8x8 2005 Annual Report Download - page 36

33
intrastate telecommunications services, the matter will be referred to the State of Wisconsin Attorney General for
enforcement action. The letter also states that even if the Company were certified by the WPSC, the previous
operation without certification may still subject the Company to referral to the State of Wisconsin Attorney General
for enforcement action and possible forfeitures. We consulted with counsel and have responded to the WPSC and
disputed their assertions. While we do not believe that the potential amounts of any forfeitures would be material to
us, if we are subject to an enforcement action, we may become subject to liabilities and may incur expenses that
adversely affect our results of operations.
On September 17, 2003, we were contacted by the Ohio Public Utilities Commission, or OPUC, and asked to
respond to a questionnaire on Voice over IP technologies that the OPUC is conducting. The OPUC inquired as to the
nature of our service, how it is provided, and to what Ohio residents the service is made available. The questionnaire
did not contain any assertions regarding the legality of the Packet8 service under Ohio law or any statements as to
whether the OPUC believes we are subject to regulation by the state of Ohio. We responded to this questionnaire on
October 20, 2003.
On September 22, 2003, the California Public Utilities Commission, or CPUC, sent us a letter that alleged that we
are offering intrastate telecommunications services for profit in California without having received formal
certification from the CPUC to provide such service. The CPUC also requested that we file an application with the
CPUC for authority to conduct business as a telecommunications utility no later than October 22, 2003. After
consultation with regulatory counsel, we responded to the CPUC, disputed its assertions and did not file the
requested application. In our October 22, 2003 response to the CPUC, we disagreed with the CPUC's classification
of us as a telephone corporation under the California Public Utilities Code. We asserted that we are an information
services provider and not a telecommunications provider. The letter from the CPUC did not indicate, and we cannot
predict, what any potential penalties or consequences in failing to obtain certification might be. If we are subjected
to penalties, or if we are required to comply with CPUC regulations affecting telecommunications service providers,
our business may be adversely affected. On November 13, 2003, the CPUC held a hearing in San Francisco to hear
testimony from CPUC staff and industry representatives regarding what course of action the CPUC should take with
respect to Internet telephony. A representative from 8x8 testified at the hearing. On February 11, 2004, the CPUC
stated that, as a tentative conclusion of law, they believe that VoIP providers are telecommunications providers and
should be treated as such from a regulatory standpoint. The CPUC initiated an investigation into appropriate
regulation of VoIP providers under state law, and acknowledged that it has not enforced the same regulatory regime
over VoIP as applies to telecommunications services. The CPUC is considering a number of potential regulatory
requirements, including contribution to state universal service programs, provisioning of 911 services, payment of
access charges to interconnect with the PSTN and compliance with NANP protocols and basic consumer protection
laws, including California's telecommunications "bill of rights." The CPUC is also considering whether exempting
VoIP providers from requirements applicable to traditional providers of voice telephony creates unfair competitive
advantages that should be proactively addressed, if the regulatory framework governing the provision of VoIP
should vary based on the market served and whether VoIP providers should be subject to the current system of
intercompany compensation arrangements. The CPUC has indicated that this process could last up to 18 months, but
there is no way for us to predict the timetable or outcome of this process. On April 7, 2005, the CPUC instituted a
rulemaking to assess and revise the regulation of all telecommunications utilities in California except for small
incumbent local exchange carriers, or ILECs. The primary goal of this proceeding is to develop a uniform regulatory
framework for all telecommunications utilities, except small ILECs, to the extent that it is feasible and in the public
interest to do so. While not specifically directed at VoIP, it is unclear at this time what impact this new rulemaking
will have on the CPUCs classification or treatment of VoIP services.
In May 2004, in response to a 2003 complaint case brought by Frontier Telephone of Rochester against Vonage, the
New York State Public Service Commission, or NYPSC, concluded that Vonage is a telephone corporation as
defined by New York law and must obtain a Certificate of Public Convenience and Necessity, which represents the
authorization of the NYPSC to provide telephone service in New York. The NYPSC will allow a forty- five day
period in which Vonage can identify and seek waivers of any rules that it believes should not apply. Vonage will be
required to provide 911 service in some form, and will be required to file a schedule of its rates. Currently, this
decision applies only to Vonage. In June 2004, a federal judge issued a preliminary injunction enjoining the NYPSC
from regulating Vonage as a telecommunications carrier. Vonage has asked the federal district court to make this a
permanent injunction, and this request is being considered. While this ruling applies only to Vonage and not to us, if
we are subject to regulation by the NYPSC, we may become subject to liabilities and may incur expenses that
adversely affect our results of operations.