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Last week, California’s telecommunications regulator, the California Public Utilities Commission (“CPUC”), adopted a new regulatory framework for providers of interconnected voice over Internet protocol (“iVoIP”) that marks a significant shift in regulation of a service that has long been lightly regulated both at the state and federal level.  Under the new rules adopted at Thursday’s CPUC meeting, iVoIP providers are now subject to registration and licensing requirements in California, which also will require that these companies notify the CPUC of – and in some cases, seek prior approval for – any transfers of control or assignments of their assets.

The new rules could have significant and far-reaching ramifications for carriers providing iVoIP services in the largest market in the United States.  For example, because the CPUC’s decision now requires at least some form of filing with the regulator before transfer of control of an iVoIP provider may occur, financial or strategic investors focused on the telecommunications space should take note that regulatory requirements may apply to any acquisition or investment in an iVoIP provider with operations in California.  In some circumstances, a transfer of control of a California iVoIP provider or assignment of iVoIP provider assets may require prior approval from the CPUC, a process that tends to be the lengthiest state regulatory approval process for communications transactions that require state review.

Substantively, the CPUC’s order concerns the creation of new utility classifications (and corresponding authorization types) for iVoIP providers, which are subject to different licensing or registration requirements depending on the nature of the iVoIP services they provide.  The following is a summary of the three new utility types and the key requirements for each from the CPUC’s order.

New iVoIP Utility Categories

The regulatory framework established by the CPUC’s order creates two new categories of iVoIP providers: (1) Digital Voice Nomadic providers and (2) Digital Voice Fixed providers.  However, the CPUC divides the latter into two sub-types based on whether the iVoIP entity provides facilities-based or non-facilities-based service.  This creates the following new utility categories, each of which is subject to new rules governing transfers of control:

1. Digital Voice Nomadic (“DVN”) Provider.DVN Providers are entities offering only “nomadic” iVoIP service, which the CPUC describes as a network-agnostic service offering that is decoupled from physical infrastructure or specific devices such that the provider cannot distinguish between intrastate and interstate communications.As an illustrative example, the CPUC’s decision cites the voice service at issue in the Federal Communications Commission’s (“FCC’s”) 2004 Vonage Order, in which the agency preempted the Minnesota Public Utilities Commission’s proposed application of traditional telephone regulations to Vonage’s “DigitalVoice” service.

DVN Providers are subject to the lightest regulation under the new regulatory framework and need only submit and keep updated an information-based registration form.  This is similar to the existing registration process the CPUC requires for wireless carriers. 

However, this registration process applies only if an iVoIP provider’s service offering is “exclusively nomadic.”  If a provider of fixed iVoIP service (discussed below) also provides some portability features (e.g., the ability to receive calls through an app on a mobile device), that does not qualify the provider for the lighter-touch registration process.  Consistent with this requirement, registration as a DVN Provider (through submission of a “Nomadic Registration Form”) requires that the provider submit along with its registration a sworn affidavit attesting to the following, which intends to limit eligibility to providers of iVoIP services similar to the Vonage DigitalVoice service the FCC addressed in 2004:

• The service can be accessed from any broadband connection without a requirement to subscribe to Internet access at any one location or from any particular Internet access provider;
• The service is provided to nomadic (portable) IP compatible communication devices; and
• The associated telephone number(s) is not tied to user’s physical location for assignment or use, and calls may be received by customers unrestricted by location.

Transfer of Control Requirements.  For any transfer of control involving a DVN Provider (or assignment of its assets), the DVN Provider must notify the CPUC 30 days in advance by submitting an information-only filing intended to update the DVN Provider’s registration.  However, the CPUC has discretion to require prior approval if it finds the transaction involves special circumstances warranting further review.

2. Digital Voice Fixed (“DVF”) Provider.DVF Providers are entities providing iVoIP service that is not exclusively nomadic – i.e., any iVoIP provider whose service does not qualify under the criteria outlined above.Under the CPUC’s new framework, these companies are regulated more like traditional wireline telephone service providers.

DVF Providers fall into two sub-categories based on whether the provider owns all or part of the network facilities over which it provides iVoIP service.  Both classes of DVF Providers must hold a license (called a “Certificate of Public Convenience or Necessity” or “CPCN”) under the new framework, but a streamlined application process applies to those providers that do not have their own network assets.

a. Non-Facilities-Based DVF Provider.Non-Facilities-Based DVF Providers are those iVoIP providers that do not own telecommunications infrastructure.These providers must hold a CPCN, but they can use a streamlined application process (referred to as “Section 1013 Registration”) that traditionally has applied to other non-facilities-based carriers (e.g., carriers providing resold long-distance services).

b. Facilities-Based DVF Provider.Facilities-Based DVF Providers are any iVoIP providers that own the network facilities used to serve their customers.These entities are subject to the long-form CPCN application process that the CPUC has long required for companies seeking to provide facilities-based telephone services.

Transfer of Control Requirements.  For any transfer of control (or assignment of assets) of a DVF Provider to an entity that already holds a CPUC authorization or is affiliated with such an entity (e.g., a parent or subsidiary), the parties must seek prior approval from the CPUC through the CPUC’s “Tier 2 Advice Letter” process.  These Advice Letters are deemed approved 40 days after filing, provided the CPUC does not “suspend” the submission for further review. 

However, for any transfer of control that would involve the acquisition of a DVF Provider or its assets by an entity without an existing CPUC certification (or by an entity that is not a parent or subsidiary of a “certificated” entity), the CPUC’s long-form approval process applies.  This could present significant burdens for future investments in California iVoIP providers – traditionally, the CPUC’s long-form approval process is resource- and time-intensive (in some cases, approval can take 8–12 months, and sometimes longer).

Automatic Migration to New Utility Types

To implement the new regulatory framework, the CPUC’s decision provides for automatic migration of California iVoIP providers to the new utility types.  The type of authorization to which currently operating iVoIP providers will be migrated depends on their existing regulatory status before the CPUC, as follows:

• iVoIP Providers Currently Registered.Some California iVoIP providers previously registered with the CPUC pursuant to procedures the CPUC discontinued in April 2021.These providers (listed here), which currently are designated as Digital Voice Service (“DVS”) utilities in the CPUC’s carrier database, will be automatically granted a CPCN as a Non-Facilities-Based DVF Provider effective 45 days from the CPUC’s decision.Providers may elect to opt out of the automatic migration process during the 45-day window by either (1) demonstrating that they qualify as a DVN Provider or (2) filing with the CPUC to surrender their authorization and exit the California market.
• iVoIP Providers with CPCNs.During the pendency of the CPUC’s iVoIP proceeding, some iVoIP providers filed for a California CPCN as an interexchange reseller (utility type “IER”; full list here).Others had previously filed for CPCN as another utility type (e.g., Competitive Local Carrier (“CLC”), Competitive Local Reseller (“CLR”)).These providers will be automatically migrated to the new DVF Provider CPCN and utility type, though IER-designated VoIP providers will have the opportunity opt out within 45 days, provided they qualify as a DVN Provider.

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Please note that the above summary is not comprehensive – the CPUC’s decision is far-reaching and covers many additional issues, including several related to the CPUC’s implementation of its new regulatory framework.  Some of these issues (including the CPUC’s definition of whether a DVF Provider’s service is “facilities-based”) will be covered in a second phase of the CPUC’s rulemaking, which the CPUC’s decision extends to August 1, 2026.