Control over Net phone companies

Judge: Feds, Not States, Should Govern Voip

July 20, 2004

By Ben Charny

State utility commissions can have very little control over Net phone companies, a New York federal judge wrote in an order that hands another victory to Vonage and similar upstarts.

State utility commissions will be able to work with Vonage to rectify customer complaints but won't be able to regulate or tax the company, according to U.S. District Judge Douglas Eaton.

Eaton's order, released within the past few days, strikes at the heart of a debate between federal regulators, which want to exercise a hands-off approach to voice over Internet Protocol (VoIP) to let the young industry grow, and states, which rely on tax revenues to pay for public programs.

The Federal Communications Commission, which in the process of drafting Net phone rules, will have the upper hand in how to approach Voip in New York, Eaton wrote.

"On balance, the Public Service Commission has not demonstrated state public interests, which require the immediate exercise of state common-carrier regulations," the judge wrote. But the New York state PSC can collect complaints from Net phone customers, refer the complaints to Net phone providers and even offer nonbinding arbitration as a way to settle any disputes, Eaton said.

Eaton is the second judge to dismiss attempts to force Net phone providers to follow state telephone rules and tax regimes. In Minnesota, a federal judge made a similar ruling in October. That ruling is under appeal.

Eaton's written order was promised three weeks after he said the New York Public Service Commission cannot force Net phone provider Vonage to apply for a telephone operator license. The ruling is in place until Dec. 13, when the two sides meet again to discuss the case with the judge.

Eaton's decision could foreshadow an important regulatory win for the Net phone industry, which typically sells unlimited dialing that's much cheaper, because calls use the Internet, where they aren't subject to the myriad of traditional phone rules, regulations and taxes.

With two state efforts to regulate Voip now derailed, the balance of power may have shifted to the FCC, which wants a limited state role and earlier this year issued a preliminary report on Net phone calling but left the details for further study.

"It's very good that New York is listening to the word from Washington," said Jeff Pulver, founder of free Net phone service FWD.

Groups such as the Multistate Tax Commission fear that as more calls flow onto the unregulated Internet, billions of dollars in state funding for programs--including 911 emergency services and the government's E-rate program--could be jeopardized.

Eaton's decision also highlights growing pressure to change rules that have molded the telephone industry from its formation to the present. Congress and the FCC have drawn a strict line between voice networks and data networks, but with the rise of VoIP, that distinction is collapsing.