Opening Remarks

• The Honorable John McCain
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  Opening Remarks

  The Honorable John McCain

  · At the Committee’s hearing on Voice over Internet Protocol – or VOIP – held earlier this year, I announced that the Committee was undertaking a series of hearings this spring on telecommunications policy. Today’s uncertain telecommunications policy landscape, wrought largely by rapidly developing technology, an outdated statutory framework unable to keep pace, and federal regulations mired in litigation from their outset, requires us to reexamine the very assumptions under which the Telecommunications Act of 1996 was put into law. · The VOIP hearing in February was the first hearing in this series and gave members an opportunity to look at the catalytic role of technology in our increasingly outmoded telecommunications policies. Today, we look squarely at the Act and the lessons we can learn from it. I look forward to hearing testimony from some of the telecom industry’s finest leaders as they take a look back at the past eight years since passage of the Act to identify its successes and failures. · Tomorrow we will take a look ahead and hear testimony from industry analysts and former federal and state regulators about their suggested revisions of telecommunications law, including alternative regulatory frameworks that we might consider in any future reform of telecommunications policy. We will also hold at least one more hearing in the coming weeks to give industry executives opportunities to comment on these proposals and provide their own suggestions for the future. · As I have said many times before, and will continue to remind my colleagues as we proceed down the path of reform, the Telecommunications Act was a fatally flawed piece of legislation, written by lobbyists, that freezes telecommunications policy in a bygone era already rendered obsolete by technological advances. We should be mindful not to repeat the failures of the past as Congress picks up the pen once again to craft the next version of the Act. I look forward to working with my colleagues on this issue of tremendous national importance, and I will introduce a bill later this year to reform telecommunications law so that our legal framework for the next decade is not in fundamental conflict with the goals upon which our telecom policy is originally based, as stated in the Act’s preamble: “To promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.” · I thank the witnesses for being here today and I look forward to your testimony.

Testimony

• Mr. Richard Notebaert
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  Testimony

  Mr. Richard Notebaert

  Thank you, Mr. Chairman and Members of the Committee. I appreciate this opportunity to offer a brief overview of the Telecommunications Act of 1996. I’ll do that from the perspective of my experience at Ameritech—which I led when this legislation passed; at Tellabs, a Chicago-based telecom equipment manufacturer; and now at Qwest, the incumbent local service provider in 14 western states that also offers services including long-distance and enterprise systems throughout America. In 1996, we had high hopes for this legislation—not that the Act was everything we had hoped—but that it would finally provide a progressive, consistent national telecom policy rather than the antiquated 1934 legislation then in place. We welcomed competition and the chance to enter new markets, and we were eager for reform. We thought this bill offered real promise, beginning with its very first line, and I quote, “The purpose of the Act is to promote competition and reduce regulation.” I am here today to suggest some reasons why, in my view, that opening line failed. Mr. Chairman, if I boil down where we think the Act went wrong, it would be in three areas. First, it was far too complicated. The bill, which was just over 100 pages, morphed into thousands of pages of decisions and rules. And those rules include complex—and sometimes inconsistent—procedures for achieving simple things. That creates significant ambiguity and thus contributes to nonproductive dissension throughout the industry. Just as you so accurately envisioned, Mr. Chairman, when you predicted the legislation had the “hallmarks of becoming a real regulatory nightmare.” Second, the regulatory process takes too long, especially in view of today’s market realities. For instance, when Qwest responded to consumer demand and filed for permission to provide stand-alone DSL, that process cost us $130,000 and took 45 days. The cable company, which has twice as many broadband customers as we do, could have achieved the same thing in less than 24 hours. And third, it has created complete uncertainty. Three times since the Act was passed, the courts have rejected the rules that require us to sell network elements at below-cost prices. But nothing has been resolved. And this ongoing limbo makes it impossible to raise capital, to build a business plan, or to justify infrastructure investment. We agree with the final words of the recent court decision that reflects its exasperation due to, and I quote, “… the Commission’s failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings.” In addition, Mr. Chairman, I am convinced there is a direct and dramatic connection between this uncertainty and the fact that nearly one million telecommunications employees have lost their jobs, and that the manufacturing side of this industry has lost some 90 percent of its market capitalization. What is the remedy? I believe it lies in the same vision that has been at the foundation of Qwest’s turn-around: looking at the market through the eyes of consumers. Because if we view this as consumers would, the path to success gets much, much clearer. I would offer that any legislation or regulation you support should be based on two principles: The first of those principles is that customers view telecommunications—at least voice services—as a commodity. Multiple providers offer it via wireless or cable or landline or, increasingly, the Internet. We have accepted that, and regulators should do the same—by eliminating the regulation of a single provider when others offer the same capability regulation free. By the way, no provider in its right mind raises prices above those of its competitors in a commodity marketplace. At Qwest, in fact, we are responding to this new reality by lowering the amounts customers pay. The second principle is that customers are embracing new technology now. If they decide wireless works better for them than wireline, they could care less that regulators say it’s not a substitutable service. When their preference is for a technology that makes distance irrelevant, it doesn’t matter that the government still considers distance important. If VoIP best suits their needs, it’s irrelevant that the ’96 Telecom Act never even considered the Internet as a competitive factor. The fact is that we will make progress only when regulation becomes more in sync with the advances in technology, which is, by the way, advocated by the Sununu approach to VoIP. There are many initiatives, Mr. Chairman, that you and this distinguished committee can take toward fulfilling the promise of legislation that had the stated purpose “to promote competition and reduce regulation.” And I’ll look forward to whatever questions you may wish to raise on our mutual journey toward that end. Thank you.

• Mr. James Geiger
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  Testimony

  Mr. James Geiger

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• Mr. David Dorman
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  Testimony

  Mr. David Dorman

  Mr. Chairman, Senator Hollings, and Members of the Committee, thank you very much for inviting me to speak with you today regarding AT&T’s view of the state of competition eight years after enactment of the 1996 Telecommunications Act. At AT&T, we see a bright future for the competitive telecommunications industry as long as competition remains our guiding principle and pro-competition rules are enforced in a stable and predictable manner. I speak to you today from a unique perspective. When the Act was passed, I headed Pacific Bell, one of the incumbent Bell companies that today is part of SBC. In the post-1996 Act environment, I spent almost two years at PacBell and SBC, and have been with AT&T since December 2000. So I have seen how the Act’s passage has affected the Bells, and how its implementation has affected the competitors. My message to you today is that whatever one thinks of the 1996 Act, it has begun the very valuable process of opening the telephone exchange market to competition. It is indisputable that competition has brought residential and small business customers savings and choices that would not have been possible without the Act. Studies have shown that the competition produced by the Act has resulted in savings to consumers and businesses of billions of dollars per year. The D.C. Circuit’s recent decision invalidating the FCC’s pro-competitive framework poses a mortal threat to this progress, however. Left in place, that decision could harm millions of consumers and businesses, eliminate thousands of jobs, and hamper investment in new technologies. The goals of the 1996 Act have proven more difficult to attain than many of us – and many of you – may have hoped, but that means they should be reinforced, not abandoned. Any changes to the Act must maintain a strong, pro-competitive framework to preserve and extend the consumer benefits realized today, and to ensure that competitive national carriers have a sufficient and growing customer base to allow and justify our investment in and widespread deployment of innovative new technologies and services, especially Voice over Internet Protocol (“VoIP”). Firm resolve in enforcing the pro-competitive policies of the 1996 Act is a necessary first step on the path to VoIP, but ensuring the appropriate regulatory framework for VoIP itself is equally critical. VoIP must be allowed to develop free of burdensome regulation. In particular, the FCC should be encouraged to resist the insistence of the Bell companies -- by far the largest telephone companies in the country -- that they need subsidies in the form of inflated access charges from nascent VoIP providers. The intercarrier compensation and universal service systems must be reformed to ensure that universal service is preserved while at the same time not requiring new and innovative competitors to contribute disproportionately to universal service or otherwise subsidize incumbent carriers. Let me provide more detail on each of these points. Attaining the Ambitious Goals of the 1996 Telecommunications Act Has Proven Difficult At its core, the Telecommunications Act of 1996 had an extraordinary goal. It sought to eliminate monopoly in the local telephone exchange, the last mile facilities that connect virtually every home and business to the public switched telephone network. To achieve the goal of local competition, the Act offered the incumbent local telephone monopolies a remarkable trade. In exchange for opening their local monopolies to competition in accordance with a “competitive checklist,” the Bell telephone operating companies would be permitted to enter into markets from which they had previously been excluded. It was widely believed that granting the Bells a clear path to provide wireline long distance services would give them the incentive to open their local markets to competition. The demonopolizing of local service and Bell entry into long distance was the mutual quid pro quo. Creating a competitive local market, however, proved more difficult than first imagined. Building a local telephone network with no subscribers to fund that construction is incredibly risky and technically challenging. Entering a business in competition with an established provider whose network has ubiquitous capacity and was built with ratepayer funds at a guaranteed profit is even riskier. Indeed, even in 1996 many believed that local telephone service was a natural monopoly. Recognizing the difficulty new entrants would face, Congress established several pathways for competitive entry. The Act allowed providers to interconnect their networks with those of the incumbents, to lease unbundled network elements (“UNEs”) from the incumbents, and to resell the services of the incumbents. Congress did not, however, predict and protect against factors that have complicated competitive entry. The Bells have resisted and challenged nearly every attempt to implement the pro-competitive provisions of the Act. They have spent years playing their two hole cards – price and process. And with them, they’ve largely managed to keep competitors out of their monopoly. Their strategy of resistance, delay, and litigation has enabled them to maintain their dominance of the local telephone market, while dozens of their competitors have been forced out of business. Further, Congress could not have predicted that the Bells would become even more formidable opponents in the few years after the Act was passed. Rather than enter each other’s territories to compete, as Congress anticipated, the seven Bell companies have consolidated into four, much larger companies wielding even more market power. Nevertheless, the FCC has granted the Bells the enormous competitive benefit of long distance entry in every state. To obtain that authority, the Bells relied upon the ability of competitors to use leased network elements -- the very competition they now seek cynically to eliminate -- as evidence of the competition that was a predicate of their first being allowed to enter the long distance market. Other events, too, have made competitive entry more difficult. Access to capital has become seriously constrained. The enactment of the 1996 Act spurred investment in new telecommunications facilities and services far exceeding the historical norm. From 1980 to 1995, the industry average investment was $38.8 billion annually and there was an average annual investment growth rate of 2.8 percent. Investment after the Act passed soared -- growth averaged 22.3 percent annually and the industry invested on average $95.3 billion per year. In the year 2000, competitive carriers’ capital expenditures totaled nearly 64% of their revenues. The burst of the dotcom bubble essentially eliminated access to needed capital, however. Numerous competitors declared bankruptcy or shut down operations. For many of those that continued, stock prices plunged. While telecommunications companies captured an average of two billion dollars per month in initial public offerings in 1999 and 2000, they virtually ceased to be able to raise money in IPOs in 2001. As competitors scaled back their plans, consumers were left with fewer choices. In addition, fraud has crippled the telecommunications industry. Competitors were significantly harmed at an already difficult time for the telecommunications industry by fraudulent practices that overstated both profitability and demand for long-haul telecommunications facilities and services. This led to crippling overcapacity, cost investors tens of billions of dollars, and imposed incalculable costs on the industry and the economy. At bottom, the confluence of events caused a severe misallocation of resources and investment throughout the telecommunications industry that has forever changed the complexion of the marketplace. AT&T’s Experience At AT&T, we have done our best to surmount these barriers and become a viable player in the market for local telephone service. I am pleased to say that today we provide local service to more than 4.3 million residential lines and 4.5 million business lines, including 1 million small business lines. We have done so through a combination of facilities-based entry and the lease of Bell network elements, both means established by Congress in 1996 and rules crafted by the FCC as instructed by the Act. First, we have invested billions of dollars in our own local facilities since 1996. In 1998, we purchased Teleport, a facilities-based competitive local service and access provider, for $11 billion to provide local and long distance service to enterprise customers. Since then, we have spent an additional $15 billion dollars on local facilities. As of September 30, 2003, we had invested in 158 local voice switches, 20,600 route miles of metropolitan fiber, and 8,400 fiber rings in 67 metropolitan statistical areas covering 91 cities in 49 states. All these investments have made AT&T the largest facilities-based competitive local exchange carrier in the country in terms of revenue. Further, all these sums are in addition to the tens of billions we invested in our long distance network, cable and wireless facilities. In both the business and residential markets, however, facilities-based service requires a significant concentration of demand to be economic. To the extent multiple networks can ever economically compete, a significant customer base is needed to justify network deployment and reduce the risk of such deployment. Until we can develop that local customer base, a strategy that relies solely on facilities-based competition is simply not economically feasible. MCI and Sprint recognized this 25 years ago when they entered the long distance business by reselling AT&T’s service. For the same reason, the Bell companies today are using the networks of AT&T and the other established interexchange carriers to offer long distance service rather than waiting to build their own long haul facilities. There are other substantial challenges to facilities-based competition. Eight years after passage of the Act, the Bells still have substantial unique advantages over competitors in providing facilities-based service. For instance, only the Bells enjoy unfettered use of the public rights-of-way in most places, while a competitive carrier must negotiate -- often over many months or even longer -- a rights-of-way agreement with the municipality in which it seeks to provide service before it may even begin building its network. The Bells also have exclusive access to many multi-tenant buildings and have access to capital at much lower interest rates than new entrants. All these disparities between the incumbents and their competitors give the incumbents a substantial cost advantage over new entrants. In the face of these economic challenges and the incumbents’ legacy advantages, the only viable means of competitive local market entry in the mass market has proven to be the lease of capacity on the incumbent carriers’ networks. Leasing unbundled network elements from the Bell companies and using them to create and assemble our own innovative service packages has allowed AT&T to remain in the market even as many others have failed. The same has proven true for the rest of the competitive industry. The majority of competitors that have survived in the mass market are using UNE-P. UNE-P also provides the stepping stone to facilities-based competition by enabling competitors to build a customer base that justifies investment in facilities. Despite their rhetorical support for facilities-based competition, the Bells’ repeated efforts to eliminate UNE-P will eliminate this essential first step and with it the most meaningful prospect of facilities-based competition in the future. As a result of a lawsuit initiated by the Bells, the Court of Appeals for the D.C. Circuit in March invalidated the FCC’s rules ensuring that competitive local telephone companies can lease UNEs when they otherwise would be impaired in their ability to compete in local markets. In fact, the D.C. Circuit appears to have set a nearly insurmountable presumption against competitors seeking to use UNEs, driven by its view that -- notwithstanding the mandate of Congress in the Telecommunications Act -- local competition based on unbundled access rather than ownership of local facilities is “synthetic” and deters investment in telecommunications facilities. The D.C. Circuit decision is wrong. It blatantly contradicts two Supreme Court decisions that explicitly rejected arguments that the Act elevates facilities-based competition over other entry methods and that leased use of the network deters investment by competitors or the Bells as “fundamentally false.” The Solicitor General and the Antitrust Division of the Department of Justice also have already rejected the D.C. Circuit’s interpretation of the Act, arguing that it failed to “accord appropriate deference to the FCC’s reasonable interpretation of a complex statute” and substituted a standard that creates an “unwarranted restriction on the FCC’s implementation of the Act’s network element provisions” that is “in tension with other provisions of the Act” and “not compelled by statutory text.” The Solicitor General also has noted that the “job of judges” is “to ask whether the Commission made choices reasonably within the pale of statutory possibility in deciding what and how items must be leased,” not to substitute its own policy views for those of Congress. Likewise, the Bells were successful in their efforts to uphold the FCC rule eliminating competitors’ access to broadband facilities -- a ruling that will not only impair broadband competition but also significantly inhibit competitors’ ability to invest in facilities for voice competition. In fact, while the Bells claim that they welcome competition from facilities-based competitors, they regularly stifle attempts to construct such facilities. Just this month, Qwest engaged in a tremendous lobbying effort to halt Salt Lake City and other Utah municipalities from joining the Utah Telecommunication Open Infrastructure Agency (“UTOPIA”). UTOPIA is a government agency formed by 18 Utah cities to build a fiber-optic network that would provide Internet, telephone and TV access directly to households in member cities. AT&T and other competitors could lease space on the UTOPIA network rather than the Bell network, freeing Qwest of the need to allow AT&T access to its local facilities. Qwest, however, has done everything it can to secure opposition to the project, including promising to accelerate its DSL deployment in the area to 90% of homes. The Bells do not want facilities-based competition; they want to keep their monopoly. Until we or others are able to build more of our own facilities, however, we remain dependent on the Bells for leased use of their network. For more than eight years, we have tried to obtain access to these facilities through commercially negotiated arrangements pursuant to sections 251 and 252 of the Act, and we continue that effort today, particularly given the recent request of the FCC Commissioners to engage in intensive negotiation efforts during a 45 day “time out” in legal proceedings. Given the Bells’ persistent market power, these negotiations will be challenging. While the sale of wholesaling capacity is today a major revenue contributor to long distance and wireless companies where vibrant competitive markets exist, the Bells with retail market shares of 90% are most reluctant wholesale providers. Even as the largest customer of each of the Bells, we rarely see any effort by them to ensure that we are a loyal wholesale customer. Nevertheless, AT&T is committed to pursuing any process that offers the hope of preserving competition in the local telecom market. I have designated our two most senior operating executives to handle the Bell negotiations, and I am reviewing their progress daily. Despite the challenges, we are negotiating in good faith to secure economically reasonable rates that allow us to continue providing competitive local service alternatives to customers. AT&T has always preferred the business commitment of a fair commercial agreement over regulatory uncertainty. In fact, I called for such an approach in a speech before the American Enterprise Institute only last September. We’re hopeful that the Bells will recognize, as we did in the long distance market, that a robust wholesale business is good for them. We hope that the FCC’s call for genuine, good-faith negotiations will provide all parties with the proper incentives to create commercial arrangements that preserve competition and benefit consumers. At the same time, the government must retain the option of Supreme Court stay and review of the D.C. Circuit decision. The D.C. Circuit decision is wrong as a matter of law and bad policy for this Nation. It is inconsistent with the Telecommunications Act and the Supreme Court’s interpretation of the Act. Moreover, I believe that the prospect of Supreme Court review of that decision is the most significant reason for the Bell companies to negotiate right now. The stakes -- for consumers, small businesses, and AT&T -- are simply much too high to risk a court vacatur of the FCC’s rules in the hopes that the Bell companies, after eight years of opposition, will negotiate commercially reasonable access arrangements. Consumers Benefit From Competition While certainly not perfect, the 1996 Act represented an important shift in telecommunications policy that began the long process of opening the local monopoly to competitive entry. Competition has meant more choices, better service and lower prices for tens of millions of consumers. There are now more than 19 million UNE lines serving consumers and small businesses. Consumers and small businesses save close to $11 billion dollars annually. While the benefits to date have not met your expectations or ours, they would not have been realized without the Act. In response to competition, the Bells have had to lower their prices, often for the first time, and sometimes by as much as one-third. Competition has also led providers to offer bundled services. In response to bundled offers from competitors, the Bells now offer bundled local and long distance service in all of their states, to about 85% of all American households. They offer bundled local and high-speed Internet (DSL) service to nearly three-quarters of all U.S. households. Bear Stearns recently estimated that the number of consumers in competitive markets that have switched to one-stop-shopping “bundles” of services is over 52 million. Bundled services -- both local and long distance -- are often available for a flat “all you can eat” fee per month, rather than traditional per-minute charges. Estimates point to 30% savings where bundled offers are in the market, and suggest that consumers of bundles save in the range of $7 billion per year. So while the Act might not be perfect, there is no doubt it is delivering real and otherwise unachievable benefits to consumers and small businesses today. Encouraging Investment Will Bring Emerging Services to the Marketplace To preserve these benefits for consumers, it is imperative that Congress and the FCC renew their commitment to the pro-competitive policies that have given millions of residential and small business customers choice and billions of dollars in savings. Staying the course on competition means resisting the incumbent providers’ calls to repeal the market-opening reforms of the 1996 Act. It also means rolling back the FCC’s decision to eliminate our ability to use UNEs to provide the broadband services that customers increasingly demand. Lack of access to broadband facilities will impede our ability to offer bundled voice and data services, putting us at a disadvantage vis-à-vis the incumbent Bell companies, at least in the short term during the incubation period of nascent technologies like WiFi, WiMAX and broadband over power lines. Clearly, there are those who would return consumers to the monopoly environment that existed before the 1996 Act. A move backwards -- whether through regulation, legislation, or judicial order -- would carry a heavy price. It would mean: · disconnecting millions of homes and businesses from the carriers those customers chose to provide them with competitive phone services; · taking away the lower prices and more responsive services those customers gained from their choice; · taking away the benefits of lower prices and more responsive service from Bell customers once the threat of competition is removed; · permitting the remonopolization of consumer and small business telecommunications (unless policymakers are willing to expel the Bells from the long distance market and restore an antitrust standard that keeps them out until they face market-disciplining facilities-based competition); and · the loss of a significant driver for our economy -- competitive incentives to deploy and promote the use of broadband -- at a time when our nation can least accommodate it. The far better choice is to encourage existing competition. The importance of pro-competitive policies goes beyond today’s greater choices and lower prices. The incentives of companies like AT&T -- or even the Bells -- to invest in new services and technology are substantially diminished by marketplace instability. Creating an environment in which U.S. companies feel confident to invest and deploy new services is particularly critical now, when exciting new technologies are emerging. Let me stress that we do not regard UNE-P as a panacea. We do not like being dependent on a reluctant supplier for our critical service inputs, and we are highly motivated to escape our dependence on the Bells. VoIP Holds the Promise of New Choices and Capabilities While UNE-P and circuit-switched facilities are the “now” for competitors serving mass market consumers, VoIP is the future. VoIP holds the promise of choices and capabilities far beyond today’s offerings. It will enable consumers to tailor their communications services to their needs and lifestyles at competitive prices and with important enhanced security benefits. It very well could be the “killer app” to drive widespread broadband adoption for which we have all waited. It could also be an important step to our nation’s economic revival. With VoIP, voice service is just another “hosted application,” like e-mail, so customers can take their phone numbers wherever they go and access connections over any device, such as a standard home telephone, wireless phone, or computer. The Alexis de Tocqueville Institution recently concluded that government at all levels could save $3-10 billion annually -- up to 60% of their current phone bills -- by replacing circuit-switched service with VoIP. VoIP has potential applications in all segments of the communications industry -- in the enterprise market; on customers’ premises, replacing old and costly PBX systems; in international service, where the FCC has recognized VoIP’s value in bypassing high foreign settlement rates; and in private IP- and Internet-based networks, where AT&T and others are deploying VoIP technology. As the service develops, these deployments will continue to expand, enabling America’s businesses and consumers to enjoy the benefits of voice, video and data services over one secure network. I must add that you should not think of VOIP as “cheap phone service.” It promises to be lower-cost, yes, but with a host of new user features and options that go well beyond today’s “POTS.” But if national carriers cannot remain in the market today, they will not be able to generate the revenues they need to make the investments necessary to make this service a reality in the near future. VoIP will be yet another technology controlled by the Bells -- who held back DSL from consumers for some ten years so customers would have to take their other, higher priced services. It was only when cable operators deployed cable modem service that the Bells responded with a mass-market, high-speed Internet access service of their own. Similarly, without the threat of losing customers to a VoIP rival, the Bells will have no incentive to invest in and deploy this new technology, preferring to milk the legacy assets as long as possible. Competitors will spur investment by the Bells, not deter it. AT&T fully intends to lead the VoIP revolution for businesses and our customers. We have invested heavily to make the necessary changes to our network -- some $3 billion in 2003 alone. We are already providing VoIP service to hundreds of business customers, and we have begun commercial deployment of a broadband consumer VoIP offering. We have announced that we will be providing VoIP service in the top 100 markets in the country this year. But without UNE-P, we cannot retain and grow our customer base -- and without a stable, mass market customer base, VoIP deployment would become riskier and more costly. Clearly, it will take much longer to reach wide penetration. VoIP Must Be Appropriately Regulated Ensuring the continued availability of UNE-P and facilities-based competition will promote the widespread availability of VoIP. Equally important are the decisions that Congress and the FCC make about the regulation of VoIP itself. AT&T believes that VoIP should be allowed to develop in the marketplace. We welcome the fact that many Members of this Committee and Congress, such as Senator John Sununu and Congressman Chip Pickering, support a “hands off” approach to VoIP and have introduced legislation that would bring the benefits of competition and innovation to the telecommunications marketplace. Senator Sununu and Congressman Pickering’s deregulatory approach to VoIP both acknowledges the need to reform the current subsidy system and allows this nascent service to flourish. AT&T strongly supports this approach. Allowing emerging services to develop free of unwarranted, legacy regulation allows carriers to design the service to respond to customer needs and interests, and to remain flexible in their business plans as customer preferences emerge, rather than be bound by a government-dictated vision of what the service should include and what is a benefit to consumers. We recognize, however, that providers of VoIP services must also meet important social policies. Access for the disabled, enabling public safety (911) response, and the needs of law enforcement to trap and trace calls when necessary are technical and operational issues that the industry can resolve, and AT&T is taking the lead to resolve them. And government has a legitimate role in ensuring this gets done. Indeed, the enormous flexibility and power of VoIP promises to address these issues in ways superior to current circuit-switched technology. Let me assure the members of this Committee that nothing about VoIP threatens universal service. The problem with the universal service fund (USF) is that it is still supported by a shrinking base of interstate revenues for traditional telecommunications services. A growing fund with a shrinking base cannot be sustained. It’s long past time for the universal service systems in this country to be reformed, and we support VoIP being part of the broader reform of the USF system. We think VoIP providers should contribute to universal service -- in a sustainable, fair, and nondiscriminatory manner. For example, basing contributions on telephone numbers or connections would broaden the base of contribution and assess it on voice communications regardless of underlying technology. The largest threat to VoIP, however, comes from an effort to apply 20th century access charge regulations to 21st century technology. The access charge scheme was developed decades ago to ensure that whenever a long distance company used the local network, it would subsidize local service by paying grossly inflated rates to the local carrier. While there was much in this framework to which one could object, it remained workable as long as local carriers and long distance carriers operated in separate markets. Its infirmities became apparent and unsustainable when those carriers entered each others’ markets, and even more so when the principle outside users were no longer long distance companies, but wireless companies and ISPs. For that reason, eight years ago, Congress ordered that implicit subsidies, including those in access charges, must be eliminated. Unfortunately, they still remain in place eight years later. And while the FCC has promised for years to overhaul its intercarrier compensation regime -- and FCC Chairman Powell has called the regulations “a mess” -- it continues to address these issues on a piecemeal and discriminatory basis. The far better course would be comprehensive reform of the intercarrier compensation and universal service regimes in ways that eliminate market distortions and opportunities for regulatory arbitrage while also protecting and advancing this Nation’s proud heritage of Universal Service. The Bells, realizing that VoIP could replace the switched long distance calls that bring them these inflated revenues, have seized on this inaction and are calling for VoIP providers to subsidize them as well, even though VoIP providers already pay the local companies directly for use of their networks. It is ridiculous to ask emerging providers of this nascent technology to subsidize monopolists many times their size operating in the same market. If we require the new grocer in town to subsidize the supermarket, we are not going to see many new grocers. Internet access flourished in this country in part because Internet service providers were not saddled with payment of access charges. The incredible growth of wireless services was helped substantially by the fact that wireless carriers pay far less in access charges than wireline competitors. The same approach will promote the widespread availability of VoIP. AT&T agrees that affordable service needs to be maintained in high-cost areas of the country. Applying the legacy access charge regime to VoIP, however, is not the way to achieve this result and would prove counterproductive and market-distorting. It simply slows the deployment of new and desirable technologies while driving users away. * * * Mr. Chairman, this Committee has a long commitment to promoting competition and securing for consumers the benefits of choice and lower prices that competition can bring. You and your colleagues have provided the leadership necessary to liberate the telecommunications industry from the shackles of the monopoly era. Today we are at a crossroads where we must call upon your leadership again. The competitive vision of the Telecom Act is being fulfilled, but it needs the continued support of lawmakers and regulators if all its ambitious goals are to be met. If local markets remain open to competition, consumers, businesses and the American economy can all win. Thank you again for inviting me here today, and I look forward to your questions.