Lansing Bureaucracy Threatens New Communications Technology

State and federal regulators should welcome the unfettered progress of Internet telephony (using the Internet to make and receive calls). But rather than allow new marvels of telecommunications to advance freely, attempts are underway in both Lansing and Washington to impose antiquated regulations on the new technology.

It is questionable whether the Michigan Public Service Commission (MPSC) is authorized under existing state law to regulate Internet telephony. But even were it so, the public interest would not be served by further expanding the very government interference that for decades stifled competition and innovation in telecom.

Internet telephony, also known as Voice Over Internet Protocol or VoIP, transmits calls through the Internet by converting the sound waves of voice into digital packets of data that travel at light speed through the global network. The technology allows customers to interconnect with or bypass entirely the wire line telephone system.

VoIP is both cheaper and far more versatile than other telecom services, but there are still drawbacks. Unlike traditional land line service, VoIP requires an electrically powered adapter to connect with a personal computer, leaving it more vulnerable to power outages. Internet viruses or other network interference may also impair service.

VoIP currently holds only a slight share of the market. But exponential growth is expected in the near term, with some analysts forecasting that VoIP will capture 18 percent of phone lines within five years. Cox, Cablevision and Time Warner all have launched VoIP service, while Comcast executives have announced plans to offer the service to all the company’s 21.5 million subscribers by the end of 2005.

VoIP has so far escaped the regulatory encumbrances that plague most other segments of the telecom market, including price controls, subsidies and service mandates. Unfortunately, that may soon change. The Michigan Public Service Commission has launched an “investigation” into VoIP “in order to formulate an informed, consistent regulatory policy.”

A truly “informed” policy would constitute abolition of the regulatory regime originally crafted decades ago to control government-created telephone monopolies. Consumers well know that the choices of affordable services available today can seem downright dizzying, making the old monopoly mindset obsolete.

The telecom world no longer belongs to Grandma Bell. Wireless connections comprise the same proportion of the Michigan market as wire line – 41 percent, according to government data. High-speed broadband connections account for another 6 percent. This competition is further enhanced by the availability of full-service packages, including both local and long-distance calling, from wire line, wireless, cable and VoIP companies.

Aiming for “consistency” in policy usually means protecting special interests. Competing telecom firms are understandably anxious about the regulatory double standard that saddles their services but not VoIP. But the more rational course is to end unnecessary regulation, thereby creating a true “level playing field” — the open market. All of the social objectives underlying current telecom regulation, including universal service, 911 access and affordable rates, could be accomplished faster and cheaper through deregulation.

The commission’s investigation of VoIP is also premature. The Federal Communications Commission (FCC) has yet to decide whether states will have any regulatory authority over Internet telephony. This is no small point. By its very nature, VoIP is unconfined by geographic boundaries and thus clearly constitutes interstate commerce. Regulatory authority, therefore, falls solely to the FCC, which is in the midst of its own rulemaking proceedings.

This is hardly the first time that the Michigan commission has overstepped its authority. For example, the MPSC is continuing to develop rules governing competition in landline calling despite a federal court ruling earlier this year that this regulatory responsibility belongs to the FCC alone.

Gov. Jennifer Granholm has repeatedly stressed the importance of streamlining regulation to bolster the state’s economy. And rightly so. Michigan was ranked a lousy 34th among the states in the recently released U.S. Economic Freedom Index compiled by the Pacific Research Institute. The state simply cannot afford unnecessary and costly regulations that propel industry outside Michigan’s borders. If the MPSC cannot overcome its regulatory impulses on VoIP, it should be reined in by the governor and legislature.

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Diane Katz is director of science, environment and technology policy for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Michigan. Permission to reprint in whole or in part is hereby granted, provided the author and her affiliation are cited.


An impending state regulatory initiative could stifle the development of future communications technology — Internet phone calls — resulting in fewer jobs and less economic growth in Michigan.

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