New technology allows low-cost calls over the Internet, which is great news for those who dislike big phone bills. The bad news is that regulators are targeting this innovative service in a way that will harm its future and cheat consumers.

Companies such as Vonage and Net2Phone offer Internet phone calls using a technology called "voice over Internet Protocol" (VOIP). It works by taking sound and converting it into packets of computer data that are sent across the Internet and reassembled into sound at the destination. And although the technology uses the Net to provide the service, adaptors allow it to be used with a regular phone, so consumers of VOIP don't need to be computer savvy.

By using the Internet's infrastructure, VOIP makes calls much cheaper than traditional phone companies can provide. This is great news for consumers and bad news for traditional phone companies. But many regulators don't welcome it either.

Public Utility Commissions (PUCs) in a number of states including California, Wisconsin, and Minnesota are working to strangle VOIP with mammoth regulations that were crafted for the outdated infrastructure of the old phone companies. In one of those states, Minnesota, the issue recently went before a federal court.

Fortunately for consumers, Judge Michael Davis of the district of Minnesota ruled that VOIP cannot legally be regulated like the old telecom dinosaurs because VOIP is a data-based information service not a telephone service, and thus not subject to the same telecommunications rules. This ruling is a win for innovation, but unfortunately the battle is not over. For instance, California's PUC maintains that VOIP providers must submit to state regulation or face disciplinary action.

That pioneers of this revolutionary technology are forced to defend themselves against public servants who are supposed to have the consumer's interest in mind is disturbing. This is one more reason why the entire convoluted telecommunications regulatory machine should be dismantled.
The 1996 Telecommunications Act was enacted to create a "pro-competitive, deregulatory national policy framework," but instead the last seven years have been filled with regulatory wrangling and burdensome lawsuits.

Through regulations stemming from the 1996 Act, government forces phone companies like the Bells to share their infrastructure with rivals at prices set by regulators. This scheme created a false "competition" that hampers and distorts investment. Now that disruptive technologies make old services obsolete, the recognition that old regulations are obsolete should follow. Frustratingly, not everyone sees it that way.

Penn State University telecommunications professor Rob Frieden recently said that "at some point, fundamental fairness requires a level playing field." That's like saying there should be a fair playing field between the horse and buggy and the automobile. Not only would it be absurd to try to create "parity," but it would also be costly, directing resources away from innovation.

What is going on in telecommunications is nothing short of revolutionary and regulators should be barred from trying to hold it back. There is no need to address the level of "fairness" between old and new technologies. Indeed, it would be unfair to consumers and future generations to attempt to slow down new technologies that bring cost savings and new efficiencies.

And while regulators force VOIP firms to spend resources fighting battles of the past, newer technologies, such as one produced by the creators of the infamous file swapping software Kazza, threaten the business models of VOIP firms. Just as Kazza allows music and movie files to be swapped for free, Skype allows free Internet phone calls.

Currently, Skype's service can only be used on the Internet (not with a standard phone), so Vonage and others may have time to figure out how to compete. But the point is that the telecommunications market has moved breathtakingly far away from the old, monopolistic, phone companies that current regulations were meant to address.

Regulators should take their hands off new communications services. If they don't do it on their own, legislators should mandate a hands-off policy. Telecom has morphed into a hi-tech industry that plays by different rules, including extreme competition and innovation. For the sake of consumers, it should be allowed to flourish.

This column originally appeared in the winter issue of Policy Forum, a publication of the American Legislative Exchange Council (www.alec.org).

Sonia Arrison is director of the Center for Technology Studies at the California-based Pacific Research Institute. She can be reached at sarrison@pacificresearch.org.

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