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VoIP Gets Tangled in Regulatory Thicket

Voice over IP and IP telephony were supposed to be "killer apps" that would spread into the mainstream along with the growth of broadband services for consumers and businesses.

Yet advocates of IP telephony, which essentially uses the Internet to transmit local and long distance calls, say the technology is getting entangled in a thicket of regulations that govern traditional landline phone services provided by long-distance and local phone service providers.

"Voice as a mere application of the Internet remains the future of communications," said noted VoIP and telecommunications expert Jeff Pulver. "But the monopolization of local access connectivity will delay progress in the United States."

Pulver points to the growing regulatory maze facing Vonage, which provides SIP-based local and long distance voice services to broadband customers, as an example.

The public utilities commission for the state of Minnesota recently ruled that the Vonage Holding Corporation, in which Pulver is an investor, "has offered and continues to offer telephone services in Minnesota, including local exchange service and long distance service, without first obtaining a certificate under state statutes."

The state's PUC argued that "local telephone service offered by Vonage violates Minnesota law in that it fails to provide adequate 911 service."

Vonage plans to appeal the ruling. It argues that the company operates as an "information services provider" (rather than the traditional designation of a telecommunications services provider), and is not subject to the jurisdiction of the state's PUC.

The PUC ruling seems only intended for companies that provide access and service together on the same line, Pulver said. "It doesn't add up." By his estimate, widespread use of IP for voice applications is still a good 20 years away, because of the regulatory thicket that the application has run into in recent months.

While the Minnesota case continues to unfold, other states are making moves to assert regulatory authority over VoIP. Pulver cites the states of Alabama, North Carolina and Ohio as states where, in addition to Minnesota, utilities regulators are "taking action against VoIP providers in their states."

In addition, Colorado, Pennsylvania and Illinois are making moves to look into whether VoIP services fall under the same regulatory rules for voice services as traditional telecommunications providers. In Ohio, for example, Pulver noted that the state PUC is looking for comments on whether a company that is providing VoIP services is "transmitting telephonic messages" as defined by Ohio law, which would make them subject to Ohio's regulators.

Traditional long-distance and local phone service providers are weighing in on both sides of the debate, despite the conventional wisdom that holds that cheaper phone service via IP threatens the traditional phone service margins of the telecommunications industry.

Even the Federal Communication Commission's Aug. 21 Triannial Review, which sought to clarify how phone lines and new communications technologies would be regulated, has left VoIP largely out of the picture -- though hardly out of the debate over its potential impact on the phone companies.

The FCC ruling, which essentially followed its earlier order of Feb. 20th, said that Regional Bell Operation Companies (the Baby Bells such as Verizon, SBC and BellSouth) are required to lease their copper phone lines to competitors at steeply discounted rates for at least three more years.

The second part of the order said the Bells don't have to share high-speed broadband lines with competitors, which is expected to bolster the Bells' efforts to invest in and roll out more high-speed broadband services.

Legg Mason's telecom analyst Blair Levin, the chief of staff of the FCC from 1993 to 1997, said he doesn't see the Triannial Review affecting VoIP right away. The order "gives incentive for more investment in broadband, and to build out networks," he said.

But it's not as though VoIP is being overlooked in the complex order, he noted, as cable companies and more third parties like Vonage look to offer telephony over IP networks. The cost of upgrades to their broadband networks could mean that Bell companies continue to lose traditional voice customers to VoIP providers.

In that regard, the Bell companies, and long-distance players for that matter, face a larger threat from cable companies who are increasingly moving to offer voice over IP services along with their current digital bundle of video and high-speed data services over their cable networks.

And although Florida's PUC recently decided to leave VoIP unregulated, Pulver asserts that the growing crop of state-by-state regulatory reviews will slow the spread of phone service via high-speed Internet connections.