators. This comprehensive overhaul of the state’s VoIP regulations signals a major shift away from the more deregulated federal approach set by the FCC and would have far-reaching consequences for service providers.

As our firm previously reported, summarized below are some of the key proposed changes set forth in the ALJ’s Proposed Decision:

• Creation of Digital Voice Nomadic (DVN) and Digital Voice Fixed (DVF) Categories: The Proposed Decision introduces two new classifications for VoIP providers—Digital Voice Nomadic (DVN) and Digital Voice Fixed (DVF). Fixed VoIP services would be subjected to more stringent regulations similar to those applied to traditional telecommunications providers, while nomadic services would have slightly more lenient requirements.
• Licensing Requirements for Fixed VoIP Providers: Fixed VoIP providers would be required to obtain operating licenses similar to those required for traditional “telephone corporations” under California law. This significantly expands the Commission’s oversight and could impose costly compliance burdens on VoIP providers.
• Regulatory Oversight for Major Corporate Transactions: The Proposed Decision requires VoIP providers to seek Commission approval for significant corporate transactions, such as mergers, acquisitions, or asset transfers. This mirrors the existing regulations for legacy telephone services but imposes new barriers for VoIP providers that operate over the internet.
• Expanded Reporting and Filing Requirements: Both Nomadic and Fixed VoIP providers would be subject to new reporting requirements, including annual operating reports, transaction filings, and regulatory fee submissions. This imposes substantial administrative burdens, which may deter new entrants into the California VoIP market.
• Performance Bond and Fee Obligations: The Proposed Decision mandates that VoIP providers post a performance bond and pay regulatory fees akin to traditional telecommunication corporations. This measure adds financial liabilities and risks for VoIP companies, particularly smaller providers who may struggle to meet these requirements.
• Nomadic VoIP and Informational Submittals: Although nomadic VoIP providers are not required to seek licensing approval like Fixed VoIP providers, they must still file informational submittals detailing their operations. The Proposed Decision allows the Commission to review these submittals and, if deemed necessary, require formal proceedings for further oversight.

Yesterday, on behalf of the Cloud Communications Alliance (CCA), our firm filed detailed Comments in opposition to the Proposed Decision, citing fundamental issues that would disrupt the competitive VoIP landscape, contradict federal regulations, and stifle innovation.

Key Arguments Presented by the Cloud Communications Alliance:

1. Misapplication of Federal Law and Jurisdiction: The ALJ’s Proposed Decision rests on an incorrect assumption that “fixed” VoIP providers can track both the origination and termination points of a call, thus allowing the state to regulate such services. This assumption is legally and factually flawed. While some fixed VoIP providers may have the technical capacity to identify the call’s origination point based on registered addresses or static IPs, they cannot track the termination points, particularly for mobile or internet-based calls. This limitation is central to federal preemption established in the FCC’s Vonage Order, which asserts that VoIP providers, due to the dynamic nature of internet communications, cannot reliably distinguish between intrastate and interstate traffic. The Proposed Decision overlooks this critical point, leading to a legally unsustainable conclusion that state regulation can apply to VoIP providers.
2. Overreach on Defining VoIP Infrastructure: The ALJ’s decision to equate the equipment used by VoIP providers (such as gateways, softswitches, and IP-enabled handsets) with “infrastructure” as traditionally defined under telecommunications law is misguided. Historically, infrastructure referred to fixed, physical assets such as telephone lines, towers, and switches. In contrast, the equipment used by VoIP providers is flexible, cloud-based, and typically software-driven. The ALJ’s attempt to broaden the statutory definition of “infrastructure” to include VoIP components is an anachronistic interpretation that fails to account for the technological evolution of internet-based services.
3. Imposition of Transfer of Control Requirements: The Proposed Decision seeks to extend state approval requirements for mergers, acquisitions, and transfers of control to interconnected VoIP providers, effectively creating a de facto licensing regime. This would introduce significant delays, uncertainty, and financial burdens on VoIP providers, many of whom operate in highly competitive and rapidly evolving markets. Such requirements directly conflict with the FCC’s preemption framework, which was established to promote competition and innovation by preventing states from imposing market entry barriers. The transfer of control approval process acts as an unnecessary regulatory hurdle, further deterring investment and stifling the expansion of VoIP services.
4. Contradiction of Federal Deregulatory Policies: For over two decades, the FCC has pursued a deregulatory approach toward VoIP services, recognizing their unique position as internet-based technologies that transcend state boundaries. The imposition of traditional telecommunications regulations on VoIP services, as proposed by the ALJ, contradicts this federal framework. Federal law preempts states from enforcing market entry barriers and other burdensome regulations on VoIP providers, a principle that has been upheld through multiple FCC orders and court rulings. The Proposed Decision undermines these well-established federal policies, threatening to roll back years of progress in fostering a competitive and innovative communications marketplace.

The CCA strongly urged the CPUC to reject the ALJ’s Proposed Decision, asserting that the Proposed Decision is based on incorrect assumptions about the technical capabilities of VoIP providers and constitutes an unwarranted overreach of state regulatory authority, directly conflicting with federal law. The CCA believes that these burdensome regulations, if adopted, would stifle competition, hinder innovation, and deter investment in the VoIP sector, which has thrived under the Federal Communications Commission’s (FCC) deregulatory framework. The CCA implores the CPUC to ensure its policies align with the federal framework to continue promoting the growth and evolution of internet-based communication services.

For more information or specific guidance related to the implications of the CPUC rulemaking or the ALJ’s Proposed Decision, please contact the Cloud Communications Alliance at jmarion@cloudcommunications.com or Jonathan S. Marashlian at The CommLaw Group at jsm@commlawgroup.com.