Layers of regulation: CPUC maintains grip on telecoms infrastructure

by Steve Blum • , , , ,

Kicking down barriers to competition, progressively.

There’s always a danger of reading too much into a single, seemingly routine decision by the California Public Utilities Commission, but I’ll risk it. Earlier this month, the CPUC granted a certificate of public convenience and necessity to Schat Communications LLC, which is a sister company of Schat.net, an Internet service provider in eastern California. In doing so, the commission determined that Schat is a “telephone corporation” under Californian law and can be regulated as such.

Schat isn’t offering traditional voice or other consumer services that the commission is allowed to regulate. Its retail offerings are all Internet protocol (IP) based – i.e. VoIP and plain vanilla Internet access – which are specifically exempted from commission oversight by state law. In technical jargon, those belong to the network layer – Layer 3 – or higher of the standard Open Systems Interconnection (OSI) model, which provides clear and globally recognised definitions of the roles and the relationship between the technologies that make digital communications possible. The CPUC did not specifically reference the OSI model, but the language it used in the Schat decision usefully parallels those definitions.

The commission endorsed Schat’s assertion that physical infrastructure – Layer 1 in the OSI model – is something completely different from what state law considers IP services, which live on Layer 3 or higher (for brevity’s sake, I’m ignoring Layer 2, arguably a grey area)…

Schat Communications’ proposed middle-mile network will consist of conduits, ducts, poles, wires, cables and other property over which Schat Communications will offer transmission services to other certificated carriers (i.e., telephone corporations) as well as to business customers. Carriers purchasing Schat Communications’ transmission will then be able to offer telephone services to their customers. As such, Schat Communications’ middle mile network will be comprised of “telephone lines” and by such offering, Schat Communications will be a “telephone corporation” pursuant to the [Public Utilities] Code.

The commission is clearly saying that Layer 1 infrastructure is still within its regulatory domain, whether or not IP-based Layer 3 services are riding on it. If it follows this line of thinking to the logical conclusion, physical plant – all the way down to last mile copper – will remain regulated, even if telecoms companies completely convert to IP technology.

More broadly, the decision bridges a 100-year philosophical divide. The modern CPUC’s roots lie in California’s early 20th century Progressive Era, which brought regulation of natural monopolies and dismemberment of purposeful ones. Cyberspace may be limitless, but the physical dimensions of our world haven’t changed. The cost and difficulty of building public utility infrastructure – the defining hurdle of a natural monopoly – remain. By establishing a clear framework, based on objective technical standards, for keeping static physical infrastructure in a traditional regulatory regime, the commission is creating neutral ground where vigorous competition and the Internet’s libertarian ethos can flourish in the 21st century.