updated 12/29/2004 5:26:26 PM ET 2004-12-29T22:26:26

A Minnesota agency may not regulate calls through cyberspace as it does calls through traditional phone lines, a federal appeals court ruled.

The Tuesday order by the Eighth U.S. Circuit Court of Appeals in St. Louis upholds a lower-court ruling and is a win for fledgling companies like Vonage Holdings Corp. of Edison, N.J., which provides Voice over Internet Protocol, or VoIP.

The Minnesota Public Utilities Commission had argued that VoIP companies were providing phone-like service and therefore should be regulated as phone companies are. But those businesses said they provide an information service rather than a telecommunications service.

VoIP converts the sound of a voice into packets of data, sends them across the Internet, and reassembles them into sound on the other end of a call.

The Federal Communications Commission last month issued its own rules , saying that Internet phone services should not be governed by the same state regulations as traditional telephone companies. The decision left open the possibility that the states could tax Internet phone businesses.

In its two-page order, the Eighth Circuit said the FCC rules back the lower court's ruling prohibiting the state from treating Internet-based services the same way as other telecommunications services.

The FCC ruling had been criticized by some consumer groups, who argued that state regulators should have regulatory power over VoIP service in order to guarantee safeguards such as making sure 911 calls work properly and rural subscribers aren't left out.

Vonage subscribers use conventional phones hooked to a special box and a broadband connection to make cyberspace calls.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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