It may stunt Internet development and violate federal law if state regulators try to treat Internet-based voice calls as they do traditional calls, a judge ruled.
U.S. District Judge Michael Davis made public Thursday the rationale behind his decision last week to bar Minnesota regulators from requiring a small company that provides cheap phone service via high-speed Internet connections to face the same regulatory fees and obligations as a traditional phone company.
Because they operate without those burdens, Vonage and a handful of other upstart companies are able to charge less for their Internet-based services compared with those offered over regular phone lines.
It is unclear what impact the federal ruling in Minneapolis might have on state regulators in California and Wisconsin who have also voted to regulate Internet phone companies or other states that are now considering the matter.
The so-called Voice over Internet Protocol, or VOIP, technology used by Vonage and other companies converts sound into packets of computer data much like e-mail, sends them across the Internet and reassembles them into sound at the destination.
The regulatory issues include whether VoIP providers need to contribute directly into state and federal funds that cover the cost of 911 emergency calling systems, and subsidize companies who provide phone service to remote communities. In terms of 911, regulators also need to decide if and how VoIP providers need to interact with public safety networks.
Because VoIP phone numbers do not need to be associated with a specific physical location, a 911 call dialed from a VoIP phone may not automatically route to the correct emergency switchboard.
Judge Davis didn't specifically address the issue of 911 or universal phone service.
The growth of VoIP is seen as threat to traditional phone companies. Vonage, for instance, advertises unlimited calls to anywhere within the United States and Canada for $34.99 per month. Others such as Packet8 charge as little as $20.
In a 22-page memorandum, Davis wrote that equating Vonage's services with telecommunications services simply because its customers make phone calls "simplifies the issue to the detriment of an accurate understanding of this complex question."
Davis also said state regulators are pre-empted by a federal statute meant to keep the Internet free from regulation that could hurt the medium's development. He said VoIP is clearly a data-based information service rather than a telephone service, and thus not subject to the same telecommunications rules.
Jeffrey Citron, Vonage's chief executive, said he expected the ruling to affect how other states handle VoIP. He also said Vonage is working to improve its 911 capabilities.
"Anyone else looking at this issue should draw the same conclusion,"he said. "Services like Vonage should not be regulated."
In addition to the three states that voted to regulate Internet telephony like regular phone services, at least a half dozen other states are considering the matter.
But one state, Florida, has already decided not to regulate VoIP companies.
Minnesota regulators dropped their order that Vonage apply to be certified as a phone company after Davis issued a permanent injunction last week. Burl Haar, the PUC's executive secretary, said the commission was studying the decision and had no immediate comment.
Greg Brewster, associate dean of the School of Computer Science at DePaul University in Chicago, said that although traditional phone companies were likely to find the decision unfair, requiring VoIP companies to have all services in place immediately would be 'a great burden.'
They "need some time for that technology to mature before they're expected to shoulder the full load," Brewster said.
But Penn State University telecommunications professor Rob Frieden said that "at some point, fundamental fairness requires a level playing field."
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