OTTAWA — Canada's telephone giants will continue to face pricing and competition controls on their burgeoning Internet voice services, the federal regulator said Friday in a ruling seemingly at odds with the Conservative government's free-market philosophy.

But the Canadian Radio-television and Telecommunications Commission also said it would take another look at the broader issue of regulations that restrict former monopolies such as Bell and Telus -- only five months after it completed the last review.

"The prize in all this is deregulating local service, and we think you do it once and do it properly rather than trying to do it piecemeal starting with VoIP and going eventually to circuit-switched," said CRTC vice-chairman Richard French.

The gesture, however, wasn't enough to quell the anger of the big players.

Lawson Hunter, executive vice-president of Bell's parent company BCE, said the CRTC ruling was "smoke and mirrors."

"I don't think there's anything real here," Hunter said. "I think they could have done more, I think they still don't quite get what the government wants them to do, and it just indicates once again that we need change."

Said Janet Yale of Telus: "It's bad for consumers because at the end of the day if we're regulated and our competitors are not, we can't put our best offers forward ... and it means competitors don't have to be as sharp as they would otherwise have to be."

Still, those so-called incumbent firms hold 95 per cent of the residential phone service revenues in Canada -- well above the 75 per cent threshold set by the CRTC for deregulation.

Competition for local phone service is growing rapidly, particularly from the big cable companies, but still isn't available in many parts of the country.

To make sure that newcomers can gain a foothold in the market, the CRTC regulates the traditional phone companies. Namely, it makes sure that they don't use their business, cellphone or Internet revenues to help lower the price of local service to below cost and strangle other firms. They must also abide by certain consumer protections.

And so, when the CRTC looked at the new Voice over Internet Protocols (VoIP), it ruled last May that they should be treated just like regular phone service where the incumbent companies were concerned.

They launched an appeal, and the Conservative government -- led by free-market proponent Industry Minister Maxime Bernier -- asked the CRTC to review its decision.

Bernier had also issued a general policy directive to the commission, saying that regulation should only exist in the absence of market forces.

A spokesman said it would be inappropriate for the minister to comment on the latest decision because cabinet can still decide to rescind it or vary it within 90 days.

The CRTC decision was not unanimous.

One commissioner disagreed with regulating VoIP services. Two disagreed with reviewing the regulatory framework for local phone service.

French of the CRTC took issue with the view of Bell and Telus that the commission had ignored the government's wishes.

"The interpretation that the government wanted the CRTC to deregulate VoIP -- well the government had the power to say that and it didn't, so that interpretation seems biased," French said.

The VoIP ruling was welcomed by Vonage Canada, a firm that sells voice-over Internet telephone services.

"We felt the CRTC got it right the first time to encourage competition in voice over IP, so we're quite pleased that they're sticking to their guns," said Vonage president Bill Rainey.

Still, even Vonage couldn't completely embrace the commission's announcement.

It and other new entrants in the residential phone market fear the CRTC could be pressed toward premature dereglulation of the industry.

"We really want to make sure that ... it supports a world where there's a mechanism for anti-competitive behaviour and potential abuse of market power so that the monopolies don't stymie competition, in fact competition grows and is sustainable," said Rainey.

Added Ken Engelhart of Rogers Communications: "Our argument has always been that if you have wide open competition too early, you might return to the good old monopoly days, and that's the difficult balance the CRTC is trying to maintain."