New York classifies Vonage as phone company

Handing a setback to emerging Internet phone services, the New York State Public Service Commission on Wednesday ruled that Vonage Holdings is a telephone company and is thus subject to state regulation.

In a statement announcing its decision, the agency sought to soften the blow, saying it nevertheless hopes to apply "only minimal regulations to ensure that it does not interfere with the rapid, widespread deployment of new technologies."

New York is the latest state to weigh in on the regulation of voice over Internet Protocol (VoIP) services, a hot-button policy issue that has some local officials worried about potential tax losses, as the technology grows in popularity.

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In October 2003, a federal judge rejected an attempt by Minnesota's Public Utilities Commission to regulate Vonage, saying its services fell outside the traditional definition of a phone company.

Other states, including California and Florida, are considering the issue, but many have decided to wait for a clearer signal from federal regulators over the status of VoIP. The Federal Communications Commission earlier this year issued a preliminary report on Net phone calling but left the details for further study.

Industry advocate Jeff Pulver, founder of VoIP service Free World Dialup, criticized New York's decision Wednesday in a posting on his Web site.

"I am quite disappointed to see that New York State decided to apply legacy telephone regulation to Internet-based communications, while the FCC is in the process of figuring out the right regulatory treatment for VoIP," he wrote.

"Between this decision in New York and a pending decision in California, these new developments may lead to the introduction of new regulatory barriers that in fact could slow the adoption of IP communication services and delay the extraordinary benefits available from such services," he wrote.

Although the New York decision is unwelcome for the industry, the New York State Public Service Commission expressed optimism that it could balance its interpretation of state law with the policy goal of encouraging the growth of VoIP services.

"While today's decision means that Vonage will be subject to some form of regulation, we are limiting the effect of our decision to allow Vonage an opportunity to address the framework of that regulation," Commission Chairman William Flynn said in a statement.