The Canadian telecommunications regulatory agency ruled last Thursday that the country’s ILECs must get regulatory approval on pricing for VOIP products. But the VOIP offerings of the country’s startups, CLECs, and cable companies are immune (see Rogers Picks Sigma for VOIP and MetaSwitch Lands Canadian Deals).

The Canadian Radio-television and Telecommunications Commission (CRTC) ruled that VOIP is more like a telephone service than a data service and must be regulated as such.

The ruling comes as Canada’s VOIP market is getting its legs, and it may have serious impact on which industry and which companies take an early lead in the competition for users (see Nortel Comments on VOIP).

In its ruling the commission sought to prevent Canada’s ILECs from forcing smaller players out of the market by selling VOIP service at bargain basement prices (see VOIP for Life?). The ILECs hold a strong position in the Canadian marketplace, controlling 97 percent of the country's wireline telephone business.

The commission also rejected forbearance requests from BCE Inc. (Bell Canada) (NYSE/Toronto: BCE) and Telus Corp. (NYSE: TU; Toronto: T). The two said they will immediately appeal the CRTC’s decision.

"IP is a disruptive technology that is changing the telecom industry and the way it enables the Canadian economy,” said Bell Canada CEO Lawson Hunter in a statement Thursday. “The commission has misunderstood this new competitive paradigm in what may turn out to be an historic mistake with significant consequences."

The commission says it took a two-pronged approach in its analysis. It says it considered the competitive and economic factors first, and only then the question of whether VOIP should be regulated as a phone service or a data service.

“The determination of whether or not to forbear from regulating a service or class of services is based on a determination of the relevant market in which the service is offered and on whether the ILECs have market power in that market,” the ruling reads.

The ruling then argues that because VOIP’s primary purpose is to connect consumers with the PSTN, not to the Internet, it must be a phone service.

“The Commission considers that the use of IP does not define the fundamental purpose of the service,” the majority writes. “From a consumer's perspective, the key question is not what technology is used to provide a service, but rather what use the service is to the consumer.”

The decision leaves some in the U.S. VOIP community with mixed feelings. On one hand it protects VOIP startups, but on the other it runs counter to the industry's sworn goal of keeping regulation away (see PointOne Expands in Canada).

“This is an interesting approach that Canada took; they are attempting to impose regulations where the VOIP offering is a replacement service to traditional phone service," says Voice On the Net (VON) Coalition president and former Federal Communications Commission (FCC) staffer Staci Pies. “Yet they are being less regulatory when it comes to new entrants, and that is a good thing.”

“To the extent that they feel they have to regulate, at least they are recognizing that small VOIP providers have different structures and different business plans and different protections need to be in place,” Pies says.

Two of the Canadian commissioners disagreed with the agency’s decision.

Commissioner Andrée Wylie said in a dissenting opinion that the decision was inconsistent with earlier rulings concerning wireless communications.

Commissioner Andrée Noël could not agree with the agency’s classification of VOIP as a telephone service: “It is still an Internet service, and one of its functionalities makes it possible to digitize and transmit synthesized voice via data packets.”

“In my opinion, this constitutes a retail Internet service, and it should not be regulated.”

— Mark Sullivan, Reporter, Light Reading