The Federal Communications Commission ruled 3-2 that states are now barred fromon Internet phone providers, which treat calls no differently than any other application on the Internet. That class of operators includes Vonage Holdings, which asked the FCC for just such a designation in May, plus Verizon Communications, AT&T and dozens of other commercial Internet providers, according to those familiar with the FCC's thinking.
If anything emerged Tuesday from that decision, it was, as FCC Chairman Michael Powell put it, that "distance is dead." Existing federal, state and city phone regulations have one thing in common: each relies on where a call begins and ends, which reflects the dominant phone technology at the time these rules were written. But Vonage, ATT, and other phone service providers use the unregulated Internet, and history is replete with failed attempts to apply geographic-based rules. On Tuesday, when a divided commission was voting 3-2 on an Internet phone issue, the five members did agree on one thing: that geography should play a limited role in future decisions involving VoIP--voice over Internet Protocol technology.
"This landmark order recognizes a revolution has occurred," Powell said at the meeting in Washington, D.C.
In it decision, the FCC said that any number of various different state regulations would be "conflicting with our commission's policies" and also violate federal commerce laws.
The FCC foreshadowed how it might operate in President Bush's second term. Tuesday's vote was along party lines, with the three Republican commissioners embracing the decision as a way to protect VoIP, while commission Democrats concurring, but with objections. The decision fails "to account in a meaningful way for essential policy issues, including universal service, public safety (and) law enforcement," said FCC Commissioner Jonathan Adelstein, a Democrat.
The FCC's decision was a general one, was widely anticipated, and answers just one of dozens of questions about how regulators will ultimately treat VoIP. "What I see coming out of this is more questions," FCC Commissioner Michael Copps said at the meeting.
Much of the nitty-gritty of policymaking--and an actual written policy--is also still to come, as the FCC plods away at drafting a set of rules for new services like Vonage's that rely on Internet Protocol, the backbone of the Internet.
For instance,had also asked in its May petition whether it would be considered a telephone or information service, a designation that means the difference between a draconian regulator regime or a much lighter governmental hand. The commission did not answer that question Tuesday.
The commission also did not address what Vonage Chief Financial Officer John Rego described Monday as a "zero hour" request by Time Warner Cable and other cable providers to be included in the FCC's Tuesday decision. Cable providers, most of which now sell VoIP plans, fear that they'll be left out of the ruling because their services run over privately owned and operated networks, not the public Internet.
"In a perfect world, it would be great in just one proceeding to deal with all the issues, but we can't do that here," FCC Commissioner Kathleen Abernathy said at the meeting. "It would be a mistake to be on sidelines and try and deal with these other regulatory framework issues."
Response from states was muted. A representative for the National Association of Regulatory Utility Commissioners said the are focusing now on a court hearing in mid-November in which Minnesota utility regulators will argue they have a right to oversee Vonage and other Net phone service providers. The state is seeking to overturn a that states cannot subject VoIP providers to their rules.
More than two dozens states are seeking to regulate VoIP, including Minnesota and California, fearing public service funding derived from phone taxes will dry up as more calls flow over the unregulated Internet.
Powell and two of the four FCC commissioners suggested Tuesday that states still have a role to play--namely to protect consumer interests.
But that may not mollify state utility regulators, who have joined what Copps called the "growing chorus of people" criticizing the FCC for taking a piecemeal approach to VoIP regulation. Tuesday's decision was the third major one concerning VoIP from the FCC. The first one deregulated VoIP services such as Free World Dialup, which only connects PCs. The FCC has also ruled against AT&T's claim that its long-distance calls are off-limits to any regulation because the calls are, at one point, using the Internet rather than the traditional phone network.
Internet phone service providers were pleased with Tuesday's decision. Vonage, for example, had postponed plans to expand into several rural areas while it awaited Tuesday's FCC action. It can now revive those plans and expects to announce it has entered those new markets in the next two to three months, a company representative said Tuesday.
"We're glad the FCC planted the flag on this one," the representative added.
The ones with the most to lose from the spread of Internet telephony are the four regional Bell operating companies, which had a near-monopoly lock on local phone services until the Internet phone providers came into existence. In a statement issued Tuesday, BellSouth Vice President Jonathan Banks urged the FCC to "create a similar regime for all IP-enabled networks and services." He describes the FCC's decision as a "critical step towards encouraging the deployment" of such services nationwide.
A tougher regulatory stance would have hurt projections that VoIP services will expand from the 1 million homes foreseen at year's end to about 10 million by the end of the decade. As traditional phone carriers see more local calls flow over the Internet rather than their own more expensive networks, they have been adding their own VoIP-based services to lure business customers away from those companies that specialize in Internet phone technology.