Sometimes, when technology is racing ahead of government's ability to keep up, the best thing for regulators to do is simply step aside and watch closely, rather than risk standing in the way of progress.

That's what happened with the World Wide Web. And despite some early fears about the new technology's possible effects, the lack of regulation created a wide-open field that has brought forth a budding revolution in communication.

Susan Kennedy believes the same is true with the rapidly evolving technology of Internet-based telephone service, which is fast gaining a foothold in business and might soon be commonplace in the home. The new service promises to transform the telephone business, bringing dirt-cheap long-distance calls to everyone, among other things.

Kennedy, a lifelong Democrat and a former party official and aide to Gov. Gray Davis, is a Davis appointee to the California Public Utilities Commission. But listen to hear talk about Web phone service and you might think she is a disciple of economist Milton Friedman and his deregulation principles.

"California is tripping all over itself trying to call this a telecommunication service and be the first kids on the block to go out and regulate it," Kennedy said. "But we are doing a lot of damage."

She thinks the state, by seeking to regulate the service, is chilling investment when it should be nurturing the new technology and making California a leader in its development. She stepped up her involvement last fall after the commission, with no public discussion, decreed that the new phone service was the same as the old, as far as regulators were concerned, and ordered several companies to apply for licenses to operate in California.

The companies refused, and Kennedy thinks they were right to do so. Now, she says, the commission should leave them alone.

"We'd be in two years of legal battles if we tried to just slap existing regulations on these people right now," she said. "It's not worth it. California ought to be drawing up the blueprints, coming up with the model for other states. We shouldn't waste one minute trying to harness these guys.

Unlike traditional phones, which transmit the sound of your voice over two copper wires, Internet phones break sound into digital packets of information and than send it through high-speed cable or any other medium that can carry a digital message.

By avoiding the old telephone infrastructure, the new companies can charge less than $20 a month for unlimited long distance and allow users to take their phone with them anywhere in the world, plug it into a high-speed Internet connection and receive calls on their regular number as if they were sitting at home. The new technology could also could finally make video phones an everyday reality.

But the old infrastructure isn't the only thing missing. The new phones so far have no way of identifying their location for 911 emergency dispatchers. Nor can their messages be bugged by law enforcement authorities, as long as they stay on the Internet and don't re-enter the old switching network. Finally, users pay none of the fees California has slapped on traditional phone service to subsidize service to rural areas, the poor and disabled.

Some of those issues will be worked out over time. Customers already are demanding 911 compatibility, and the companies that figure out a way to provide it will have an advantage in the marketplace. In the meantime, users can keep their old phone and use the Internet service as a supplement.

The law enforcement issue is trickier. There appears to be no way for investigators to effectively listen in on Internet-only calls, nor any way to make such eavesdropping feasible. Short of banning the technology, the cops are just going to have to adjust.

As for the subsidies, Kennedy suggests scrapping the current system, which takes a tremendous amount of administrative time by the telephone companies, and replacing it with something much simpler. She would start with a flat charge per-phone and then perhaps adjust it to account for high-volume users.

She thinks some other customer protections - like keeping track of how long it takes telephone companies to respond to service calls - need not apply at all to the new generation of phones because competition is so fierce that customers will naturally drift to the firms that provide the best service.

"What's our role in consumer protection?" she asks. "It's not to make sure that the person who answers the customer service line is polite. And we shouldn't be wasting our resources keeping track of how long I am listening to Muzak while I am on hold."

Kennedy's vision is a radical one for a regulator, especially a Democrat. But she's convinced it is the right thing to do, this time.

"Regulators cannot give up jurisdiction," she says of her colleagues. "It's just anathema to them. They cannot viscerally do it. But we have to. If we don't, we have the serious capacity of hurting investment in these new technologies."