updated 11/9/2004 7:13:53 PM ET 2004-11-10T00:13:53

Federal regulators gave a boost Tuesday to the fledgling Internet phone industry, removing a regulatory hurdle that threatened to drive up the cost of making calls through cyberspace.

The Federal Communications Commission voted 5-0 for a petition by Vonage Holdings Corp. of Edison, N.J., which had asked the agency to declare the company’s product an interstate service, giving the FCC regulatory control.

The move exempts Vonage and similar providers of Voice over Internet Protocol, or VoIP, from some key state-by-state regulation that the companies say would add cost.

FCC Commissioner Kathleen Abernathy, a Republican, said streamlining regulation of VoIP companies will help the industry grow. “By fencing off these services from unnecessary regulation, this order will help unleash a torrent of innovation,” she said.

The FCC ruling applies to cable TV, phone and other companies offering similar Internet phone services, including AT&T Corp., Time Warner Inc. and many smaller providers. The decision does not, however, preclude states from imposing some taxes and fees. It also does not address access charges, which are fees paid to local phone companies for completing calls sent via the Internet to conventional phones.

VoIP technology shifts calls away from wires and switches, instead using computers and broadband connections to convert sounds into data and transmit them via the Internet. Vonage subscribers use conventional phones hooked to a special box and a broadband connection to make cyberspace calls.

The company offers unlimited calls in the United States and Canada for $25 a month and has more than 300,000 subscribers, roughly half of all VoIP customers in the United States.

Rural access, 911 service still unclear
The two Democratic commissioners on the five-member FCC joined the unanimous decision but expressed concerns the ruling didn’t address other issues facing VoIP providers. Among them: universal service fees for bringing telephone service to rural areas and emergency 911 services.

“The commission’s constricted approach denies consumers, carriers, investors and state and local officials the clarity they deserve,” Commissioner Michael Copps said. “These issues can’t be ducked and they can’t be dodged if we are truly serious about these technologies.”

Stan Wise, president of the National Association of Regulatory Utility Commissioners, said phone customers in rural and poor areas would be especially hurt if VoIP providers aren’t forced to pay into the fund that supports those services.

Consumer groups also criticized the decision.

The FCC has “tied the hands of state regulators who have asserted that VoIP is no different than traditional phone service in terms of public safety, universal service and consumer protection,” said Janee Briesemeister, senior policy analyst for Consumers Union.

“Companies are now free to market VoIP as an alternative to traditional phone service, while consumers are left in limbo over vital issues, such as whether E911 will work,” she added.

Minnesota case
Vonage has been battling public utilities officials in Minnesota who want the company to register in the state as a telecommunications service, subjecting it to rate regulation and other state rules.

The company argued its service is interstate because customers can make calls from any place that has a high-speed Internet connection. That means there’s no way to tell whether a customer who has a billing address in Minnesota is making a call from that state or another one, the company said.

Vonage said the ruling was a victory for customers, as did many of the nation’s biggest traditional phone companies and several industry groups.

“Because the FCC has acknowledged the reality of the Internet — which knows no state boundaries and no borders — more people will enjoy the benefits of Internet phone service,” Vonage chief executive Jeffrey Citron said.

The FCC did not rule on Vonage’s request to certify it as an information service instead of a telecom company. Such a move would have a profound impact on the industry because it would mean VoIP providers wouldn’t have to pay taxes and fees that traditional phone companies do.

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