Innovation is the driving force in today's information economy. But innovation is in danger of being stifled in the central nervous system of the information economy itself -- our telecommunications infrastructure -- because of the regulatory tangle that governs our 130-year-old public switched telephone network (PSTN).

A new technology called Voice over Internet Protocol (VoIP), or Internet telephony, promises an evolutionary leap beyond the standard telephone service we have been accustomed to, as well as a host of benefits for consumers. The new technology transmits voice signals the same way email is sent, using the Internet's data-transfer protocols to break conversations into digital packets that can be sent on lower-cost, more efficient "packet-switched" networks. That innovation makes many other innovations possible, from eliminating the distinction between local and long distance calls, to easily maintaining several telephone numbers in a single account, to sorting and storing voice messages on your computer. Internet telephony requires consumers to have broadband Internet connections, which would be an added bonus for the information economy as a whole. Since Internet telephone service may hold great appeal for consumers, it could become a "killer application" that spurs more rapid adoption of broadband Internet service in U.S. households, which will in turn help spur efficiency gains throughout the economy.

Perhaps the most important bonus, however, is the fact that Internet telephony opens telephone service up to competition as never before. Just as consumers can choose from scores of email service providers, they can also choose from a growing field of Internet telephone service providers. Yet, because Internet telephony performs the same basic function for consumers as traditional telephone service (though, with advanced new features), it is being tangled up in a complicated telecom regulatory system -- which was originally designed for the era of local phone monopolies, when a single company controlled the wire tethered to your house.

State public utility commissions have been taking steps to impose price controls, rules for market entry and exit, and taxes on Internet telephony on the theory that the old telecom regulations should naturally apply to a new generation of telephone services. This makes no sense, both for the obvious reason that there are not likely to be monopolies in the Internet telephony business, and because it needlessly creates a balkanized patchwork of state regulations when cohesive federal oversight of the new industry would be far more appropriate.

Internet telephony requires a new regulatory framework -- a streamlined set of federal guidelines geared to the more competitive telephony marketplace enabled by VoIP. Government should not regulate prices or set market entry rules for Internet telephony as it did in the era of local telephone monopolies. But it will still need to guarantee consumer protections and ensure the necessary access for law enforcement to monitor telephone conversations in criminal and homeland security investigations. In the near term, government will also need to manage the transition to an all-VoIP broadband world by addressing legacy issues such as universal service and access charges.

The Federal Communications Commission (FCC) recently took an important first step toward establishing the right regulatory model when it asserted preemptive federal control of VoIP services, ruling that the Minnesota Public Utilities commission could not impose state regulations applicable to traditional telephone service providers on Vonage, a VoIP services company. But now, Congress and the FCC must take further steps to reform our outmoded telecommunications regulatory system for a new era of technological competition. Specifically, they should:

• Develop a new system for classifying advanced telecommunications services so they can be appropriately regulated according to the functions they offer consumers;


• Preempt state powers to exercise traditional utility-like regulations over VoIP, as the FCC did in its recent Vonage decision;


• Ensure regulatory parity among Internet telephony providers that use the North American numbering plan (