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F.C.C. Takes On Oversight Of Internet Phone Services

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F.C.C. Takes On Oversight Of Internet Phone Services

November 10, 2004

By Stephen Labaton

WASHINGTON, Nov. 9 - The Federal Communications Commission seized regulatory control over Internet-based telephone services on Tuesday by issuing an order that sharply limited the role of state regulators.

In a unanimous ruling, the commission said that Minnesota could not impose regulations on these services. That included a requirement that one of the leading companies in the field, Vonage, must offer to all Internet phone customers emergency 911 service similar to that offered by the traditional phone companies.

The decision, if upheld by a federal appeals court considering the matter, would set the precedent of limiting state regulators to issues of consumer fraud, general commercial law and state taxes. Regulators in Minnesota and New York were blocked by federal courts when they tried to require Vonage to be certified by the states and subject to the rules that govern traditional phone services.

But federal officials said that they hoped the commission's order, which was announced just a few days before a federal appeals court is scheduled to hear oral arguments in the Minnesota case, would cut short the legal skirmishing and leave the field largely in the hands of the F.C.C. and Congress, should it decide to rewrite the telecommunications laws next year. Some senior lawmakers, like Representative Joe Barton, the Texas Republican who is chairman of the House Energy and Commerce Committee, praised the decision.

The order blocks the states from imposing most regulations on the telephone services, and on cable and traditional phone companies that offer high-speed Internet services that the Internet telephone services use. Although relatively few people are customers of the new Internet-based service, that is expected to change in the next few years.

Commission officials said they acted to eliminate the prospect that the new technology could be stymied by a patchwork of state regulations or that one state could impose rules that set a national policy over the service.

"Today's decision lays a jurisdictional foundation for what consumers already know - that the Internet is global in scope,'' said Michael K. Powell, chairman of the commission. "To subject a global network to disparate local regulatory treatment by 51 different jurisdictions would be to destroy the very qualities that embody the technological marvel that is the Internet.''

For months, Mr. Powell has proposed a new regulatory framework for the services, known as Voice over Internet Protocol, or VoIP, that would clear away many of the restrictions imposed on wire line services.

State officials sharply criticized the decision on Tuesday. They said they were concerned that it could undermine the $1.9 billion in state programs around the nation that provide universal phone service to rural, poor and underserved areas as the traditional telephone companies move closer to offering Internet-based services.

"Today's action will make a sinking ship sink a little faster, especially on universal service, where $1.9 billion in state programs are now in the cross hairs,'' said Robert Nelson, a member of the Michigan Public Service Commission.

In a filing with the commission, California officials predicted that they could lose nearly half of the financing for their state universal service programs within the next three years if Internet phone service became as widely available as predicted and was made exempt from state universal service requirements.

"Three or four more of these kinds of orders and there will be no need for Congress to rewrite the Telecommunications Act, because the F.C.C. will have effectively done it,'' said Brad Ramsey, general counsel of the National Association of Regulatory Utility Commissioners.

Mr. Ramsey said that as the Internet telephone services became more popular, the decision would have the effect of putting enormous pressure on customers of other services to pick up the costs of any reductions in the universal service payments.

As Washington has moved toward less regulation in a variety of industries in recent years, some state officials have become more aggressive. But the F.C.C. order will make that difficult when it comes to the new technology.

The move comes as the commission prepares to offer a far less rigorous regulatory system for the new technology in an effort to provide an incentive to develop the new services and make them competitive with traditional phone services.

The decision was applauded by some major telephone companies, including Verizon Communications and SBC Communications, which are developing plans for Internet-based services.

"Treating Voip with a consistent and light regulatory touch is the best way to spur its development and serve the needs of consumers,'' said Susanne Guyer, a senior vice president at Verizon.

Still, the commission will face many difficult regulatory issues involving the new technology in the coming months.

The agency has begun to consider the applicability of traditional phone regulations to the new service. These include universal service, compensation between phone companies and 911 services. The commission is also struggling with requests from law enforcement officials who want the commission to make it easier for them to monitor Internet telephone calls involving crime suspects.

Despite those issues, industry officials said the commission order would help encourage investment in the new services.

Jeffrey A. Citron, chief executive of Vonage, said that as a result of the decision, the company planned to expand into Iowa, Maine and North Dakota. The company, with more than 300,000 customers, already has a presence in 39 states.

"This decision is a brick that's being laid in the foundation to help resolve some of the larger issues that are still out there,'' Mr. Citron said.

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