Powell Backs Regulation-Free Internet

WASHINGTON — Federal Communications Commission (FCC) Chairman Michael K. Powell said Monday he “unflinchingly (believes) in maintaining an Internet free from government regulation” and firmly supports the idea that the Internet telephony industry should “evolve in a regulation-free zone.”

Powell’s comments opened the FCC’s landmark proceeding to determine what, if any, taxes and regulations should apply to the emerging market industry built on Voice over Internet Protocol technology. The inquiry is the agency’s first examination of a new, high-stakes telecom market promising lower prices and new services for consumers and businesses.

“No regulator, either federal or state, should treat into this area without an absolutely compelling justification for doing so,” Powell said. “Innovation and capital investment depend on this premise. The entrepreneurs seated before us depend on this premise. In my view, we should come to this forum with a sense of regulatory humility, mindful that is the entrepreneurs, not governments, who came up with the idea of making high-quality, inexpensive phone calls over the Internet.”

The FCC will now gather additional information and public comment about the issue. The process is expected to take at least a year.

Other commissioners, and a wide range of VoIP experts, including some state regulatory officials, agreed that a light touch involving public safety, law enforcement and disability issues should be brought to bear on the industry.

“We may have already moved beyond the ‘nascent’ phase for this technology, with more people signing on daily and the rollout picking up what I think is impressive speed,” Commissioner Michael Copps said. “We’ve let VoIP bubble up on its own, but now it’s starting to boil. Before it becomes too hot for end-users and entrepreneurial-minded businesses to touch, we must bring clarity to the issues.”

During the day-long hearing, industry leaders, federal officials and consultants, Commission experts, and state public utilities commissions generally agreed Internet telephone services should be regarded as an interstate business and exempt from local telephone access charges.

There were also concerns voiced over the industry’s ability to handle 911 emergency calls, law enforcement phone taps and equipment for the handicapped.

“If these are the only things we need to work on, I’m very encouraged we can get this done. I believe we have consensus on what to focus on,” Powell said.

Just eight years ago, VoIP was regarded as a computer-to-computer hobbyist niche novelty virtually ignored by regulators. No more. The steady growth of broadband, combined with technological improvements allowing telephone-to-telephone traffic to flow over the Internet, has moved VoIP to the forefront of regulatory interest.

Edison, N.J.-based Vonage, which secured $35 million in venture capital financing last month, claims 70,000 subscribers and is adding more than 10,000 lines per month to its network. Vonage sells through its Web site and retail partners such as Amazon.com . Wholesalers, including EarthLink , resell the Vonage broadband phone service under their own brands.

“The mere specter of common carrier regulation opens up a Pandora’s box that has the potential to not only devalue and slow the growth of VoIP, but also detrimentally impact future innovation of new Internet communications applications,” Vonage CEO Jeff Citron told the commissioners.

The Baby Bells and cable companies also sense the shift. SBC, Verizon, BellSouth and Qwest are all planning VoIP offerings in at least some of their markets.

According to the Synergy Research Group, the boom is creating a 50 percent growth rate in the worldwide market for enterprise IP telephony, generating almost $864 million in vendor revenue last year. Cisco grabbed 43.7 percent of the sales, followed by Avaya (16.5 percent) and 3Com (16 percent).

The technology is a quandary for regulators because the new industry doesn’t fit traditional telecom regulatory models. While it clearly provides telephone service, it does so over the virtually regulation-free Internet instead of the heavily taxed and regulated public switched telephone networks (PSTN).

VoIP providers route calls from leased local telephone lines to a gateway server that converts analog voice into digitized data packets. From there, the data packet moves over the Internet to its destination, where it goes through another gateway that rolls it over to a local line.

The process bypasses traditional long distance lines and their tariffs and rules. In addition, VoIP providers contend they are not a telephone company since they don’t traffic in voice packets.

While Powell and other commissioners have indicated they favor a light regulatory touch for VoIP, cash-strapped states are taking a more aggressive approach.

California says since VoIP providers use conventional telephone lines to connect their calls, they are a telephone company and is seeking to collect access fees. Washington, Oregon and Florida are in court with Internet phone companies on the same issue.

In the only court decision, however, a federal judge spiked Minnesota’s attempt to regulate and tax telephone service offered by Vonage, ruling the company does not have to register as a telephone company in order to conduct business in Minnesota.

The states argue more than taxes are at stake. Fees from landline-based telephone voice services fund programs to extend lines into remote and rural areas, connect schools and libraries to the Internet and to underwrite E911 services.

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