Anger and the threat of legal challenges greeted the decision Thursday by the Canadian Radio-television and Telecommunications Commission that said the country's major phone companies will not be able to set their own prices for on-line telephone services, part of its effort to create more competition and lower prices in the budding market.

The CRTC dismissed challenges by Bell Canada and Telus Corp., both of which had argued that that voice over Internet protocol (VoIP) should be left unregulated like other Internet applications.

The reason given was that unregulated pricing could squeeze out rivals from smaller rivals until there is significant and real competition in the market. Interestingly, the CRTC did not put the same restrictions on those companies.

CRTC chairman Charles Dalfen predicted the market could reach an acceptable level of competition within the next two years. "This is precisely the moment when Canada needs a regulatory framework that will provide the quickest road to competition," Mr. Dalfen said.

Both Telus and Bell reacted to the decision angrily and both pledged to appeal and perhaps even launch legal challenges against the agency.

Lawson Hunter, executive vice-president of regulatory affairs for Bell parent company BCE Inc., called the decision "a historic mistake for Canada and for our consumers." He also accused the commission of "retarding investment and choice," and said the CRTC "doesn't understand where technology is heading."

Over at Telus, executive vice-president of government and regulatory affairs Janet Yale labeled the ruling a "missed opportunity," and added that Internet applications should not be regulated.

The fear of the country's largest cable companies was that Bell and Telus would set rock-bottom prices in an effort to kill any competition before it started. The CRTC heard that argument and reacted appropriately, said Paul Bissonette of Shaw Communications, Inc., adding that now his company and others would have the opportunity to carve out a piece of the pie for themselves.

He added that it would have been "very, very, very difficult" for Shaw and "virtually impossible" for smaller firms to enter the sector if the CRTC had not imposed price regulations on the incumbents. "They clearly would be pricing in a Machiavellian way to make it economically unviable for us to get into that business."

Voice over Internet Protocol is a technology that allows users to make telephone calls using a broadband Internet connection instead of a regular (or analog) phone line. Some services using VoIP may only allow you to call other people using the same service, but others may allow you to call anyone who has a telephone number - including local, long distance, mobile, and international numbers. Also, while some services only work over the computer or a special VoIP phone, other services allow the use of a traditional phone through an adaptor.

It is estimated that about 25,000 Canadians use VoIP services, although some analysts expect that number to increase dramatically in the coming years.

Mr. Dalfen said the ruling is simply an attempt to make the local phone market more competitive. Seven years into the VoIP competition, the large incumbents still control 97 per cent of the market.