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Vonage Faces Hangup in Minnesota

With the regulatory scene far from clear, upstart voice-over-Internet protocol telephone provider Vonage Inc. has run into trouble with the state of Minnesota over whether it should have to gain approval as a telephony provider.

Industry observers are watching the case as a possible marker for more regulation to come, even as pressure increases on the Federal Communications Commission to re-examine how IP telephony services are classified.

Concerns began to arise in December, when the Minnesota Department of Commerce first spotted Vonage advertisements offering Internet telephony service in the state, according to Diane Wells, special assistant to the department's deputy commissioner.

The commerce department recommended to the state Public Utilities Commission that Vonage be barred from operating in Minnesota because it had failed to seek certification as a phone provider and file a 911 emergency-system support plan. The PUC met in August and agreed, ruling that Vonage is a telephone company and should apply for certification in the state.

"The department's complaint rested on the fact that it holds itself out to provide telephone service — it uses standard telephone equipment to place calls," Wells said. "The service allows the customer to call standard 10-digit telephone numbers, and that the conversations are transmitted without change in the form or content, so it's not as if there is data manipulation going on."

But Vonage is appealing the Minnesota regulators' decision, arguing that as a data service, it does not have to meet the state approval process — nor does the FCC require it to do so.

"They are thinking that voice-over-IP is a telephone service, and they want it to be treated as a telephone service under regulation," said Vonage executive vice president of product development Lou Holder. "Vonage's position is that it is still a data service. Just because today I am using it for voice, tomorrow I can use it for video and IM text chat."

So far, the FCC has not deemed Internet telephony as a telecommunications service, instead placing it under the heading of data services. That means companies ranging from Vonage to any IP services fielded by cable operators are not required to contribute to universal service funds or pay interstate access and tariffs, as other telephone providers do.

Even if Vonage were required to seek state approval, the 911 emergency plan could be a problem. Unlike a traditional switched telephony system — in which emergency calls and caller addresses are transferred automatically to the nearest emergency authority — Vonage's system does not transfer address location information.

That's one of the concerns the Minnesota regulators have flagged, along with the fact that customers can opt for out-of-state area codes, leading to misdirected emergency calls.

Vonage has developed database software that records a customer's primary geographic address for service, which is used to direct emergency calls to the proper local authority. But the challenge comes in updating the information as people move, Holder said.

He added Vonage is working on a second phase of 911 compatibility that would directly connect to the dedicated 911 switching systems, while a third phase would add other information, including a resident's medical information, to the local authorities' emergency response systems.

"The main goal we had when we started was to work on a system that actually interconnected with their system from the get-go," Holder said. "It takes some time, so we decided to break it into a three-phase approach.

"This is the first phase of offering this solution. We definitely want to get to that point. Of course there are a lot of hurdles we have to overcome."

Minnesota also is looking into a handful of Internet telephony providers that have set up shop and started marketing in the state, but Vonage is the first to generate such action.

"We check whenever we hear company advertising to make sure they are certified, and there are other companies that provide telephone service — voice-over-Internet protocol — and they have certification," Wells said. "We're getting more inquiries as this technology becomes more common as to whether or not companies need certification in Minnesota, and we tell them that they do."

That message is far from consistent elsewhere among service providers or state regulators. Cablevision Systems Corp., which is readying an IP telephony rollout covering its entire service area this quarter, has no plans to seek regulatory approval for the product as a telephone service, according to a spokeswoman.

The MSO views it as a data service, which it has full authority to offer, and it is keeping regulators in New York, Connecticut and New Jersey apprised of its progress as the rollout nears, she said.

Time Warner Cable is taking a different tack, opting to go ahead and register its IP telephony service in Portland, Me. as a telephone service and paying the resulting fees and surcharges. But it is not passing those taxes on to its IP telephony customers, according to spokesman Keith Cocozza.

"Right now, we're paying the appropriate taxes on voice service — strictly voluntarily," he said.