Tag Archives: schat communications

Layers of regulation: CPUC maintains grip on telecoms infrastructure

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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.

CPUC finds a legal way to treat ISPs as regulated phone companies

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CPUC sends a Schat across incumbents’ bow.

Buried in last week’s California Public Utilities Commission consent agenda was a resolution granting a certificate of public convenience and necessity (CPCN) to Schat Communications, an independent Internet servicer provider based in Bishop, on the eastern side of the Sierra Nevada. Schat applied for the CPCN in order to qualify for California Advanced Services Fund (CASF) grants for two proposed last mile projects in Mono and Inyo Counties.

CASF rules are different now, but back in February, an applicant either needed a CPCN or the mobile telephone equivalent or at least have an active application in front of the commission. Golden Bear, Bright Fiber, Surfnet and Viasat were in the same boat, with CPCN applications pending. If a telecoms company has a CPCN, it means that it is a “telephone corporation” and can be regulated as such by the CPUC.

To one extent or another, all five applications were held up as the CPUC struggled with an institutional history of regulating telephone companies rather than ISPs and a state law, passed last year that expressly forbids the CPUC from exercising control over Internet protocol services, including VoIP as well as pretty much any other broadband-based content or service.

Nearly a year later, Schat is the first one to convince the CPUC that what it does is sufficient for it to be regulated (and given CASF grants)…

Schat Communications argues that its intention to provide “middle-mile transport service” and manage a network consisting of “conduits, ducts, poles, wires, cables and other property” qualifies it as a telephone corporation, and therefore a public utility. Public Utilities Code §710 does not preclude our regulation of “non-VoIP and other non-IP enabled” services such as the middle-mile transport intended by Schat Communications. Therefore, we agree with Schat Communications that it is a telephone corporation, and therefore a public utility subject to our jurisdiction.

It’s good news for the other applicants. Even though the law has since changed, a CASF applicant with a CPCN still has considerable advantages. It also opens up some interesting questions about middle mile service providers – say, AT&T or Verizon – that are moving toward IP-based networks, partly for technical reasons but also partly to escape regulation. It might not be as easy as they seem to think.

Tellus Venture Associates assisted with several CASF proposals in the current round, including Surfnet and Bright Fiber, so I’m not a disinterested commentator. Take it for what it’s worth.