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FCC Asserts Role as Internet Phone Regulator

By Yuki Noguchi
Washington Post Staff Writer
Wednesday, November 10, 2004; Page E01

The Federal Communications Commission said yesterday that the federal government, not states, has the authority to regulate phone service provided over the Internet.

The unanimous ruling in a case involving Vonage Holdings Corp. was a victory for companies offering local and long-distance phone service over high-speed Internet connections. It was a defeat for state utilities regulators who sought to subject the new Internet services to many of the fees and regulations they have long applied to traditional phone providers.

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Companies providing Internet phone service said they had been reluctant to expand into more states until it was clear whether they would face state-by-state regulation and whether their consumers would have to pay state fees.

But the FCC's unanimous decision did not resolve the broader question of whether Internet phone services will be treated as information services or as traditional phone providers. As traditional providers, they could be required to contribute to federal universal service programs that subsidize phone service in poor and rural areas, and they could have to pay whenever they connected with the networks owned by traditional phone providers to complete calls.

The FCC also will take up separately a debate about whether law enforcement agencies should be able to tap Internet-phone lines under the same terms as traditional phone lines.

Next week, the U.S. Court of Appeals for the 8th Circuit, in St. Paul, Minn., is taking up a case brought by Vonage challenging the Minnesota Public Utilities Commission's authority to regulate its service.

The court could defer to the FCC's decision, or it could go further in deciding whether Internet-phone service should be classified as an unregulated information service. If the court strikes down the FCC's decision, the FCC could appeal to the Supreme Court.

Although the case before the FCC involved Vonage, which provides Internet phone-calling to 320,000 customers, the ruling also applies to its competitors, which include communications giants that are beginning to offer Internet phone service. Cable operators including Cablevision, Cox Communications, and Time Warner Cable offer Internet voice calling, as do phone companies AT&T Corp., Verizon Communications Inc., SBC Communications Inc., MCI Inc., and Primus Telecommunications Group Inc. "The FCC acknowledged the reality of the Internet, which knows no state boundaries and no borders," said Jeffrey A. Citron, chief executive of Vonage, a privately held New Jersey company. The firm otherwise would have had to deal with a patchwork of state rules, which would have been costly for the company, he said. "We were holding back on capital investments because there was a concern that we didn't want to go into new states" without clear rules, he said. In coming weeks, Vonage expects to expand its service to Iowa, Maine, and North Dakota, he added.

Opponents of the FCC's decision said it leaves states in the lurch.

"There are state programs that fund high-cost, rural, and poor peoples' phone service that rely exclusively on revenues collected based on traditional phone service at the state level," said J. Bradford Ramsay, general counsel for the National Association of Regulatory Utility Commissioners. He said he could not estimate how much revenue the states may lose as Internet calling grows.

"This landmark order recognizes that a revolution has occurred," FCC Chairman Michael K. Powell said. "Internet voice services have cracked the 19th century mold to the great benefit of consumers." He said Internet programs are more versatile than their century-old, copper-line predecessors.

The two Democrats on the five-member commission concurred with the decision, but said the FCC needed to issue clearer, more comprehensive rules that addressed the bigger regulatory questions. Commissioner Michael J. Copps said the FCC hasn't resolved how Internet phone providers should deal with emergency calling, consumer protection, and other features that consumers expect to come with their basic telephone service.

"We need a framework for all carriers and all services, not a stream of incremental decisions based on the needs of individual companies," Copps said.

Internet telephone service comes in many forms. Some transfer calls from one computer to another entirely over the Internet. Systems like Vonage's use modems to convert digital signals so that a normal phone can send calls at least partly over Internet lines.

The growth of Internet calling raised regulatory questions because subscribers place calls the traditional way, with sound quality that increasingly matches that of conventional phone service -- yet the calls are carried over the Internet, and the Internet isn't regulated.

Yesterday's decision followed smaller steps by the FCC to define the rules for Internet telephone calling. In February, it ruled that a Pulver.com, a free, members-only phone service, should not be regulated as a phone company. In April, it decided that a telecommunications carrier that transports a call part of the way over an Internet network must still pay other carriers to complete those calls.


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