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By Ben Charny
CNET News.com

Regulators in large U.S. states are moving forward with Net-phoning rules, forcing an inevitable confrontation with federal regulators who believe the industry falls under their jurisdiction.

By pushing ahead with regulation now, states are facing long battles in court with Net-phoning--or VoIP (voice over Internet Protocol)--service providers that believe existing laws don't apply to them; and later with the Federal Communications Commission, which is expected in the next few months to leave states with very little, if any, regulatory power over Net-based phone calls.

Though small Net-phoning start-ups like Vonage are moving forward unfazed by the unsettled legal and regulatory picture, larger providers that want to play good corporate citizen might be forced to wait the months or years for the regulatory and legal picture to come into focus, industry sources say.

"There will be a collision if the FCC takes a position that's at variance with a state's," said Carl Wood, one of the five commissioners on the California Public Utilities Commission.

Public service commissioners in California and now New York aren't trying to create problems, Wood said, rather they say they're compelled to show the FCC what role states should play over the unregulated industry. The FCC is now deciding on its own whether it will regulate Net-phoning service providers. The decision, not expected for several months, will likely pre-empt many of the state's moves.

"The FCC is interested in state's views, especially when they come from big and important states like California and New York," Wood said. "This could have some influence over the FCC's pending decision."

States are also bound by the law to make such moves, points out Brad Ramsay, executive director of the National Association of Regulatory Utility Commissioners, a trade organization representing state utility commissions. "There are laws on the books, and you can't sit on them forever," he said.

But as states weigh in with regulations, they are creating different rules tailored to their areas, a complex lattice that smaller Net-phoning service providers might not be able to navigate.

"These new developments may lead to the introduction of new regulatory barriers that in fact could slow the adoption of (Internet Protocol) communication services and delay the extraordinary benefits available from such services," Jeff Pulver, the founder of Free World Dialup, a free Net-phoning service, wrote in response to New York's recent decision.