Opening Remarks

• The Honorable Lamar Alexander

  United States Senator

  Tennessee
  Read statement

  Opening Remarks

  The Honorable Lamar Alexander

  Mr. Chairman, members of the Committee, I would like to thank you for the opportunity to testify here today as you take a first look at “voice over Internet protocol” (VOIP) – a technology that could lead, in a few short years, to all our phone calls being made over the Internet. Chairman Powell will undoubtedly repeat what he told me in my office just a few weeks ago: telephone service on the Internet is coming down the track like a speeding freight train. Companies like SBC – one of the country’s largest phone companies – have announced that they plan to have VOIP available in most metropolitan areas as soon as the end of this year. I am here today, however, to make sure that our state and local governments aren’t tied to the tracks ahead of this train. I want to take this opportunity to talk about one of the most important principles of government that unites us as Americans - federalism. We’re going to be talking about federalism here today as we discuss the regulation of this new technology. Historically, state and local governments have shared the responsibility in the regulation of the telephone industry. This shared responsibility has given states a major say in how service is provided in their states, the provision of emergency services, and the provision of services to low income and rural customers. As the FCC considers how this industry is to be regulated – and Chairman Powell has already indicated that he supports minimal regulation of VOIP technologies – we must recognize that state and local governments have interests that must be preserved. One other area has become my focus in recent months: the taxation of telephone services. According to the Congressional Budget Office, states are already collecting more than $20 billion in taxes on telephone service and service providers annually. In Tennessee, the $361 million collected is more than 5% of its general revenues. In Texas, more than $1.2 billion is collected. In light of the significance of these revenues to state and local government, as Congress and the FCC begin to consider how to handle these issues, I think that it is most important to raise a red flag on federalism at this time. In dealing with the growth and regulation of the telecommunications industry Congress has generally respected the tradition of strong state and local governments. But, the House of Representatives has already passed a bill that would put at risk this $20 billion in revenues. In extending the current moratorium on the taxation of Internet access, this House bill sounds innocent enough, but, if the FCC should decide, as it has indicated it might do, to designate VOIP as an information service, then the language of the bill could very likely ban states from collecting these taxes. The Senate version of this bill, S. 150, though less of a threat, still risks more than $10 billion in annual taxes collected on the sale of telephone service according to a Congressional Budget Office letter that I will include today with my testimony. This letter makes it clear what the text of the Budget Act as amended in 1995 and common sense tells us: banning a tax without paying for it is just as much of an unfunded mandate as requiring a service without paying for it. I certainly agree that high-speed Internet access is important to growth in our economy and should be encouraged. But, I would point out that the Department of Commerce reports that there are already more than 24 million high-speed Internet users in the United States today. The Department of Commerce also reports that high-speed Internet has been adopted by consumers at a faster rate in the last five years than cell phones, CD players, VCRs, and even color televisions were adopted at the same point in their first five years of deployment. The federal government didn’t feel the need to exempt from taxation such important industries as telephones, railroads, and automobiles and they did just fine. Why then is it so important to exempt Internet access from taxation when the numbers show that it’s doing just fine on its own? But even if it is in the interest of the federal government to do so, I don’t see why we should send the bill to the states. If the federal government wants to do it, then the federal government should pay for it and consider former FCC Chairman Reed Hundt’s proposal for a subsidy of $50 billion to bring high-speed internet to 100 million homes. Chairman Powell stated on January 14, 2004, at the National Press Club that the goal of the FCC in regulating phone calls over the Internet should be to “do no harm” to the industry. I agree with that, and I think that principle should be expanded to include an effort to do no harm to the state and local governments that have come to rely on these tax revenues. I believe that the bill I have proposed with Senator Carper and nine other senators who have served in state and local government positions embodies this idea. It is a temporary measure that makes sure we don’t take a permanent action that has drastic long-term consequences, and it protects states that are already collecting Internet access taxes to prevent them from seeing an immediate loss in revenues. These are the principles we should be seeking to apply as the discussion of this technology continues, and I hope that the Committee will keep these points in mind as it listens to the testimony here today.

Testimony

• The Honorable Michael K. Powell
  Read statement

  Testimony

  The Honorable Michael K. Powell

  Good morning, Mr. Chairman and distinguished members of the Committee. It is my pleasure to come before you today to discuss Internet voice services. For the last three and a half years, I have engaged you and the nation in a dialogue about the digital migration taking place across the communications landscape. The digital migration is about empowering consumers by replacing yesterday’s slow, limited and generally monopolistic communications networks with multiple high-speed, dynamic and competitive full-service digital networks. Increasingly, these digital broadband networks, whether wired or wireless, are using the flexibility of Internet protocols to offer Americans a full suite of communications services – from voice to video to data. We continue to work hard to bring these broadband Internet networks to each and every American at affordable prices. We have championed the deployment of multiple broadband networks in order to rid ourselves of the intractable “last mile” problem. We have pushed for greater deployment of DSL, cable modem, 3G wireless, WIFI, Ultra Wide Band, satellites and broadband over power lines, just to name a few new services already in commercial use. More broadband platforms mean more competition, more innovation and more tools to advance important goals such as universal service. The Commission is mindful, however, that networks are valuable only if consumers use them to communicate, to entertain themselves, to work, and to learn. These uses are often referred to as Internet “applications.” Successful Internet applications are vital to our national broadband policy because they create demand and thus grow the network. Just as email and e-commerce were drivers of the narrowband Internet, higher bandwidth applications like streaming video and music entertainment, home networking and Internet voice will be the “killer apps” for broadband. As you know, the FCC has not generally moved to regulate these Internet applications. In part, this has been a result of our charge in section 230 of the Communications Act that it is the policy of the United States to promote the continued development of the Internet and other interactive computer services and to preserve the vibrant and competitive free market for these services “unfettered by Federal or State regulation.” Against this backdrop, in recent months, one application has grabbed headlines: Internet voice services. These applications have garnered a great deal of attention because they allow voice communication among users, much like traditional wired or wireless voice networks. Internet voice application comes in many flavors, in some cases – like pulver.com – the communication is computer to computer, in other cases the Internet user calls a traditional phone. When packetized, voice applications are virtually identical to any other Internet application, such as email or instant messaging. Consequently, would-be entrepreneurs are just a website and a server away from offering services that mirror those of a “phone” company. And suddenly every consumer with broadband access can chose among potentially hundreds of voice over Internet service providers. This remarkable development in the growth of competition is made possible by tapping into the global and ubiquitous Internet to deliver tremendous innovation and opportunity for the American people. Voice applications are not alone. Everywhere Internet applications are bringing new competition to old markets and, in turn, ushering in an era of innovation, competition, lower prices and high quality services. Whether we are talking about Internet voice services, or Internet video and audio services, Internet news services, or Internet commerce, the broadband revolution is bringing tomorrow’s communication and commerce tools to more and more Americans everyday. These new opportunities for consumers are also providing new opportunities for our nation’s economy. The need to “rip and replace” the nation’s infrastructure is stimulating previously moribund capital spending, it is opening new paths to growth, increasing our Nation’s productivity and holds out the promise for new jobs as business and consumers increasingly unleash the power of broadband. Restraining from regulating the economics of Internet applications has served us well. The creativity and innovation of the marketplace has been breathtaking and dynamic, bursting at the seams with entrepreneurial spirit. Consumers are enjoying more choices, better value, and more personalized products. There is little compelling evidence that heavy economic regulation of these vibrant services is warranted. I do, however, believe we must preserve and advance venerable social and security policies. Paramount among them are universal service, 911, law enforcement and disability rights. I recognize that IP services ride atop a physical layer that, in many parts of our country, is still expensive to build and maintain. I am committed to ensuring that the entire nation has access to affordable communications services, as more and more communications move to IP networks. We have begun laying the foundation for a comprehensive, yet minimal, regulatory environment for Internet voice application services. At our February meeting, the Commission adopted a Notice of Proposed Rulemaking to look at the issues surrounding these applications. We are working with our colleagues elsewhere in the federal government and at the state and local level to develop a sound policy framework. We are focused on addressing and advancing our social objectives of public safety and 911, universal service, homeland security and access for people with disabilities. In addressing these issues, I have called for a series of Solution Summits. The first Summit is slated for March 18 and will address E911 capability. In addition, the Commission is working hard to reform our country’s inter-carrier compensation regime. Finally, we are keeping a watchful eye for anti-competitive conduct by owners of broadband networks to ensure our citizens can tap the full potential of the Internet in a broadband world. I would like to thank you, Mr. Chairman, for calling this hearing, and I look forward to working with you and other members of the Committee, my state colleagues, industry and my fellow commissioners on these challenging and critical issues. Good morning, Mr. Chairman and distinguished members of the Committee. It is my pleasure to come before you today to discuss Internet voice services and the role of the Federal Communications Commission (the “FCC” or the “Commission”). I. Introduction For the last three and a half years, I have engaged you and the nation in a dialogue about the digital migration taking place across the communications landscape. The digital migration is about empowering consumers by replacing yesterday’s slow, limited and generally monopolistic communications networks with multiple high-speed, dynamic and competitive full-service digital networks. Increasingly, these digital broadband networks, whether wired or wireless, are using the flexibility of Internet protocols to offer Americans a full suite of communications services – from voice to video to data. We have worked hard at bringing these broadband Internet networks to each and every American at affordable prices. We have championed the deployment of multiple broadband networks in order to rid ourselves of the intractable “last mile” problem. We have pushed for greater deployment of DSL, cable modem, 3G wireless, WIFI, Ultra Wide Band, satellites and broadband over power lines, just to name a few new platforms already in commercial use. More broadband platforms mean more competition, more innovation and more tools to advance important goals such as universal service. The Commission is mindful, however, that networks are valuable only if consumers use them to communicate, to entertain themselves, to work, and to learn. Although much of our focus has been on bringing these broadband Internet networks to each and every American, the Commission is now turning its attention to promoting investment, innovation and competition at the applications layer of the Internet. Internet voice services, coming in many flavors, are some of the first of many broadband Internet applications being adopted by consumers today. These exciting new services tap into the global and ubiquitous Internet to change the make-up of the communications and other industries daily – all to the benefit of the American people. Successful Internet applications are vital to our national broadband policy because they create demand and thus grow the network. Today, Internet applications are bringing new competition to old markets and, in turn, ushering in an era of innovation, lower prices and high quality services. Just as email and e-commerce were drivers of the narrowband Internet, higher bandwidth applications like streaming video and music entertainment, home networking and Internet voice will be the “killer apps” for broadband. Whether we are talking about Internet voice services, or Internet video and audio services, Internet news services, or Internet commerce, the broadband revolution is bringing tomorrow’s communication and commerce tools to more and more Americans today. These new opportunities for consumers are also providing new opportunities for our nation’s economy. New opportunities for job creation can be found in building broadband networks and applications. Productivity gains for our economy continue as business and consumers increasingly unleash the power of broadband networks. At the same time, we are creating opportunities for small businesses and entrepreneurs to enter previously prohibited communications markets at the applications layer of the network. Although the prospects for the digital migration have been promising, to date, the realization of its potential and benefits for our country are far from certain. This country must continue to promote and adopt regulatory policies that promote investment and allow these new and emerging broadband Internet services to flourish. A failure to do so will lead to more outsourcing of high tech jobs and investment to foreign lands, leaving the most powerful nation in the world a second class citizen in tomorrow’s growing digital economy. At the same time, we must leverage these new technologies to ensure that many of our core, traditional and vital social objectives continue to be met. Regardless of the pace of technological change, we must remain committed to universal service, law enforcement access, E911 capabilities, and access for people with disabilities. And, we must effectively manage the transition from the analog to an all digital world to ensure that Americans relying on yesterday’s communications tools are not left behind. The Commission is hard at work on these issues. We continue to work to bring alternative broadband Internet distribution networks to the American people. We have begun laying the foundation for a “light touch” regulatory environment for Internet voice services. We are focused on addressing and advancing our social objectives of public safety, universal service, homeland security and access for people with disabilities. The Commission is also working hard to reform our country’s inter-carrier compensation regime. We are working with our colleagues elsewhere in the federal government and at the state and local level to develop a sound policy framework. Finally, we are keeping a watchful eye for anti-competitive conduct by owners of broadband networks to ensure our citizens can tap the full potential of the Internet in a broadband world. The public interest is our guide in our tireless pursuit to bring the vast benefits – both personal and economic – of the digital migration and broadband Internet service to every American. II. Emerging Internet Voice Services—What are They? With 50 million people (and rapidly growing) taking advantage of broadband Internet access, Internet-based services and applications have a promising year ahead. One class of applications, allowing for the transmission of voice communications, will continue to grow in many shapes and sizes. This application comes in many flavors, but has garnered a great deal of attention because it allows voice communications among users, much like traditional wired or wireless voice networks. Some of these Internet voice services will be delivered over the public Internet; others will use Internet protocols over private networks to reach end-users. Some of these services will be Internet-only applications; others will allow Internet callers to reach out to users on the public switched telecommunications network. Some will be pay services; others will be free or simple add-ons to other types of applications. All, however, will enhance our ability to communicate with each other. Indeed, Internet voice services are evolving in a number of different ways. Some providers, like Vonage, are offering Internet voice services using the public Internet and a consumer’s broadband connection to allow consumers to make calls to other broadband Internet users or to people using traditional plain old telephone service. Many cable operators, on the other hand, are offering IP-based voice services using their private digital networks to interconnect with the PSTN and not using the public Internet at all to transmit voice services. These types of voice services typically charge a monthly fee for a variety of different calling plans and features. We are also seeing the development of computer to computer voice services. Free World Dial-up, for instance, employs peer-to-peer technologies to allow those using the service to transmit calls to one another. This particular computer-to-computer service is free to users. Internet voice capability is also built in to other services. For example, instant messenger software applications generally provide for voice add on features. Microsoft’s Xbox Live gives those playing broadband video games the ability to talk to each other during play. As you can see, we are entering a dynamic space in the evolution of Internet voice services and applications. As more people begin to take advantage of these new and exciting competitive voice offerings, we are starting to see substantial consumer and economic benefits of the digital migration emerge. III. Benefits As the digital migration continues in earnest, increasing numbers of Americans are taking advantage of the increased choices, lower prices, innovation and personalization that broadband Internet services and applications offer. It is noteworthy that these benefits are emerging almost completely in the free market environment. IP-enabled communications are unleashing a torrent of innovative services and applications from many more sources than users of traditional communications services are accustomed to. In the voice space, for example, hungry, free radical entrepreneurs and software developers are taking advantage of extremely low entry barriers to pour investments into service offerings to take on established telephone industry giants. These industry giants are not, however, sitting still. Cable operators and traditional local and long-distance telephony providers are moving to IP-based voice products as a cheaper, more efficient way to deliver local and long-distance voice services to the public. The result is a degree of choice for consumers never before seen in the residential voice market. More Americans have more providers to choose from, more services to choose from and more devices to communicate with than in any time in American history. With increased choice and competition come the additional benefits of lower prices and greater innovation. The same forces at play that are attracting entrepreneurs to enter the Internet voice business are allowing these and more established providers to offer consumers cheaper voice services. Lower entry and transaction costs are allowing Internet voice services to be offered at low prices, in some instances, for free. The benefits do not end with competition and innovation for American consumers. Our economy is also seeing great gains from the digital migration broadly and Internet voice services specifically. As firms, new and old, continue to invest in broadband Internet networks and services and applications, we are seeing the creation of more technology focused jobs in our economy. Small businesses are using new technologies, such as Wi-Fi and WiMax to provide competitive last mile broadband Internet access. Not only are small businesses and entrepreneurs entering communications markets, small businesses are using broadband technologies and services to lower the costs of business (i.e., using Internet voice services to lower yearly phone bills), to enter new markets and more efficiently and effectively conduct commerce with suppliers and consumers around the globe. As these businesses spur economic and job growth through investment in broadband Internet services and applications, we are seeing durable productivity gains spreading throughout our economy. A recent Lehman Brothers report suggested that by 2007 investment in information technology will allow for productivity gains that will bring $140 billion in savings to six major economic sectors. These consumer and economic benefits are not, however, guaranteed. While Internet voice services offer great potential, they are also extremely easy to establish abroad. If we do not create the proper regulatory climate in the United States, it is quite possible our local calls will be routed through Canada and Mexico at cheaper rates, rather than through Kansas and Montana. We must adopt the right policies to foster investment, innovation and competition. IV. Proper Policies Economic Regulation The development and success of the Internet has been a result, in part, of our nation’s desire to maintain its minimally regulated status. Congress was mindful of the danger of regulating Internet services. Indeed, in section 230 of the Communications Act Congress enunciated a national policy to promote the continued development of the Internet and other Interactive computer services and to preserve the vibrant and competitive free market for these services “unfettered by Federal or State regulation.” We will remain vigilant. As I recently described in a speech at the University of Colorado at Boulder, I believe that government and broadband providers should strive to achieve four key Net Freedoms: (1) Freedom to Access Content: Consumers should have access to their choice of legal content; (2) Freedom to Use Applications: Consumers should be able to run applications of their choice; (3) Freedom to Attach Personal Devices: Consumers should be permitted to attach any devices they choose to the connection in their homes; and (4) Freedom to Obtain Service Plan Information: Consumers should receive meaningful information regarding their service plans. These freedoms will preserve consumer choice, foster competition, and promote investment in infrastructure and Internet applications. If adhered to, they will also eliminate the need for much of the anachronistic common carrier regulatory regime. Social/Public Safety Policies. There are at least four key areas where government should and must be engaged for the good of consumers: universal service, CALEA, E911, and access to people with disabilities. At our February meeting, the Commission adopted a Notice of Proposed Rulemaking to look at the issues surrounding these applications. We are working with our colleagues elsewhere in the federal government and at the state and local level to develop a sound policy framework. We are focused on addressing and advancing our social objectives of universal service, public safety and 911, homeland security and access for people with disabilities. In addition, the Commission is working hard to reform our country’s inter-carrier compensation regime. Before addressing each of these issues in more depth, I want to echo the Commission’s recent announcement that we will be hosting a series of Solutions Summits in the coming months as we move forward with the IP-enabled communications proceeding to quickly address important social and public safety policies. The first of these summits will be held at the FCC on March 18, 2004 and will address 911 and E911 issues. I look forward to using these working sessions to develop real answers to these challenges thereby allowing these new technologies to improve our ability to achieve our policy goals. Universal Service IP communications represent a real opportunity to advance our universal service objectives, including ubiquity and affordability. New technology can reduce the costs of providing supported services, particularly in the higher-cost areas of our country. The introduction of technologically advanced, lower-cost networks also can have a positive effect on the high-cost fund over time, thereby limiting the burden our policies place on consumers. Nonetheless, as we progress further in our digital journey, we and our colleagues at the state level will have to confront some significant challenges in the short and long term. Fully recognizing this challenge, the FCC is currently reexamining nearly every aspect of the universal service program, as I indicated in October, to ensure that the program is administered as efficiently and effectively as possible and that the overall program remains sustainable. I assure you again today that I remain committed to the enduring goals of universal service. This digital migration cannot be complete or successful if there are portions of our population left behind. Voice service availability to all Americans will continue to be vital to the success of our nation. I recognize that IP services ride atop a physical layer that, in many parts of our country, is still expensive to build and maintain. True to our Congressional mandate of comparable prices and comparable services, the Commission must continue to be sensitive throughout the digital migration to the rural areas of our country where the cost of service remains high and the march of technology can sometimes lag one step behind. Some difficult times can be expected as competitive policy continues to erode implicit subsidies that skew competition while replacing them with explicit support mechanisms that are sustainable in a competitive environment. Nonetheless our universal service goals and our commitment to obtaining them remain unwavering. Our goal is to foster a system of universal service that is fair to all competitors in an increasingly competitive marketplace. Through our various proceedings and in cooperation with Congress and the states we will adopt the universal service fund to meet the progress of technology. CALEA Just as the near exponential rate of technological evolution has challenged the Commission, it has challenged law enforcement. New services like voicemail, call forwarding, and mobile phones have required industry, the Department of Justice and the Federal Bureau of Investigations to work in concert with the Commission to ensure that the needs of law enforcement are met in a way that is not overly burdensome or too costly for consumers. So again it is with Internet voice services. It is our understanding that law enforcement will soon be filing a petition requesting that the Commission commence a proceeding to help set standards by which the success of CALEA with respect to earlier services can be extended to Internet voice services. The Commission will devote the necessary resources to expeditiously and responsibly complete this task. In the interim, it must be emphasized that carriers, the law enforcement community and the Commission are working in partnership to ensure that law enforcement retains access to the information they have now and to ensure that they have the tools they need in this ever changing environment. 911 Internet-based services provide a tremendous opportunity for improving our E911 systems. The existing 911 system is vital in our country, but limited functionally. In most systems, it primarily identifies the location from which the call was made. But an Internet voice system can do more. It can make it easier to pinpoint the specific location of the caller in a large building. It might also hail your doctor, and send a text or Instant Message alert to your spouse. Our 911 potential is limited only by the infrastructure available and the creativity we employ in developing 911 applications. Already at least 10 Internet voice providers have entered into an agreement with the 911 association NENA to extend 911 capabilities to Internet voice services. The public safety community has been an excellent partner in this endeavor already and I look forward to additional progress at the Summit on March 18, 2004. Access to people with Disabilities Technology has consistently permitted Americans with disabilities to become more integrated and productive in their daily lives. We will not allow Internet-based services to fall short of this precedent. Given the Commission’s strong record of action in this area and Congress’s great leadership in passing the ADA, I am confident that industry will respond appropriately to ensure access by individuals with disabilities. I am pleased to announce that our Solution Summit on access issues will be held on May 7, 2004. V. Recent FCC Actions and Next Steps Against this backdrop, the Commission released a comprehensive NPRM to examine how best to address VoIP and granted the Petition filed by pulver.com at our Open Meeting on February 12, 2004. In pulver.com, the Commission continues to encourage investment and innovation in the case where the voice application rides entirely over the Internet in digital form. Pulver’s FWD allows users of broadband Internet access services to make VoIP or other types of peer-to-peer communications directly to other FWD members, without charge. In this petition the FCC looked closely at the FWD offering and concluded that it clearly fit the information service definition and could not be categorized as a telecommunications service. The record was nearly unanimous on this outcome. The NPRM takes up each of the important policy areas addressed above. The NPRM also examines some of the important definitional debates surrounding Internet voice services, with a view to existing definitions and how those definitions might apply to today’s changing communications environment. Once the NPRM is released, the Commission will build a record to determine where best to draw the line between the various flavors of Internet voice services, and to begin to determine how the social and public safety objectives can best be achieved when using IP-enabled communications. A full and robust record will pave the way for the Commission to adopt policies that facilitate economic growth, a more secure homeland, and preserve and advance universal service and access to people with disabilities. I am pleased that we have made the progress that we have thus far and taken the first, bold step of granting the pulver.com petition and issuing the NPRM and I thank my fellow Commissioners for their hard work in getting this far. But our work is not done. Still other petitions remain before the Commission that involve different flavors of IP-voice services, with different levels of digitization and interaction with the public switched telephone network. Some cannot operate without use of the PSTN and offer little in the way of innovation for end consumers. Others involve the ability to bridge the old and the new. Each will have to be dealt with under its own merits, faithfully applying applicable statues. Among the open proceedings is a petition for declaratory ruling filed by AT&T regarding the applicability of access charges to particular types of VoIP services. I wish to emphasize that nothing in the NPRM discussed above will preclude the Commission from addressing pending petitions before the culmination of the rulemaking. As my colleagues work to reach their own decisions in the still pending proceedings I want to assure you that I am deeply concerned that telephone rates in rural areas remain affordable. I fully recognize the gravity of any decision that might cause a precipitous decline in access charge revenues and a concomitant impact on universal service. All of these decisions illustrate the importance of reforming our intercarrier compensation regime. We understand that the industry is hard at work to develop such a plan. I implore them to develop a proposal promptly. We have an open docket and I hope that the Commission will adopt a combined order and further notice of proposed rulemaking later this year. This item would take significant steps in the direction of a unified regime by providing immediate guidance on carriers’ transport and interconnection responsibilities, and by soliciting comment on the legal and economic issues that must be addressed as part of a transition to a more rational and sustainable intercarrier compensation regime. While many industry players have divergent views on the exact solution, nearly everyone agrees that the current system is broken. The Commission’s intercarrier compensation docket provides an excellent opportunity to work together with all industry segments to replace a system built in a monopoly environment with one that is designed for a competitive market yet still sustains universal service. That policy decision will be essential if our nation is to tap the full potential of IP-enabled services. VI. CONCLUSION In examining voice over IP, we should begin with the non-regulation of the Internet as the first article of faith because limiting government intrusions – both at the federal and state level – maximizes the potential for innovation and increases opportunity for the nation as a whole. There are clear exceptions to this rule – four of which are discussed above – where the security or well being of the nation and the consumer will require our intervention. But we must be sure that such exceptions do not swallow the rule. Without a doubt, VoIP will revolutionize the way consumers work and play. The choice for us as policy makers is to create the kind of environment where these changes can flourish. I would like to thank you, Mr. Chairman, for calling this hearing, and I look forward to working with you and other members of the Committee, my state colleagues, industry and my fellow commissioners on these challenging and critical issues.

Witness Panel 2

• Mr. Glenn A. Britt
  Read statement

  Witness Panel 2

  Mr. Glenn A. Britt

  Good morning Chairman McCain, Senator Hollings, and members of the Committee. My name is Glenn Britt, and I am Chairman and CEO of Time Warner Cable. Thank you for inviting me to speak here today about Time Warner Cable’s experience deploying Voice-Over-Internet Protocol, and for providing an opportunity to share my thoughts on the important role policy makers and regulators can play in facilitating the growth and development of this new voice service. Introduction Time Warner Cable is the nation’s second largest MSO, serving nearly 11 million video subscribers and over 3 million broadband subscribers in 27 states. Time Warner Cable offers subscribers a wide array of entertainment and communications services, including basic cable, digital cable, high-speed data, video on demand, and subscription-based video on demand services. Time Warner Cable is also taking a lead role in offering other new products to its customers including High Definition Television (HDTV), Digital Video Recording (DVR) functionality, and home networking to interconnect multiple computers in the household with a single broadband connection. And as I will discuss in more detail this morning, we have already begun the process of adding to this mix a highly competitive facilities-based voice offering to the more than 18 million Americans within Time Warner Cable’s service areas. Time Warner Cable’s VoIP Service Will Fulfill the Goal of Facilities-Based Telecommunications Competition Advances in Voice-Over-Internet Protocol technology – or “VoIP” as it has come to be known – give Time Warner and other cable operators the ability to fulfill the vision of the 1996 Telecommunications Act by bringing true facilities-based competition in telephony services to the marketplace. Since 1996, cable operators have invested more than $84 billion in private risk capital to rebuild and upgrade their facilities. VoIP technology allows cable operators to use these new broadband networks to offer subscribers high quality, reliable, local and long distance telephony services, making it an economically feasible means of competing with incumbent carriers. The development of IP-based telephony services also gives the few cable operators that have not yet upgraded their systems another reason to do so. After several years of testing and developing a potential VoIP offering, Time Warner Cable launched what we call “Digital Phone” on a commercial basis to residential customers in Portland, Maine in May 2003. Today, we provide Digital Phone service to nearly 12,000 customers in the Portland area, and we continue to add VoIP capability to our cable systems. We recently launched Digital Phone service in Raleigh, North Carolina, and I am pleased to report that we plan to make Digital Phone operational throughout the majority of the Time Warner Cable footprint by the end of 2004. To the customer, Digital Phone feels just like conventional telephone service. When a customer orders Digital Phone service, Time Warner Cable installs a new cable modem/ telephony device called a Multimedia Terminal Adapter or “MTA” in the customer’s home. The MTA is connected to existing inside wiring, enabling a subscriber to receive voice service over each existing telephone jack in his or her home. In addition, consumers switching to Digital Phone can maintain their current telephone numbers, and have access to toll-free 800 calling, Telecommunications Relay Services for the disabled, Enhanced 911 (E911) services, and Directory Listings. With respect to matters of particular importance to this Committee, let me emphasize that Time Warner Cable contributes to both state and federal universal service funds in connection with our Digital Phone service. Digital Phone also includes the capability to assist law enforcement agencies by permitting the interception, when necessary, of both call identifying information and call content in response to lawful requests. Time Warner Cable views this as a critical aspect of its service in this time of heightened national security and law enforcement concerns. Time Warner Cable’s Digital Phone service is delivered over a managed network with quality of service standards designed to ensure that customers are provided with the same high quality of service they have come to expect from traditional telephone service. The upgraded, two-way capable, digital network that we have built during the past several years is the central component of the architecture used to provide Digital Phone services. We are deploying devices called “softswitches” on a regional basis, which manage, route, and control calls originating from and terminating into our network and provide vertical telephone features (such as caller ID and call waiting) without the need for a Class 5 circuit switch. Using the softswitch architecture, calls travel over a network managed by Time Warner Cable—not the public Internet—as they move toward their final destination, whether that is on our network or a location on the Public Switched Telephone Network (PSTN). When calls to reach customers not served by Time Warner Cable must traverse the PSTN, Time Warner Cable completes these calls through its relationships with competitive local exchange carriers. We recently announced strategic relationships with MCI and Sprint under which those carriers will assist in the provisioning of Digital Phone service to customers, termination of IP voice traffic to the public switched telephone network, delivery of Enhanced 911 service, local number portability and carrying long distance traffic. With the rollout of Digital Phone, Time Warner Cable consumers are already benefiting from having a choice of facilities-based telephone providers. Moreover, deployment of VoIP service by Time Warner and other cable operators also has the potential to offer consumers new features and functionality such as multimedia conferencing, interactive gaming, and other multimedia applications which will over time demonstrate the real benefits consumers can reap from the integration of video, data, and voice services over a single broadband network. It is the next development in the increasingly competitive communications environment where cable competes for customers with telephone companies, satellite distributors, and others offering one or more services. It is no surprise that cable operators have begun and will continue to embrace this technology. Time Warner Cable is leading the way. VoIP Regulation Should Encourage and Promote This New Competition The absence of a clear regulatory framework for VoIP posed a dilemma for Time Warner Cable as we were preparing to bring the service to market. We could assert that VoIP was an unregulated information service and risk challenges from state PUCs and incumbent telephone companies. Alternatively, we could abide by the regulations applicable to more traditional telephone services and risk becoming saddled with a legacy regime in which IP technologies and service offerings do not fit precisely and that, therefore, is inappropriate to the unique character of IP-based telephony. In the interests of rolling out our service in the smoothest possible manner, we decided to obtain state regulatory certification for our VoIP offerings and to comply with traditional telephony requirements while expressly reserving our right to revisit this issue when the FCC and Congress established the appropriate regulatory structure for VoIP services. I respectfully submit that the time for establishing this structure is now. Traditional phone regulation was developed in an era in which the phone company was an established local monopoly with a guaranteed financial return, and regulation was imposed in an effort to protect consumers against the exercise of monopoly power. These principles do not apply to the new world in which VoIP will operate, and it makes no sense to force VoIP – and other technologies that may emerge – into an outdated regulatory scheme. The introduction of new technologies such as VoIP presents an opportunity for the government to reexamine the rules applicable to competitive entrants, and to develop a new, federal regulatory scheme for VoIP that will allow its widespread and speedy deployment, regulating only where demonstrably necessary and leaving the rest to the marketplace. The government’s valid concerns – like E911, support for law enforcement needs, access for persons with disabilities, continued funding for universal service, and other important consumer protections – can be satisfied without forcing VoIP into traditional telephony regulation. In short, critical public policy objectives can be satisfied without the wholesale importation of legacy requirements that have failed to keep pace with technological advancements and a more competitive environment. The National Cable & Telecommunications Association, of which Time Warner Cable is a member and whose board of directors I chair this year, has proposed a regulatory approach to VoIP that could accomplish this goal. NCTA has proposed a four-prong baseline test to determine whether a particular IP-based voice service should be subject to a new regulatory framework. The test is based on whether the service has the following four characteristics: 1. it makes use of the North American Numbering Plan (7 or 10 digits phone numbers to reach a called party); 2. it is capable of receiving calls from or terminating calls to the public switched telephone network at one or both ends of the call; 3. it represents a possible replacement for “plain old telephone service”; and 4. it uses Internet Protocol transmission between the service provider and end user customer. If a service meets these qualifications, NCTA calls for balancing VoIP providers’ rights and responsibilities to achieve all necessary public policy objectives but through the lightest possible regulation. For example, under this framework, qualifying VoIP providers would be assigned vital responsibilities, such as providing assistance to law enforcement and public safety according to the principles outlined in CALEA; offering 911/E911 services and access for the disabled; contributing to the Universal Service Fund; participating in intercarrier compensation; and complying with general consumer protection requirements. At the same time, such providers would be afforded certain rights essential for successful deployment of competitive voice services, such as the efficient exchange of traffic on public and private networks, number portability, access to 911/E911 resources, proper compensation for terminating calls, non-discriminatory access to universal service support, and access to rights-of way and other facilities without incremental fees. These ideas are described in greater detail in an NCTA White Paper titled: “Balancing Responsibilities and Rights: A Regulatory Model for Facilities-Based VoIP Competition.” I have attached to my testimony a copy of this paper for your consideration. Conclusion Mr. Chairman and Committee Members, we are excited about the future, and believe that a minimally regulatory environment that ensures VoIP providers comply with vital requirements, while still retaining a framework in which providers feel confident to invest, innovate and deploy new technologies like VoIP, will best serve the public. I thank you again for the opportunity to appear to discuss the exciting opportunity in the communications marketplace presented by the emergence of VoIP technology. I look forward to your questions.

• Mr. Glen F. Post, III
  Read statement

  Witness Panel 2

  Mr. Glen F. Post, III

  Mr. Chairman and members of the Committee, my name is Glen Post, and I am Chairman of the Board and Chief Executive Officer for CenturyTel. I appreciate the opportunity to appear before you today. I. Introduction – CenturyTel’s Markets CenturyTel is a leading provider of telecommunications services in rural communities in 22 states. Many of our service territories are represented by members of this committee, including Louisiana, Mississippi, Montana, Nevada, Oregon, Texas and Washington State. Our principal business focus is providing high quality telephone, long distance, Internet, broadband and advanced services in rural and small urban markets. The majority of our three million customers and 7,000 employees live and work in the very areas that we believe have the most critical stake in the issues we will discuss today. II. Voice Over Internet Protocol – The Most Recent Sign that the Telecommunications World is Changing Mr. Chairman, technology and market forces are driving our industry faster than regulations have been able to adapt. Voice Over Internet Protocol is an exciting new service that signals that the way our country communicates is becoming increasingly varied and that the pace of change will accelerate even more. It is an exciting time in our country’s telecommunications development, but also a time of great uncertainty for the country’s local phone companies and their investors. Our ability to invest in our network and bring high quality services to our customers is now controlled to a great degree by increasingly volatile regulatory decisions, an out-dated regulatory environment that no longer reflects reality, and government-managed competition whose rules are unevenly applied to market participants. The competitive nature of rural markets is changing, too. Wireless providers that make few commitments to service quality aggressively lobby for universal service dollars in every state, cable companies are transforming themselves into large essentially unregulated phone companies, and services offered by CLECs and satellite providers are widely available. Soon we will be embracing the prospect of broadband services provided over wireless platforms and power lines. Yet, it is the incumbent local phone company alone that must provide service to all users, that remains price regulated, that must open its network to all competitors, and that shoulders the full responsibility of meeting state and federal regulatory obligations. The need for well-reasoned, consistently applied regulation has never been greater. Today, we have an opportunity to discuss the paramount issue of what role broadband voice service will play in shaping the future of our Nation’s telecommunications infrastructure: an opportunity to go one layer deeper and consider how it will affect such things as the national commitment to universal service…. fostering real, facilities-based competition… driving economic development…protecting national security and emergency response, and enhancing all consumers’ ability to enjoy advanced telecommunications and information services. A. The Facts About Rural Markets and Voice Over IP We have all heard plenty about Voice Over IP in the last few months. But lost in the avalanche of news stories and advertisements by those promoting the technology is one critical, but seldom-mentioned fact: VoIP service providers cannot deliver their services without utilizing and relying upon someone else’s network. Their ability to compete depends in large part on the network in which we have invested to make broadband connections available to rural America. They do not concern themselves with the capital-intensive task of building and maintaining a broadband-capable network that universally serves all customers. We cannot lose sight of this fact as we consider the effect that the regulatory treatment of VoIP will have on the continued availability of telecommunications service in all markets. Technology, regulations and policies all change, but time will do little to change certain characteristics that are unique to providing telecommunications services in rural areas. You know the statistics: population densities are low, terrain is often rough, distances between customers are long, and locations are remote. CenturyTel and companies like ours have spent much time and resources planning and developing our networks to overcome the technological and distance obstacles that traditionally hindered voice and broadband deployment in rural markets. Today, our company offers broadband services to almost 70 percent of our access lines—including those customers in some very remote, sparsely populated areas. Many rural telephone companies have done the same. We are proud of that accomplishment, and we believe we are playing an important role in fulfilling the universal service, competitive and advanced service goals of the Communications Act. I say all of this to highlight my view that discussions about Voice Over IP cannot take place in a vacuum. We cannot discuss VoIP without also talking about universal service…. intercarrier compensation…competition…public safety…customer service… and how the promised benefits of broadband-based services, such as Voice Over IP, can become a reality for all consumers. B. The Important Role of Intercarrier Compensation Intercarrier compensation issues must be addressed in the VOIP debate. Access charges are nothing more than legally required payments for use of another carrier’s network. They play a critical role in keeping local rates affordable, encouraging investment in the telecommunications infrastructure investment that drives a huge portion of our national economy and promoting interconnection between carriers. At their foundation is the common sense recognition that all customers benefit when all customers are connected to the public switched telephone network. In order for all customers to be connected, carriers must compensate each other fairly, and end-user rates must be affordable. CenturyTel both pays and receives compensation to and from other carriers. This approach to intercarrier compensation has served your constituents well. Today, local and long distance rates are reasonably affordable and available to all. I am still trying to figure out why some people see something wrong with this picture. Certain petitions now before the FCC would lead us to believe that intercarrier compensation is something other than a fair payment for the use of someone else’s network. Apparently, injecting the words “VOIP” or “Internet” into the description of a voice service leads some to believe this magically changes the nature of that service. AT&T’s petition to have its traditional long distance service declared to be VoIP technology is nothing short of alarming. AT&T is not offering a new product or service, yet AT&T seeks to avoid paying a legitimate cost for use of phone company loops and switches and shows no regard for the need to protect consumers or maintain much-needed stability in the industry. While the FCC considers this petition, AT&T’s abuse of the system continues by their pocketing the difference and not lowering their customers’ bills. The truth is, nothing changes in our network when VoIP or other IP-based services travel across it. Today we originate, transport or terminate voice over IP calls—sometimes all three--so that two or more people can have a voice conversation on telephones just like the ones you have in your homes and offices. Vonage, Level 3, and long distance companies such as AT&T should not be allowed to unilaterally exempt themselves from access payments—especially at the expense of the telecom sector as a whole. If VoIP service providers are allowed to use the public switched network and not pay for that use, who will pay for the network’s upkeep and continued modernization? For customers in high cost rural markets, the goal of advanced services and all the economic development promise that implies will be lost. C. A Commitment to Universal Service The question that we must ask ourselves is whether VoIP will bridge the digital divide between rural and urban America, or make it wider? If the universal service issues surrounding VOIP are not properly addressed, it will be the latter. Our country’s commitment to universal service must be renewed and strengthened. Without it, customers who live in rural areas face the real risk of being left behind as our nation’s communications network continues to evolve. For this reason, there is no question in my mind that all voice service providers, including VOIP providers such as Pulver.com and Vonage must contribute to universal service funding. The FCC now says that “Pulver.com” is an information service provider. And yet Pulver’s VoIP service requires use of the local loop. This dependence on the local loop should require that Pulver pay into universal service funding. How long will Pulver’s customers be able to complete their calls if the broadband voice application service does not contribute a fair share of universal service support to support the underlying telecommunications infrastructure? The availability of affordable telecommunications services has long been a cornerstone of our nation’s communications policy. It is the principle that makes our telecommunications network one of our most valuable national assets, and it is a significant factor in the economic and social development of our nation. We must not allow the hype surrounding this promising new technology to distract us from this important policy principle. All users must contribute to universal service to help make services available and affordable for all. D. The Government’s Role in Preserving Key Social Objectives Some regulators already have discussed applying “a light touch” when it comes to regulating VOIP. But, should a “light touch” mean no social or economic responsibility? I fear such an approach not only will subject consumers to second-class service – such as no E-911, or access for people with disabilities. But even more troubling, it will in time undermine the high quality service and near-ubiquitous deployment that this country has worked long and hard to achieve – service and coverage that is the envy of other nations. From a consumer standpoint, there is nothing wrong with demanding some level of accountability from all providers. There is no downside for consumers if all providers shoulder their fair share for supporting the network, assume law enforcement and national security responsibilities, and comply with 911 requirements, numbering resource conservation, and disabilities access obligations. The telecom industry is making the investments needed to help our nation’s telecommunications network evolve to embrace new technology. But, our industry cannot afford to exempt certain providers from paying their share for using the capabilities of modern networks that ultimately help to make them money. Telecommunications has unlimited potential to become a key economic development driver in rural markets and to fill the void being left by such rapidly dwindling industries as agriculture, timber and mining. Just for the record, in our markets, VOIP providers are not creating 1,500 jobs in Northeast Louisiana, and they are not buying fleet cars and trucks from the local automobile dealer in Olive Branch, Mississippi. They are not going to invest over a half billion dollars in telecommunications infrastructure in the State of Washington, and they are not going to provide a full array of services to every customer that wants them in any given rural area. In fact, they won’t even provide the broadband pipe that makes their service work. Indeed, the government has an important role to play in making sure certain societal objectives are met, including universal service, 911, carrier of last resort obligations, and law enforcement access. E. Consumers Deserve a Robust Market Where ALL Competitors Can Compete Freely Voice Over IP is an exciting technology that highlights the need for a broad revisiting of the Nation’s communications policy. We need to move beyond government-managed competition that rewards those who make no network investment while handcuffing those who do. We should allow the local phone companies to bring our longstanding commitment to the community, to innovation, and to customer service to the 21st century communications marketplace. State and federal policy makers must understand that a new world brings new challenges, such as encouraging infrastructure investment in an uncertain environment, and preserving important social objectives such as universal service, emergency services, and access for law enforcement. III. Conclusion How you and the FCC proceed has critical implications to the long-term future of this nation’s telecommunications infrastructure and our ability to keep pace with the rest of the world. Our efforts in crafting new policies today are indeed necessary, but we should seek to avoid unintended negative consequences for consumers of tomorrow as we open this new chapter in telecommunications history. Properly address the issues of how VoiP service providers will do their fair share to support the national telecommunications infrastructure on which their existence depends, and you strengthen the foundation for the continued reliability of the nation’s network. VoIP must be considered in the broader context of all the fundamental changes that are underway in the new telecommunications marketplace—and reform must take place for the rules governing all competitors today. Hopefully, today’s hearing will advance that effort. I am very appreciative of the opportunity to discuss these important issues with you today, and I thank you for your time. I look forward to your questions.

• Mr. Jeffrey Citron

  Chairman and Chief Executive Officer

  Vonage
  Read statement

  Witness Panel 2

  Mr. Jeffrey Citron

  Click here for a PDF version of Mr. Citron's remarks.

• The Honorable Stan Wise
  Read statement

  Witness Panel 2

  The Honorable Stan Wise

  Mr. Chairman and members of the Committee, I am Stan Wise, Commissioner with the Georgia Public Service Commission and President of the National Association of Regulatory Utility Commissioners (NARUC). Thank you for providing me the opportunity to testify today on behalf of NARUC. Founded in 1889, NARUC represents the interests of State utility commissions operating in each of your home States. NARUC’s member commissions are responsible for implementing: (1) State telecommunications laws; and (2) federal statutory provisions specifying incumbent local exchange company obligations to interconnect and provide nondiscriminatory access to competitors. See, 47 U.S.C. § 252 (1996). NARUC has approved two resolutions relating to voice-over-Internet-Protocol technologies, both of which are attached to this testimony. State commissions want VOIP and other technologies to succeed. NARUC’s members are committed to making sure consumers in every one of our States can realize the benefits of exciting new technologies like voice-over-Internet-Protocol (“VOIP”) in the context of a telecommunications market that continues to live up to the demands that we as a society place on it. My own state of Georgia is home to innovative companies like ARRIS Corporation, which makes VOIP networking equipment, and trial projects by Z-Tel Communications, Charter, and CableCom. Georgia has a vibrant and growing technology industry and we thrilled to play host to such groundbreaking offerings. State Commissions Have Applied A Light Touch. Just like federal policymakers, State commissions are investing substantial effort to understand the unique business models, services and consumer opportunities that have sprung up around VOIP technology. Numerous States have opened dockets or informal investigations to gather all the facts before deciding how to proceed. A few States have asked VOIP carriers to certify as telecommunications service providers, leading in at least one case to litigation over whether such services is actually an information service or can be certificated under State law as a telecommunications service. Significantly, that Minnesota case was opened as a result of a complaint that the relevant carrier was not complying with State emergency calling laws. At the same time, Time Warner Cable has to chosen to file for certification as a telecommunications carrier in at least five States and provide 911 emergency dialing, pay access charges and remit universal service fees. In all States where the issue has arisen or been investigated, State commissions have applied either a light regulatory touch or, to date, no touch at all. Current VOIP providers do not have market power nor do they control essential bottleneck facilities. Like any other new entrant, they are not generally subject to economic regulation or extensive oversight by State commissions. Consumer Expectations And The Phone System. Consumers have certain expectations of today’s phone system, including ubiquitous, reliable service, a minimum level of service quality, advance notice before termination and important features like E911. Disabled individuals want to participate in the same communications system as the rest of us. Law enforcement needs fair but effective access to communications to track down criminals and terrorists. The most important and challenging fact about VOIP is that, if industry predictions are correct, it could replace a substantial part of the current telecommunications market over the next couple years. Today, consumers who use a “pure VOIP” product like Free World Dialup or “Skype” are likely to have a “plain old” telephone on the same desk as the computer and whatever VOIP hardware they are using. If they need to dial 911, call a relative or even order a pizza, the current system is there for them. But with big players like SBC, Time Warner and AT&T entering the market, the stakes are raised because many households will reach a situation where the VOIP phone (or computer or whatever you want to call it) is the only phone in the house. Eventually, non-technophiles will come to rely on VOIP phones they way they rely on the current system today. Whether we realize it or not, we build our lives around a reliable telephone system. If a babysitter, God forbid, has to call 911, she’ll need a reliable dial tone, clear service and effective routing to the nearest public safety answering point, and the local ambulance dispatcher will want to know where she is, even if she can’t give the directions. While policymakers are notoriously bad at predicting the “next big thing,” I am certain consumers will continue to expect many of the same things from the phone system of the future, regardless of which technology it uses. The good news is that industry groups are stepping up to the plate and beginning to work on their own emergency dialing and disabled access solutions and actively engaging in discussions about how to sustain the universal service system and reform intercarrier compensation. We are happy they are engaging in these activities so they can meet their public service obligations in the most efficient, effective manner possible. None of us intends to apply old rules to new technologies in ways that don’t makes sense, but the public interest obligations of the telecom system are serious enough to require continued governmental oversight and, when necessary, enforcement. Intercarrier Compensation, Universal Service And Taxes. In the near term, State commissioners plan to play a pivotal role in ongoing dialogues about how to reform intercarrier compensation and universal service. In carrying out the Telecommunication Act’s mandate to make all subsidies “explicit,” the federal Universal Service Fund is facing growing demands. The FCC has opened a broad proceeding on VoIP technologies. No matter what you believe the end game should be, there are undoubtedly a host of critical issues raised by that proceeding. However, the FCC rules or, alternatively, Congress acts, knotty issues, transition and otherwise, that require resolution before moving forward, are outstanding. Our November resolution lists a few of the concerns that would apply if VoIP services were classified as Title I: · Additional uncertainty and reduced capital investment while the scope of the FCC’s authority under Title I is tested in the courts; · Loss of consumer protections applicable to telecommunications services under Title II; · Further disruption of traditional balance between federal and State jurisdictional cost separations and the possibility of unintended consequences and increased uncertainty; · ?Increase risk to public safety; · ?Loss of state and local authority over emergency dialing services; and · Reduced support base for federal and State universal service as well as State and local fees and taxes. How VoIP services are ultimately defined, as well as the FCC’s reformation of the federal intercarrier compensation regime, will also have obvious effects on intrastate intercarrier compensation schemes and possibly funding for State universal service programs. Many States also operate their own universal service programs, filling in the gaps missed by the federal system for thousands of high cost and low-income consumers. Any comprehensive solution – on VOIP or intercarrier compensation – must allow States to preserve these programs. Most policymakers agree that federal and State universal service and intercarrier compensation regimes are inextricably linked to policy choices adopted for certain types of VOIP services. Those choices could also impact service quality and reliability as well as impact existing mechanisms for constituent/consumer dispute resolution concerning issues like “slamming” and “cramming.” At a minimum, before either Congress or the FCC takes precipitous action defining the policy that applies to VoIP and other telecommunications, those issues must be addressed. Actions that increase incentives for regulatory arbitrage before taking care of rural America and low-income consumers or fully exploring the impact on a range of related issues will make the task of transitioning to these new services exponentially more difficult. Moreover, the same issues of traffic migration that bedevil the intercarrier compensation system and the universal service fund will begin to inflict a major financial hit on state budgets, up to $13 billion, if the VOIP services that terminate to the Public Switched Telephone Network (PSTN) are classified as “information services” and removed from State taxing jurisdiction. This raises the stakes for whatever decision the FCC or Congress ultimately makes. Principles Moving Forward: Functional Nature Of The Service. If there is one thing we can be sure of, it is that the technology itself will continue to evolve and change as quickly as the ink dries on legislation. Not even the industry leaders here on this panel can tell you what the technology will look like several years from now. Although the technology has been around for a while, as far as I can tell, the current “VOIP boom” began scarcely five or six months ago, so many more twists and turns are sure to come. The technology used to deliver voice communications has been in constant flux ever since Alexander Graham Bell patented the first telephone. Policies that focus on specific technologies risk policy-makers, rather than markets, deciding which competitors should win or lose. The consensus among State commissioners, as indicated by our resolutions, is that public interest obligations of a service derive from the functional nature of that service – not from the technology used to deliver it. · If a service originates and terminates on the PSTN, it is a telecommunications service. · If a company controls bottleneck facilities for basic telecommunications services, neither VOIP nor any other technology should shield it from oversight. · If babysitters and grandmothers rely on a service for voice communications, it should be reliable, should connect you to emergency dialing services and should be available to the disabled. · Nor should constituents be forced to choose between cutting any phone service and paying a specious charge “crammed” on their bill by a third party vendor. If we don’t expect these things from our phone service, we should have a genuine debate about that – for all phone service – as I expect this body will over the next several years. Far from slowing down new technologies with old rules, this approach actually frees us to be clear about the public interest obligations we expect from telecom services without creating market distortions or opportunities for regulatory arbitrage. VOIP is the hot technology of today, but members of this committee know that “hot technologies” come and go. Some change the world and others disappear leaving only their press releases. The public interest obligations of the telecom system should be built around the consumer and the role that a particular service plays in his life. The Role of the States State commissions will continue to play a valuable role in maintaining a telecom system that is reliable, dependable and available at comparable prices in every region of the country. Each of us is intimately familiar with the telecom markets in our own States and in a position to be responsive to local consumers in ways that simply can’t be done from Washington. We maintain State universal service programs, mediate competitor-incumbent interconnection agreements, monitor the level of competition in individual markets, and, significantly respond and resolve your constituent’s complaints about service. I know that Vonage, TimeWarner, CenturyTel and lots of others are working day and night to do amazing things for consumers and address the public interest concerns I’ve raised today. State commissioners applaud the IP communications industry for its dynamism and we have no intention of standing in the way of progress. Instead, we look forward to working closely with industry on those public interest issues over the coming months and years as the innovation that makes this nation great inevitably reshapes our telecom system along with the rest of the economy. Resolution Relating To Voice Over The Internet Telecommunications WHEREAS, The Internet is providing opportunities for new methods to originate, transport, and terminate telecommunications, but is also providing new regulatory challenges, and WHEREAS, AT&T Corp has filed a petition with the Federal Communications Commission requesting in part that the FCC prevent local exchange carriers from assessing interstate access charges on certain phone-to-phone Voice Over Internet Protocol services, pending adoption of final federal rules, and WHEREAS, In 1998 the FCC reached a tentative conclusion that certain phone-to-phone IP calls may be telecommunications services, even if the carrier converts such a call to IP format and back again, and that a user who receives only voice transmission without other enhancements is receiving a telecommunications service, not an information service, and WHEREAS, A decision by the FCC, in this docket or elsewhere, to declare all phone-to-phone calls over IP networks to be information services by virtue of the technology could have negative effects on various telecommunications policies, including universal service, and might be inconsistent with the 1996 Act, and WHEREAS, Voice over the Internet Protocol and intercarrier compensation issues are inextricably linked, and WHEREAS, A significant portion of the nation's total voice traffic could be transported on IP networks within a few years, now therefore be it RESOLVED, By the Board of Directors of the National Association of Regulatory Utility Commissioners, convened in its February, 2003 Winter Meeting in Washington, D.C., that the FCC should confirm its tentative decision that certain phone-to-phone calls over IP networks are telecommunications services, and be it further RESOLVED, That NARUC asks the 706 Joint Conference to systematically address issues relating to Voice Over the Internet Protocol and to explore, with the States and the appropriate joint boards, and with industry, mutually satisfactory methods of dealing with the related jurisdictional rate and separations issues, including but not limited to reviewing, revising and simplifying the varied existing intercarrier compensation regimes while preserving universal service, and be it further RESOLVED, That NARUC's General Counsel should file with the FCC comments and ex parte presentations consistent with this resolution. Sponsored by the Committee on Telecommunications Adopted by the NARUC Board of Directors February 26, 2003 Resolution on Information Services WHEREAS, Communications consumers are served by an increasing number of technologies in today’s markets and these technologies will continue to evolve and develop in the future; and WHEREAS, The existing legal and regulatory constructs evolved in markets where almost all consumers were served by the public switched network and that new constructs will need to evolve and develop; and WHEREAS, These FCC decisions and proceedings have or may assert jurisdiction under Title I over new technologies but without acknowledging that those technologies utilize and include telecommunications services; and WHEREAS, When it passed the Telecommunications Act of 1996, Congress established a definition of “information services” and validated the FCC’s previous rulings that enhanced services should be regulated on a different basis than telecommunications services; but Congress did not state that services that combine elements of information services and elements of telecommunications services should be regulated under Title I; and WHEREAS, In 1998 the FCC reported to Congress that carrier regulation should be applied solely to companies that provide underlying transport, and not to the “information services” that are “built on top” of those facilities, and it tentatively concluded that certain phone-to-phone VOIP calls “bear the characteristics” of telecommunications services; and WHEREAS, The Telecommunications Act of 1996 preserves the jurisdiction of the States to regulate intrastate telecommunications services; and WHEREAS, Telecommunications Services associated with information services may be unregulated or more lightly regulated under the FCC’s statutory forbearance powers [47 U.S.C. § 160]; and WHEREAS, In February, 2003, NARUC adopted a resolution regarding VOIP services advising the FCC that a decision declaring all phone-to-phone calls to be information services by virtue of Internet technology might be inconsistent with the 1996 Act and could have negative effects on various telecommunications policies, including universal service, now therefore be it RESOLVED, That the National Association of Regulator Utility Commissioners (NARUC), convened in its November 2003 Annual Convention in Atlanta, Georgia, that, in accordance with the principle of technological neutrality, regulatory jurisdiction should be based, whenever possible, on the characteristics of a service, not on the technology used to provide that service, whether the service is commingled with any other service or the speed or capacity of that service; and be it further RESOLVED, That NARUC urges the FCC to carefully consider the following: - Uncertainty and reduced capital investment while the scope of the FCC’s authority under Title I is tested in the courts; ?- Loss of consumer protections applicable to telecommunications services under Title II; - Disruption of traditional balance between federal and State jurisdictional cost separations and the possibility of unintended consequences and increased uncertainty; - ?Increases risk to public safety; - ?Customer loss of control over content; - ?Loss of state and local authority over emergency dialing services; and - ?Reduced support base for federal and State universal service as well as State and local fees and taxes, and be it further RESOLVED, That State and federal regulators should work together to adapt their regulatory oversight to the technological changes in communications markets so that all consumers receive the benefits of these new technologies; and be it further RESOLVED, that NARUC General Counsel is authorized to make filings consistent with this resolution, including filing amicus curiae briefs in court proceedings. ___________________________ Sponsored by the Committee on Telecommunications Recommended by the NARUC Board of Directors, November 18, 2003 Adopted by NARUC Convention, November 19, 2003

• Mr. Kevin Werbach
  Read statement

  Witness Panel 2

  Mr. Kevin Werbach

  Mr. Chairman, and Members of the Commerce Committee, thank you for the opportunity to testify on the implications of voice over Internet protocol (VOIP) technology. This is an extraordinarily important issue for the US economy and the American people. We are witnessing the most significant change in telecommunications since Alexander Graham Bell called out for Mr. Watson. The growth of IP-enabled communications signifies nothing less than the transformation of the telecom industry, and the entire information sector that depends upon it. The decisions regarding VOIP that the Congress, the FCC, and state regulators make will determine the path of this transformation. Will we try to put the genie back in the bottle, by subjecting VOIP and other real-time Internet applications to legacy regulatory obligations? Or will we take a forward-looking approach, recognizing the extraordinary economic benefits VOIP can provide, and continuing America’s global leadership in information and communications technology? That is the fundamental choice this committee faces today. I am the founder of the Supernova Group, an independent technology analysis and consulting firm. Earlier in my career, I had the honor of serving as Counsel for New Technology Policy at the Federal Communications Commission. I participated in the Commission’s efforts, beginning nearly a decade ago, to understand a new phenomenon we called “Internet telephony.” The FCC wisely decided to allow that technology to develop outside the constraints of legacy common carrier regulation. Following its longstanding approach to “enhanced” or “information” services, the FCC created a space for the nascent VOIP technology to develop. As a result, investment and technological innovation has driven rapid development of VOIP, despite an extended downturn in the communications sector. The growth of VOIP has occurred not because it’s a regulatory arbitrage trick, but because it’s a better technology. It is more efficient, and more flexible, than the legacy circuit-switched technology. That is why all significant industry participants, including the Regional Bell Operating Companies, are deploying VOIP equipment within their networks in place of circuit switches. This is a true success story of regulatory forbearance creating new growth opportunities. VOIP is already used significantly for office phone systems and for national and global backbone transport. Cisco alone has sold more than two million IP phones to enterprise customers. And research firm IDC estimates that 10 percent of worldwide voice traffic already uses VOIP technology in some manner. The widespread rollout of broadband has created an opportunity to deliver VOIP directly to end-users as an application on top of data connectivity. This is a crucial conceptual shift, which I will explain later in my testimony. As a practical matter, broadband deployment allowed new entrants like Vonage and Packet8 to inject new competition into the local phone market. More than 100,000 Americans now subscribe to consumer voice over broadband offerings. And major players such as AT&T, Comcast, Time Warner Cable, and Qwest have announced plans to launch voice over broadband offerings in the near future. In short, VOIP is helping to fulfill the promises of competition, lower prices, and innovation that Congress hoped to achieve when it passed the Telecommunications Act of 1996. It is now time for government to address the thorny policy issues that VOIP raises. The greatest threat to the continued growth of VOIP today is regulatory uncertainty and a patchwork of inconsistent decisions by state regulators and the FCC. We need a national policy that encompasses VOIP and the intertwined issues of universal service and inter-carrier compensation. What VOIP Is… and Isn’t Voice over IP isn’t simply another form of telephone service as we know it. It is the leading edge of a new communications paradigm. Until now, telephony has been tied to a specific kind of network and a particular industry structure. The service and the infrastructure were one and the same. In a digital broadband world, however, there is one network of networks tied together by common technical protocols. The infrastructure that delivers Web pages and files can also carry voices and moving pictures. Voice is just one class of application, which can be implemented in many different ways. And telephony is just one of a plethora of voice applications. It’s worth explaining what I mean by voice as an application. The Internet is a connectivity platform. At its core, it is a set of technical and architectural protocols for interconnecting digital networks. Those networks can incorporate any physical media capable of carrying digital bits, and they can transport any application or content that can be encoded into those digital bits. To a data network, a voice call is nothing more than an instant message with different latency and reliability characteristics. And indeed, all the major instant messaging providers such as Yahoo! and AOL offer voice chat capabilities in their applications today. Because voice is an application in an IP world, it need not be tied to transmission facilities. I can load a piece of software called a softphone client onto my laptop computer or a handheld personal digital assistant and turn that device into a voice communications end-point. If I then use that device to call my friends, who is the service provider that would be subject to Title II regulation? The software vendor? The laptop manufacturer? My broadband provider? What if I’m online through a WiFi wireless hotspot in a Starbucks? I can now buy a $50 Webcam from a company like Logitech, plug it into my PC, and use it to engage in free or very low-cost videoconferencing with other computer users around the world. Or I can subscribe to the online services associated with Sony’s PlayStation and Microsoft’s Xbox video game consoles, and chat live with other players in the same game. Or I can download a piece of free software called Skype and use it to make calls to other Skype users through a web of direct peer-to-peer connections, with no central network. Skype has announced free five-way conferencing, so that every call can instantly become a multipoint conference. As these examples show, VOIP is much more than services that may, from a distance, look similar to traditional circuit-switched voice telephony. The legacy telecom regulatory framework is based on the idea of a call that originates and terminates between subscribers at defined locations, through a circuit established by one or more carriers. None of these concepts necessarily endures in an IP world. Trying to separate out unregulated from regulated VOIP applications will prove to be a futile exercise. For example, if the full panoply of legacy regulation and taxes apply to a service that uses an ordinary-looking phone, providers will have incentives to make their terminal equipment look less like an ordinary phone. Instead of engaging in regulatory whack-a-mole, we must step back and examine the point of those obligations and taxes. The Layered Model All of this leads to the question now before this Committee: what policy approaches to VOIP will best serve the interests of the American people? Let’s be clear on what is not in dispute. No one in the VOIP debate questions that law enforcement agencies should have access, subject to appropriate procedural safeguards, to the information they need to do their jobs. No one questions the need to support emergency services such as 911, or to ensure that Americans with disabilities have access to essential communications services. And no one questions the enduring value of universal service to ensure that all Americans receive the benefits of telecommunications. However, we must recognize that the communications world is changing. The way we meet those essential goals will change along with it. Just because certain mechanisms were used in the past doesn’t make them sacrosanct. And if the system is flawed, or has not kept up with the rapid pace of technological development, we should not curtail that development in an effort to fix it. The challenge is to achieve our essential social policy goals at the least cost to innovation, investment, and competition. I’d like to offer a general framework and a specific set of recommendations. As a general matter, the legal framework for converged data networks should reflect the architecture of those networks. Engineers use the concept of layering to describe how data networks operate. The underlying physical transmission is a separate layer from the addressing and routing mechanisms that deliver traffic to the right points on the network, which is separate from the applications that encode and decode that traffic, and which is separate from the traffic itself. Open connectivity between those layers ensures innovation and competitive deployment of new applications. The traditional communications regulatory framework classifies services into horizontal categories such as telecommunications and broadcasting. From that initial classification flow a host of legal obligations. If VOIP and other real-time Internet applications are deemed telecommunications services under the 1996 Act, they would be subject to the full panoply of regulation designed for circuit-switched carriers. A layered approach to communications regulation, which I have outlined in some of my writings, would approach the problem differently. It would distinguish among content, applications, addressing, and physical connectivity. Competitive issues of market power and interconnection primarily concern the physical layer. If the physical layer is open, there is little or no need to regulate what runs on top. That is the lesson of the Internet, which emerged because Internet service providers and application providers like Yahoo!, Amazon.com, and eBay had nondiscriminatory access to underlying telecommunications networks. The FCC, in its recent decision that Pulver.com’s Free World Dialup service is an unregulated information service, effectively found such a layered model already present in the 1996 Act. The statutory distinction between telecommunications services and information services, derived from the FCC’s earlier basic/enhanced division, recognizes that data applications ride on top of regulated transmission pipes. Of course Congress, unlike the FCC, has the power to change the Act. Any reform of the 1996 Act should make the data-centric, layered model more explicit. IP is the future of the network. Specific Policy Issues Turning to the specific questions we have been asked to consider for this hearing, there are three kinds of policy obligations that potentially impact on VOIP: - Economic regulation to ensure effective market competition. - Universal service policies designed to achieve social goals for availability of telecommunications itself. - Policies to support other social goals, such as law enforcement, access for people with disabilities, emergency services, local taxation, and consumer protection. It seems quite clear that the bulk of the economic regulation in Title II of the Communications Act should not apply to VOIP. Common carrier regulation was designed for dominant incumbents like the old AT&T and today’s Baby Bells. In the VOIP space, there is no such incumbent. Moreover, so long as the incumbent network owners do not discriminate, there will never be a VOIP provider with that degree of control. VOIP is an application using standard protocols. The barriers to entry are low, and the opportunities for innovation are high. Application of legacy regulation to VOIP would do more than just stifle innovation in new competitive phone services. It would cast a pall of uncertainty over the entire technology sector. Would Microsoft be subject to those obligations for its Xbox Live online gaming chat service? Would a software provider that sells a VOIP softphone client to run on a handheld PocketPC or Palm device? Would Intel, for putting voice over WiFi phones into its reference designs for laptops, as it did last week at its developer forum? Universal service raises somewhat different issues. It is a collective benefit that requires collective contributions. It would be a sad irony, though, if those contribution obligations stifled the deployment of affordable and innovative new service offerings. We must distinguish universal service, the important public policy objective, from the existing maze of hidden cross-subsidies and regulatory charges. Moreover, just because some applications do not explicitly contribute to universal service funding mechanisms does not mean they provide no support to the system. Free World Dialup may be free, but its users must pay for a broadband connection, typically to a local phone or cable operator. Companies such as Vonage and AT&T pay for the circuits, transport, origination and termination they need to deliver their VOIP traffic. A portion of those payments makes its way into universal service funding mechanisms. When the topic is VOIP and universal service, the elephant in the room is access charges. Whether VOIP applications are subject to access charges is not the same question as whether they contribute to universal service. Access charges are the non-cost-based, regulated rates that local exchange carriers charge interexchange carriers for originating and terminating telecommunications traffic. They are a descendant of internal accounting transfers by the old Ma Bell, subjected to twenty years of regulatory tinkering and industry horse-trading. They are just one of several inconsistent inter-carrier compensation regimes that telecommunications providers face, depending on the legal classification of traffic. The current system is artificial and unsustainable. Inter-carrier compensation needs to be reformed for the US telecom industry to move forward. The industry knows it. Press reports suggest that local and interexchange carriers have been negotiating to develop a consensus proposal for inter-carrier compensation reform. The FCC is also looking to act. Those efforts will only succeed if all parties have a reason to come to the table. Subjecting VOIP to access charges, especially before comprehensive inter-carrier compensation reform, would be the best way to derail those much-needed reforms. VOIP is just one factor putting pressure on the universal service and inter-carrier compensation regimes. Eight years after the passage of the 1996 Act, we still do not truly have the competitively-neutral, transparent, portable, explicit universal service funding system that the Act envisioned. Given the money at stake, this is the Bermuda Triangle of telecom regulation. Yet we must go there, if we want universal service to survive in the IP communications era. Attempting to regulate VOIP will not make the challenges facing universal service funding go away. It will simply create more confusion, limit competition, and delay the inevitable. The layered model suggests a possible alternative path to achieve our universal service goals. Take a look at the personal computer industry. Different companies make chips, build components, assemble computers, and develop software. Every layer is a platform. Competitors in each layer work to reduce prices and improve quality, with stunning results. The PC you buy today is many times more powerful than the PC you could buy five years ago, and sells for half the cost. Once only for the wealthy, PCs are now in two-thirds of American homes, and the number continues to grow. All without any government-mandated subsidies. The telephone business should follow the same path of rapid price reductions and performance enhancements as the PC business. Already, VOIP providers are introducing new price points and innovations such as area code mobility, real-time billing and service provisioning, and easy conference calling. They should be encouraged, not restrained. Finally, we come to social policy obligations such as CALEA, disability access, consumer protection, and emergency services. Especially in the post-9/11 era, there is no question that law enforcement authorities must have the tools they need to do their jobs. CALEA is one arrow in the quiver of law enforcement agencies seeking information to aid their investigations. It is not the only tool they have available. And even if VOIP application providers on top of telecommunications networks are not subject to CALEA, the telecommunications service providers they depend on still are. Furthermore, because VOIP decouples the voice application from underlying transport, the provider that interfaces with the end-user may only have access to the call routing information, not the content of the communication. The VOIP community must continue to work with law enforcement and national security agencies to find the most appropriate technical mechanisms for lawful access to information needed to support investigations. The FCC has announced its intention to launch a CALEA proceeding in the near future that will provide a public forum for these issues. There is no reason to short-circuit those processes. Similarly, there is no reason to assume that, without rapid application of traditional Title II regulation to VOIP, the other social policy objectives mentioned above will not be met. As with law enforcement access, there may be alternative sources of legal authority. Furthermore, VOIP providers have already developed voluntary mechanisms to achieve goals such as interconnection with 911 and other public safety systems. Such industry efforts should be given an opportunity to succeed. If they do not, or cannot, achieve the necessary objectives in a reasonable period of time, regulators and Congress should consider the need for targeted action. Applying the full legacy regulatory regime to VOIP and other real-time Internet applications, simply to ensure that particular social policy objectives are met, would be a colossal case of the tail wagging the dog. Conclusion Over the past decade, we have seen the benefits of a policy approach that shields Internet-based applications from unnecessary application of legacy regulation. Congress expressed its desire for an unregulated Internet in the 1996 Act, and the FCC has followed that direction in its regulatory proceedings. With VOIP, we are seeing the Internet realize its destiny. It is evolving into a converged network of networks that delivers an array of advanced applications, services, and content to all Americans. Perhaps even more powerfully, it is allowing individuals themselves to create and share information with their families, friends, communities, and extended social networks. We can embrace that future, or we can try to pull the Internet back into yesterday’s regulatory system. Make no mistake. Broad-brush regulation of VOIP is tantamount regulation of Internet applications. From the network’s perspective, a stream of voice bits is no different from an eBay auction or a Google search. The US led the world in Internet deployment. Other countries are rushing to catch up, and by some measures such as broadband penetration they have surpassed us. If we are to remain the leaders in the information-driven global economy of the 21st century, we must continue our enlightened policies to favor innovation and competitive markets, while remaining committed to our essential social, public safety, and national security goals. I commend the Committee for recognizing the need to address these critical issues.