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95–448PDF 2004

VOIP SERVICES: WILL THE TECHNOLOGY DISRUPT

THE INDUSTRY OR WILL REGULATION DISRUPT

THE TECHNOLOGY?

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS AND

THE INTERNET

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JULY 7, 2004

Serial No. 108–104

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN SULLIVAN, Oklahoma

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

TOM ALLEN, Maine

JIM DAVIS, Florida

JANICE D. SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

BUD ALBRIGHT, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

FRED UPTON, Michigan, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

Vice Chairman

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

STEVE BUYER, Indiana

CHARLES F. BASS, New Hampshire

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOE BARTON, Texas,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

Ranking Member

ALBERT R. WYNN, Maryland

KAREN MCCARTHY, Missouri

MICHAEL F. DOYLE, Pennsylvania

JIM DAVIS, Florida

CHARLES A. GONZALEZ, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Carlisle, Jeffrey J., Senior Deputy Bureau Chief, Wireline Competition

Bureau, Federal Communications Commission ......................................... 40

Citron, Jeffrey, Co-founder, Chairman and Chief Executive Officer,

Vonage Holdings Corp .................................................................................. 50

Greene, Margaret H., President, Regulatory and External Affairs,

BellSouth Corporation .................................................................................. 59

Jensen, S. Michael, CEO, Great Plains Communications ............................. 65

Kirkland, James, General Counsel and Senior Vice President, Covad

Communications ............................................................................................ 69

Martine, Cathy, Senior Vice President, AT&T Corporation ......................... 73

Nelson, Hon. Robert B., Michigan Public Service Commission, Chairman,

Committee on Telecommunications, National Association of Regulatory

Utility Commissioners .................................................................................. 83

Rutledge, Thomas M., Chief Operating Officer, Cablevision ........................ 88

Vidal, Ronald, Group Vice President, Emerging Opportunities from Level

3 ...................................................................................................................... 91

Material submitted for the record by:

Dingell, Hon. John D., a Representative in Congress from the State

of Michigan:

Letter dated July 19, 2004, to Jeffrey Carlisle, Senior Deputy Bureau

Chief, Wireline Competition Bureau, Federal Communications

Commission, enclosing additional questions for the record, and responses to same ..................................................................................... 123

Letter dated July 19, 2004, to Jeffrey Citron, Co-founder, Chairman

and Chief Executive Officer, Vonage Holdings Corp., enclosing additional questions for the record, and responses to same ................... 127

Letter dated July 19, 2004, to Margaret H. Greene, President, Regulatory and External Affairs, BellSouth Corporation, enclosing additional questions for the record, and responses to same ...................... 132

Letter dated July 19, 2004, to S. Michael Jensen, CEO, Great Plains

Communications, enclosing additional questions for the record, and

responses to same .................................................................................. 135

Letter dated July 19, 2004, to James Kirkland, General Counsel

and Senior Vice President, Covad Communications, enclosing additional questions for the record, and responses to same ...................... 137

Letter dated July 19, 2004, to Cathy Martine, Senior Vice President,

AT&T Corporation, enclosing additional questions for the record,

and responses to same ........................................................................... 142

Letter dated July 19, 2004, to Robert B. Nelson, Michigan Public

Service Commission, Chairman, Committee on Telecommunications, National Association of Regulatory Utility Commissioners,

enclosing additional questions for the record, and responses to

same ........................................................................................................ 148

Letter dated July 19, 2004, to Thomas M. Rutledge, Chief Operating

Officer, Cablevision, enclosing additional questions for the record,

and responses to same ........................................................................... 155

Letter dated July 19, 2004, to Ronald J. Vidal, Group Vice President,

Emerging Opportunities from Level 3, enclosing additional questions for the record, and responses to same ........................................ 159

(III)

(1)

VOIP SERVICES: WILL THE TECHNOLOGY DISRUPT THE INDUSTRY OR WILL REGULATION DISRUPT THE TECHNOLOGY?

WEDNESDAY, JULY 7, 2004

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS

AND THE INTERNET,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:08 a.m., in room

2123, Rayburn House Office Building, Hon. Fred Upton (chairman)

presiding.

Members present: Representatives Upton, Stearns, Gillmor, Cox,

Deal, Whitfield, Shimkus, Wilson, Pickering, Fossella, Buyer, Bass,

Walden, Terry, Barton (ex officio), Markey, Wynn, McCarthy,

Doyle, Davis, Gonzalez, Boucher, Towns, Gordon, Rush, Eshoo, Stupak, Engel, and Dingell (ex officio).

Staff present: Will Nordwind, majority counsel and policy coordinator; Howard Waltzman, majority counsel; Will Carty, legislative

clerk; Peter Filon, minority counsel; and Gregg Rothschild, minority counsel.

Mr. UPTON. Good morning, everyone.

Today’s hearing is entitled ‘‘Voice Over Internet Protocol Services: Will the Technology Disrupt the Industry or Will Regulations

Disrupt the Technology?’’

Voice over Internet protocol or VOIP is a tremendous technological advancement in the telecommunications marketplace. Quite

simply, VOIP takes voice signals, turns them into data packets of

ones and zeros and sends them over the Internet. This is much

more efficient than sending the voice signal over the public switch

telephone network. This efficiency is bringing lower prices to the

consumer and VOIP represents yet another competitor in the telecommunications marketplace.

And we are in an exciting place in the development of VOIP. The

companies represented at today’s witness table offering varying flavors of VOIP. On the one hand, it is being deployed to consumers

at an impressive pace for nascent technology. On the other hand,

it is still just that, a nascent technology but one with tremendous

potential, to be sure.

But we will never realize VOIP’s tremendous potential if we saddle it with unwarranted government regulation. For instance, given

VOIP’s reliance on the Internet which respects no State or local

boundaries, VOIP is truly interstate in nature. As such, we must

2

have a single Federal regulatory regime, not a patchwork of 51 different State regulations. But that single Federal regulatory regime

must tread as lightly as possible. While we need to make sure that

the law enforcement officials when authorized have adequate tools

to track criminals and terrorists who might use VOIP services and

that consumers have access to E911 services, VOIP providers

should not be regulated like common carriers.

Today’s hearing title poses two questions. The first question is

will the technology disrupt the industry? My answer to that is that

it likely will, but the benefits to the consumer will be tremendous.

The second question is: Will regulation disrupt the technology?

My answer to that question is not unless we let it, and we should

not.

I want to thank all of today’s witnesses for being with us today.

Look forward to your testimony. Appreciate it being sent up in advance.

I want to particularly thank Jack Carlisle who was born on Saturday for letting us borrowing his dad for today’s hearing. Congratulations, Jeff, and your wife Rebecca.

With that, I yield for an opening from my friend and ranking

member of the subcommittee, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much. And I want

to comment you for calling this hearing today on Voice over Internet Protocol.

Internet protocol based telecommunications and services continue

to make inroads into markets traditionally served through older

technologies. IP technology can put any content; voice, video, data

or a combination into packets of zeros and ones. These digital packets can be delivered over any telecommunications infrastructure.

This is the kind of destructive technology that Joseph Shumpeter

spoke about in his book published 60 years ago entitled ‘‘Capitalism, Socialism and Democracy.’’

In that book he spoke of a process of industrial mutation that incessantly revolutionizes the economic structure from within incessantly destroying the old one, incessantly creating the new one.

This process of creative destruction is the essential fact about capitalism, he said.

Now Internet based technologies are buffeting many of the incumbent marketplace participants across many industries. In the

telephone market consumers stand to benefit from advances in

technologies such as VOIP which possess the ability to bring additional features and services to what we once called plain old telephone service.

In addition to challenging industry participants, it also challenges regulators to not be timid about embracing change, ensuring

that innovative creatively destructive technologies and service providers are not thwarted from reaching consumers by established incumbents, and that was a key goal of the Telecommunications Act

of 1996.

The FCC has struggled with adopting many of the future oriented regulatory definitions in the Telecom Act of 1996 in the last

several years. Indeed, the Commission has been reversed in key

court decisions that supported a more competitive interpretation of

the blueprint that Congress established in the Telecommunications

3

Act for the digital free-for-all that we hope to unleash across all

markets. We had hearing after hearing after hearing in this committee room in 1994, in 1995, in 1996 about this digital free-forall about the fact that any company would be able to provide any

service within time as long as a vigorous paranoia-inducing competition was unleased in the telecommunications marketplace.

So all of this is now coming to pass, although belatedly in some

areas because of the Federal Communications Commission. But

nonetheless, we have been making great progress.

Consumers deserve access to new Internet-base services. Consumers also deserve to receive those services from multiple providers so that they benefit not only from access to new technology,

but also from improved service quality and lower prices.

Consumers must also retain the important consumer protections

developed over the years for these services. Just because the technology used to deliver a service utilizes a new technology doesn’t

mean that the service itself changes from a consumer standpoint.

The need for ensuring consumers of affordable service, consumer

privacy rules, billing protections, fraud protection, emergency service and law enforcement access do not disappear simply because a

voice call travels in packets rather than dedicated circuits.

Today’s hearing will provide us with an excellent opportunity to

hear how both the industry and regulators are confronting the rise

of Internet telephony and allow us over the coming months to gage

whether any changes are necessary to existing telecommunications

statutes or whether any adjustments need to be made to regulatory

interpretations of those laws.

Again, Mr. Chairman, this is an incredibly important hearing

and I think you for conducting it.

Mr. UPTON. Thank you.

Mr. Cox?

Mr. COX. Thank you, Mr. Chairman.

And I just want to pay homage to my colleague from Massachusetts for his tribute to Schumpeter’s creative destruction. I mean

there is very little more that can amaze me now when Massachusetts liberals are honoring Schumpeter. And it’s fair then, I think,

to say we are all capitalists now.

Mr. MARKEY. I wish the Federal Communications Commission

believed it, but that is the problem.

Mr. COX. It is actually a sign of the times that we find ourselves

making common cause in this way, as in fact we’ve done on many

other issues.

I want to thank you, Mr. Chairman, for holding this important

hearing for that very reason.

And I, too, would like to offer a special thanks to Mr. Carlisle

of the FCC. And I hope that you’ll share my thanks and congratulations with the entire Commission for your outstanding decision to

approve the Pulver petition. This wise decision will ensure that

consumers of voice software applications on the Internet which

never use the public switched telephone network won’t suffer the

burden of old line telecom regulation.

Consumers now have the freedom to talk to friends, family, customers and colleagues all over the world without ever needing the

services of a regulator, which makes one wonder not only whether

4

traditional regulation has anything to offer VOIP customers, but

also whether it has anything to offer customers period.

While VOIP service remains a small segment of the telephone

market, still far less than 1 percent, it is clear that every week

thousands of Americans are moving to this new technology. It is

important to listen to these consumers. They are sending us a very

clear message: They do not want to stay in the heavily regulated,

heavily taxed traditional telephone market. So it is important for

those who are considering regulation of this market to recognize

that applying the old regs to VOIP is by definition anti-consumer,

at least for those consumers who have freely chosen to reject the

traditional network.

We must also recognize that just as the technology has destroyed

the ability of companies to exercise monopoly power over voice communications, it also undermines the ability of governments to exercise monopoly power over the design and cost of these services. The

government, of course, can still make demands on U.S.-based providers of voice applications, but if an American broadband customer can simply access a website overseas to use a foreign provider of such services, then we have only succeeded in outsourcing

jobs and capital to more Internet-friendly jurisdictions. And as the

inventor of the Internet, the United States should be the natural

home for this exciting technology.

We can also chase this business offshore with heavy taxation.

Yesterday Declan McCullagh of news.com reported that the IRS is

considering applying the Spanish-American War tax on telephone

services to new applications such as VOIP. I urge the IRS to abandon this effort even though this hearing is not about them.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you.

I would recognize Mr. Dingell for an opening statement.

Mr. DINGELL. Mr. Chairman, thank you. This is a very important

hearing and I commend you for calling it.

We are looking at some very significant changes, great advantages, great opportunities and great potential for unfortunate consequences if we do not handle these matters well.

Voice-Over-Internet-Protocol telephone services holds tremendous

promise for bringing greater competition, lower prices, and exciting

new applications to the telecommunications marketplace. We do

not yet know who the winners and losers will be in that marketplace, but we know that America’s consumers stand to benefit tremendously from this wonderful technology. For this reason it is incumbent upon the Congress, the Federal Communications Commission and the States to move cautiously in regulating. We do not

want to over overregulate at the risk of stifling or unduly slowing

down the emergence of VOIP offerings. We also do not wish to pick

the winners and losers. Those choices are much better left to consumers.

The FCC is presently embarked on several proceedings to determine how VOIP, which over the next several years is likely to become the dominant method of voice communications, will be regulated. I’ve reviewed some of the chairman’s pronouncements in this

field. Some I agree with, including the notion that it is not necessary to subject VOIP to all the common carrier regulations which

5

currently exist in the Telecommunications Act. Other pronouncements, however, particularly the notion that VOIP may be deemed

an unregulated information service, I find troubling.

I would like to take this opportunity to remind the FCC that it

is a creature of Congress and that Congress never intended that

voice services should be deregulated at the whim of the FCC. There

is nothing in either the 1996 Act nor its legislative history which

suggests that Congress ever intended the dominant voice service to

be classified as an ‘‘information service’’ and, thus, essentially deregulated under Title I. Rather, it is to be regulated as a ‘‘telecommunications service’’ under Title II, subject to section 10 forbearance where less regulation is appropriate. And I note, section

10 affords broad discretion for the FCC to act in the broad public

interest.

Of course I agree with those who argue that it would be foolish

to impose title II regulation, in its entirety, on VOIP service offerings. Congress anticipated that advances in technology might

render existing regulations either unnecessary or even harmful.

The law provides the FCC, therefore, with section 10 forbearance

authority so that it can refrain from wholesale regulation in such

instances.

While VOIP providers need not be subject to legacy economic regulations such as tariff requirements, other core regulations remain

critical—including those which pertain to universal service, access,

emergency services, law enforcement and individuals with disabilities. It is also critical that neither the Congress nor the FCC take

any action which would disrupt the ability of the States to perform

their responsibility in the area of core consumer protection functions which protect consumers from the rascally acts of certain less

scrupulous companies, of which we seem to have a fine number in

this business.

I will be watching the FCC closely as it moves forward. I hope

that it remains within the bounds of the statute and congressional

intent. I would note that the FCC recently lost an important appellate decision largely because it ignored statutory directions from

the Congress and clear congressional intent. Likewise, with respect

to VOIP, an end-run around the Telecommunications Act in order

to achieve quicker deregulation is not what Congress intended or

what the public interest requires. It is less likely to be upheld in

court and is a disservice to consumers as it will only slow VOIP

roll-out by prolonging the uncertainty which presently exists in the

marketplace.

Finally, we in Congress must recognize that with the rapid emergence of VOIP, it is our responsibility to ensure that the law keeps

pace and provides appropriate boundaries and guidance.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you, Mr. Whitfield?

Mr. WHITFIELD. Mr. Chairman, I also would like to thank you for

having this hearing on a very important subject matter. All of us

are looking forward to the testimony of our nine experts in this

field, and we look forward to trying to determine the real difference

in information services and communications services, and the segments of this industry that are regulated versus the other segments that are not regulated. And we have many challenging

6

issues facing us. I know that all of us look forward to the testimony, and for that reason I will waive back the balance of my time.

Mr. UPTON. Ms. McCarthy?

Ms. MCCARTHY. I’ll waive back.

Mr. UPTON. Mr. Gonzalez?

Mr. GONZALEZ. Thank you very much, Mr. Chairman. And I will

be really brief.

I thought you would commence the proceeding day with maybe

the proclamation ‘‘let the games begin,’’ because I know this really

is laying the foundation for what will be a very interesting debate,

and we get all the information gathering done this year, of course.

It is has often said that the future of any technology will be determined by regulation. And I think we can all agree regardless of

ideology, party affiliation or even region. The question is to what

degree and extent.

For the bottom line for all of us is, of course, to encourage

healthy competition which is really the cornerstone of our great democracy. And to that end I hope that this will be a real healthy,

healthy debate.

And when I say ‘‘competition,’’ it should be for all players, all actors, all entities old and new.

And with that, I yield back. Thank you, Mr. Chairman.

Mr. UPTON. Mr. Shimkus?

Mr. SHIMKUS. Thank you, Mr. Chairman.

First I would like to ask unanimous consent that a statement by

the National Emergency Number Association be inserted into the

record.

Mr. UPTON. Without objection.

[The prepared statement of the National Emergency Number Association follows:]

PREPARED STATEMENT OF THE NATIONAL EMERGENCY NUMBER ASSOCIATION

In the last 15 years modem communications services advancements have put a

spotlight on the need for a more appropriate E9-1-1 system. Specifically, a 9-1-1 system that is able to adapt rapidly to new technology and the resulting new devices

supporting communications.

Today, over 50 million Americans are using some form of broadband services. A

growing number of that subset is migrating to Voice over Internet Protocol (VoIP),

for competitive voice telephony. Truly we are at the dawn of a new era, in which

voice, data and computer integration are converging to offer consumers, commerce

and others new communications choices in our digital age.

Yet with all the excitement for VoIP comes concern. If the past is any indication,

public safety services and access may be overlooked unless we pursue early technical review and service planning.

Since its inception, the 9-1-1 system has been THE first responder in times of individual and mass emergencies. Every day, Americans call 9-1-1 at the time of their

greatest need. For the caller and the public, the successful completion of a 9-1-1 call

can mean the difference between danger and security, injury and recovery, or life

and death. Simply, the ability to call for help in times of an emergency is not ‘‘voluntary’’—it’s mandatory.

In regards to Voice over Internet Protocol, NENA respectfully offers the following

recommendations to improve the public policy leadership for 9-1-1 and Voice over

Internet Protocol planning with our nation’s emergency communications.

Guiding NENA leadership is our adopted technical, operational and policy ‘‘Future

Path Plan’’ by which new services, technologies and devices capable of dialing or signaling 9-1-1 can and should be able to provide their users with access to emergency

assistance.

For well over two years, we have used the ‘‘Future Path Plan’’ to convene stakeholders discuss solutions and form interim/transitional and long-term solutions to

define full requirements for our nation’s 9-1-1 system.

7

As the United States Congress, grapples with Voice over Internet Public Policy

issues, NENA offers the following observations and actions for consideration and review of nation’s communications system.

NATIONAL PLAN FOR 9-1-1 AND VOIP POLICY

We need a national 9-1-1 VoIP policy. We recognize that to be effective and meaningful the 9-1-1 system must work with a wide range of VoIP and IP-enabled products and services. VoIP technologies, and those well into the future, will need 9-1-

1 orientation and long-term solutions to accommodate all the variances. It’s about

building solutions.

CONSUMER EXPECTATIONS

9-1-1 is national, consumers are increasingly global. We must retain consumer

service quality expectations. Technical development of 9-1-1 must be convergent

with its policy direction. 9-1-1 needs to be treated as an integrated public safety

service, part of a larger whole for our safety and national security. In over 35 years

of 9-1-1 service, we’ve learned some important and valuable lessons in implementing

new technologies: 9-1-1 must be treated as an inter-dependent overall system; coordination is very important; federal leadership is necessary for national implementation and resolution of issues.

OPEN SYSTEMS AND OPEN STANDARDS

We as a nation must develop policies for 9-1-1 compatible with the commercial

environment for IP communications. We cannot support the further fragmentation

of 9-1-1. We recognize that consumer expectations for 9-1-1 are national and therefore require jurisdictional leadership and resources from the Federal Government.

We have called for a national coordinating office as offered by recent legislation in

the House of Representatives H.R. 2898 and United States Senate (S. 1250).

REGULATORY LEADERSHIP AND SUPPORT

Finally, we support the need for targeted federal regulation for 9-1-1 and VoIP,

believing further that this is most appropriately handled by the FCC, through our

present collaborative approach. With our support, we look to the Commission to

maintain a directive influence in the needed processes for industry and public safety

collaboration.

We seek a ‘‘light touch’’ regulatory approach for 9-1-1 that enables full 9-1-1 capabilities for the consumer while minimally affecting, and actually improving the advancement of overall consumer services. In our experience, voluntary consensus provides better, more accurate results. Improved 9-1-1 project management is better

than legal debate. Real 9-1-1 solutions are better than arbitrary requirements.

In August, 2003 we began aggressive IP development efforts. The NENA-VON Coalition agreement is a result of those efforts, and is an important first step toward

consensus development; to both guide the initial efforts of Voice over Internet providers in handling 9-1-1 calls, and to gain agreement in an active role in the development of migratory and longer term IP and VoIP solutions for 9-1-1. Our schedule

for completion of technical and operational elements of this agreement is before the

end of First Quarter 2005. And in our consensus, we strongly believe that customer

disclaimers do little to support the public’s safety.

To this end the nation’s 9-1-1 system needs reliable and dependable funding. In

the VoIP environment, funding could prove evermore complicated, given the traditional policy framework reliance on state and local funding for 9-1-1 services and

upgrades. Until a clear solution is identified for this immediate public safety funding problem, attention to the need for technological change and evolution of the E9-

1-1 system itself is difficult to achieve.

9-1-1 service should not be an ‘‘afterthought’’ for communications providers, but

rather an active part of service design and development.

As the consumer changes communications capabilities, the 9-1-1 system should be

dynamic in design and operation to adjust to and match new technologies and old

expectations.

We thank the Subcommittee for allowing us to share our concerns and leadership

in improving our nation’s 9-1-1 system.

Mr. SHIMKUS. Thank you.

And, Mr. Chairman, as you know, we deal with a whole bunch

of very high tech issues. And I find important for me to try to specialized in some areas. I worked with my colleague Ann Eshoo on

8

911 issues since I have been a member. That is kind of where my

focus will be. There are a lot of other issues that a lot of other

members will bring up.

We did pass the enhanced 911 bill through this committee,

through the floor and we are awaiting Senate action. But now we

have a completely a new technology of Voice over Internet Protocol.

What happens if a person uses VOIP needs to call 911? Where does

the call go?

If a customer can plug into their VOIP phone anywhere where

there is a broadband connection, how can a dispatcher determine

their location? In most cases a 911 call is how our first responders

are notified of an emergency. In fact, in this environment that’s

even important. And in our enhanced 911 bill we’ve also talked

about the ability of emergency responders to forward call in areas

of downwind issues in case of biological or terrorism to get a call

to cell phones in the downwind areas.

How an a dispatcher determine location under VOIP and 911

call? In most cases the 911 call is how, as I said, our first responders are notified. If 20 percent of the market is projected to be VOIP

by 2014, we just really need to start working on how to address

this concern.

Now some will say allow the industry to move, and I would like

to believe that that is true. We all know that the government will

be involved. Now, the question is do we move through legislations

at the Federal level or do we allow the FCC to move or to not

move; and that’s the crux of the debate.

There is a lot of other issues that VOIP has that are of concerns

with local rural telephone companies and Universal Service Fund

and how do you compensate. But I want to make sure that I am

on record and that those of you who are the panelists and those

who are joining us can help me work through this issue on emergency 911. And I think that will be helpful, and I think my colleague Anne will also be interested to see how we can address this

concern.

Thank you, Mr. Chairman. I yield back.

Ms. ESHOO. Would the gentleman just yield for a moment?

Mr. SHIMKUS. I will.

Ms. ESHOO. Are you going to place into the record the statement

of the National Emergency Number Association.

Mr. SHIMKUS. I did.

Ms. ESHOO. Good. Thank you.

Mr. UPTON. Mr. Gordon?

Mr. GORDON. Thank you, Mr. Chairman.

I concur this is an important and timely hearing. And since we

have triple desk panel before us and the issues have already been

outlined, I will limit my comments to just welcoming my friend

Margaret Greene, who is back before us again. She testified last

year on the universal services and has just completed her term as

Chairman of the United States Telecom Association.

So I welcome Ms. Greene and yield back my time.

Mr. UPTON. Ms. Wilson?

Ms. WILSON. Mr. Chairman, I will waive my opening statement

in order to ask questions.

Mr. UPTON. Mr. Walden?

9

Mr. WALDEN. I will waive my opening statement, sir.

Mr. UPTON. Mr. Pickering?

Mr. PICKERING. Thank you, Mr. Chairman.

Thank you, Mr. Chairman. I normally do not do this but today

I am going to use some props.

We have the choice before us today of the phones of our youth

versus a voice over the Internet phone, the phones of the future.

If we act and if we act in a timely way I believe that we can

achieve objectives that this committee has struggled with ever

since I arrived, and that is to achieve three policy objectives simultaneously and without conflict.

Our contradiction of the three objectives:

1: Is to have a policy with that promote broadband investment,

capital investment;

2: To promote competition without putting those two in conflict,

and;

3: Protect consumers to give them more choices at lower prices.

I think there’s great common ground and consensus from the

FCC to members on this panel that there should be a Federal policy, there should be a preemption of States that we do not have 50

States with a patchwork of regulatory contradictions and conflicts

over this application. I think that if we act quickly it will spur investment, spur competition and promote the consumers’ best interest.

We do need to act I think very quickly. There are a number of

States, New York, California and others that are beginning to look

at regulating Voice Over Internet. For that reason we should act

and considering acting this year. I know that our time is short, but

the Senate Commerce Committee has announced that it will move

to markup on Voice Over Internet legislation. I do not think that

this committee should be a place where the Senate ever does something faster than the House.

It is a place where we can find common ground between all of

the industries, between the Bells, an AT&T and MCI and cable,

wireless. From a broad range of high technology and telecommunication providers we do see Voice Over Internet being a fundamental and critical aspect of their future business plans. That is

all the more reason why we need to act quickly and to give certainty.

I realize that there are issues on social obligations, on universal

service, on CALEA and law enforcement. But I think the targeted

consensus of making this a Federal policy of preempting the States

that we can move pretty quickly while leaving the other very important issues as something that we can address in a broader comprehensive reform that we plan for next year.

Let me just in conclusion read from Chairman Michael Powell’s

letter in response to a letter I wrote him asking for his counsel on

whether the Congress or whether we should act on Voice Over

Internet regulations.

His response in a letter that is available, and I would like to submit for the record, Mr. Chairman, states: ‘‘The time has come for

the Congress and this Commission to confront the legal and policy

environment for IP-enabled services including Voice Over Internet

services. If we do not, the policy environment for the Internet will

10

develop in a piecemeal fashion or by dangerous accident and potential consumer benefits will go unrealized. Thus, it is important that

we establish a rational and consistent policy environment for IPbased services so that they will continue to evolve.

I would like to thank you for taking a role in drafting legislation

to establish a sound policy environment in this area, and I support

congressional action to that end.’’ And I would like to submit this

for the record.

And I look forward to hearing the testimony today and working

with you, Mr. Chairman, as we find a consensus and try to move

as quickly as possible to set a certain and rational framework or

Voice Over Internet for the phones of the future.

Mr. UPTON. Ms. Eshoo?

Ms. ESHOO. Thank you, Mr. Chairman, for holding this very important hearing.

I am going to submit my full statement for the record, but I do

want to welcome Jim Kirkland from Covad to this hearing. Covad,

of course, has testified many times in this hearing room before, and

we welcome you again.

My colleagues will remember that Covad is an innovative Silicon

Valley company that offers broadband services to millions of residential and business customers across the country. So welcome to

you.

I share Mr. Shimkus’ views relative to E911. These are services

that really need to be preserved and protected in whatever we do.

And I look forward to hearing from the witnesses and engaging

them in some questions.

So thank you, Mr. Chairman, for having a hearing on this all important topic.

[The prepared statement of Hon. Anna G. Eshoo follows:]

PREPARED STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Thank you Mr. Chairman for holding this important hearing.

I also want to welcome Mr. Jim Kirkland and his colleagues from Covad to the

hearing. Covad is an innovative Silicon Valley company that offers broadband services to millions of residential and business customers across the country. Covad—

one of the fastest growing companies in America—is an example of the competition

that was unleashed by the 1996 Telecom Act.

The Internet has obviously been the most significant development in telecommunications, and in our society generally, in a generation or more. It has made

possible technologies, services, and innovations unimaginable just a decade ago.

There’s not really much debate that we are now moving toward a single packetswitched network that carries voice, wireless, data, and Internet services. It won’t

matter whether you buy your phone service from a phone company, a cable company, or an Internet company—all of the traffic from these services will be carried

over the Internet, along with a variety of other advanced services and content.

Along with the seemingly infinite possibilities created by the Internet, there are

also challenges. One of the most difficult challenges we face as policymakers is how

do we incorporate Internet-based services into the existing regulatory scheme for telephony, cable television, and satellite? None of the existing regulatory frameworks

is really appropriate to deal with IP services, and we should be wary of subjecting

these emerging technologies to overly burdensome regulations.

However, it’s clear that regardless of how a telecommunications service is delivered, certain well-established obligations should be maintained. We must ensure

that we preserve universal service, access to emergency services including 911, and

other important public policies as our telecommunications system evolves to take

advantage of advances in technology. We must also make certain that competition

in the telecommunications marketplace is vibrant and that a wide variety of providers are available to consumers and businesses.

11

Let’s be clear—a single cable provider competing against a single phone company

for Internet access services is not effective competition, and innovations in technology have done nothing to change that dynamic.

The 1996 Telecommunications Act was intended to provide competitive access to

local customers and real consumer choice for telecommunications services. Because

of the reforms enacted in the 1996 Act, competitive forces have been unleashed that

have led to a race to deploy broadband communications services. As a result, the

latest FCC statistics show that in my home state of California broadband is now

available in 97 percent of the zip codes, and nearly two million digital subscriber

lines (DSL) have been put into service.

This is real progress, and I think we can attribute much of this growth to the

pro-competition rules advanced by the FCC and the 1996 Act.

Obviously, the time has come to re-evaluate the entire regulatory scheme as it applies to services delivered over the Internet, including services that have traditionally been heavily regulated. But in the meantime, we cannot afford to abandon the

competitive forces that have emerged in key sectors.

I look forward to working with my colleagues to address these challenges, and I

look forward to the witnesses’ testimony.

Mr. UPTON. Mr. Stearns?

Mr. STEARNS. Thank you, Mr. Chairman.

This technology is a transformational technology. And I think we

all agree that it could create a whole new set of jobs and industry.

Mr. Carlisle noted in his statement that VOIP represents a fundamental change in voice communication that is radically different

from traditional telephony.

Now here we are 8 years after the Telecom Act and we are facing

a technology that does not really fit into a package here under the

framework. So regulators are at odds on how to address VOIP.

They perhaps think of it like it quacks like a duck so it must be

a duck and apply the same regulatory codes to it. And, of course,

I think if they did that they would actually kill it. Because that is

what Title II of the legacy regulation will do, in my opinion. It will

definitely hurt this Nation’s technology.

Mr. Chairman, even more important the government considers

now how to address VOIP, I feel they are missing a valuable component in the whole equation.

My colleagues, VOIP is just one of a single application. There are

many new technologies we are seeing in today’s market such as

VOIP, but they all have one thing in common, and that is they deal

with an Internet protocol address. These new technologies using an

Internet protocol addressing have the ability to saturate the market with numerous offerings of high tech services, not only just

voice but video, high speed data. And who knows what in the future we’re going to have that still uses the Internet protocol addressing. The provider could be your phone, your cable, the wireless or even the electric company that provides electricity to your

home; we could have a new technology over that.

What we are actually seeing with these different offerings in a

new type of service. And I would call this an advanced Internet

communication service. Toward that end, Mr. Chairman, I introduced a bill yesterday, 4757 The Advanced Internet communication

Service Act which addresses the issues before us today in a manner

that allows for future advanced Internet communication services

like VOIP to develop without being stifled at every step of the process. As we move forward in debating changes to the Telecom Act

we should be mindful that we examine the provisions of services,

not each individual application. Our bill establishes advanced

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Internet communication services as a unique form of services that

removes the debate that now exists in the State and in the industry as to whether to classify AICS or the Advanced Internet Communication Service as an information service or a telecommunications service.

Further, by establishing the AICS or interstate services we eliminate the regulatory uncertainty of a myriad of different State regulatory approaches that would impede investment in these new services.

So, I believe, Mr. Chairman, this is the approach to do, to set up

and then we have established for future generations what we can

do.

I’d also as a unanimous consent, Mr. Chairman, enter into the

Federation for Economically Rational Utility comments that were

filed by the FCC on VOIP NPRM. I believe that these comments

offer unique perspective from a number of individuals, State commissioners on how a light regulatory hand should be applied to this

type of technology by unanimous consent.

Mr. UPTON. Without objection.

[The information referred to follows:]

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Mr. STEARNS. And I thank you, Mr. Chairman.

Mr. UPTON. Both Mr. Stupak and Mr. Buyer waive. Get an additional 3 minutes.

Mr. Wynn?

Mr. Doyle?

Mr. Towns?

Mr. TOWNS. Thank you very much, Mr. Chairman. Let me begin

by first thinking you for holding this hearing.

The landscape of the telecommunications industry is constantly

changing and the ramifications due to the development of Voice

over Internet Protocol would be enormous. While still in it’s beginning stage, adoption of this new technology is rapidly growing and

widespread adoption is expected within the next few years.

As we look upon the horizon and try to predict the development

of this new technology, I believe we should strive for a regulatory

framework that protects the consumers, encourage investment and

innovation and fosters competition; all of this should occur at the

same time.

In my district where many constituents still do not have a dial

up Internet connection, let alone broadband service, VOIP is not an

option for the foreseeable future. So I am concerned about what

happens to regular local phone service for these consumers if the

high paying profitable customer migrate to VOIP. The migration of

consumers to this new service and the regulatory treatment of

VOIP will have serious consequences for universal service and the

maintenance of the existing public switch telephone network.

I am pleased that most companies considering VOIP recognize

that we must balance the need to promote the technology with the

need to protect certain consumers. The question is where is that

balance?

I hope hopeful today’s witnesses might help bring some clarity to

this issue. To encourage investment companies must be able to operate under a predictable national framework of services, pricing

and intercarrier compensation. The fact that the service, like all

Internet traffic operates without borders makes VOIP more appropriate actually for the Federal Government for the FCC to look

into.

Finally, as we work toward the framework that levels the playing

field among all telecommunications competitors, I am not convinced

at this point that we can foster the most competitive environment

by just tackling VOIP or whether a broader approach toward all

Internet services is needed. I look forward to hearing from all of

the witnesses about these issues and would like especially to welcome, of course, Cablevision because they are from a New York

company so you know I want to welcome them especially.

And of course, Mr. Chairman, I yield back the balance of my

time.

Mr. UPTON. Mr. Fossella?

Mr. FOSSELLA. Thank you, Mr. Chairman.

By acknowledging the success of Voice Over IP it is clear that

competition can thrive if allowed and consumers would benefit.

And I speak primarily to welcome Mr. Tom Rutledge of Cablevision

for taking time to join us today.

35

Cablevision has been a leader in providing the New York area including portions of Brooklyn with Voice Over IP. In addition to

being the first company to roll out their services system wide, Cablevision has successfully worked with law enforcement to include

E911 and to meet all law enforcement access and surveillance requests. This exemplifies the will private industry has to do the

right thing without government’s heavy regulatory hand.

While Voice Over IP remains a new interstate and international

service to consumers, it’s clear that private industry through their

determination to provide competitive services and to remain unregulated has been able to build a competitive telecommunications

venue that can address public safety and full access concerns without government intervention.

I believe the individuals within the industry should be applauded

for their accomplishments to invest capital to offer consumers more

choice and new innovative products and services. And if anything

comes out of this hearing today, Mr. Chairman, I would hope we

can bring the Pickering household up to speed. As a New Yorker,

we believe we are on cutting edge and I do not get to Mississippi

often, but I had no idea. Perhaps if anything, we could take a little

collection for Mr. Pickering.

I yield back.

Mr. BUYER. He might be able to give you some free minutes.

Mr. Davis?

Mr. Boucher?

Mr. BOUCHER. Well thank you very much, Mr. Chairman. I want

to compliment you this morning for focusing the committee’s attention on a matter of far reaching consequence for the telecommunications marketplace.

The arrival of advanced communications offered over the Internet, notably Voice over Internet Protocol service promises a broad

telecommunications transformation. VOIP with its packet switched

architecture offers a far more convenient and less costly means of

making telephone calls than currently used circuit switched technology. Internet-based telephone calling will bring digital clarity,

greater flexibility and a wider array of service offerings and substantial consumer savings over the analog circuit switched technology that is now widely in use.

New businesses will be formed to offer VOIP and existing telephony providers will develop new business models around the technology as well. As video based IP services are broadly introduced

in the future, even greater market transformations will occur.

As the private sector both welcomes and accommodates these

dramatic changes, a new regulatory framework is required. Yesterday our committee colleague, Mr. Stearns and I, introduced a

measure that is designed to provide that new regulatory framework. Our goal is to treat all advanced IP applications, including

VOIP, with a lite regulatory touch. Since every Internet user who

is equipped for advanced services will have a broad choice of service providers, the services will be highly competitive. Accordingly,

the regulations which have governed monopoly telephone networks

should not apply to the new competitive Internet-based technologies. It’s time for an entirely new regulatory framework for

Internet based communications.

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In introducing the Advanced Internet Communications Services

Act of 2004, Mr. Stearns and I are seeking to help frame the debate

on advanced Internet communications regulation in anticipation of

a broader telecommunications overhaul in the Congress, which we

believe will begin in 2005. By suggesting basic ground rules today,

we’re hoping to make a substantial contribution to the rewriting of

the 1996 Telecommunications Act. That law was an analog statute.

It related to traditional telephone service only. The Internet is only

mentioned collaterally in that section dealing with the Communications Decency Act, which by the way was unceremoniously declared

unconstitutional by a nine to nothing vote of the Supreme Court.

It is now time to have a bill that focuses on the Internet solely,

and the measure that we have put forth is one such measure. Our

bill would declare that all advanced Internet communication services including VOIP, video and data applications are interstate

services subject to the exclusive jurisdiction of the Federal Communications Commission. The services in our bill will be specifically

excluded from the categories of either information service or telecommunication service, the categories into which services are now

placed.

As advanced Internet communication services, IP services will

have their own set of regulatory principles as embodied within the

text of the bill. Neither the FCC nor any State would be permitted

to regulate the rates, charges, terms or conditions or entry into or

exit from IP-based businesses.

Regarding VOIP specifically we would direct the FCC to regulate

lightly in order to assure a protection of the public safety interest

by having E911 capability, by assuring an appropriate contribution

to the Universal Service Fund, by assuring access for persons with

disabilities and providing just and reasonable intercarrier compensation when a call that originates as a VOIP called terminates

on the public switched network as a regular telephone call.

The bill requires parity and regulatory treatment among all providers of advances services and would break from traditional regulation by ceasing the regulation of specific industries in different

ways. So in the future all services would be regulated in a similar

manner by a common set of rules, whether the platform be operated by a cable company, by a telephone company or some other

provider of broadband services.

Mr. Stearns and his staff have done an excellent job in working

with us as this measure was structured. And I want to commend

them for their outstanding effort.

It is my hope that today’s witnesses will comment on some of the

principles that we have embodied in our bill as they survey the

landscape for VOIP regulation today and recommend to us what it

should look like in the future.

I want to welcome our witnesses. And thank you very much, Mr.

Chairman, for assembling this timely discussion.

I yield back.

Mr. UPTON. Mr. Barton?

Chairman BARTON. Thank you, Mr. Chairman. I have a formal

statement for the record. I assume that it’s been allowed to be entered into the record.

Mr. UPTON. It will be without objection.

37

Chairman BARTON. And I will just simply summarize, and I welcome the panel. I think this is a very important hearing. I think

VOIP is going to be huge. It makes cell phone expansion, you

know, look like wagon trains when it gets going.

And I think we do need a Federal bill. I think we need to do the

absolute minimum in terms of regulation, and I applaud the hearing that Mr. Upton is holding today.

[The prepared statement of Hon. Joe Barton follows:]

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY

AND COMMERCE

Mr. Chairman, thank you for calling this hearing today. The Internet has dramatically changed the way we communicate, shop, learn, and entertain ourselves.

And now Internet Protocol (IP) technology is changing the market for voice communications.

Voice Over Internet Protocol (VOIP) services use IP technology to packetize voice

signals and send such signals in packets over the Internet. This is a much more

efficient means of sending voice signals than traditional circuit-switched technology.

The increase in efficiency enables VOIP providers to offer services at lower costs and

using less bandwidth. This should translate into lower prices for consumers and innovate applications that can be provided in the bandwidth previously reserved for

circuit-switched phone calls.

VOIP services have great potential. And many companies, such as the ones before

us this morning, are turning that potential into reality today. I applaud the efforts

of companies using multiple technology platforms to offer consumers IP-based services.

Congress and the FCC need to ensure that these companies are able to operate

free from stifling regulations. In particular, VOIP providers should not have to battle with 51 different sets of rules across the country. There should be only one, federal set of rules that apply to VOIP.

And those rules should be absolutely minimal. VOIP should not become the communications medium of choice for terrorists. And consumers who subscribe to VOIP

services should have access to E911 capabilities. But VOIP services should not be

treated like plain old telephone service and VOIP providers should not be treated

like common carriers.

VOIP services are likely to be a very disruptive force in the communications industry, one that will benefit consumers substantially. Let’s make sure that government does not limit VOIP’s growth.

Mr. Chairman, thank you for holding this hearing. I look forward to the testimony

of our witnesses.

Mr. UPTON. Thank you.

Mr. Bass? A waive.

Mr. Terry?

Mr. TERRY. Partially waive.

I just want to welcome my friend Mick Jensen. He is not a constituent because he lives just a couple of miles outside of my district. Nonetheless he has been a good family friend for as long as

I can remember and, frankly, one of the first people I met with to

discuss telecommunications policy before I was even on this committee. I consider a Mick a mentor of mine in this area, and welcome him today.

Mr. UPTON. That concludes our opening statements.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. PAUL E. GILLMOR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Thank you Mr. Chairman for this opportunity, not only to gauge the state of competition in the communications sector, but to lay the groundwork for addressing the

insurgence of new technologies under current telecommunications law.

With the enactment of the Telecommunications Act of 1996, we were certainly not

as dependent on email or our cell phones when conducting business, and of course

38

there wasn’t a blackberry in sight. With the recent explosion in email, wireless,

broadband, and soon, voice over Internet Protocol (VOIP) services, yesterday’s advanced services such as Internet dial-up and land-lines are losing steam.

I should also point out, that while telecommunications industry investment remains weak, consumers have an array of new services to choose from, reaching farther out to serve rural areas like my Ohio district. Furthermore, as we have seen

according to the recent trends, as more people subscribe to broadband Internet access, more consumers become aware of and are more likely to take advantage of innovative VOIP services; and with it comes lower costs, spurring traditional companies within the industry to provide these enhanced features, creating more competition and most importantly, the ability to meet customers’ demands. In terms of regulation, we must continue to provide a communications environment conducive to

new investment, manufacturing, competition, and lower prices for our constituents.

I welcome the well-balanced panel of witnesses and look forward to learning more

about the latest breakthroughs in VOIP technology and its potential impact on the

current telecommunications sector marketplace. Again, I thank the Chairman and

yield back the remainder of my time.

PREPARED STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman.

I look forward to our hearing today on what may be the phone service of tomorrow, Voice Over Internet Protocol (VOIP). The concept of telephone competition

when we were crafting the Telecommunications Act of 1996 was based on the principle of shared facilities. Now we are nearing a world where consumers will benefit

from competition, but instead of it being just one platform shared by competitors,

it will be intermodal in nature. Consumers can choose what connection or ‘‘pipe’’

that provides broadband into their homes—be it copper, cable, wireless or satellite—

and expect a reasonably similar suite of services on each platform.

This is a truly exciting time, and one where innovation is rewarded. It does, however, require that we in Congress review the overall assumptions upon which the

Telecom Act is based. The lines between voice and data communications has been

blurred. The principles behind the Universal Service Fund need to be addressed,

and what obligations one has under emergency services needs clarification. We also

need to ensure that those of us in rural America are not left using 19th Century

technology in a 21st Century world.

Who would have imagined just eight short years ago that one could use their

cable provider for voice services, or their phone company for video? Well, now we

are entering that world. That’s why this is an important hearing to tackle these

matters in anticipation of a redrafting of the Telecom Act for this next Century of

communications.

I look forward to hearing from our distinguished panel on these matters Today

and want to continue our dialog as we tackle legislation addressing these matters.

I yield back the balance of my time.

PREPARED STATEMENT OF HON. ELIOT ENGEL, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEW YORK

Mr. Chairman—thank you for recognizing me and calling this hearing.

Once again, we—the members of this subcommittee and indeed all of Congress—

are presented with advances in technology that have passed our nation’s laws and

regulations.

Voice over Internet Protocol is an exciting technology that turns the home computer into a telephone.

So the question being asked today is a simple one—is this a phone or computer

program?

If only the answer were as easy. In fact, there seems to be an inverse correlation

to the ease of the question to the difficulty of the answer.

Questions of intercarrier compensation, 911, CALEA, the USF program and disabled accessibility are all on the table.

From my point of vantage point the easiest parts of the answer are ALL VOIP

systems must be completely integrated with the emergency 911 system and accessibility for the disabled. ANYTHING LESS IS UNACCEPTABLE.

The systems must all be able to be accessible to law enforcement when they have

a proper court order.

Intercarrier compensation is a hearing unto itself—so I will skip that for now!

39

That leaves USF—the program that provides subsidies for rural telephone services and the E-Rate program that funds Internet access for our schools and libraries.

As my colleagues know, USF and E-Rate are funded by a fee on long distance

usage. However, VOIP doesn’t use long distance as a measure—and as it becomes

more popular one can only assume that revenues for USF will decline.

Thus, due to this point I must withhold taking a position on how best to classify

VOIP until a much better proposal of how to fund the USF and E-Rate emerges.

I am aware that Chairman Barton has concerns about the management of the ERate program—and I join him with those concerns. There have been terrible abuses

and outright fraud in by vendors of the E-Rate program. Let me be clear—that is

stealing from kids. It is wrong. It WILL end.

I look forward to working the Chairman and my colleagues on improving the management of the E-Rate program.

As to VOIP, I know a number of my colleagues have introduced legislation to deal

specifically with its regulatory framework, however I think that it would be best to

address this in context of a larger re-write of the 1996 Telecommunications Act. We

should not try and keep plugging holes in a law that was written for the analog

age with digital age band-aids.

Mr. UPTON. At this point we are ready to hear the statements

from the witnesses. We are joined by a very good panel led by Mr.

Jeffrey Carlisle, Senior Deputy Bureau Chief of the Wireline Competition Bureau from the FCC. Mr. Jeffrey Citron, Co-Founder and

Chairman and Chief Executive Officer of Vonage Holdings Corp. in

New Jersey. Ms. Margaret Greene, President and regulatory External Affairs from BellSouth. Mr. Michael Jensen, CEO of Great

Plains Communications from Nebraska. Mr. Jim Kirkland, General

Counsel and Senior VP for Covad Communications. Ms. Kathy

Martine, senior VP from AT&T. Mr. Robert Nelson, Michigan Public Service Commission, Chairman of the Committee on Telecommunications, obviously from Lansing and from the National Association of Regulatory Utility Commissioners. Mr. Thomas Rutledge, Chief Operating Officer of Cablevision Systems in New York

and Mr. Ronald Vidal, Group VP, Emerging Opportunities from

Level 3 from Colorado.

Your statements are made a part of the record in their entirety.

We would like to limit your remarks to 5 minutes, which the subcommittee will be able to ask questions.

Mr. Carlisle, we’ll begin with you.

40

STATEMENTS JEFFREY J. CARLISLE, SENIOR DEPUTY BUREAU

CHIEF, THE WIRELINE COMPETITION BUREAU, FEDERAL

COMMUNICATIONS COMMISSION; JEFFREY CITRON, COFOUNDER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,

VONAGE HOLDINGS CORP.; MARGARET H. GREENE, PRESIDENT, REGULATORY AND EXTERNAL AFFAIRS, BELLSOUTH

CORPORATION; S. MICHAEL JENSEN, CEO, GREAT PLAINS

COMMUNICATIONS; JAMES KIRKLAND, GENERAL COUNSEL

AND SENIOR VICE PRESIDENT, COVAD COMMUNICATIONS;

CATHY MARTINE, SENIOR VICE PRESIDENT, AT&T CORPORATION; HON. ROBERT B. NELSON, MICHIGAN PUBLIC

SERVICE COMMISSION, CHAIRMAN, COMMITTEE ON TELECOMMUNICATIONS, THE NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS; THOMAS M. RUTLEDGE,

CHIEF OPERATING OFFICER, CABLEVISION; AND RONALD

VIDAL, GROUP VICE PRESIDENT, EMERGING OPPORTUNITIES FROM LEVEL 3

Mr. CARLISLE. Good morning, Mr. Chairman, and distinguished

members of the subcommittee. It is my pleasure to come before you

today to discuss Voice over Internet Protocol also known as VOIP.

On March 10, 2004 the Commission initiated its study of VOIP

by releasing its notice of proposed rulemaking in the IP-enabled

services proceeding. Before describing the status of this proceeding,

it is useful to first discuss how VOIP should be viewed by regulators in light of the changes this technology is bringing to the

market for telecommunication services.

Saying that VOIP is just another way to make a phone call is

like saying Amazon.com was nothing more than another way to sell

books. This ignores the fact that ecommerce, whether it was Amazon.com, eBay or any number of retail providers over the Internet,

changed the way we buy books and everything else.

The Internet changed fundamentally the way service providers

compete for and relate to their consumers. VOIP is better understood as bringing this dynamic to voice communications. How so?

The traditional voice network delivered its service over a dedicated centrally managed network. Whoever the owned the pipe into

your home owns you as a customer. On the Internet the voice application, in fact all applications, are separated from the physical

transmission network. They ride over it but are agnostic as to who

provides the network as long as the network is capable of carrying

Internet protocol. Thus, anyone who can attach a server to the

Internet can allow 2 people, or 3, or 4, or 100 to talk to one another. Voice inevitably is becoming an application just like any

other; less like a stand alone service that you pay a separate

monthly bill for and more of a free or almost free add on to something else you buy.

VOIP changes the market in two other ways. It accelerates the

adoption of broadband, and thus accelerates the migration of various services from dedicated network to multi-use broadband platforms. If you can get more with a broadband connection, whether

that connection is provided by DSL, cable modem or any other

technology, you’re more likely to buy it as a consumer; a dynamic

that promotes competition and brings significant consumer benefit.

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VOIP also changes the market by internationalizing voice communications. You can download VOIP software from a provider in

the U.S. or anywhere in the world.

These are fundamental changes to an industry that has been regulated for 70 years on the assumption that all provides are monopolies protected by an elaborate regulatory regime and all providers

use dedicated narrow band networks. I believe it would irrational

for regulators to ignore these changes and apply legacy regulations

reflexively without seriously examining whether they are relevant.

History provides two very useful examples; cellular and the

Internet. These technologies were left free to develop outside of

common carrier regulation, notwithstanding long hard fought battles to impose that regulation. Today the American consumer and

the American economy enjoy significant benefits because we

steered that course. These two industries grew from reaching a

handful of consumers to touching millions of lives everyday, all in

the absence of significant common carrier regulation.

The Commission’s NPRM should be viewed in this light. The

FCC has begun to examine VOIP because development of this

promising technology might very well be hampered by unjustified,

conflicting regulatory requirements that will result as different

courts and State commissions begin to address this area. In this

environment the Commission cannot simply assume that inaction

will be sufficient to engender an environment of innovation and

competition.

The NPRM first asks whether the Commission can best serve the

public interest by continuing its policy of minimal regulation of the

Internet and applications provided over it. It asks how the Commission should classify different types of VOIP applications and

what the nature of Federal State jurisdiction is over these applications.

The NPRM asks how the Commission can best implement regulations designed to advance specific societal goals such as access to

emergency services, access for people with disabilities and universal service. And asks whether economic common carrier regulation which protects against abuses by monopoly providers continues

to have relevance in the IP environment.

In response to the NPRM the Commission has received over 150

initial comments from a wide variety of sources: VOIP applications

providers and existing wireline companies, individual, State public

utility commissions, public interest advocacy groups, 911 administrators and high technology companies such as Microsoft and Cisco.

While these comments provide a rich source of material, the Commission will receive any more. Reply comments on due on July 14.

In conclusion, treatment of VOIP will very likely have some of

the farthest reaching consequences of anything the Commission

considers in the near future. Consumers, including industries that

rely on advanced communications, are counting on policymakers to

get it right.

The Commission will do its best. But while the Commission has

some discretion to fine tune treatment of new technologies, it must

act within the scope of its current congressional directives, which

divide the world into regulated telecommunication services and unregulated information services. If VOIP and other new technologies

42

are changing the telecommunications market such that new regulatory approaches are necessary, it may be time to consider whether the tools the Commission has today are sophisticated enough for

the task. In the meantime, we will move forward with our job. The

guidance and leadership of Congress is important to the success of

our process. Accordingly, we at the FCC would like to thank you,

Mr. Chairman, for calling this hearing and we look forward to

working with you and other members of the subcommittee on these

issues.

Thank you very much.

[The prepared statement of Jeffrey J. Carlisle follows:]

PREPARED STATEMENT OF JEFFREY J. CARLISLE, SENIOR DEPUTY CHIEF, WIRELINE

COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION

Good morning, Mr. Chairman and distinguished members of the Subcommittee.

It is my pleasure to come before you today to discuss services and applications that

use voice over Internet Protocol (‘‘VOIP’’), and the status of our examination of them

at the Federal Communications Commission (the ‘‘FCC’’ or the ‘‘Commission’’).

I. THE IMPORTANCE OF VOIP

The Commission has pending before it a number of proceedings initiated by petitioners about VOIP, and has initiated a broad examination of issues related to it.

As an introduction to the status of these proceedings, it is helpful to discuss why

the emergence of VOIP raises important issues, why the Commission, as indicated

in the IP-Enabled Services Notice of Proposed Rulemaking (‘‘IP-Enabled Services

Proceeding’’), is examining the best way to establish a minimally regulated environment for VOIP, and why prompt action to clarify the regulatory regime applicable

to VOIP is crucial to the future of electronic communications and America’s place

as the leading innovator in the field.

A. VOIP is Changing the Nature and Business of Voice Communication

VOIP is seen by some as simply an alternative technology for transmitting a traditional voice telephone call. This purely functional view, sometimes referred to as

the ‘‘if it quacks like a duck, it’s a duck’’ argument, is short-sighted for two reasons.

VOIP Technology is Radically Different From Traditional Voice Telephony. The

functional view ignores the fact that VOIP technology is merely an application that

rides over the public Internet, or over dedicated data networks, just like any other

application. And on public or private data networks the bitstream created by a

VOIP application is no different than any other bitstream on that data network—

it can be incorporated into other bitstreams, modified or enhanced by simply changing server or client software. Thus, voice can now be easily paired with data and

video in ways that for all practical purposes cannot be achieved over the traditional

network. Adding enhancements to voice, or voice to other applications, is no longer

a question of a common carrier spending millions of dollars to purchase and implement modifications to highly complex circuit switches—it’s a question of adding a

new feature in the next software release. Moreover, consumers no longer need to

pay rates well above cost for a la carte offerings of voicemail, caller ID, and other

enhanced features—these features may be included in their VOIP package for free.

Consumers can change their service selections simply by logging on to their VOIP

application provider’s website, or by choosing a new provider with more attractive

features.

VOIP is a Radically Different Way of Doing Business. The above description of

what VOIP is and can do still focuses on the function the consumer is receiving,

and one could say that, however amazing and easy these functions are to provide,

VOIP is still a way of making a ‘‘phone call.’’ But this raises the second reason why

a purely functional approach is short-sighted—VOIP is much more than an alternative way of making a ‘‘phone call’’—it is an alternative way of doing business.

Saying VOIP is just another way to make a phone call is very much like saying that

Amazon.com is simply an alternative technology for selling books, without any

broader consequences for markets or consumer behavior. As it turns out, e-commerce is much more than that—it changed the way we shop for things. It changed

the market for books, and everything else, by opening a truly worldwide market to

any retailer who could attach a server to the Internet, or any individual who could

open an E-Bay account.

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So how does VOIP change the business of telecommunications? By allowing data

networks to carry voice communications at comparable levels of quality to the traditional circuit-switched network, and to do so more flexibly and efficiently, VOIP

changes the dynamics of the market for telecommunications services in three ways.

The first way VOIP changes telecommunications markets is that it changes voice

from the primary service provided by common carriers into nothing more than just

another application on the network. Yesterday, voice applications were delivered

over a dedicated network that required an enormous and well-capitalized service

provider in order to maintain basic infrastructure. And the provider demanded a

protected monopoly in return for doing so. Tomorrow, the voice application—in fact,

all applications—will be separated from the physical transmission network. Anyone

can attach a server to the Internet to allow two people—or three, four, five or a hundred—to talk to one another, just as anyone can connect a server to the Internet

to provide email, file sharing, or any other service. The implications for how voice

services are marketed and purchased are staggering. No longer is innovation the

sole province of the monopoly provider, who may face little pressure to innovate.

Rather, innovation in telecommunications can come from any entrepreneur, small

company or enterprise that can connect to the network. This is the consequence of

moving voice communications to the Internet, where intelligence is on the edge of

the network instead of a tightly controlled core.

With these kinds of developments, saying that a VOIP application is another way

of making a phone call is like saying that an automobile is just another way of going

someplace in your horse and buggy. VOIP means that voice will no longer be a dedicated service for which consumers pay a separate monthly bill. VOIP may be part

of your wireless phone service, as it already is with many push-to-talk services; it

may be bundled together with video and data service that you buy from your cable,

telephone, satellite or power company; or you may buy it from dozens of providers

over the Internet; or you may simply have it as part of a software package that you

buy for some other purpose. Most likely, you will buy it in all of these different

ways. Accordingly, when VOIP separates the voice application from the physical network, the question is no longer whether consumers will benefit from competition in

the voice market. Clearly, they will. The question is, how long it will be until voice

competition is no longer an issue, because voice has become an almost free add-on

to something else you buy from multiple sources.

In this respect it is useful to compare the evolution of the voice market to that

of the market for email. There, too, a different and dynamic business model changed

how we communicate, with significant consumer benefit. Email appears to be ‘‘free.’’

But email application providers thrive in a market where intense competition drives

innovation. Advances in email provided by Hotmail, Google and Yahoo become headline news. Consumers can acquire email applications from their ISP, select webbased mail from third parties supported by advertisements, outsource mail services,

or operate email servers on their own networks. In the same way, consumers will

benefit from a market for voice applications thriving with competition, innovation

and choices suited to their needs at significantly reduced costs—but with significant

rewards for agile and smart companies capable of delivering the best service.

The second way VOIP changes telecommunications markets is that it accelerates

the migration to all digital, multiuse infrastructures. Whatever the benefits of removing the voice application from a dedicated infrastructure, obviously we will still

need companies capable of maintaining the digital infrastructure that carries it.

This business, too, is changing. For many markets in the United States, infrastructure will no longer be the monopoly environment of the traditional network. Rather,

an entire range of broadband technologies, such as DSL, cable modem, broadband

wireless, WIFI, Ultra Wide Band, satellites and broadband over power lines will

provide connectivity. When networks simply provide transmission, and are not tied

to a single application like voice or cable television, networks become highly substitutable for one another and competition increases dramatically, again rendering significant benefits to the consumer. Furthermore, the offering of demand-creating applications such as VOIP promotes deployment of broadband facilities, and increases

in deployment in turn promote further development of VOIP and other Internet applications. Thus, applications and broadband create a virtuous circle that promises

to confer significant benefits to American consumers and the American economy as

a whole.

The third way VOIP changes telecommunications markets is that it internationalizes voice communications. Just like many other applications provided over the

Internet, it doesn’t matter where the provider is located—a server providing a VOIP

application could be down the street, or in the next state, or it could be in Britain,

Ukraine, India, or, as is currently the case with Skype, in Estonia. A voice application provided through servers located in foreign countries, with the customer in the

44

1The Commission did receive a petition regarding VOIP services as early as 1996, and received another following the release of its 1998 report to Congress regarding universal service,

often called the ‘‘Stevens Report.’’ There was not, however, any consequential activity following

these petitions.

U.S. using nothing more than software downloaded from the Internet and purchasing a broadband connection from a third party, looks very different from the

service provided by traditional phone companies. While I will discuss regulatory

issues in greater detail later in my testimony, allow me to note here that this fundamental shift in how the voice application is provided has obvious implications for

regulation. Federal or state regulators can apply any number of possible regulatory

requirements to VOIP technology, but if regulators decide to do so we must acknowledge that it may be very difficult for us to enforce these requirements, that we will

place voice providers in this country at a competitive disadvantage to voice providers located in relatively less regulated countries, and that, as providers relocate

abroad, we will cause the loss of desirable jobs in the high technology sector.

Much of what I have described is a look into the reasonably foreseeable future.

But VOIP is already changing the market’s dynamics, even though it has not yet

become ubiquitous. In 1998, VOIP carried less than 0.2% of the world’s international voice traffic. In 2002, VOIP carried 10.4%, and, in 2003, is estimated to

have carried 12.8%. Recently, Cablevision announced that it would provide a bundled package of digital cable, high speed Internet, and unlimited local and long distance calling for $90. If you consider what consumers pay for digital cable and

broadband in the marketplace today, at this price, the voice service is essentially

free. This is exactly what one would expect when voice, which uses relatively little

bandwidth, is provided over a high bandwidth connection.

There are other indications that VOIP, while only gradually making its way into

the public consciousness, is nevertheless growing at an increasing pace. A report released June 27 by the Pew Internet & American Life Project and the New Millennium Research Project estimates that approximately 14 million Americans have already made some sort of voice communication over the Internet. Skype, an Internetbased VOIP service that allows its members to speak to one another with crystal

clarity for free over a peer-to-peer network connection, has been downloaded over

15 million times by users around the world.

B. Why Take Action Now?

To be sure, the Commission has long relied on a policy of limiting regulatory intrusion on the Internet and applications provided over it. The Commission could

have waited and raised the question of how VOIP is regulated at some point in the

future, after it matured. At the end of 2003, incumbent local exchange carriers

(‘‘ILECs’’) and competitive local exchange carriers (‘‘CLECs’’) served over 181 million

access lines in the United States, and even at astronomical growth rates it will be

some time before VOIP services and applications constitute a significant portion of

the U.S. voice market. But there are two factors pressuring for Commission attention and, by implication, legislative action.

First, industry actors are deploying these applications today, and are bringing

their questions to the Commission. VOIP only started to become used more broadly

in the domestic market within last two to three years. Thus, the Commission has

seen companies occupying niches across the telecommunications industry—VOIP applications providers, ILECs, data companies and interexchange carriers (‘‘IXCs’’)—

file petitions seeking clarification from the Commission regarding regulatory treatment of VOIP beginning in September of 2002.1 The petitions filed over the last two

years demonstrate the need for a measure of certainty on important regulatory

questions, and, while the petitions are pending, create their own measure of uncertainty as to how the FCC is going to apply its current regulations in this very new

environment.

Second, because of the historic and important role of state public utility commissions in regulating intrastate telecommunications, states have now begun to look at

these questions, raising the possibility of differences among state regulatory regimes, and between various state and federal regulatory regimes. Some state commissions have decided to wait until this service further develops or until the FCC

acts. But others have moved forward to examine VOIP, and some, such as Minnesota and New York, have already taken steps to classify VOIP applications as regulated telecommunications services. Federal courts in both states have stayed the

effectiveness of these rulings. Nevertheless, companies offering VOIP are dealing

today with multiple attempts to apply potentially inconsistent regulatory regimes,

with the imminent prospect of more to come.

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It is not surprising, then, that while there is investment capital that would fuel

even further innovation, there is hesitance to bring this capital to market while the

regulatory regime remains unclear. While this might be said of any number of areas

of telecommunications law, it is particularly true of VOIP, given that much of the

innovation in the area is coming from small companies and entrepreneurs who are

most vulnerable to shortages of investment capital. Accordingly, the FCC has begun

to examine this area not because it is looking for something to do, or because it is

interested in any way in regulating the Internet. The FCC has begun to examine

this area because there is a demonstrated need for clarity in the face of growing

deployment of VOIP and the very real possibility that this deployment will be hampered by burdensome and conflicting regulatory requirements.

II. THE IP-ENABLED SERVICES PROCEEDING

Because of the need for the Commission to provide clarity to consumers, industry

and the investment community, on March 10, 2004, the Commission released its Notice of Proposed Rulemaking (‘‘NPRM’’) on IP-Enabled Services, docket number 04-

36. This NPRM asked commenters to tell the Commission how it could best craft

a regime for VOIP that would encourage innovation and ensure that the benefits

of this technology could reach consumers.

The NPRM discusses how VOIP will change how voice service is delivered to business and residential customers, and then starts from the question of whether the

Commission can best serve the public interest by continuing its policy of minimal

regulation of the Internet and applications provided over it. It asks for comment as

to how the Commission could determine whether a service using VOIP is a regulated telecommunications service or an unregulated information service under the

1996 Act. Should the Commission establish the line at the point where VOIP technology interfaces with the public switched telephone network? Should the Commission use a purely functional approach that makes the distinction based on whether

the given service is a replacement for traditional telephony? Should the Commission

use a test that examines whether the service substitutes for traditional telephony

as determined by a traditional market analysis? Should the Commission instead

adopt a layered approach, view VOIP purely as an application riding over a network, and thus regulate applications very lightly while applying a more stringent

regime to facilities? And what impact should it have on the Commission’s analysis

that VOIP can be provided via peer-to-peer services that simply connect two users,

as opposed to the centrally managed networks used by traditional service providers?

In the case of traditional service providers, there is an entity to regulate that, presumably, has some control over and information about the calls routed over its network. In the peer-to-peer case, consumers communicate directly with one another,

and aside from establishing the link, the provider of the peer-to-peer application

may have little or no control over the call.

Related to the question of classification, the NPRM asks how the Commission

might best achieve a minimally regulated environment. If classified as an information service, the service is nevertheless subject to the Commission’s general jurisdiction to regulate all interstate and international communications by wire and radio.

Alternatively, even if a service is classified as a telecommunications service, Congress has directed the Commission to forbear from enforcing its own regulations or

the requirements of the statute if enforcement is not necessary to protect consumers, ensure against unjust, unreasonable or unreasonably discriminatory practices, or protect the public interest.

The NPRM goes on to solicit comment as to jurisdiction. It notes the Commission’s

recent order in response to a petition for declaratory ruling filed by Pulver.com regarding Free World Dialup—as described in the petition, a free peer-to-peer application facilitating voice communication between members of a closed group, which

does not break out to the public switched telephone network. The Commission’s

order was released on February 19, 2004, and held that Free World Dialup was an

information service subject to federal jurisdiction. The Pulver.com order further held

that state regulation treating Free World Dialup like a regulated telecommunication

service would most likely be preempted given the Commission’s finding and an explicit Congressional policy against burdening the Internet with unnecessary federal

and state regulation. The NPRM acknowledges that the Pulver.com Order only addressed one type of VOIP, and asked about the extent to which the reasoning in

the case can be applied to other types, such as VOIP applications that interface with

the public switched telephone network.

Having solicited comment on how the Commission should classify VOIP, and who

should have jurisdiction as to whether to regulate VOIP, the NPRM then asks what

regulations, if any, should apply, and develops an important distinction. The NPRM

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asks whether regulations that were designed to protect against the power of a monopoly provider of services, with control over the bottleneck facility of the wire into

the consumer’s home, have any application in an environment where consumers can

choose any number of applications providers, and use those applications over multiple networks. That is, why does it make sense to require VOIP application providers to obtain prior permission from the government to enter or leave the market,

or to conduct acquisitions, mergers or initial public offerings? Why should VOIP application providers file tariffs or comply with regulatory accounting requirements?

These measures were designed to place the government in a position to control the

power of potentially abusive monopoly providers. If technology has redressed the imbalance in power between consumers and providers by lowering barriers to entry

and allowing the consumer to choose his or her service provider, and change that

choice easily, does this type of economic common carrier regulation continue to have

any relevance, at least as regards providers using VOIP? Certainly, precedent indicates that where competitive choice is possible, lower regulatory burdens are justified. This has been the case with cellular providers, which are not subject to many

of the common carrier requirements that might otherwise apply to them. It has also

been the case with nondominant wireline providers. The NPRM solicits comment on

these issues.

This class of economic common carrier regulation is distinguished from requirements that might be generally thought of as social obligation regulation. These are

the kinds of requirements that, as a society, we have decided should apply to any

provider of voice services, as opposed to only those providers that have a dominant

market position. Thus, even if a provider of voice is not dominant, it may nevertheless be a good idea to ensure that its customers can have access to emergency services through that provider. Even if the market for voice services is changing in fundamental ways, it is still a basic goal of the Communications Act to ensure that all

Americans have access to reasonably comparable services at affordable prices. Certainly, one might say that free voice service essentially achieves that goal. But if

it is necessary to purchase some form of broadband facility in order to reach it (not

to mention equipment and software), then it may be necessary to examine how we

understand universal service and support for it may need to change over time. The

social obligations raised in the NPRM and related proceedings include emergency

service via the 911/E911 system, access to telecommunications by people with disabilities, universal service, and authorized law enforcement access to electronic communications—important societal goals that should not be compromised as the market changes. But the NPRM recognizes that the method of reaching those goals may

very well change, and that the versatility of VOIP might, for example, actually result in better 911 service and superior access for individuals with disabilities. Accordingly, while it makes clear these goals continue to be important, the NPRM also

asks how the Commission can best achieve them in the new environment, acknowledging both the problems and opportunities presented by new technology.

III. COMMENTS ON THE IP-ENABLED SERVICES PROCEEDING

I am pleased to report to you that the response by the public to the NPRM has

provided the Commission with a rich record, and features original and thought-provoking analyses of the issues. By May 28, 2004, the date for filing of initial comments, the Commission had received over 150 sets of comments. These comments

have come to the Commission from a wide range of sources, indicating the broad

interest this proceeding engenders not only among industry actors, but across American society as a whole. These sources include:

• 15 state public utility commissions, and two organizations representing state commissioners, the Federation for Economically Rational Utility Policy and the National Association of Regulatory Utility Commissioners;

• county 911 administrators;

• the Department of Homeland Security and the Department of Justice;

• groups involved in studying and advocating public policy as it relates to high tech

issues, such as the Electronic Frontier Foundation;

• public interest groups that represent specific groups of consumers, such as AARP,

the American Foundation for the Blind, Communication Service for the Deaf,

the National Consumer League and the Ad Hoc Telecommunications Users

Committee;

• trade groups that represent the interests of industries, as well as some industries

related to but outside the world of traditional wireline telephony providers, including the Telecommunications Industry Association, CTIA, NCTA, the Information Technology Association of America, and the High Tech Broadband Coalition;

47

• Internet Service Providers; • many well-known high technology companies such as Microsoft and Cisco; • local exchange carriers, both incumbent and competitive, as well as the Association for Local Telecommunications Services, CompTel/Ascent, and the United

States Telecommunications Association; • rural telephone companies, as well as organizations relating to our representing

them, such as NECA, NTCA and OPASTCO; and • numerous VOIP application providers, such as 8X8, Pulver.com, Callipso, Dialpad,

Vonage, and the Voice on the Net Coalition.

In any proceeding, a record of this size and scope would provide a significant resource for the Commission to draw upon, and it certainly does so here. However,

this is only half of the story—reply comments are due on or before July 14, 2004,

and the Commission reasonably expects to receive significantly more material.

At the present time, the record can best be characterized as follows. The parties

have, by and large, acknowledged the significant changes that VOIP technology will

bring. They differ, however, as to the specific regulatory implications of that change.

A number of commenters, largely state commissions and rural incumbent local exchange carriers (‘‘rural ILECs’’), argue that if VOIP provides the functional equivalent of a voice call, then it should be regulated in the same way as traditional voice

telephony. Others argue for a multi-factor test to determine whether a service

should be regulated or not. For example, NCTA argues that a VOIP application

should be subject to the same regulation as telecommunications service providers if

the following applies: (1) it makes use of 10 digit numbers under the North American Numbering Plan; (2) it is capable of receiving calls from the public switched

telephone network at one or both ends of the call; and (3) it represents a possible

replacement for traditional telephone service. However, NCTA also argues that if a

service meeting all of these criteria also uses IP protocol between the service provider and the consumer, including use of an IP terminal adapter and/or IP-based

telephone set, it should be subject to minimal regulation. Still others, such as

AT&T, SBC, many of the high technology companies and software providers, and

all VOIP application providers, argue that functional approaches or factor approaches are doomed to obsolescence as technology develops, and that the Commission should instead broadly classify services using IP technology, or at least those

reaching or leaving the customer in IP format, as information services.

Another strain of comments advocates a layered approach to regulation. Commenters such as MCI and others argue that the primary benefit of using IP to

transmit voice is that it allows industry to move from using networks that are optimized for and dedicated to a single function, voice, to a network capable of delivering multiple functions. Accordingly, regulation should reflect the fact that services

and applications are no longer tied to the physical infrastructure. If dozens or hundreds of competing services and voice applications are provided over the infrastructure layer, there is little or no justification for continued common carrier regulation

at those levels. Rather, the focus of common carrier regulation should be on underlying facilities, where issues of market power might still exist.

Interestingly, differences on classification among commenters did not necessarily

translate to differences over jurisdiction. Some rural ILECs, their trade organizations, many of the commenting state commissions and NARUC argue that VOIP applications, if they are classified as telecommunications services, can and should be

regulated at the state level. Some state commissions, such as the Maine Public Utilities Commissioner, advocate for less for a strict delineation of federal and state jurisdiction, as opposed to a partnership between federal and state regulators, with

the Commission responsible for ensuring an effective overall regulatory scheme.

Other rural ILECs, the Federation for Economically Rational Utility Policy, and virtually all companies interested in offering VOIP applications, whether ILEC, IXC,

CLEC, VOIP provider or other high tech company, have argued that VOIP applications are inherently interstate—that it is impossible to determine geographic end

points for calls when customers can use VOIP applications from anywhere in the

world, that IP networks ignore domestic and international boundaries when transporting bits, thus rendering the intrastate/interstate distinction meaningless, and

that the Internet and services provided over it have always been considered to be

subject to federal jurisdiction only.

With regard to whether economic common carrier regulation should apply, high

tech companies and VOIP application providers overwhelmingly also agreed that

there is no need for it. Many commenters that argued some VOIP applications

should be classified as telecommunication services, nevertheless, also argued that

they should be subject to federal jurisdiction only and that the Commission should

forbear from applying economic common carrier regulation. The Illinois Commission,

while arguing that state and federal regulation should coexist, with preemption only

48

applying to state requirements that are inconsistent with federal requirements, nevertheless thought that extension of traditional utility regulation to emerging IP-enabled services was unwarranted. Some state commissions and many commenting

rural ILECs concluded that VOIP applications should be subject to the same level

of regulation as traditional voice providers, although America’s Rural Consortium

pointed out that this parity could be achieved through federal preemption of state

regulation of voice service and removal of regulations from both VOIP and traditional providers.

As for social obligation regulation, there was general agreement among the commenters that universal service, 911 and other issues of this type will continue to

be important in the new environment. There was, however, disagreement as to how

best to achieve these goals. VOIP application providers and many of the technologyoriented trade groups tended to argue that obligations like access to 911 should only

be made mandatory over time in response to a market failure, and that there has

already been significant progress through voluntary industry action. They also argued that universal service and access charges should not apply until broader reforms to these systems are completed, as otherwise the Commission would impose

unsustainable systems on a new technology. Many others have argued for mandatory application of these requirements, with most commenters focusing on specific

areas: groups involved with advocating for disabilities access argued that mandatory

disabilities access requirements should apply; some incumbent and rural ILECs that

receive support from the Universal Service Fund and access charges argue that

these obligations should apply pending changes in the system.

The Commission has received a wealth of comments that truly represent views

across the spectrum. While I have made some initial generalizations here, the Commission is waiting for the remainder of the record to come in and looks forward to

seeing these issues explored in even further detail.

IV. RECENT ACTIONS

In addition to our work on the IP-Enabled Services Proceeding, the Commission

is also working on several petitions regarding VOIP. I’ll first describe two recent orders the Commission issued in this area, and then summarize the remaining petitions.

The Commission recently resolved the following petitions:

• Pulver.com. As I previously mentioned, on February 19, 2004, the Commission released an order resolving a petition for declaratory ruling filed by Pulver.com.

In that order, the Commission found that Pulver.com’s Free World Dialup Service was neither telecommunications nor a telecommunications service, but was

instead an information service subject to federal jurisdiction, and that state regulation conflicting with this classification would most likely be preempted. This

order was significant in terms of clearly establishing that Internet-only voice

applications would be treated very much like any other applications traveling

over the Internet: as being unfettered by federal or state regulation.

• AT&T. On April 21, 2004, the Commission released an order resolving a petition

for declaratory ruling filed by AT&T. In this order, the Commission denied

AT&T’s request to exempt its use of VOIP from access charges, when AT&T

only used the technology to transport calls that originated and terminated on

the public switched telephone network, and did not provide any enhanced

functionality, cost savings, or net protocol conversion for the end user. This

transport was carried out as part of AT&T’s conventional service offerings and

was transparent to the consumer. The Commission issued this decision to bring

to an end self-help AT&T was engaging in to avoid access charges that would

normally apply to its routing of long distance calls. The Commission, by issuing

this decision, did not prejudge the application of access charges to other types

of VOIP service, which are still subject to consideration in both the IP-Enabled

Services Proceeding and the Intercarrier Compensation docket. Thus, this decision was explicitly limited to the factual circumstances described by AT&T.

Petitions pending before the Commission are as follows:

• Vonage. On September 22, 2003, after the Minnesota Public Service Commission

ruled that Vonage’s service was a regulated telephone service under state law,

Vonage filed a petition for preemption of this decision. Subsequently, Vonage

obtained a reversal of this decision from a federal district court. An appeal of

that court decision to the United States Court of Appeals for the Eighth Circuit

is pending, while Vonage’s preemption petition is still pending before the Commission.

• Level 3. On December 23, 2003, Level 3 filed a petition for forbearance, requesting

that the Commission forbear from applying access charges to calls that origiVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 95448.TXT HCOM1 PsN: HCOM1
49

nate or terminate as Internet protocol calls on one end, with the other end originating or terminating over the public switched telephone network. Level 3 excluded from its petition those areas served by rural ILECs as defined in section

251(f)(1) of the Communications Act. The twelve month deadline for Commission action in this proceeding is December 23, 2004, with a possible extension

of three months beyond that date.

• SBC. On February 5, 2004, SBC filed a petition for forbearance asking the Commission to find that services and applications provided over Internet protocol

platforms are information services subject only to federal jurisdiction, and as

such to forbear entirely from applying Title II common carrier regulation to

such services. The twelve month deadline for Commission action in this proceeding is February 5, 2005, with a possible extension of three months beyond

that date.

• Inflexion. On February 27, 2004, Inflexion filed a petition for declaratory ruling,

asking the Commission to find that calls made to or from Inflexion’s VOIP service in areas that it characterizes as underserved are exempt from access

charges. Inflexion’s definition of underserved areas incorporates areas served by

rural ILECs that Level 3 explicitly declined to cover in its petition.

Although the Commission hopes to focus its efforts on resolving the questions

posed by the NPRM, these petitions also provide possible areas of resolution for specific questions related to VOIP. Please also note that many of the issues that relate

to universal service and intercarrier compensation are being considered in other

dockets by the Commission. Moreover, the Commission expects to release in the

near term a Notice of Proposed Rulemaking addressing issues regarding VOIP and

the Communications Assistance for Law Enforcement Act (‘‘CALEA’’) raised by the

Department of Justice, the Federal Bureau of Investigation, and the Drug Enforcement Agency in their recently filed petition for rulemaking. Consideration of VOIP

issues will not delay broader resolution of those dockets, and the Commission hopes

to move expeditiously on all fronts.

V. CONCLUSION

The Commission has indicated in the IP-Enabled Services Proceeding and in its

resolution of various petitions that it is cognizant that VOIP is leading to significant

developments in telecommunications markets. Perhaps most importantly, from the

perspective of a regulator, VOIP is changing the nature of the relationship between

consumers and providers. Thus, it would be wholly irresponsible for any regulator

to impose obsolete regulations reflexively, simply in order to protect a legacy regime.

The examples of cellular technology and the Internet are perhaps most instructive

in this respect. In both cases, the technologies were left to develop free of many of

the regulatory requirements and regimes applicable to common carriers, notwithstanding long and hard fought battles to impose such requirements. Today, the

American consumer and economy are far better off because of the deregulatory

course that has been steered—these two industries now touch millions of lives, bring

considerable benefits to consumers, and generate substantial economic growth. All

in the absence of common carrier regulation.

Thus, while the Commission deals with many significant issues, it is very likely

that treatment of VOIP will have the farthest-reaching consequences of anything

the Commission will consider in the near future. The Commission is not simply considering minor adjustments to specific regulations—the Commission is considering

the future of electronic and optic communication for many years to come. Consumers, the many industries that rely on information technology and advanced communications in their business, the telecommunications, computer and software industries, and the investment community are all counting on the Commission to get

it right. It is no overstatement to say that the world, also, is watching how the U.S.

decides to treat these services. Telecommunications regulators and policy makers in

other countries want to know whether the United States will create an environment

that is conducive to growth and investment in innovation, or an environment where

the United States figures as little more than an also-ran because other countries,

with clear national policies, have been able to surpass it.

I will conclude by noting that I believe it is important when dealing with the public policy implications of revolutionary new technologies to start from the perspective of how to best create the world we all want to live in, rather than applying

regulatory structures that may have been rendered obsolete. The relevant question

is how we as a society deal with the fundamental change in electronic communication we are witnessing, rather than falling into rather abstract fights over definitions. This being said, the Commission can only act as it may be allowed under the

Act, which divides the world into regulated telecommunications services and unVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 95448.TXT HCOM1 PsN: HCOM1
50

regulated information services. While the Commission certainly has some ability to

fine tune treatment of new technologies given its discretion and the flexibility granted to it by Congress, the Commission is still constrained by this structure. If you

believe that VOIP and other new technologies are working changes in the telecommunications market such that new regulatory approaches are necessary, you

may need to consider whether the tools the Commission has today are sophisticated

enough for the task.

In the meantime, the Commission will move forward with its work, and the guidance and leadership of Congress is important to the success of its process. Accordingly, we at the FCC would like to thank you, Mr. Chairman, for calling this hearing, and we look forward to working with you and other members of the Committee

on these issues.

Mr. UPTON. Thank you very much.

Mr. Citron?

STATEMENT OF JEFFREY CITRON

Mr. CITRON. Good morning Chairman Upton, Ranking Member

Markey and members of the committee. That you for the opportunity to be here today.

I’m Jeff Citron. I’m CEO of Vonage Holdings Corp. We are the

leading providing of consumer and small business VOIP services in

the United States with over 200,000 subscriber line equivalents.

Vonage is at the forefront of this new emerging market, which

approximately 400,000 users and as such, we are confronting public

policy issues that have never been seen before. Policy makers are

asking us what is voice IP? Is it like a phone or is more like email?

Will it replace the traditional switch networks or just be another

option for consumers? How can public safety needs be met and improved upon?

Indeed, VOIP is turning the traditional notions of telephony on

their heads as it blends voice and data into existing new offerings

never seen before.

In the face of such uncertainty and change there is a tendency

by some to try and wedge this new technology into a common carrier regime, a mild design for monopoly wire line owners. I hope

this committee will not act out of fear as others have, and instead

exercise its leadership and understanding by creating a new national framework that keeps this innovative technology free from

inappropriate regulation therefore enabling it to evolve and grow

where the possibilities are endless.

For the first time in history consumers are experiencing widespread residential local and national competition. Competition in

turn lowers prices and improves offerings. Vonage offers customers

the ability to replace their existing telephone service with voice

over IP for as little as $14.99 a minute. This also includes 500 minutes of national calling with the most popular features like caller

ID with name, call waiting and voice mail and host of more all included for free.

At the same time, Vonage is meeting its public policy goals by

supporting universal service, CALEA, 911 and local number portability. And the good news doesn’t stop here. Everyday people upgrading their dialup Internet connections to get access to this new

killer application, it offers better value and many new innovative

features.

Now, as consumers increasingly demand these new services, the

capital markets have finally taken notice. This has spurred investVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 95448.TXT HCOM1 PsN: HCOM1
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ment capital to flow into new and existing companies such as ours

which in term has lead to the creation of new jobs, increased capital spending on telecom equipment. But this resurgence is already

in jeopardy under attack by disparate interests which for fear of

change and lack of understanding suggest that voice over IP must

be subject to a full suite of common carrier regulation. These disparate groups ignore the difference between VOIP offerings and

traditional wireline networks with complete disregard for the underlying interstate nature of the service. Should you allow improper regulation to take hold, consumers and the telecom industry

will suffer greatly.

And Congress has already shown its leadership by enacting critical social policy goals. It then became incumbent on all of this operators to work together with the FCC to achieve these goals.

Vonage has demonstrated our commitment in this area of becoming

the first portable or mobile VOIP provider to adopt a basic 911 solution.

Vonage continues in its commitment to universal service by paying indirectly into the Universal Service Fund. And furthermore,

new technologies such as voice over IP can help meet the USF’s

primary goal of providing affordable communication services to everyone everywhere without the need for costly subsidies.

As for intercarrier compensation, virtually every participant in

the system has acknowledged that there is a need for reform of the

settlement system. And there needs to be put in place a system,

a national carrier intercompensation system ensuring fairness for

all parties including new entrants. While this work is underway,

it’ll be reckless to subject VOIP providers to a broken system.

Now Vonage is fully committed to meeting the needs of law enforcement personnel and has already responded to numerous requests, subpoenas from government agencies. If policymakers are

concerned that the CELEA statute may not apply to VOIP providers, then they should address the deficiencies of the CELEA

statute.

As Congress consider VOIP issues, we remind that the Internet

applications are interstate in nature, whether they be voice IP applications, sending bits of sound from one destination to another or

a web browsing program sending bits of an image and text back

and forth. Each bit of data deserves the same treatment regardless

of what content it is carrying.

Congress exercises far reaching leadership by promoting Internet

development, and now we need Congress to act again. We enthusiastically support proposed legislation as a thoughtful and sensible

compromise that would ensure our voice over IP providers can continue to innovate, create jobs and allow America to recapture its

lead over this technology.

I look forward to answering any questions you may. Thank you

very much for this opportunity.

[The prepared statement of Jeffrey Citron follows:]

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PREPARED STATEMENT OF JEFFREY CITRON, CHAIRMAN AND CHIEF EXECUTIVE

OFFICER, VONAGE HOLDINGS CORPORATION

I. INTRODUCTION.

Good morning Chairman Upton, Ranking Member Markey, and Members of the

Committee, and thank you for inviting me to appear before you today. I am Jeffrey

Citron, Chairman and CEO of Vonage, the leading voice over Internet protocol

(‘‘VOIP’’) provider in the United States.

I am honored to be here today. This Committee has been at the center of the technological and telecommunications revolution that has swept the United States over

the last decades. Now, we have reached a critical juncture with the emergence of

new technologies, and it is imperative that Congress exercise its leadership to pave

the way for these technologies before their progress is halted by impenetrable regulatory roadblocks. Going forward, the members of this Committee will play a key

role in ensuring that the United States maintains its dominant position in the international technology community, and that every American is able to experience the

communications advances that are being developed on what seems like a daily basis.

As such, I sincerely value the opportunity to contribute to the debate about VOIP

services.

Headquartered in New Jersey, Vonage uses a VOIP software solution to bring

voice communications service to consumers nationwide. Vonage customers use a

third-party provided broadband connection to make Internet calls, either to another

user on the Internet, a traditional telephone, a wireless customer, or a user of another Internet protocol (‘‘IP’’) network. Regardless of the type of call, a Vonage customer uses a computer and a broadband Internet connection. Through the use of

special software and the Internet, Vonage provides its customers with a new communications tool that offers exciting new features and functionality at a significant

cost savings to traditional telephone service. Further, because the Vonage service

requires customers to use a broadband Internet connection, Vonage’s VOIP service

drives broadband adoption. For the first time, many of Vonage’s customers now find

they have a reason to subscribe to high speed Internet service. Indeed, Internet telephony is stimulating the telecommunications and Internet industries, and the

economy as a whole.

The consumer and investor response to our VOIP product has been remarkable.

As recently as 2001, Vonage was in the research and development phase, and the

company did not fully launch its service until 2003. Nevertheless, Vonage is already

the clear Internet telephony industry leader, commanding about 50 percent of the

market share with a national reach that accounts for more IP telephony lines than

the entire North American cable industry combined. Just this week, Vonage will activate its 200,000th line.

While the response to our product is overwhelming, VOIP is still in its infancy,

with only .1 percent of all U.S. telephony subscribers, according to Merrill Lynch.

As the market and the technology develop, we encourage policy makers to resist

wedging this promising new technology into rigid regulatory boxes that were created

for legacy monopoly communication systems and markets. Vonage’s form of VOIP

is an ‘‘information service’’ like e-mail, and rides over the Internet, which is inherently interstate and incongruous with artificial boundaries.

We understand that critical public policy needs must be met in the context of

VOIP, and we commit to working with policy makers on issues such as 911 emergency calling, law enforcement interception, disability access, and the provision of

universal service. Meeting these needs, however, does not require that VOIP be regulated under a system of rules created decades ago, intended to govern the conduct

of wireline carriers who faced no competition.

Failing to apply new thinking to this new technology carries serious consequences.

VOIP providers would have to divert their energies to complying with a patchwork

of 51 sets of regulations of questionable merit to this new technology. Compliance

would not only be difficult, but in many cases impossible. The result of misguided

state efforts to regulate new Internet applications is draining resources away from

deployment and innovation. Already, Americans are missing out on the benefits of

competition and advanced functionality that citizens of Japan and China readily

enjoy. Americans are losing out on broadband adoption and the economic benefits

it brings. On a broader level, the failure by the United States to capitalize on this

opportunity is retarding further innovation, driving VOIP providers off-shore, and

contributing to the export of technology, jobs, and the tax base. American technological competitiveness is suffering, and we are already lagging behind many countries in Asia and Europe in broadband deployment and VOIP offerings.

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Congress and this Committee have exercised visionary leadership with respect to

the Internet by codifying in the Telecommunications Act of 1996 a policy of exempting ‘‘information services’’ and thereby the Internet from common carrier regulation.

That critical step put this nation on a path toward great advances in Internet technology, and ultimately to the creation of VOIP. We now look to Congress to continue

its bold leadership, for a step back would have catastrophic consequences. Time is

of the essence, as states have already begun the process of applying antiquated

rules to this promising new technology. On the federal level, the Federal Communications Commission (‘‘FCC’’) appears to be headed in the right direction, but will

need your support and guidance as it struggles to ensure that these new technologies flourish while at the same time meeting important public policy goals. We

are relying on Congress to reject ill-fitting regulatory models and focus on principles

that value consumer benefits, innovation, and economic development.

II. VOIP CREATES CONSUMER AND ECONOMIC BENEFITS.

VOIP technology furthers a number of national policy goals. It provides consumer

benefits such as lower prices, innovative features, and competition. Vonage’s VOIP

service, and similar VOIP services, drive broadband adoption, as high speed access

is a prerequisite for using the services. Further, this new technology stimulates economic development and American competitiveness.

VOIP Technology. Vonage’s service is a software application, independent of the

underlying transmission facilities that carry the calls to the Internet. Vonage’s

VOIP service converts analog voice transmissions into digitized data packets and

transmits these packets over either the public Internet or managed IP networks.

These data packets are routed using Internet protocol, which is the world’s most

common method for sending data from one computer to another.

Vonage’s Product. The Vonage service operates using a VOIP platform to transmit

voice over the public Internet. Vonage customers place calls using computer equipment that is connected to the user’s high-speed wireline, cable, or fiber-to-the-home

connections, Wi-Fi network, and eventually new networks that have not yet been

built. The digital signal is sent over the public Internet, then in some cases, back

through a traditional phone network to the receiving party’s phone. In order to permit Vonage’s end users to communicate with end users on the traditional public

switched telephone network (‘‘PSTN’’), Vonage had to make our service reverse-compatible with today’s technologies. However, our product is also forward compatible;

if the receiving party also is a Vonage customer, the call is transmitted wholly

across the Internet, never touching the traditional phone network. Forward-compatibility also enables us to terminate calls to wireless phones and other IP networks

without ever touching the PSTN.

In some cases, Vonage customers utilize a software program loaded on their computers to make a call. In other instances, the customer will use the special computer

adapter. When using the special adapter, the broadband Internet connection is

bridged to an ordinary phone essentially serving the same function as a microphone

and headset when attached to a computer. In the near future, because Vonage provides a software application similar to instant messaging or e-mail, Vonage customers will be able to use a Wi-Fi cordless handset or even personal digital assistants (‘‘PDAs’’) or other Internet-enabled device loaded with special ‘‘softphone’’ software.

Consumers Get More for Less. Through innovative software and hardware, Vonage

provides its customers with increased functionality and significant cost savings. For

example, the Vonage service package includes voicemail, caller ID, call waiting, call

forwarding, call transfer, 3-way calling, repeat dialing, call return, caller ID block,

and call hunt for no extra charge. Vonage customers experience such enhanced

functionality as local number portability, area code selection, the ability to use multiple phone numbers, web based voicemail retrieval, national number mobility, and

online features management. For this multitude of services, Vonage offers customers

flat rate billing options that range from $14.99 per month for 500 minutes anywhere

in the United States and Canada to $29.99 for unlimited residential local and long

distance calling in those areas.

Competition. Congress has made it a national priority to encourage telecommunications competition. While great strides have been made by traditional telecommunications providers in the competitive business and long distance markets,

there has been no meaningful competition in the local residential market. VOIP providers are accelerating competition in this area, realizing technological advancements and lowering consumer costs, all of which are goals Congress sought to

achieve with the 1996 Telecommunications Act.

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Even within the VOIP market, companies have implemented a variety of consumer offerings that generally fall under the ‘‘VOIP’’ banner, two of which are consumer applications: computer-to-computer and computer-to-phone. Using computerto-computer products, the call dialing and receiving party both must possess special

premises equipment that differs from an ordinary analog telephone. Vonage customers can talk computer-to-computer, and Vonage’s service is also capable of reverse-compatibility with the legacy phone system by performing the net protocol

conversion necessary to allow customers on the Internet to communicate with customers on traditional switched networks and vice versa, largely known as computerto-phone VOIP. Additionally, Vonage users are able to communicate with many

other kinds of networks, such as wireless networks and IP networks. In short,

Vonage both enables reverse-compatibility with existing services while readying consumers for the technologies and functionalities of the future, when all networks will

be IP based.

Broadband Deployment. While an estimated 85 percent of U.S. homes currently

are capable of receiving broadband Internet access, only about 20 percent of all U.S.

homes (23 million total broadband subscribers) have adopted the technology. These

numbers pale in comparison to countries such as Korea and Canada. Those countries had broadband penetration levels at almost twice that of the United States.

Also impressive is the development of broadband services in Japan. In 2001, there

were less than 10,000 digital subscriber line (‘‘DSL’’) broadband customers in the

entire country. In just three years, the broadband market has swelled to over 10

million customers.

Because VOIP services require a broadband connection to achieve the necessary

speed and ‘‘always on’’ functionality, VOIP provides consumers with the incentive

to upgrade to these broadband networks. In fact, many Vonage customers upgrade

to broadband simply to use our service. Often these customers find that they can

receive the additional benefits of Vonage’s service and high speed broadband for less

money than it typically costs to purchase a traditional telephone service and

narrowband Internet access. VOIP penetration drives broadband adoption, which in

turn promotes broadband deployment.

American Competitiveness. Investment in the technology sector will drive innovation and help America reinforce its role as the world technology leader. This role

is at stake given that broadband deployment has lagged in this country, and VOIP

adoption in other countries has already surpassed the U.S. That growth has been

attributed, in no small part, to the Internet telephony services that some Japanese

broadband providers offer, like Yahoo! BB, which already has 3 million VOIP users.

The only way America can maintain its position as the world’s technology leader is

to foster the growth of new technologies like VOIP.

Economic Benefits. VOIP can spur a telecommunications industry rebound and

contribute to the national economic recovery. The telecommunications industry,

which once helped drive the technology boom of the mid-to-late nineties, has been

hard hit by the nation’s economic slump. Merrill Lynch estimates the S&P integrated telecom index fell about 64 percent from January 2000 to January 2004,

while the broader market fell only about 24 percent. According to a 2004

VentureOne report, investment levels in the communications sector are down to

1996 levels.

Internet telephony can help revive the telecommunications, technology, and equipment sectors and the economy in general. Excitement surrounding VOIP services

has already increased investment. A VentureOne report stated that IT investments

increased to $2.3 billion last quarter, up from $2.1 billion in the third quarter. That

increase, which was the first time IT funding had demonstrated sequential growth

since 2000, was due in part to several large investments in VOIP providers. Further, several VOIP equipment manufacturers, such as Sonus, Cisco, Lucent, and

Motorola posted large stock price gains for 2003, partially due to increasing interest

in VOIP equipment and services.

III. CONGRESS SHOULD CONTINUE ITS POLICY OF ALLOWING ‘‘INFORMATION SERVICES’’

TO GROW UNFETTERED BY REGULATION.

In an effort to stimulate innovation and competition in the Internet sector, Congress and the FCC have long respected policies that differentiate ‘‘information services’’ from regulated telecommunications services. While Internet telephony may, in

some respects, resemble traditional telephony from a consumer perspective, from a

technical and regulatory perspective, Vonage provides an ‘‘information service.’’

Federal Precedent. Federal policy has long differentiated ‘‘telecommunications

services’’ and ‘‘information services.’’ The FCC distinguished between ‘‘basic services’’ and ‘‘enhanced services’’ as far back as 1980 in the FCC’s Second Computer

55

Inquiry, 77 FCC 2d 384 (Computer II). Basic services are essentially telecommunications common carrier services that are regulated under Title II of the Communications Act of 1934. The FCC concluded that regulation of enhanced services is unwarranted because the market for those services is competitive and consumers benefit

from that competition. Id. at 433. The FCC acknowledged that notwithstanding this

decision, there is a communications component in some enhanced services. Id. at

435. The FCC reaffirmed the distinction between basic and enhanced services in its

Computer III proceeding in 1986. Third Computer Inquiry, 104 FCC 2d 958 (Computer III).

Congress Codifies Distinction. The Telecommunications Act of 1996 mirrors this

distinction with its definitions of ‘‘telecommunications service’’ and ‘‘information

service.’’ The 1996 Act defines ‘‘telecommunications service’’ as ‘‘the offering of telecommunications for a fee directly to the public or to such classes of users as to be

effectively available directly to the public regardless of the facilities used.’’ 47 USC

153(46). The Act defines ‘‘telecommunications’’ as ‘‘transmission, between or among

points specified by the user, of information of the user’s choosing, without change

in the form or content of the information as sent and received.’’ 47 USC 153(43).

By contrast, the 1996 Act defines ‘‘information service’’ as ‘‘the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management

of a telecommunications service.’’ 47 USC 153(20).

By codifying these definitions, Congress set out a policy of separating regulated

common carrier services from Internet services to encourage innovation and competition. Congress found that ‘‘[t]he Internet and other interactive computer services

have flourished, to the benefit of all Americans, with a minimum of government regulation.’’ 47 USC 230(a)(4). In order ‘‘to promote th[is] continued development,’’ the

1996 Act reaffirmed the ‘‘policy of the United States’ of maintaining the Internet

‘‘unfettered by Federal or State regulation.’’ 47 USC 230(b).

‘‘Information Services.’’ By these definitions, VOIP is an information service, and

not a telecommunications service. VOIP is a software application that rides on

broadband Internet networks. VOIP service offers the ‘‘capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available

information via telecommunications.’’ 47 USC 153(20).

Policy Has Worked. The government’s policy of encouraging innovation through a

regulatory safe harbor sparked unimagined innovation in Internet development, and

led to the development of VOIP. For years, VOIP services were more theory than

reality, and were largely ignored by policy makers. The neglect proved positive as

entrepreneurs and inventors saw an open playing field and were provided incentive

to create. VOIP is rapidly growing, and should be allowed to continue, without the

trappings of common carrier regulation. Now, as VOIP is gaining consumer acceptance, policy makers have announced an intention to explore and even regulate the

service, but this would be a mistake. As I have noted, VOIP still only accounts for

.1 percent of U.S. telephony subscribers. The technology is in its infancy, and should

be allowed to grow consistent with the policy that led to its inception.

To that end, policy makers should clarify the existing statutory framework to ensure that it continues to reward innovation, foster consumer benefits, and facilitate

broadband deployment and the growth of the Internet. In this respect, it is imperative to make clear that VOIP services such as Vonage’s are not telecommunications

services, but rather are interstate information services.

IV. THERE ARE SERIOUS RISKS TO PREMATURELY REGULATING VOIP.

Regulating VOIP prematurely could threaten the consumer and economic benefits

that have already resulted from this nascent technology. While the technology is beginning to reach the mass market, it is still evolving, and it is too early to know

what regulations, if any, are necessary. What is known, however, are the risks of

regulation.

Patchwork of State Regulation. Failure to establish a federal policy protecting the

growth of VOIP could result in a patchwork of premature, burdensome state legislation and regulations, crippling the domestic VOIP industry. Overregulation, particularly differing regulations in all 50 states and the District of Columbia, will make

it impossible for VOIP to grow. Newer companies like Vonage do not have the resources to participate in proceedings at every state utility commission, nor to comply

with 51 sets of differing regulations that may each have the same goal, but may

require us to comply in different ways. The Internet, by its very nature is an interstate service, incapable of being divided into artificial boundaries. Policy makers

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should recognize this inherent feature of the Internet when formulating policy and

applying such policy to applications riding over the Internet.

Vonage’s Experience. Vonage experienced first hand the strain that burdensome

state regulations can place on a nascent technology company. The Minnesota Public

Utilities Commission (‘‘PUC’’) last year asked Vonage to obtain a certificate of authority to provide a telephone service. Vonage had less than 500 customers in Minnesota, yet was forced to vigorously oppose the Minnesota PUC to avoid the establishment of an improper state level precedent. As a result of the arguments asserted

by Vonage, the United States Federal District Court for the District of Minnesota

ruled in Vonage’s favor on October 14, 2003 and issued a permanent injunction.

Notwithstanding the outcome in Minnesota, the New York Public Service Commission (‘‘PSC’’) in May of this year issued a similar order asserting its jurisdiction

over the interstate information services that Vonage provides. Once again, Vonage

was forced to seek relief in Federal court. Just last week Magistrate Judge Eaton

in the Southern District of New York indicated his intention to issue a preliminary

injunction precluding the PSC from imposing legacy telecommunications regulations

upon the company.

While Vonage is pleased with these decisions, successfully fighting these cases is

a serious drain on Vonage’s resources, and continues to be burdensome. The Minnesota PUC is currently appealing the case for a second time and a hearing on the

issuance of a permanent injunction in New York is scheduled for early next year.

This litigation is forcing Vonage to use valuable human and financial resources to

fight court battles, directing these resources away from service enhancements and

innovations, including technical solutions to meeting public policy goals. Vonage

simply can not afford to continue to duplicate this effort in 48 other states and the

District of Columbia. We would be driven out of business.

We hope that federal policy makers will take action to make clear to states that

VOIP is an interstate information service, thereby halting the march of the states

to regulate it.

National Policy Issues. With resources stretched thin for VOIP providers, overregulation by the states or the federal government would slow technological development. With the uncertainty that is created by this regulatory hodgepodge, capital

will dry up. If the U.S. becomes a hostile environment for VOIP, domestic innovation will slow, risking this nation’s role as a technology leader. Furthermore, since

VOIP services are provided over the Internet, they can be launched from anywhere

on the globe. Providers like Skype are already offering services from off-shore locations. Not only would it be a loss of this nation’s technology base, once providers

move off-shore, the U.S. would have no access to the services and thus face difficulties meeting public policy goals such as 911 service, universal service, or law enforcement intercepts for these off-shore services. The U.S. would also lose an important tax base, and would see a further exportation of service jobs.

V. VOIP PROVIDERS CAN MEET PUBLIC POLICY GOALS.

While policy makers are rightfully concerned about how VOIP fits in with public

policy goals, VOIP can assist in meeting these aims, and in some cases it even holds

more promise than legacy systems. VOIP will, of course, have to meet public policy

goals in ways that are technically feasible for its technology, and government should

help facilitate such growth through an understanding of the capabilities and limitations of the technology.The issues public policy makers most often identify as areas

of concern are compliance with emergency 911 capability, disability access, universal

service, law enforcement access to call intercepts, and intercarrier compensation.

However, public policy goals can be and are being met without classifying VOIP as

a telecommunications common carrier service.

911 Dialing. The ability to access emergency services through dialing 911 is an

important feature for consumers of telephony, whether it is plain old telephone service, wireless service, or VOIP service. VOIP service offers the promise of truly exciting functionality in this area. While we are building solutions now, ultimately VOIP

will offer consumers and emergency workers more functionality than the services of

today. For example, VOIP customers in the future might be able to access 911 services through any Internet-equipped device, such as a Blackberry, PDA or instant

messaging product. In addition to the customer’s precise location, emergency workers may be able to instantly and seamlessly access that customer’s medical history,

while at the same time a separate message could notify the customer’s primary physician or family members of the emergency situation.

Vonage is the VOIP industry leader in providing a 911 solution to its customers.

Similar to traditional telephone service, Vonage customers who dial ‘‘9-1-1’’ on their

handsets have their calls forwarded to the Public Safety Answering Point (‘‘PSAP’’)

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for that customer’s designated area. There are, however, several technology issues

that currently cause the Vonage solution to differ in certain respects from traditional 911 service.

First, similar to cellular providers, the mobility of the Vonage service prevents it

from being able to identify the actual geographic location of customers that place

a call using the Vonage software. Thus, Vonage requires customers to register their

location before they are able to use the 911 service, and then routes any 911 calls

to the PSAP serving that location. Because of the mobility of VOIP customers,

Vonage is developing technology solutions to provide enhanced location information

to PSAPs. We are currently in the midst of several trials of a new solution, in Rhode

Island, Minnesota, Washington and Texas.

Second, in order to route 911 calls to a PSAP’s dedicated 911 lines, Vonage must

obtain interconnection to the incumbent LECs. While some incumbents are cooperating with Vonage and local PSAPs, others are refusing to work with Vonage and

local PSAP administrators to foster interconnection arrangements or technical

trials. The reaction has been mixed, to say the least. In this area, it would be helpful for Congress to encourage the LECs to provide such assistance as access to trunk

interconnection so we can fulfill our commitment to offering wireline-comparable

911 services.

Vonage makes the limitations inherent in its 911 service clear to all Vonage customers and is continually working to remedy these issues. Vonage is working with

the National Emergency Number Association (‘‘NENA’’), which recently adopted a

joint resolution with the VOIP industry, to develop technical solutions for VOIP 911,

and we are regular participants in the NENA working group. We participated in the

FCC’s March 18, 2004, Internet Policy Working Group ‘‘Solutions Summit’’ on 911/

E911 issues associated with Internet-based communications services. Further,

Vonage is working to upgrade its 911 service and negotiating with competitive LECs

to obtain indirect access to the E911 trunks.

Vonage is confident that it will be able to offer a 911 solution to its customers

in the near future that is comparable to that offered by traditional telecommunications providers. All of this is being done despite the fact that VOIP is not classified as a common carrier service nor required to provide these offerings.

Disability Access. Individuals who have disabilities should have full access to the

range of developing technologies. While VOIP technology and deployment are in the

early stages, VOIP providers anticipate software solutions to disability-related obstacles to service. Given the flexibility of software solutions, we anticipate that

VOIP providers will ultimately be able to offer greater functionality than the traditional legacy systems.

Universal Service. Congress has expressed its commitment to ensuring that rural

and underserved areas receive telecommunications services equivalent to those

found in more high-density or well-funded locations through the Universal Service

Fund (‘‘USF’’). In this context, Congress is contemplating USF reforms and may consider the role of VOIP services as part of that exercise. While it has been suggested

that VOIP is a threat to the fund and therefore VOIP services must be regulated

as telecommunications services, in fact the existing system is ‘‘failing’’ for a number

of reasons and VOIP does not need to be regulated as a common carrier service in

order to make direct contributions to USF.

The FCC has opened a rulemaking in which it is examining ways to ensure that

USF support remains sustainable. As part of that proceeding, it has recognized that

numerous factors are contributing to the decline in monies paid into the USF, and

the emergence of VOIP services is only one small piece of that puzzle. For example,

the decline in long distance rates, the proliferation of flat-rated calling plans and

bundled service packages, and the substitution of wireless, e-mail, instant messaging, and other services for traditional long distance calling have all reduced monies flowing into USF.

VOIP providers can and do pay into the fund as end-users, and there is flexibility

under current law to accommodate VOIP services in relation to USF. Even if policymakers determine that VOIP providers should contribute directly to USF, such a

result could be achieved under existing law. The FCC has broad statutory authority

to modify the current contribution metrics without engaging in any perversion of the

dichotomy between information and telecommunications services. FCC Chairman

Powell testified before this Committee on October 30, 2003, that the FCC has ‘‘legal

authority to assess Universal Service contributions against information service providers that use telecom.’’ Under current law, VOIP providers offer information services, but they use some underlying telecommunications services. VOIP providers

need not be regulated as carriers to be required to contribute to universal service.

Unfortunately, the USF distributions currently are weighted heavily towards the

support of legacy narrowband networks, which are not capable of supporting

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broadband Internet access services or the modern applications that run on these

broadband networks. This continued support of legacy networks at the expense of

the deployment of modern broadband networks and applications will only serve to

further distance the United States from the rest of the world leaders in terms of

broadband adoption and the development of modern applications, such as VOIP.

Therefore, Vonage believes it is important that any USF reform efforts should consider policies that encourage construction of broadband-capable networks in high

cost areas.

Law Enforcement Intercepts. Without exception, Vonage has complied with all subpoena requests from law enforcement, including providing call logs, records, and

other detailed account information. In the future, Vonage software will also allow

law enforcement intercept capabilities. Vonage is committed to assisting law enforcement and will comply with VOIP requirements determined by policy makers.

The FCC has announced its intention to open a proceeding to consider the interaction between CALEA and VOIP. Vonage looks forward to participating in that

proceeding, and in working toward a technical solution wherein VOIP providers can

continue to assist law enforcement in their surveillance efforts. It is not necessary,

however, to classify VOIP as telecommunications services in order to meet law enforcement needs.

Intercarrier compensation. Intercarrier compensation has been included in the

panoply of issues that policy makers are considering as they evaluate the impact

of VOIP services on the market and on public policy. Vonage does not connect directly to the phone network, but rather contracts with carriers to transport its calls

to their destination on the public switched network. Vonage has not thus far participated in proceedings related to VOIP access charges (computer-to-computer calls are

subject to Internet industry voluntary peering arrangements for termination to

other computer users). Nonetheless, Vonage recognizes, as many policy makers do,

that the access charge system is broken and in need of repair. However, Vonage emphasizes that VOIP is not the source of the access system’s ills; these problems have

myriad causes and predated the emergence of VOIP by several years. VOIP consumer products, such as Vonage’s service, will not have an impact on access charges

for a long while to come, as we represent only .1 percent of telephony subscribers.

The existing system of intercarrier compensation is complex, imposing unique

charges on each different type of carrier and each different type of service. The FCC

has recognized that these disparities are unsustainable in a converging and increasingly competitive market and has been examining intercarrier compensation reform

for almost three years. Vonage urges Congress to support the FCC’s efforts to reform this broken system.

In Section 254(e) of the Telecommunications Act of 1996, Congress required the

FCC to make the implicit subsidies in the access charge regime explicit, and the

monies to be collected in the Universal Service Fund. The FCC has begun the process of making interstate USF support explicit and reducing subsidies implicit in

interstate access charges. We are hopeful that the FCC will finish these reforms as

quickly as possible and that the states will also take up this important matter and

remove implicit subsidies and rationalize their intercarrier compensation systems as

well.

Removing implicit subsidies from the system of access charges and imposing a

single cost-based termination charge on all types of providers and traffic should end

any alleged arbitrage opportunities and bring rationality to the system.

VI. RECOMMENDATIONS.

As Congress contemplates the role of VOIP as a provider of consumer voice services, we offer our perspective on what policies would help VOIP to grow. First, Congress should make clear that VOIP is an interstate service, like the Internet itself.

Doing so will bring regulatory clarity, which will stimulate investment and promote

further consumer benefits. Second, Congress should reaffirm that VOIP services

such as Vonage’s are ‘‘information services,’’ and therefore VOIP providers such as

Vonage are information service providers. Public policy needs can be met without

regulating communications over the Internet as if they were being provided by a

telecommunications carrier.

We look forward to working with Congress during this exciting time. We hope

that Congress will continue its support for Internet based technology, by allowing

the sector to grow unfettered by ill-fitting regulations that were designed for legacy

systems. Any less would imperil VOIP carriers like Vonage in the face of what will

soon become overwhelming regulation. VOIP providers have something valuable to

offer to consumers, but we can only move forward by focusing our limited resources

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on improving our service, growing, and meeting critical public policy mandates like

those this Committee is considering.

Accordingly, we are pleased to offer our unqualified support for Rep. Pickering’s

bill, which would help keep VOIP on an innovative, disruptive path by clarifying

jurisdictional lines for VOIP services. This bill offers thoughtful direction on difficult

issues such as intercarrier compensation, USF, 911 services and law enforcement

access to VOIP technology. We urge this Committee to markup this bill as soon as

possible.

I look forward to answering any questions you might have. Thank you.

Mr. UPTON. Ms. Greene?

STATEMENT OF MARGARET H. GREENE

Ms. GREENE. Mr. Chairman, members of the subcommittee,

thank you for inviting me here today and for recognizing that

telecom policy really is about technology. Voice over IP, the technology bringing us together today is disruptive, but it is merely a

technology not the disruptive industry shock. The real shock, the

earthquake that has disrupted the global telecom landscape is the

increasing mobility and convergence of networks and devices.

The industry is moving in clear fundamental directions, from

wireline to wireless, from narrow band to broadband. And all

things broadband and wireless are moving to IP. The profound implications of that are becoming more evident everyday. Surely wireless and broadband networks have changed your communication

experience, and yet their impact remains largely absent from our

policy decisions.

A few facts. Disruptive shock No. 1: Wireline to wireless. More

and more customers go to wireless. In 2002 wireless customers surpassed wireline customers in number. Wireless minutes dramatically increased while wireline voice minutes, especially in long distance, declined. And yet wireline policy continues on much as it has

for the last decade, if not for the last seven decades.

Disruptive shock No. 2: Narrow band to broadband. In the digital

broadband era once separate technologies have converged. Twothirds of the traffic on BellSouth’s network is not data, text, photo,

video. No longer just plain old voice. The combined effects of

broadband and IP are profoundly disruptive; broadband because of

the rich applications that it can deliver to consumers and IP because it is quickly becoming the common denominator across all

communications. Whether it is your cell phone, your laptop or your

interactive pager; most any form of communication people are

using today is either at or moving toward an IP platform.

Where Internet applications like email and instant messaging replace over 40 percent of what used to be local phone calls.

Broadband competitors have names like BellSouth and Comcast,

but also Microsoft, Cisco, Vonage, Skype. Apple, IBM, Earthlink.

VOIP, it is real, it is imminent, it is a new software application

which creates a new market.

VOIP technology allows voice to be turned into data and carried

over the network in packets. It is not a new network, but it is a

use of existing networks. Cable telecom companies and many others are rapidly moving forward deploying VOIP technology. Best

Buy and Circuit City sell a Vonage starter kit for $29.99. Cablevision launched voice over IP across its entire footprint. Time Warner now offers voice over IP in Charlotte and Raleigh-Durham and

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shortly throughout the region. Cox has rolled out in Roanoke.

Comcast plans to offer VOIP service to 40 million customers by the

end of 2005. AT&T has launched CallVantage in 34 markets and

plans to sign up a million customers by the end of 2005.

At BellSouth we have explained our VOIP solutions for our business customers and we are exploring ways to bring increased

functionality and technology to our residential customers.

But why are these statistics important? Because they show that

broadband, wireless, IP telephony, high speed unconstrained and

always on communications are here today. These are the shocks

that technology has unleased in our telecom ecosystem, and we

have not even mentioned the impact of broadband over power lines.

How policymakers respond to these shocks will be a major determinant of the course of the industry. The response must be timely,

but it must also be comprehensive and balanced. It must recognize

that the functionally equivalent technologies need to be lumped together and treated alike, not separately considered or singled out

for preferential treatment. And we must recognize that government

cannot keep pace with the technology cycle, and should not try to

legislate on a technology specific basis.

For this reason, we think voice over IP should not be the subject

of stand alone legislation. But nor should it be the subject of 51 different approaches. Like most of telecom policy, it should be jurisdictionally interstate and subject to the exclusive jurisdiction of the

FCC.

Much of the value of VOIP comes from the value of being able

to be carried on the ubiquitous public network. Today there are two

broadband capable networks that exist; cable and wireline telecommunications with the promise of two more, fixed wireless and

power lines. Yet only the wireline network has the burden of legacy

social dues which include governmental intervention and control at

both the retail and the wholesale level. Access charges were established to provide compensation for these social responsibilities.

Nothing changes that equation when VOIP is involved. Those that

use the public switch network should pay compensation for its use.

Additionally, the underpinning and main prerequisite for providing VOIP service is a broadband connection which between 85

and 90 percent of U.S. households can now obtain from a provider

other than their incumbent local exchange telephone company. And

that is why I would like to recognize the Boucher-Stearns bill as

a positive contribution to the regulatory debate. That bill recognizes the role that networks play in the development and growth

of voice over IP by freeing the underlying IP broadband networks

from legacy regulation.

IP-enabled services should be free of economic regulation, of discriminatory regimes like computer inquiry rules that stifle innovation and raise the cost of broadband services. Instead we need to

shift the focus to vital issues facing us such as universal service

contributions across all technological platforms; 911, access for the

disabled, privacy safeguards and cooperation on homeland security.

With that focus we can ensure that this technology brings the

greatest benefits to consumers as quickly as possible.

Thank you.

[The prepared statement of Margaret H. Greene follows:]

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PREPARED STATEMENT OF MARGARET H. GREENE, PRESIDENT—REGULATORY AND

EXTERNAL AFFAIRS, BELLSOUTH CORPORATION

Mr. Chairman, Congressman Markey, members of the Subcommittee, thank you

for giving me the opportunity once again to testify before you to present BellSouth’s

views on Voice over Internet Protocol (VOIP). Your hearing today is timely and I

am sure it will prove to be a valuable contribution to the consideration of the many

issues that VOIP presents. Today, we have the Congress, State Legislatures, Federal Courts, the Federal Communications Commission (FCC) and State Regulatory

Commissions all looking intensively at this issue.

VOIP is a software application that allows voice to be turned into data and carried over the network in packets. VOIP is not a new network, but a use of the existing network to provide new voice alternatives. The underpinning and main prerequisite for providing VOIP service is a broadband connection, which between 85

and 90 percent of U.S. households can now obtain from a provider, other than their

incumbent local exchange telephone company. Additionally, in the 9 BellSouth

states, DSL now passes more than 75% of all households. Riding on this competitive

infrastructure, a wide range of providers are deploying and marketing VOIP services nationwide. All six major cable operators, which collectively reach 85 percent

of U.S. households, have begun commercial deployment of VOIP, or have announced

plans to do so imminently. VOIP services are now being offered in markets throughout the country by incumbent local exchange carriers such as BellSouth, AT&T and

other inter-exchange carriers, CLECS and a new breed of VOIP-only competitors

such as Vonage and Pulver.com. Here are a few examples demonstrating that VOIP

is real. It is imminent and it will transform voice into another data application—

• Best Buy and Circuit City are now both making available a ‘‘Vonage Broadband

Phone Service Starter Kit’’ for $29.99 after a $50 rebate. • Cablevision has already launched VOIP across its entire footprint. • Time Warner now offers VOIP in Charlotte and Raleigh-Durham and will shortly

expand throughout the region. • Cox has rolled out in Roanoke, Virginia. • Comcast announced plans to offer VOIP service to 40 million customers by the

end of 2006.

• AT&T has launched its CallVantage service in 34 markets and plans to sign up

1 million customers by the end of 2005.

VOIP providers now market their service as a primary-line replacement, and the

majority of consumers are purchasing the service as such. Significant numbers of

consumers have already abandoned circuit-switched service in favor of VOIP, and

their ranks are rising very rapidly. Added functionality and price points are the cornerstone of why consumers are moving to VOIP. Analysts predict that, within the

next three years, local telephone companies will lose up to 10 percent of their line

to cable-operator providers of VOIP services, and millions of additional lines to other

VOIP competitors. On June 14, 2004, the New York Times reported on a Mercer

Management Consulting survey that indicated that as many as 30% of all U.S.

homes will subscribe to VOIP in the next three years. This is astronomical growth

given that the same article reported that the market research firm, IDC, is expecting only 600,000 such VOIP subscribers by the end of this year, with Vonage being

the current dominant provider with 200,000.

Why such a massive increase in three years? The answer is that there has been

an earthquake in telecommunications. The industry is moving in clear fundamental

technological directions—from wireline to wireless; from narrowband to broadband—

and all things broadband and wireless are moving to IP.

VOIP services match the functionality of conventional circuit-switched voice in

many respects, including voice quality, total home wiring, and number portability,

and are typically priced 30-40 percent or more below comparable circuit-switched offerings. VOIP providers also offer many features that are unavailable on conventional circuit-switched networks.

Most importantly, VOIP is promoting adoption of broadband service itself. As FCC

Chairman Powell and AT&T CEO David Dorman have both indicated, VOIP is now

widely viewed as the ‘‘killer app’’ for broadband service. Because VOIP will give consumers an increased incentive to subscribe to broadband service, it will expand the

base of broadband customers, and thereby lower the average cost of providing

broadband service. Today, about 24 million customers—22 percent of U.S. households—currently subscribe to broadband; 30 percent will by the end of 2004 and almost 40 percent by the end of 2005. As the participation by Best Buy and Circuit

City in marketing Vonage VOIP service attests, the incremental cost, for these

broadband customers, of adding VOIP service is low. This is due to the fact that

the principal incremental cost of adding VOIP, for a customer who already has a

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broadband connection, is for a relatively inexpensive adapter that encodes the analog signal into digital packets.

Given that VOIP service costs considerably less, many customers would likely

substitute VOIP for circuit-switched service, even if there was some difference in

quality or functionality. But as industry analysts, competitive carriers, and equipment vendors now uniformly agree, VOIP provides comparable or superior quality

and functionality to conventional circuit-switched service.

Change is in the process of occurring as we speak here today, and there are a

number of issues that need to be addressed concerning VOIP, broadband and economic regulation of these applications and services.

A. JURISDICTION—STATE OR FCC

When you have VOIP phone service, your phone number no longer has a relationship to your physical location. The user can choose any area code offered by the

VOIP provider, and it need not be an area code where you live. Two examples that

I will cite for you will illustrate what this is all about.

First, on June 14, 2004, Brian M. Carney, the Deputy Editorial Page Editor of

the Wall Street Journal Europe wrote a column for the Op-Ed page of the Wall

Street Journal (U.S. edition) entitled ‘‘VOIPification (No, It’s Not In the Dictionary . . . Yet). Mr. Carney tells us in this article that he lives and works in Brussels, Belgium, where he is a Vonage customer and that he has a phone in his apartment that is assigned a telephone number with a 917 (U.S.) area code. 917 is one

of the area codes for New York City. As he points out in his article: ‘‘friends and

relatives in New York can call for the cost of a local call and we can call them—

or anyone else, anywhere in the U.S. or Canada—for a fixed monthly fee of around

$30.’’

The second example involves the decision by the Minnesota Public Utilities Commission (MPUC) to require Vonage to comply with Minnesota laws that regulate

telephone companies. This MPUC determination was appealed to Federal District

Court and the court granted Vonage a permanent injunction against this MPUC action finding that Vonage’s service was an information service not subject to state

jurisdiction. The court pointed out in its recitation of the facts in this case that at

that the time of the MPUC decision (September 2003) that Vonage had 500 customers with billing addresses in Minnesota. It also had 38 customers with Minnesota billing addresses who had requested telephone numbers not geographically

situated within Minnesota and 88 customers with billing addresses outside of Minnesota.

What these two examples illustrate is that VOIP is not an intrastate communication service within the meaning of Section 2(b) of the Communications Act of 1934.

Yes, you can make a call on a VOIP phone say from here on the Hill to our offices

on 21st Street, but you could also take that VOIP phone on vacation with you to

Florida and call back to the office on 21st Street. The two calls would use the same

phone number, and the actual location of the caller is unknown. IP enabled services,

meaning services such as broadband internet access and applications such as VOIP

that rely on the IP protocol, should be determined to be jurisdictionally interstate

and subject to the exclusive jurisdiction of the FCC.

At least two state legislatures (Florida and Pennsylvania) have passed laws pertinent to VOIP. A number of states regulatory bodies such in Alabama, California,

Colorado, Illinois, New York, Ohio and Wisconsin are considering issues raised by

VOIP, either on their own, or in response to petitions from interested parties. This

jurisdictional confusion should be ended as it creates a climate of uncertainty that

is not conducive to investment and innovation.

We have followed the development, introduction and deliberations regarding the

two major VOIP bills that have been introduced to date in the Congress ‘‘H.R. 4129

introduced by Congressman Pickering and S.2281 introduced by Senator Sununu.

Both bills wisely provide that VOIP applications are to be subject to Federal government jurisdiction and delegation of that authority to the states is prohibited by the

terms of the bills.

B. REGULATORY TREATMENT

IP enabled services that include VOIP applications and broadband internet access

services should be free of economic regulation, by which I mean the authority to regulate any IP enabled service with respect to its rates, charges, terms or conditions

for any such service as well as authority to regulate entry into or exit from the IPenabled services market. This withdrawal of economic regulation is warranted by

the fact that as the FCC has recently noted: ‘‘[a]s communications migrate from networks relaying on incumbent providers enjoying monopoly ownership of the underVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 95448.TXT HCOM1 PsN: HCOM1
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lying transmission facilities to an environment relating on numerous competing applications traversing platforms, power over the prices and terms of service necessarily shifts from the provider to the end user.’’

Today’s disparate regulatory treatment assigned to providers of ‘‘telecommunications services’’ and ‘‘information services’’ is inappropriate in the context of IP enabled services. The VOIP and broadband markets are widely competitive, making

economic regulation of these services and applications inappropriate and unwarranted.

In the current VOIP market, there are already multiple providers of VOIP offering services in non-traditional ways. Hosted voice providers, free of economic regulation such as Vonage currently dominate the VOIP market. Cable operators, also free

of legacy economic regulations, continue to invest in their own VOIP infrastructure

and are expected to dominate the consumer cable VOIP market by the end of this

year. The result of all of this largely unregulated (with the significant exception of

the BOC new entrants) investment activity is that VOIP is now competitive with

those voice services available over traditional circuit switched networks. These competitive circumstances also make the elimination of economic regulation of these circuit switched services likewise warranted.

The market for broadband internet access is equally as competitive as the VOIP

market. Broadband over cable is now available to more than 85% of all U.S. households and should be available to 90% by the end of this year. Small businesses are

increasingly turning to cable for broadband access service and inter-exchange carriers, not ILECs, have captured most of the business broadband market. Moreover,

inter-modal competition continues to grow by means of fixed wireless while the nation’s largest electric utility companies have been conducting broadband over power

line (BPL) trials. The Power Line Communications Association estimates that BPL

will reach between 750,000 and 1 million customers by the end of this year and

independent industry analysts estimate that BPL could reach 6 million power lines

by 2006.

Given these market conditions, IP enabled services should be free of economic regulation and Bell operating companies that are non-dominant in the provision of

broadband services should no longer be subject to legacy type regulation, such as

the Computer Inquiry rules that stifle innovation in, and raise the cost of, the

broadband services that are essential to VOIP. The legal, technological and market

circumstances of the early 1980’s when the Computer Inquiry rules were established

are very different than those that exist in broadband today.

Neither H.R. 4129 nor S.2281 totally accomplishes these regulatory reform goals.

They do for VOIP applications, but not for broadband internet access services. We

believe that legislation should not, as these bills both do, address only a single application such as VOIP as Congress will, if this approach is taken, surely wind up

having to legislate on each flavor of new communications technology. Given the

rapid pace of change in communications, this would surely be a futile effort. At a

minimum, the issues revolving around the jurisdiction and regulation of all

broadband services should be addressed.

C. SOCIAL POLICY OBJECTIVES

All IP enabled services, even though free from economic regulation, should contribute to federal universal service support mechanisms, be subject to inter-carrier

compensation obligations, provide access to the disabled, provide emergency 911

services and provide assistance to law enforcement. Simply put, the regulatory

framework should be constructed so that all analogous IP enabled services are treated the same, regardless of transmission technology or legacy regulation.

1. Universal Service and Inter-carrier Compensation

There should be a regulatory framework designed to provide incentives to invest

in new services and facilities, which will eventually require a comprehensive and

holistic overhaul of current universal service funding and PSTN access charge regimes that will eliminate opportunities for arbitrage. Steps must be taken to level

the playing field in both these areas through the establishment of a competitively

neutral mechanism for universal service funding and for a unified inter-carrier compensation regime that eliminates existing distortions and arbitrage opportunities.

By doing so, there will be eliminated any incentive for carriers to characterize their

IP-enabled service offerings exclusively to avoid legitimate contribution and compensation obligations.

In the final analysis, the essential rule should be that those who use the PSTN

should pay for its support, regardless of how their service or application is classified

or categorized for regulatory or taxation purpose. If the PSTN is not equitably supported and available for VOIP customers to reach other customers, the value propoVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 95448.TXT HCOM1 PsN: HCOM1
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sition of VOIP service would disappear. Local exchange carriers have a right to recover the legitimate costs imposed on their networks in the origination and termination of interstate communications. A PSTN interconnecting provider’s use or substitution of IP technology does nothing to change the nature of the interconnecting

provider’s use of the network. A government policy or requirement that allows some

providers to avoid access charges, because of the technology that they use would

therefore deprive local exchange carriers of appropriate compensation for their property. Those that use the Public Switched Telephone Network to terminate their traffic should pay compensation for this use.

The Federal Universal Service Support Programs are in serious need of comprehensive reform from both the contribution and distribution perspectives. As I indicated in my testimony before this Subcommittee last September regarding Universal Service :

‘‘As communications migrate to broadband, the old world base of universal

service funds—local and long distance wireline is shrinking. And increasingly,

alternate technologies, like cable modem and VOIP, offer directly competitive

services while being exempt from the social responsibilities attendant to universal service. Like so many other aspects of our current regulatory scheme for

telecommunications, this puts the historic providers of universal service, those

living with the legacy of using wireline revenue flows to subsidize social goals,

at a competitive disadvantage in a robustly competitive marketplace. This situation cannot exist without serious detriment to the regulated carriers and it

must be fixed.

Fixing this competitive/social policy mismatch means, for the issue of universal service, ensuring neutrality on both sides of the equation. Parity of obligation must exist between those who offer functionally equivalent telecommunications services. If broadband connections are to be assessed, as DSL is today,

then functional equivalents, like cable modem service, must pay.’’

These observations are as timely today as they were when I shared them with

you last year. Neither the House nor the Senate bill comprehensively reforms Federal Universal Service—the Congress needs to.

2. E 911 Requirements

An IP-enabled information service that (1) includes a voice capability component

and (2) is either (a) assigned a North American Numbering Plan (NANP) telephone

number or (b) can call a line assigned to a NANP telephone number and (3) either

(a) originates or terminates or both originates and terminates calls on the PSTN or

(b) is a substitute for traditional voice communications, should comply with E911

requirements that are economically and technically reasonably achievable given the

nature of the technology and the associated costs. IP-enabled service providers that

meet the foregoing test should be required to fulfill 911 emergency call processing

requirements in a manner that is not unnecessarily disruptive of the overall market

development of IP-enabled services. The industry should be allowed to develop reasonable solutions for accomplishing E911 requirements through the adoption of open

and voluntary industry standards prior to imposing any government mandated

standards.

The National Emergency Numbering Association (‘‘NENA’’) has been actively addressing, with industry support and participation, various proposals for ‘‘migratory

paths’’ for IP-enabled services. BellSouth strongly encourages reliance on NENA for

guidance on leading the industry toward operational and technical solutions and

standards that would enable VOIP and IP-enabled services to move forward in manageable stages.

Both H.R. 4129 and S.2281 require the FCC to appoint a representative industry

organization to develop consensus guidelines, protocols or performance standards in

this area. So long as, NENA and in turn the Emergency Services Interconnection

Forum (‘‘ESIF’’), for the purpose of creating an American National Institute Standard (‘‘ANSI’’), are brought within this ambit , the industry will be able to develop

the appropriate and desired standards.

3. CALEA

BellSouth has a very long history of cooperating with law enforcement, which has

existed long before the promulgation of CALEA. BellSouth has been an active participant in the development of technical standards and products necessary to comply

with CALEA and has devoted substantial time and resources to upgrade its network

to deploy CALEA-compliant solutions. BellSouth remains committed to working together with the FBI, Department of Justice and other members of the industry to

develop standards for IP enabled services that fall within the scope of CALEA.

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D. CONCLUSION

VOIP is a new application which has created a new market, and the rules need

to fit that new market—no economic regulation, no entry and exit requirements, no

unbundling obligations, and limited regulations which apply equally to all providers

to address public safety issues. But the networks which enable VOIP are not new.

Today there are two networks that exist: cable and telecommunications, with the

promise of two more: fixed wireless and power lines. Yet only the telecommunications network has the requirement to provide voice ubiquitously with a host of

social responsibilities while having its profits diluted by the obligation to unbundle

and sell pieces to its competitors at below cost.

VOIP is just an application using this network to transport voice carried in packets. Our network was created to provide ubiquitous service to all customers. Access

charges were established to provide compensation for that network, which is today

still saddled with many social obligations not shared by other network providers.

Nothing changes that equation when VOIP is involved. Those that use the Public

Switched Telephone Network should pay compensation for its use.

So the question is not whether VOIP will disrupt the industry. The disruption has

begun. At this point how regulation or legislation responds will determine whether

the technology is disrupted. A light handed regulatory approach which is limited to

ensuring parity for all providers, public safety requirements, incentives for

broadband investment, and compensation for the Public Switched Telephone Network will allow the technology to bring the greatest benefit to consumers as quickly

as possible.

Mr. UPTON. Mr. Jensen?

STATEMENT OF S. MICHAEL JENSEN

Mr. JENSEN. Good morning Chairman Upton and members of

this committee. I am Mich Jensen, CEO of Great Plains Communications.

It is a privilege to have the opportunity to share some thoughts

with you about the exciting evolution of Voice Over Internet from

the perspective of a telecommunications service provider serving a

high cost rural area of our nation.

I also appreciate the concern you have for maintaining and advancing universal service in rural areas, and I want to note especially my appreciation of the efforts of your fellow committee member, by friend Congressman Lee Terry.

Great Plains Communications is a family owned telephone company headquarters in Blair, Nebraska. We had a very humble beginning in 2009 when my wife’s father began to build what is now

Nebraska largest independent telecommunications company. We

serve 32,000 access lines in 76 communities with absolutely the

best telephone service possible.

Great Plains had Nebraska first all buried cable distribution

plant, first digital switchboard, first all digital network and we

were the first to bury fiberoptic cable. However, there was a deeper

more basic principle that guided our growth and development:

Keep the customers as your highest priority. Serve them as you

want to be served. Be a part of their community.

Our family is now in its fourth generation of ownership of Great

Plains Communications and those principles have not changed. We

now provide much more than local telephone service. We have deployed broadband Internet services to every single community we

serve, even those that have fewer than 100 people. Our cable television business has the latest digital TV technology and we also

offer long distant services. None of that would have ever been possible without our customers in hometown Nebraska loyally paying

their telephone bills every month. Intercarrier compensation and

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universal service also played a very key role in our network buildout and upgrades.

Great Plains is representative of the Nation’s small rural incumbent local exchange carriers and I am indeed honored to be appearing today on behalf of the hundreds of local exchange carriers that

are represented by NTCA and OPASTCO, and more importantly on

behalf of the several million subscribers that we serve together.

VOIP technology certainly is intriguing. The ability to send voice,

data and other information over the Internet or using Internet protocol is one that all companies both large and small must deploy.

However, as promising as the technology may be, VOIP is a long

way from replacing traditional telephony. It is merely an evolution,

not a revolution of technology.

In the haste to jump on the VOIP bandwagon, Congress must

guard against legislation that has the potential to ravage the underlying networks that carry not only VOIP but every other form

of telecommunication service. I comment Congressman Pickering

on his work bringing this important issue to the forefront. However, VOIP is but one of the many technologies that has a potential

to transform the telecommunication industry.

Instead of looking at single technology such as VOIP, the committee must look at the telecommunications industry as a whole

and seek to construct a broad framework that will allow the industry and the regulations that govern it to adopt the rapidly changing

technologies now and in the future. Rather than prohibiting any

form of regulatory oversight of VOIP, policymakers should be taking steps to ensure that the underlying telecommunication infrastructure is properly deployed and maintained. Without universal

service and compensation by carriers that utilize real company’s

networks, the United States would not have the high quality network that exists today. Without this new network, new technologies like VOIP would simply not be possible.

Exempting VOIP providers from universal service obligations

and access would lead to disinvestment in network infrastructure

and result in deterioration of the national network.

I would like to lay out a balance and sustainable approach to

VOIP. VOIP and other IP-enabled service providers should be required to pay access charges regardless of their regulatory classification as an information or telecommunication service.

Next, the underlying network upon which all calls, including

VOIP are carried must continued to be supported to enable the deployment of existing and new technologies and to uphold the doctrine of universal service. Also, the definition of universal service

must evolve to include broadband services so that all Americans

have access to them.

Further, the universal service contribution base should be expanded to include cable, wireless and satellite broadband Internet

access service providers and VOIP and other IP-enabled service

providers since those providers benefit from that national network.

Next, rather than Federal preemption across the board, the FCC

should allow for the possibility that some IP-enabled services may

fall under exclusive State jurisdiction or shared State and Federal

jurisdiction. The FCC must also ensure that all consumers, particuVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 95448.TXT HCOM1 PsN: HCOM1
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larly those in rural areas are protected from power that large carriers would possess were IP to be deregulated.

VOIP providers should be required to comply with the same 911,

CALEA and disability access rules as incumbent providers.

I strongly encourage the committee to take its time to ensure any

legislation ultimately adopted is comprehensive and must avoid a

piecemeal approach to telecom reform. Congress must continue to

support the longstanding policy of providing all Americans with access to comparable affordable telecommunication services now and

in the future.

Mr. Chairman, thank you for this opportunity to speak on a topic

on a topic so critical to the future success of rural telecommunication.

[The prepared statement of S. Michael Jensen follows:]

PREPARED STATEMENT OF S. MICHAEL JENSEN, GREAT PLAINS COMMUNICATIONS ON

BEHALF OF THE NATIONAL TELECOMMUNICATIONS COOPERATIVE ASSOCIATION

Good Morning Chairman Upton and members of the committee. I am Mick Jensen, CEO of Great Plains Communications. Great Plains is a family-owned telephone company in Blair, Nebraska. We had a very humble, and by today’s standards, very primitive beginnings in 1909. Those were the days when telephone service was a challenge to provide and a luxury to have. It was in that environment

that my wife’s grandfather started down the path to building what is now Nebraska’s largest independent telecommunications company, serving 34,000 access lines

in 76 communities in the state with the absolute best telephone service. Along the

way, our founding family members established themselves and our company as true

pioneers. We developed some of the first techniques anywhere for burying telephone

lines; an innovation that helped make America’s telecommunications networks the

most reliable in the world. We were the first company in Nebraska to develop an

all-digital switching network, and we were the first to install fiber optics in the

state. But, beyond the technical innovations that identified us, there was a deeper,

more basic principle that guided our growth and development—keep the customers

as your highest priority. Serve them as you want to be served. Be part of their community. Take care of them, and they will do their part to take care of you.

Our family is now into its fourth generation of ownership of Great Plains Communications and those principles have not changed. By building on that foundation, we

now provide much more than local telephone service. We have deployed some form

of broadband Internet services to every single community we serve, even those that

have fewer than 100 people. We have built a cable television business that has the

latest digital TV technology in 31 communities. We began offering long distance

services a couple of years ago, and we have established ourselves as the experts in

utility locating and damage prevention services.

None of that would have ever been possible without our customers in hometown,

Nebraska loyally paying their telephone bills every month. We owe it all to them

and we must look out for their best interest whenever possible.

Great Plains is representative of the nation’s small, rural incumbent local exchange carriers. The good things we stand for and do, make our rural communities

a better place in which to live and work. That is why I am honored to be appearing

today on behalf of the hundreds of rural local exchange carriers that are represented

by NTCA and OPASTCO, and more importantly, on behalf of their several thousand

employees and several million subscribers.

NTCA members and their fellow rural independents provide service to seven percent of this nation’s access lines, but actually cover 40 percent of the landmass of

this country. We have a mission of service that supersedes profit making. That is

why we appreciate the opportunity to provide feedback on all of the regulatory and

legislative activity surrounding Voice over Internet protocol or VOIP.

Today the vast majority of Americans use their landline and wireless telephones

to place and receive voice calls. Over the next several years there will be some migration of voice communications from landline and wireless telephone service to

Voice over Internet protocol (VOIP) service. During this migration there will be a

significant number of VOIP originated calls terminating on the public switched telephone network (PSTN). Until the day when all American households and businesses

completely migrate from the PSTN to an IP-network to place and receive calls,

which may take decades, there will always be VOIP call traffic using and imposing

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costs onto the PSTN. Even if all VOIP and other IP-enabled services were accommodated on broadband-only-facilities, the costs of these facilities are still higher in

rural areas. Some form of access and/or universal service will be needed to ensure

that rural consumers continue to receive access to advanced telecommunications and

information services that are reasonably comparable in urban and rural areas of the

United States.

Recognizing that the transition of all voice communications to an IP-only platform

will not occur in a flash cut, policymakers should take a flexible and evolving approach to deciding the issues related to the regulatory classification and level of regulation placed on specific types of VOIP and IP-enabled services and should follow

competitively neutral principles when considering the formulation of VOIP policy.

First, to the extent that VOIP and IP-enabled service providers use the PSTN to

originate or terminate voice calls, they should be subject to the same inter-carrier

compensation obligations as interexchange carriers (IXCs), irrespective of whether

the traffic originates on the PSTN, on an IP network, on a wireless network, or on

a cable network. Second, all VOIP and IP-enabled service providers, regardless of

their VOIP service’s regulatory classification as an ‘‘information service,’’ ‘‘telecommunications service,’’ ‘‘cable service,’’ or ‘‘wireless service,’’ should be required to

contribute to the universal service fund (USF) to ensure that all Americans have

access to affordable communications services. Third, VOIP providers should adhere

to similar regulatory obligations to provide consumers with 911 service, CALEA

compliance and disability access, or require VOIP providers to provide other alternatives that meet the public’s interest in security and safety. Fourth, policy should

allow for the possibility that some VOIP and IP-enabled services may fall under exclusive state jurisdiction or shared state and federal jurisdiction. Fifth, policymakers

should expand the list of USF contributors to include cable, wireless and satellite

broadband Internet access service providers and facilities-based and non-facilitiesbased VOIP/IP-enabled services providers to ensure all Americans, rural and urban,

have access to affordable and comparable communications services.

Regulation is necessary in order to provide for equitable and non-discriminatory

compensation to underlying carriers that supply VOIP providers access to their networks to complete VOIP originated calls. Without universal service and compensation by carriers that use rural networks, we would not have the ubiquitous high

quality network we have today. Exempting such companies would lead to a disinvestments in network infrastructure and result in the deterioration of the national

network in the future. Simply because VOIP providers use an IP-network platform

to provide voice communications, VOIP providers should not be granted with Most

Favored Nation (MFN) status and be given a free pass on access charges. This will

only create an unfair competitive advantage in favor of VOIP providers in the highly

competitive voice communications market. VOIP providers and competing voice providers using different network platforms all impose terminating traffic costs on

rural ILECs. In order to adhere to the FCC’s principle of competitive neutrality, all

VOIP and other IP-enabled service providers must be required to pay access

charges. All providers, regardless of the technology they utilize, should pay for their

use of other carrier’s networks.

Existing VOIP providers do not actually make universal service fund (USF) contributions. As VOIP calls move more voice minutes off the PSTN, these lost minutes

and revenues assessed for USF funding will increase the overall USF contribution

burden on existing landline and wireless telecommunications carriers. Over time,

this will make it more and more difficult for some small, high-cost, rural ILECs to

recover the cost of their total network facilities. Consequently, some high-cost ILECs

that provide the high-speed Internet connections may not have enough access revenues and/or USF support to cover their costs. Without these rural networks many

consumers in high-cost rural areas would be left without landline, wireless and/or

cable telephone and broadband service. To avoid this outcome, NTCA urges Congress and the FCC to require all VOIP/IP-enabled service providers to contribute to

the universal service fund to support the underlying networks that enable

broadband Internet access to carry VOIP traffic.

In addition, all VOIP providers should be required to adhere to similar regulatory

obligations concerning 911, CALEA and disability access services. VOIP consumers

deserve the same protections that other voice carriers are forced to provide.

Landline, wireless, cable and VOIP providers provide similar voice services. No provider of voice communications services, regardless of the technology used to provide

the service, should have an unfair competitive advantage in the marketplace. Imposing similar 911, CALEA and disability access obligations on VOIP providers will

promote the public health and safety and ensure competitive neutrality.

We also ask Congress to urge the Commission to refrain from making a blanket

ruling that it has exclusive federal jurisdiction over all VOIP and/or IP-enabled

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services. The Commission has recognized that if an information service is characterized as ‘‘purely intrastate’’ or it is practically and economically possible to separate

interstate and intrastate components of a jurisdictionally mixed information service

without negating the federal objectives, state commission jurisdiction could apply

over such services. With the creation of new IP-based services and their tracking

mechanisms there will likely be some ‘‘purely intrastate’’ VOIP and IP-enabled services and the ability to track the intrastate and interstate components of these services. The FCC should allow for the possibility that some VOIP and IP-enabled services may fall under exclusive state jurisdiction or shared state and federal jurisdiction.

The enhanced service provider (ESP) exemption for Internet service providers

(ISPs), which provides ISPs with an exemption from access charges and USF contributions should also be eliminated. With the implementation of the CALLS and

MAG access reform plans for non-rural and rural ILECs, access charges have been

reduced to historical lows and are based on cost. At the same time, ISP usage of

the PSTN has continued to increase dramatically and has placed a significant and

rapidly growing cost burden on ILECs without adequate compensation for ISP

usage. If VOIP services are added to the list of services exempt from access charges

and USF contributions, the entire universal service funding system will be at risk

of collapsing. All ISP’s and VOIP service providers using the PSTN must pay access

charges and universal service contributions.

Finally, just as the current definition of universal service must evolve to keep

pace with consumer needs and evolving technology, so must the USF assessment

base. The universal service support ensures comparable and affordable services

throughout the Nation. Cable, wireless and satellite broadband Internet access providers and facilities-based and non-facilities-based VOIP and other IP-enabled services providers will benefit from the nationwide network made possible by universal

service. They should therefore all contribute. Expanding the list of contributors to

the fund will be critical to this Nation’s continued success in providing all Americans, rural and urban, access to affordable and comparable communications services.

In addition, as the committee moves forward on telecom policy, we would implore

the committee to remain cognizant of the following specific areas that are so critical

to rural carriers and the consumers they serve—the preservation of universal service for the high cost carriers, compensation by carriers that use rural networks; targeted regulation over outright deregulation in order to protect rural consumers; reasonable access to spectrum; and, finally, strong, meaningful leadership to encourage

nationwide broadband deployment and ensure a level playing field for all carriers

in this competitive environment.

Congress must continue to support the longstanding policy of providing all Americans with access to comparable affordable telecommunications services at comparable rates now and in the future. That is why public policy must ensure that

the underlying networks that deliver voice, and data to consumers remains affordable and reliable. Therefore, it is essential that the regulatory treatment of VOIP

applications not negatively impact the existing public switched network or slow the

deployment of broadband in rural areas.

Mr. Chairman, thank you for this opportunity to provide testimony on a topic so

critical to the future success of rural telecommunications.

Mr. UPTON. Mr. Kirkland?

STATEMENT OF JAMES KIRKLAND

Mr. KIRKLAND. Good morning, Chairman Upton, Ranking Member Markey and members of the subcommittee. My name is James

Kirkland, and I am Senior Vice President and General Counsel of

Covad Communications.

Let me start by thanking the chairman for convening this important hearing on VOIP services, and for asking Covad to provide its

perspective on these important issues. We would also like to commend Congressman Pickering for his leadership on these issues in

introducing the VOIP Regulatory Freedom Act of 2004. We support

the Pickering bill’s national declaration that VOIP is an unregulated information service, with a focus on industry-led, rather than

government-mandated solutions. We believe that this deregulatory

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framework is a good starting point for further dialog on this very

important technology.

Covad is very excited to be a critical ingredient in the deployment of voice over IP. We’ve invested hundreds of millions of dollars in building a facility’s based alternative broadband network to

compete with the large incumbent providers who provide

broadband services. Our network reaches more than 50 million

homes in 35 States.

Our facilities include state-of-the-art DSLAM or DSL multiplexers that are located in 2000 central offices throughout this

country, as well as 19 Internet points and presence. Our network

incorporate local loops provided by the incumbent carriers, but

other than those local loops is entirely facilities-based.

Covad was responsible for kick-starting DSL competition in the

United States. In fact, we were the first company to launch commercial DSL service in the United States. We currently provide

service to 500,000 consumers and businesses.

We also provide competitive DSL services so that our partners

like AT&T can compete in the bundling arena providing full bundles of broadband and telecommunication services.

We agree with everything that’s been said about the potential for

voice over IP to revolutionize the telecommunications industry

within the next few years. And Covad will be at the forefront of

that.

One critical fact about voice over IP is that for this service to

really effectively work, broadband is required. And so diverse

sources of broadband will be critical ensuring that VOIP develops

in a competitive manner. Covad’s management of our own facilities

allows us not simply to provide service on a best efforts basis over

a third party’s network, but to control the quality of the communications that reside over a network. Some of the early entrants

currently provide service over existing networks such as the phone

company and cable network on what’s called a best efforts basis.

To put that into practical terms, if you are using your broadband

connection to download files and you’re also using it to make phone

calls, the phone calls will vie with the data usage for that

broadband pipe, and the quality of service is not necessarily guaranteed depending on what your usage patterns are.

Covad by being a facilities-based carrier is able to engineer its

network to ensure that voice, which you really don’t want interruptions of, gets the priority over the network and the quality can be

maintained. So facilities-based competition is essential to allow differentiation, competition across all different features and allow consumer’s choice of who their provider is.

On the other hand, if you limit the facilities-based competitors to

two, the decisions on how VOIP is deployed, the features that you

get will be dictated by the decisions of essentially two entities in

anyone market. And Covad submits that the history of innovation

in this country is driven as much by the small entrepreneurial

companies as by the large well funded incumbents with substantial

resources to invest.

Next week we are celebrating the launch of VOIP service in

Washington, DC. And I think all of you will have received invitations, and we hope you can hope. Voice over IP, while we have

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talked about it a lot today, it is hard to really understand what it

is until you actually see a service like CallVantage or like Vonage,

or like our service which we acquired by a company called Gobeam.

The amazing diversity of features that you can get is really something that you have to see to believe. It is also, I am sure you have

all had the experience of looking at all the data that is in your computer and then having to write down on a scrap of paper what a

phone number is so you can dial it over your phone connection.

VOIP eliminates all that. You can do instantaneous conference

calls, instantaneous callback just by clicking your mouse. And it

really is a great service. We’re very excited about it.

Again, I think Covad’s perspective here is that VOIP does have

tremendous potential, but the true potential of VOIP will not be

met unless there is full facilities-based competition. We still need

to utilize phone company loops. These are a ubiquitous resource

that was developed with ratepayer money. We believe that it is the

only ubiquitous infrastructure. While we hear much talk of new

technologies, it is the only network that connects virtually all

homes and small businesses in this country. And without continued

access to unbundled elements in the network, it will be very difficult for competitive facilities-based competition to develop.

And I look forward to the questions from the panel.

[The prepared statement of James Kirkland follows:]

PREPARED STATEMENT OF JAMES KIRKLAND, GENERAL COUNSEL AND SENIOR VICE

PRESIDENT, COVAD COMMUNICATIONS GROUP, INC.

INTRODUCTION

Good morning Chairman Upton, Ranking Member Markey, and Members of the

Subcommittee. My name is James Kirkland, and I am the General Counsel of Covad

Communications. Let me start by thanking Chairman Upton for convening this important hearing on VOIP services, and for allowing me the opportunity to offer

Covad’s perspective on ensuring the rapid rollout of VOIP. Let me also commend

Congressman Pickering for his leadership on these issues by introducing the VOIP

Regulatory Freedom Act of 2004, H.R. 4129. We support the Pickering bill’s national

declaration that VOIP is an unregulated information service, with a focus on industry-led, rather than government-mandated, solutions. We believe that the deregulatory framework set forth in the Pickering bill is the right place to start in considering the critical policy issues raised by VOIP.

COVAD: LEADING FACILITIES-BASED VOIP COMPETITION

Covad will be at the forefront of deployment of VOIP technology. Covad was the

first company to deploy mass market DSL services in the nation. Covad has invested hundreds of million of dollars in building the leading nationwide facilitiesbased broadband network, reaching nearly 50 million homes and businesses in 35

states. Covad’s broadband facilities include Digital Subscriber Line Access Multiplexers (DSLAMs), IP routers, and ATM switches in over 2000 central offices across

the nation.

Today, Covad continues to invest in facilities-based competition. This year, Covad

acquired a leading VOIP service provider, Gobeam, and in March we raised $125

million in new capital to help fund a nationwide VOIP rollout. By the end of 2004,

Covad plans to roll out its business-class VOIP services nationwide to 100 major

markets. In 2005, Covad will develop consumer VOIP services across its nationwide

broadband facilities.

Covad is particularly excited by the revolutionary enhanced features that VOIP

services make possible, in comparison to the relatively limited features available

with legacy POTS services. As its name suggests, Voice over Internet Protocol based

services bring the flexibility and capacity for rapid innovation found in other IP enabled services to public voice services. These services have traditionally relied upon

the hard wired, and relatively inflexible, capabilities of the public telephone network. Covad’s VOIP services illustrate the power of this combination of voice and

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IP. Covad’s services provide businesses with all of the capabilities of expensive PBX

systems, with little investment in hardware. Each user receives a unique phone

number to consolidate their multiple phone numbers. Find me and follow me capabilities allow calls to find you no matter what phone you are using, and are all

configurable in real time using a ‘‘Dashboard’’ web-interface to manage incoming

and outgoing phone calls through a computer. The service includes a personal virtual fax number to handle all incoming faxes; a unified visual mailbox to manage

voicemail and faxes like e-mail; and robust call logs and integration with Microsoft

Outlook, allowing users to make and return calls from their PC. Covad’s VOIP services also include easy to use web collaboration and voice conferencing tools. These

features dramatically enhance the speed and ease with which end users can access

the enhanced functionalities of VOIP telephony, combining the familiarity of a traditional telephone handset with the flexibility and power of a computer-based interface.

Covad’s services are available today. Gobeam, which was a small, venture capital

backed company, had 13,000 VOIP lines in service when Covad acquired it. Covad

is now launching this service nationwide. Next week, to celebrate our launch of

VOIP services in the Washington, D.C. area, Covad will host a launch party with

live demonstrations of its new VOIP services. We will shortly send you all invitations for this event, and welcome the opportunity to demonstrate our innovative

VOIP services firsthand.

CURRENT MARKET

It is not an understatement to say that facilities-based VOIP services truly hold

the potential to revolutionize the telecommunications industry, all within a few

short years. Indeed, the VOIP revolution is not just around the corner—it is already

underway. The U.S. VOIP market has been forecasted to grow to more than five

million subscribers by 2007, a five-fold increase over 2002 levels. Furthermore, the

Internet Protocol-PBX market, which has just under 100,000 lines today, is expected

to grow to more than 1.7 million lines by 2007. Covad adds a unique and critical

ingredient to this revolution—namely, its own nationwide, facilities-based

broadband network. Covad’s management of last-mile broadband transmission facilities enables it to offer VOIP services that rival the legacy public switched telephone

network in their reliability, quality of service, and public safety features, such as

access to 911. Because Covad’s VOIP services are facilities-based, they offer more

than simply a rough, ‘‘best efforts’’ imitation of traditional telephone services. Instead, Covad’s VOIP services offer a complete, high quality alternative to traditional

telephony services—with all the additional features and enhancements that VOIP

makes possible.

FOSTERING FACILITIES-BASED COMPETITION

Covad is able to provide innovative new services like VOIP because Congress had

the vision and the foresight in 1996 to create a flexible regulatory framework to

manage the transition from local telephone monopolies to robust local competition.

This transition is still at a very early stage. The local telephone network remains

the sole, ubiquitous public infrastructure connecting virtually every home and business in this country. By requiring that the local telephone companies allow competitors to utilize and integrate these ubiquitous loops into innovative, facilities based

service platforms, competitors can develop new and innovative services like VOIP.

True innovation in the provision of telecommunications services requires that a

service provider control both the ‘‘application’’ portion of the service it provides as

well as the underlying transmission capabilities used to carry a service. By controlling its own broadband facilities, which utilize telephone company loops from customer premises to central offices where Covad maintains its own broadband points

of presence, Covad is able to control the quality of service it provides to its customers, and introduce innovative features that are both software and network

based. On the other hand, if the loops which connect homes and businesses become

the exclusive province of a single phone company in any area, the deployment of

new technologies like VOIP will be determined by the decisions and business objectives of one, or at most two large incumbents that control facilities in any market.

Covad respectfully submits that the history of innovation in this country has been

driven as much, if not more, by small entrepreneurial companies as large, well funded incumbents. If VOIP is to truly flourish, there must be room for both small and

large competitors. With the competitive spur of smaller, often nimbler and more focused competitors, the large incumbents are far more likely to deliver on their promises of future investment in advanced facilities.

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1See ‘‘Vonage Becomes First Broadband Telephony Provider To Activate 100,000 Lines,’’ Press

Release, Vonage, Feb. 2, 2004 (available at http://www.vonage.com/corporate/presslindex.

php?PR=2004l02l02l0). 2See ‘‘AT&T Ushers In New Era in Communication With Launch of AT&T CallVantage Service—New Jersey,’’ Press Release, AT&T, March 29, 2004 (available at http://www.att.com/news/

item/0,1847,12989,00.html). 3See ‘‘Straight Talk on VOIP,’’ David W. Barden, et al., Banc of America Securities Equity

Research, April 15, 2004, at 4. 4See ‘‘Everything Over IP,’’ Glenn Campbell, et al., Merrill Lynch Research Report, March 12,

2004, at 19 (available at http://www.vonage.com/media/pdf/resl03l12l04.pdf). 5See High-Speed Services for Internet Access: Status as of June 30, 2003, Industry Analysis

and Technology Division of the Wireline Competition Bureau, Federal Communications Commission, at Table 5 (December 2003). Specifically, out of a total of 23,459,671 high-speed lines (over

200kbps in at least one direction), RBOCs served 7,266,765 lines, other ILECs served 948,828

lines, and cable providers served 13,684,225 lines.

Without robust facilities-based competition from multiple players, Covad believes

that the revolutionary potential of VOIP may not be fully realized, or may be realized much more slowly. At this initial stage in the development of VOIP services,

VOIP service providers that do not operate their own broadband transmission facilities have had some initial success in developing the marketplace for VOIP services.

For example, in a few short years, Vonage has grown its subscriber line count to

more than 100,000 consumers and small businesses across the nation.1 AT&T recently announced its own entry into the third party VOIP marketplace, with the

rollout of its CallVantage Service. AT&T plans to enter 100 major markets by year’s

end, and expects to sign up 1 million consumers and businesses for CallVantage

services by year-end 2005.2

These services offer innovative features, but are limited by their providers’ lack

of control over the facilities used to carry them. Indeed, as Banc of America Securities recently wrote,

Because they have no legacy voice business, the virtual carriers, like Vonage,

have every reason to press ahead aggressively... But they have significant risks

long term. The current regulatory arbitrage from which they benefit (namely

the ability to circumvent access charges and the USF), may go away eventually;

they have little brand awareness or reputation; they can’t bundle multiple services; and they are at the mercy of the infrastructure provider to maintain the

plant sufficiently; and, at least today, they can’t offer a quality of service (QoS)

guarantee.3

Control over and operation of underlying broadband transmission facilities will

confer significant advantages to service providers offering integrated transmission

and VOIP services, such as:

[the abilities] to control the quality of service, leverage existing customer relationships and take advantage of their on-the-ground field service networks to

assist with customer installation.4

For example, Covad’s control over its network based facilities allows it to use packet

prioritization techniques to ensure that voice quality is maintained even as a user

downloads large files or watches streaming media.

Competition in the underlying transmission facilities layer will become increasingly more important over time in ensuring the competitiveness of services and applications like VOIP. In other words, to preserve and extend the competition being

created by third party providers of IP enabled services, it will become increasingly

more important to preserve and extend competition in the underlying provision of

broadband transmission services. Robust competition in the broadband transmission

facilities layer for competitors like Covad who are unencumbered by legacy businesses will help ensure that the exciting innovation being witnessed today in the

provision of third party IP enabled services like VOIP will continue unabated.

IMPORTANCE OF BROADBAND COMPETITION

Robust facilities-based competition in the provision of the broadband services that

VOIP requires does not yet exist. Amidst all the hype over the broadband future

and new technologies, the underlying reality is stark. In most areas of the country

Covad remains the only provider of broadband access services left to compete with

cable and ILEC broadband. According to the Commission’s latest data, the incumbent telephone companies and cable providers control more than 93% of the nation’s

broadband access lines.5 Moreover, many end users lack a choice even amongst this

limited set of two providers—for example, cable providers have historically focused

their network deployment in residential areas, leaving most businesses with the incumbent telephone company as their only broadband option. In fact, recent figures

show that cable penetration in the small business segment has actually dropped:

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6 Yankee Group, Cable and DSL Battle for Broadband Dominance (February 2004), at 4-5 (emphasis added). 7 Id. at 4 (emphasis added). 8See United States Department of Justice/Federal Trade Commission, Horizontal Merger

Guidelines, Section 2 (rev. Apr. 8, 1997). 9 Report and Order, 2002 Biennial Regulatory Review—Review of the Commission’s Broadcast

Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications

Act of 1996, 18 FCC Rcd. 13620, ¶ 289 (2003). 10See ‘‘SIP Happens: How VOIP Technology ‘Re-unbundles’ Telecom,’’ Scott Cleland, et al.,

Precursor Telecom and Media Research, Apr. 12, 2004. 11See id. 12See ‘‘Straight Talk on VOIP,’’ supra n. , at 4. 13See ‘‘Straight Talk on VOIP,’’ supra n. , at 5. 14See id. 15See id. at 6.

‘‘We projected cable modem would surpass DSL in this [the small business] segment

by year-end 2003. However, cable modem penetration dropped precipitously in the

small business market, or businesses with between 20 and 99 people. Cable operators also achieved limited success in the remote office market, reaching only 4.2 percent of the market in 2003.’’ 6 As the Yankee Group now recognizes, ‘‘DSL operators

dominate the U.S. [small business] broadband and enterprise remote-office

broadband market.’’ 7 Even more fundamentally, as both the Department of Justice

and the FCC have long recognized, duopoly conditions are insufficient to produce

competitive outcomes. Duopoly competition is problematic not simply because the

firm with the larger market share may exercise market power, but also because

both participants are likely to have the incentive and ability to maintain prices

above competitive levels rather than attempting to ruthlessly compete with each

other, as they would need to do in a market with multiple firms.8 Accordingly, as

the FCC has concluded, ‘‘both economic theory and empirical studies’’ indicate that

‘‘five or more relatively equally sized firms’’ are necessary to achieve a ‘‘level of market performance comparable to a fragmented, structurally competitive market.’’ 9

Most importantly, large incumbents with substantial investments in existing facilities are less likely, left to their own devices, to be aggressive innovators in disruptive technologies like VOIP.

The incumbent telephone companies, with substantial legacy businesses, face conflicting incentives in deploying VOIP which threatens their core circuit-switched

voice businesses with VOIP services:

SIP threatens to strand the Bells’ core network... VOIP customers bypass, obsolete and strand the Public Switched Telecom Network (PSTN).10

Given nearly $150 billion invested in circuit-switched telephone plant,11 it is easy

to see why incumbent telephone companies have severely conflicting incentives in

rolling out VOIP: ‘‘the Bells will be reluctant to cannibalize themselves . . .’’.12 The

Bells’’ history in deploying DSL technology is instructive. As is now widely acknowledged, the incumbent phone monopolies were slow to deploy ADSL precisely because

it threatened to cannibalize lucrative, legacy monopoly services such as ISDN, T1,

and second line telephone service.

The cable industry also has conflicting incentives. Cable providers have much

stronger incentives to aggressively roll-out bundles of VOIP and broadband transmission. After all, ‘‘[r]elative to the Bells, [cable’s] major advantage is obviously that

it doesn’t have a legacy voice business it needs to protect.’’ 13 Viewed in the broader

context of their own legacy monopoly, however, the picture gets murkier. Under duopoly conditions, the ILECs and cable providers have every incentive not to aggressively compete in each others’ core businesses:

[W]e think cable operators are wary of being too successful...the chief risk

is that being too successful in VOIP could induce the Bells to be more aggressive in the data and video businesses (such as ratcheting up marketing activity

and price pressure). To put it another way, we think cable operators want to

be successful with VOIP only up to the Bells’ threshold of pain; maximizing the

value of VOIP may not maximize the value of the cable business if it invokes

a predatory response...14

[W]e think cable regards the potential Bell threat as much larger [than virtual carriers like Vonage] and we think it is highly unlikely to risk baiting the

Bells with an aggressive push into VOIP just to preempt what it regards as a

smaller threat.15

Indeed, alongside the flurry of press announcements announcing cable operators’

ambitious future VOIP rollout plans is a note of caution:

Most are wary of using big, new capital expenditures to take on entrenched

local phone giants, such as Verizon, while they are also spending heavily on

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16See ‘‘Cable Poised to Offer Phone Service—Just Not So Fast,’’ USA Today, May 27, 2004. 17Seoul’s Strong Hand Sets Pace on Web, International Herald Tribune Online, November 26,

2001. 18 Id.

fancy, new set-top boxes and cable modems. ‘‘To dislodge a competitor that large

takes a lot of money, and cable operators are still loaded with debt,’’ says Richard Nespola, CEO of telecom consultant TMNG. ‘‘Investors would not jump for

joy.’’ 16

This economic reality highlights another limitation of duopoly competition in the

IP transmission layer. To the extent that the cable industry does pursue VOIP services, this is no guarantee that the industry will make further investments to optimize their transmission networks for VOIP. They may merely elect to provide VOIP

services on a ‘‘best efforts’’ basis utilizing their existing internet access capabilities.

In this scenario, cable companies would not drive any significant transmission layer

innovation, but would simply be ‘‘virtual’’ voice carriers, like Vonage, over their own

networks.

Unlike the established telephone and cable companies, Covad has no legacy business to protect—Covad has always been a broadband company, with a network designed from the ground up to provide advanced broadband services like VOIP.

Covad has every incentive to roll out VOIP services as quickly as possible to as

many businesses and consumers as it reaches. Thus, we believe that including

Covad’s facilities-based VOIP offerings in the overall marketplace will significantly

speed the rate at which broadband services like VOIP are adopted.

TRANSITION TO FULL FACILITIES-BASED COMPETITION

Covad is well aware of the controversy surrounding unbundling requirements. Recently, the U.S. Court of Appeals for the D.C. Circuit has issued a ruling that many

predict will result in the phase-out of UNE-P competitive voice services. Although

Covad disagreed in many significant respects with the Court’s reasoning, the Court’s

decision is now the law of the land. Today, Covad stands ready to participate in the

transition to facilities-based services, including VOIP, that do not rely on unbundled

phone company switching. Covad believes strongly that the Court’s decision and the

expected phase out of unbundled switching should not and need not mean the death

of telephone competition. Instead, by migrating to facilities-based VOIP services

using unbundled loops, competitive carriers can respond to the Court’s mandate, ensuring that consumers retain continued choice among multiple telephone providers.

Covad stands ready to meet the Court’s mandate and offer that choice, with a facilities-based VOIP solution. Furthermore, Covad is currently the leading nationwide

provider of wholesale broadband services, including broadband services to many of

the companies currently relying on UNE-P. Thus, Covad is well poised to answer

the Court’s call by providing a migration path for these companies away from UNEP and onto facilities-based VOIP services.

In order to achieve this transition, it is critical that the FCC respond to the

Court’s decision by quickly developing judicially sustainable rules for competitive access to critical last-mile transmission facilities. For facilities-based mass market

VOIP competition to transform from vision to reality, Covad will need continued

non-discriminatory access to unbundled local loops and local transport. These lastmile transmission facilities provide the critical link between end users and Covad’s

backhaul network facilities. These simple last-mile transmission links, which no single company could ever duplicate, represent the bare minimum unbundling regime

needed to fully realize a facilities-based VOIP revolution. And, as I’ve already mentioned, Covad’s facilities-based broadband network and existing wholesale relationships offer a viable migration path for the 20 million consumers currently served

using UNE-P. But this transition cannot happen overnight or without rules that foster facilities-based competition such as ensuring that hot cut processes facilitate an

orderly transition from UNE-P to UNE-L and maintaining rate stability.

The experiences of countries like South Korea and Japan are instructive. Both nations enjoy significant leads over the U.S. in broadband penetration, and both nations have experienced explosive growth in broadband deployment after adopting

and enforcing unbundling regimes. South Korea’s market-opening measures included $400 million in loans to competing broadband carriers,17 the formation of a

new company (Hanero) to compete with incumbent Korea Telecom,18 and opening

Korea Telecom’s network with requirements for local loop unbundling, including

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19See ‘‘Developments in Local Loop Unbundling,’’ Organisation for Economic Cooperation and

Development, Working Party on Telecommunications and Information Services Policies, Sept.

10, 2003, at 49 (available at http://www.oecd.org/dataoecd/25/24/6869228.pdf). 20 Korea Broadband, PDS Consulting Short Paper, Version 12 June 2003. 21Seoul’s Strong Hand Sets Pace on Web, International Herald Tribune Online, November 26,

2001. 22South Korea, Korea Broadband Overview, Point Topic, October 20, 2003. 23On a roll: Japan’s success with DSL, Ovum Research, DSL: Business Models for Exploiting

the Local Loop, July 2002. 24 How the ‘‘Japanese Miracle’’ of Broadband Came About, Glocom Platform, Japanese Institute of Global Communication, Colloquim #43, December 24, 2003.

sharing of the local loop.19 The result has been thriving competition in the

broadband market, with three main suppliers,20 and rock-bottom prices (as low as

$25 a month 21) for consumers. As a result, ‘‘[a]t the end of June 2003, South Korea

ranked third in the world by the total number of DSL lines and first in the world

in terms of DSL penetration, with 14.27 DSL lines per 100 population.’’ 22 Japan’s

market-opening measure included being one of the first countries to introduce line

sharing, reducing line sharing charges to the lowest rates in the world, reducing collocation costs, shortening provisioning intervals, and unbundling backhaul facilities.23 As a result of such actions, at the end of 2003, Japan led the U.S. in

broadband penetration, and a competitor named Softbank—not the incumbent—was

the top DSL carrier in Japan.24 The experiences of South Korea and Japan show

that maintaining competitive access to local loop and transport facilities spurs the

deployment and adoption of innovative new services like broadband. Similarly, preserving competition among multiple facilities-based providers of VOIP will dramatically speed the pace at which VOIP services are developed, deployed and adopted

here in the U.S.

SOCIAL POLICY OBJECTIVES

Apart from the minimal regulation over last-mile transmission facilities needed to

preserve competition among multiple service providers, we believe that regulators

should adopt a generally deregulatory stance towards VOIP. We believe there is

promising evidence that traditional social policy objectives can be met without enacting new regulatory requirements for VOIP services. For example, last December,

the National Emergency Number Association (NENA) and the Voice on the NET

(VON) Coalition, of which Covad is a member, announced a voluntary agreement

on approaches to provide VOIP subscribers with basic 911 service, and to work together to develop solutions for enhanced 911 functionality. Likewise, in the area of

law enforcement access to IP enabled services, industry standards setting bodies

have been working on developing solutions enabling law enforcement access to packet-mode and broadband transmission technologies, calling into question the need for

intrusive new regulation of overlying information services like VOIP.

Furthermore, we believe that many critical social policy objectives can be met by

focusing on enforcing and rationalizing existing telecommunications service regulations, rather than by extending them to information services like VOIP. For example, we generally believe that regulators should refrain from imposing legacy access

charge regulations on VOIP services, and instead should focus their efforts on reforming existing regulations to develop a comprehensive intercarrier compensation

mechanism. Similarly, rather than imposing new universal service obligations on information services like VOIP, we believe that regulators can help safeguard universal service by rationalizing the existing contribution mechanism, so that all providers of broadband transmission services contribute equitably. In sum, we believe

that the enforcement of existing regulations on broadband telecommunications service providers like Covad, combined with voluntary industry collaborative efforts and

standards setting, can meet critical social policy objectives like public safety and

universal service—without imposing intrusive new forms of regulation on information services like VOIP.

CONCLUSION

Mr. Chairman, Members of the Subcommittee, we are in the midst of a revolution

in the telecommunications industry. We are witnessing a revolution away from the

limitations of traditional phone service to all of the enhancements, efficiency gains

and innovation that VOIP makes possible. We are witnessing a revolution away

from competition through legacy circuit switches to facilities-based competition over

packet-switched broadband networks. We are witnessing a transformative revolution

in the way the entire telecommunications industry does business. Covad is excited

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to be part of that revolution, and looks forward to working with the Subcommittee

to maximize the potential of a facilities-based, broadband future.

Thank you again for this opportunity and I welcome questions from the panel.

Mr. UPTON. Ms. Martine?

STATEMENT OF CATHY MARTINE

Ms. MARTINE. Mr. Chairman and members of the committee,

thank you for giving me the opportunity to discuss voice over IP

today.

AT&T intends to provide IP-based services to all of the key market segments; large enterprises, call centers, small offices, teleworkers and residential users. We have been delivering voice over

IP services in the business market since 1997, and in March 2004

we launched our residential VOIP service known as AT&T

CallVantage. Now, less than 4 months later, it is offered in 22

States and 72 major markets. Soon it will be available in over 100

markets.

VOIP is the foundation for our future. Much of the Silicon Valley

will benefit from an IP explosion. Small and medium sized businesses will also profit from affordable VOIP services. The resulting

productivity gains can, in turn, drive broader economic growth.

These benefits will only emerge if policymakers limit regulations to

a light handed regime, and most importantly avoid saddling VOIP

with flawed intercarrier compensation requirements.

We support the legislation proposed by Congressman Pickering

which recognizes the need for regulatory restraint if VOIP is to develop to its fullest potential. Let me provide some details on these

points.

As you have heard, VOIP holds the promise of choices and capabilities far beyond today’s offerings. In the IP environment VOIP

services and features can be provided and enhanced much more efficiently. VOIP could well be the killer application that drives

broadbanded option.

AT&T fully intends to lead the VOIP revolution. We have invested heavily to upgrade our total network including some $3 billion in 2003 alone.

AT&T CallVantage service provides a host of new advanced features such as the ability to detect voicemail from your computer

and dynamically control your feature settings yourself.

Innovations will increase as manufacturers, service providers

and software developers take advantage of the ability to integrate

voice, data and advanced consumer computer capabilities.

AT&T has been committed to providing a choice in the market

for local telephone service. We have invested billions of dollars in

our own facilities. Today we provide local service to more than 4.3

million residential users and 4.5 million business lines. Last year

AT&T began developing residential VOIP services as yet one more

means of competing for local phone customers.

The recent Federal court decision invalidating the FCC’s

unbundling rules could impede our deployment of VOIP. Without

access to unbundled network elements, AT&T will not be able to

offer residential local services to households that lack broadband

services. AT&T will also have far less ability and incentive to invest in VOIP absent a mass market base of customers.

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Equally important to our ability to deploy VOIP are the decisions

that the Congress and the FCC make about its regulation. We welcome the fact that many policyholders and makers such Congressman Pickering support a hands off approach to VOIP. His bill recognizes that to accomplish this goal a Federal framework makes

the most sense.

We agree with those who have said VOIP services must provide

access for the disabled, enable 911 and cooperate with requests

from law enforcement agencies. These are issues that the industry

is working hard to resolve, and AT&T is taking a lead in this efforts. There is no need to regulate in these areas barring a demonstrated failure by the industry to act appropriately.

The universal service and intercarrier compensation schemes are

badly broken and require substantial revisions before they can or

should be applied to VOIP.

Noting about VOIP threatens universal service. The real threat

is the shrinking base of interstate revenues that support the system today. AT&T has proposed moving to a flat rate charge for

each assigned and user telephone number. This system would include VOIP and would be competitively neutral and provide a solid

foundation for the fund.

The Commission’s access charge regulations are especially unworkable, but the long promised overhaul has yet to occur. The

emergence of VOIP services dramatically underscores the urgent

need for intercarrier compensation reform. VOIP providers collectively serve only several hundred thousand customers while the

Bells serve nearly 100 million. Having VOIP providers subsidizing

the incumbents cannot be the right answer. No one demanded that

the auto industry subsidize the buggy manufacturers, the computer

industry the typewriter providers or email providers the post office.

And contrary to some claims, VOIP providers do not get a free ride

when they don’t pay legacy access charges. VOIP providers purchase high speed or other local business lines to connect to the public switch network and pay for termination as an enhanced service.

AT&T agrees that affordable service needs to be maintained in

high cost areas of the country. Applying the old access charge regime to VOIP will not achieve this result. If VOIP is to deliver on

its promising potential, then it can not be regulated like plain old

telephone service. Today we are asking your support to keep that

from happening so that all Americans can realize the competitive

and innovative benefits of VOIP technology.

Thank you for inviting me here today, and I look forward to your

questions.

[The prepared statement of Cathy Martine follows:]

PREPARED STATEMENT OF CATHY MARTINE, SENIOR VICE PRESIDENT, AT&T

INTERNET TELEPHONY, CONSUMER MARKETING AND SALES

Mr. Chairman and Members of the Committee, thank you very much for giving

me the opportunity today to discuss Voice Over Internet Protocol. AT&T intends to

provide IP-based services to all of the key market segments—large enterprises, call

centers, small offices, teleworkers, and residential users. In March 2004, AT&T

launched its residential VOIP service, known as AT&T CallVantagesm Service.

Now, less than four months later, it is offered in 22 states and 72 major markets.

By the end of September, it will be available in over 100 markets.

VOIP is the convergence of voice and data, with the potential to bring choice and

innovation to the telecommunications marketplace. If allowed to grow unimpeded by

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legacy regulation, it will offer consumers an increasing array of advanced features

not available today to enhance ways of communicating and simplify busy lives.

VOIP will also contribute significantly to the business world. Teleworkers using

VOIP will be far more productive and successful at their work. VOIP will bring the

kind of advanced voice and data service now available only to Fortune 500 companies within the reach of small and medium-sized businesses. Much of Silicon Valley

is now in the IP value chain and will benefit from an IP explosion in this market.

The resulting productivity gains can, in turn, drive broader economic growth and

raise standards of living for all Americans.

These benefits will only emerge, however, if policymakers limit regulation to a

light-handed regime that allows VOIP to develop free of burdensome regulation at

the federal, state or local level and, most importantly, avoids saddling VOIP with

flawed intercarrier compensation requirements. The VOIP legislation proposed by

Congressman Pickering—H.R. 4129—would do just this.

Imposing today’s inflated access charges on nascent VOIP providers would severely impede the growth of VOIP. VOIP providers are already paying substantial

compensation to local exchange carriers for the right to terminate traffic on their

networks. They should not have to subsidize their established competitors as well.

With respect to intercarrier compensation, the priority should be on reform rather

than burdening innovative new services and technologies with an outmoded regulatory model heavy with subsidies.

If VOIP is to develop into a robust alternative service for residential consumers,

then competitive carriers must first have the opportunity to develop the residential

subscriber base for local voice service that is necessary to justify our continued and

growing investment in VOIP. To accomplish this, we and other competitive local exchange carriers need ongoing access to unbundled elements of the Bell networks at

reasonable rates. While we do not like being dependent on the Bell network, the

transition cannot occur overnight.

Firm resolve in enforcing the pro-competitive policies of the 1996 Act is a necessary first step on the path to VOIP. Unfortunately, those policies are in dire jeopardy. In the face of the Administration’s refusal to appeal the recent decision striking down the FCC’s unbundling rules, we have reluctantly concluded that we cannot

incur the costs to solicit any additional local and long distance customers in seven

states. Without the swift adoption of new rules to ensure local competition, we will

have to consider similar steps in other states. Such retrenchment in the offering of

traditional communications services will directly hinder the growth of next generation VOIP services.

Let me provide more detail on each of these points.

VOIP HOLDS THE PROMISE OF NEW CHOICES, MORE CAPABILITIES AND THE POTENTIAL

FINALLY TO ELIMINATE LOCAL TELEPHONE MONOPOLIES

VOIP holds the promise of choices and capabilities far beyond today’s circuitswitched offerings. It enables consumers to enhance and tailor their communications

services to their needs and lifestyles at competitive prices. 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 economic driver for our nation.

AT&T fully intends to lead the VOIP revolution for businesses and consumers. We

have invested heavily to make the necessary changes to our network—some $3 billion in 2003 alone—and we have announced that we will be providing VOIP service

in the top 100 markets in the country this year.

With VOIP, voice service is just another ‘‘hosted application’’ like e-mail, letting

customers take their phone numbers wherever they go and access connections over

any device, such as a standard home telephone, wireless phone, or computer.

AT&T’s consumer offer, AT&T CallVantagesm Service, for example, already includes

a host of new advanced features, including advanced call forwarding features and

‘‘do not disturb’’ options that enable consumers to program the service so that the

phone answers to their needs instead of the other way around. AT&T

CallVantagesm Service provides subscribers a ‘‘Personal Call Manager Web Site,’’

which gives subscribers complete control over their answering, voice mail and other

capabilities. Subscribers can check their voicemail from their computer and forward

information as a ‘‘talking’’ e-mail. These benefits will only increase as device manufacturers, network operators, service providers and application developers take full

advantage of the ability to integrate voice, data and advanced computer capabilities.

In the IP environment, voice services can also be provided much more efficiently.

IP technology allows for more efficient routing of calls than traditional circuitswitching. These efficiencies enable more innovative service packages. Current

VOIP offerings allow customers that have a broadband connection to place unlimited

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calls anywhere in the country for a single, low monthly price. The Alexis de

Tocqueville Institution concluded earlier this year 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. You should not, however, think of VOIP as

‘‘cheap phone service.’’ It promises to be lower-cost, yes, but with a host of new communications management features and options that go well beyond today’s ‘‘plain

old telephone service’’ (‘‘POTS’’).

AT&T’S HISTORY AS A LOCAL COMPETITOR

AT&T has long been committed to providing a choice in the market for local telephone service. 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—we have invested billions of dollars in our own local facilities since 1996—and the lease of Bell network

elements, both means established by Congress in 1996 and pursuant to rules crafted

by the FCC as instructed by the Act.

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. Up to this

point, the economic challenges presented by facilities-based competition and the incumbents’ legacy advantages in this area have made the lease of capacity on the

incumbent carriers’ networks—‘‘UNE-P’’—the only viable means of competitive local

market entry in the mass market.

I cannot emphasize enough how important access to fairly priced network elements is to the widespread availability of VOIP: without access to unbundled network elements at reasonable prices, AT&T will not be able to offer mass market residential local competition to those households that have not signed up for broadband

service for reasons ranging from availability to affordability. And without a mass

market customer base, AT&T will have far less ability and incentive to fund the

customer support, billing and back-office systems that are necessary to offer VOIP

services on a very large scale. Even then, we will not be able to compete if the Bells

are allowed to restrict the ability of AT&T and other competitors to provide VOIP

services to the Bells’ DSL customers.

Until just last month, UNE-P provided the stepping-stone to facilities-based competition by enabling competitors to build a customer base that justifies investment

in facilities. Unfortunately, however, a recent federal court decision invalidating the

FCC’s unbundling rules will prevent us from doing just that. AT&T strongly believes that this decision is both wrong and flatly contradicts Supreme Court precedent, but the Administration has refused to appeal it. The Bell companies’ refusal

to negotiate reasonable interconnection and leasing agreements in the wake of that

decision has left AT&T no choice but to stop incurring the costs to solicit new local

phone customers in many residential markets. With the Bell companies poised to

raise wholesale rates for UNE-P as early as November, we will simply not be able

to provide a bundle of local and long distance services economically and build the

customer base for VOIP. We therefore urgently need interim rules ensuring fair

competition so that more consumers will not face higher rates for their telephone

service and to provide much-needed stability in the marketplace.

Interim rules should guarantee, at a minimum, that the rates competitors pay the

Bells for lease of unbundled network elements do not rise above current levels,

which have already been judged by the Supreme Court to allow the Bells a reasonable profit. The new rules must also foster the transition to facilities-based competition by ensuring that the Bell companies continue to provide so-called ‘‘UNE-L’’ access to copper loops, high-capacity loops, transport and dark fiber at current rates.

UNE-L service will, among other things, allow competitors to offer service options

to customers who lack the broadband connections that enable VOIP.

There is also a direct correlation to the availability of unbundled loops and the

growth of broadband. Of the ten countries that surpass the United States in per

capita broadband penetration, nine of them require local loop unbundling. AT&T

proposed a plan earlier this year to transition from UNE-P to UNE-L, and even offered to pay higher wholesale rates if we failed to meet our own deadlines for construction, but the Bells were unwilling to enter into any such agreements.

The fact is, we do not regard UNE-P as a panacea, and we never have. 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 has the potential to allow us to end this dependence, but only if we and other national carriers

can remain in the market today. If we are squeezed out of the local marketplace

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1 Congress Daily AM, February 24, 2004

2 Congress Daily AM, February 5, 2004

now, our ability to deploy and grow our VOIP service will be far more difficult and

take far longer, leaving VOIP as yet another technology controlled by the Bells.

Remember that these are the same companies that held back the deployment of

DSL services to residential customers for some ten years so customers would have

to take their other, higher priced services. Only when forced by competition, in that

case the deployment of broadband Internet connections by cable operators and competitive carriers Covad and Rhythms, did the Bells finally introduce mass-market,

high-speed Internet access service. 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 or the rich array of features it is capable of providing. Competition will

spur VOIP investment by the incumbents, not deter it.

A ‘‘HANDS-OFF’’ APPROACH IS THE APPROPRIATE REGULATORY APPROACH FOR VOIP

Allowing VOIP to develop in the marketplace is a critical step to bringing this Nation into the digital age. AT&T welcomes the fact that many Members of Congress,

such as Congressman 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. Congressman Pickering’s deregulatory approach to VOIP—H.R. 4129—acknowledges the need to reform the current subsidy

system and allow this nascent service to flourish.

In particular, the bill recognizes that because the Internet is global in nature and

these services will be deployed nationwide, a federal framework makes the most

sense. Forcing U.S. VOIP providers to develop 50 different varieties of VOIP services to comply with a patchwork of potentially inconsistent state regulatory burdens

could hinder their development. Continuing regulatory uncertainty as to federal

versus state regulation of VOIP, or worse yet, the regulatory uncertainty that would

accompany implementation of 50 different regimes to regulate VOIP, would inevitably impede investment, in direct opposition to the federal policy of creating a regulatory framework that promotes the growth and development of broadband services.

Indeed, recognizing the critical importance of a uniform, nationwide deregulatory

environment, the Pickering bill prohibits even the FCC from regulating VOIP applications except as specifically authorized.

Such an approach will be critical to VOIP’s ability to lead the United States’

broadband revolution: the United States’ broadband penetration lags behind that of

a number of other countries. Many of those who have higher rates of broadband

penetration have recognized that allowing VOIP to flourish will contribute to a positive economy and allow them a competitive edge in the global marketplace. The

United States, too, must protect its economic interests by abandoning outdated policies favoring and protecting incumbent revenue streams.

AT&T strongly supports the approach of this legislation. Allowing emerging VOIP

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. As FCC Chairman Powell stated on February 8, 2004:

the case for government imposed regulations regarding the use or provision of

broadband content, applications and devices is unconvincing and speculative.

Government regulation of the terms and conditions of private contracts is the

most fundamental intrusion on free markets and potentially destructive, particularly where innovation and experimentation are hallmarks of an emerging

market.

The wisdom of this approach was confirmed recently—in reverse—when a new

local VOIP provider concluded it could not stay in business in any of the states in

which it had been operating when faced with an order from Washington state regulators to register as a telephone company and comply with the same laws as other

long distance companies (including the payment of access charges). Regulators must

be able to approach VOIP service flexibly if they expect VOIP to bring its promised

benefits to consumers and competition. As Congressman Upton has recognized,

VOIP services ‘‘revolutionize how we communicate, and as is the case with any innovative technology, will call into question many aspects of today’s antiquated regulatory regime.’’ 1 Congressman Stearns has similarly recognized the ‘‘problem in pigeon-holing [VOIP] into an outdated regulatory framework.’’ 2

We agree with those who’ve said that providers of VOIP services must meet important social policies. Providing access for the disabled, enabling public safety (911)

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response, and cooperating with lawful requests for information from law enforcement are issues that the industry can and is working to resolve, and AT&T is taking the lead in these efforts. While government has a legitimate role in ensuring

that these things get done, it should refrain from regulating this new service in

these or other areas in the absence of a demonstrated failure on the part of industry

to act appropriately. We may also need some flexibility and reasonable transition

periods to come into compliance, in recognition of the fact that IP-enabled services

present different technical and operational issues than those considered when the

legacy common carrier regulations were originally developed. Nonetheless, we believe that the enormous flexibility and power of VOIP promises to address these

issues in ways superior to current circuit-switched technology.

Other legacy regulations, however, will require substantial revisions before they

can or should be applied to VOIP. The universal service and intercarrier compensation schemes are irremediably broken and indeed, no longer make sense even in the

context of the traditional, circuit-switched wireline telephone services for which they

were developed. Prompt attention to these fundamental flaws in existing regulation

is urgently needed so that IP-enabled services are not burdened with costly and outdated, broken regulatory schemes that would prevent VOIP services from reaching

their potential.

Let me emphasize 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 a reformed universal service system—in a sustainable, fair, and nondiscriminatory manner.

AT&T has proposed a contribution system to the FCC that would replace the current revenues-based system with a numbers/capacity-based system that is fairer and

more sustainable. Under our proposal, providers would pay a flat-rated charge for

each assigned telephone number that maps to a unique end-user’s service. Services

known as ‘‘special access services’’ would also be assessed a flat-rated charge based

on the capacity of the service. Such a system would be competitively neutral, and

would provide a solid foundation for the fund because the use of numbers is increasing. Moreover, VOIP providers would be fully included, since their service nearly always uses traditional phone numbers—as would future technologies, which are likely to retain the use of numbering. The Commission has full authority to implement

such reforms—but it has yet to do so. Carriers need clarity and predictability in the

marketplace if they are to make the risky investment needed to make VOIP widely

available.

Especially unworkable are the Commission’s vastly outdated access charge regulations. 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 wireless companies and ISPs became the largest users of access

minutes. 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 the FCC’s long-promised overhaul of its intercarrier compensation regime has yet to occur. While Chairman Powell commendably

opened a proceeding examining needed revisions as one of his first acts as Chairman, that docket remains unresolved more than three years later.

Now, the emergence of VOIP services dramatically underscores the urgent need

for the Commission to complete intercarrier compensation reform. Whatever the historical wisdom of requiring interexchange carriers to subsidize through inflated access charges local exchange carriers operating in a different market, it makes no

sense to require nascent VOIP providers to subsidize the monopoly local exchange

carriers against whom they will be directly competing. VOIP providers collectively

serve only several hundred thousand customers, while the Bells serve nearly one

hundred million. It cannot be the right answer for the emergence of VOIP to subsidize the Bells.

The far better course is comprehensive reform of the intercarrier compensation regime to eliminate market distortions and opportunities for regulatory arbitrage.

Nearly every segment of industry agrees that there is a need to move to a rational

system in which all traffic is exchanged under the same compensation rules. Even

OPASTCO—the Organization for the Promotion and Advancement of Small TeleVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6621 95448.TXT HCOM1 PsN: HCOM1
83

communications Companies—acknowledges the need for intercarrier compensation

reform, although its members directly benefit from current law. In a hearing before

the Senate Commerce Committee on June 16, 2004, Arturo Macias, current Chairman of OPASTCO, testified that although it was important for rural carriers to be

able to recover their costs of providing access to their networks, current intercarrier

compensation rates are not cost-based, and OPASTCO would not oppose their reform.

Until that reform occurs, however, these legacy access charges should not apply

to IP-enabled services, even on an interim basis. Even Qwest agrees with us that

providers using IP at either the origination or termination points of telephone traffic

should not pay access charges, even if the traffic at some point traverses the public

switched telephone network. The imposition of above-cost access charges on IP telephony would radically alter the economics of providing VOIP services and would

severely impede the development of those services.

Contrary to the Bells’ claims, VOIP providers do not get a ‘‘free ride’’ when they

don’t pay access charges. To the contrary, VOIP providers typically purchase what

are known as Primary Rate Interfaces (‘‘PRIs’’)—a type of high-speed line—or other

local business lines to connect to the public switched telephone network, and they

pay substantial compensation to the terminating local exchange carrier for the right

to do so.

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.

Today we are at a crossroads where we must call upon your leadership. If VOIP

is to deliver on its promising potential—and offer something truly different in the

marketplace—then it cannot be treated and regulated like plain old telephone service. We are asking for your support to keep that from happening, so that Americans

can finally realize the long-promised benefits of widespread competition and the innovations promised by VOIP.

Thank you again for inviting me here today, and I look forward to your questions.

Mr. UPTON. Thank you.

Mr. Nelson?

STATEMENT OF ROBERT B. NELSON

Mr. NELSON. Thank you, Mr. Chairman. I applaud you for holding this hearing today on what you and others have noted is an exciting new innovation in the telecommunications industry and

holds great promise for all residential and business customers

alike.

As representative of our national association, I will address today

the appropriate role for States in promoting VOIP in cooperation

with our Federal partners.

Our challenge is to let innovation take its course while preserving the services and features consumers care about and expect

in the telecom systems. State commissions want VOIP to succeed

and have pursued a light touch policy where they have taken action. Despite the fears of some today, no State to date has pursued

full scale economic regulation of VOIP. In fact, many States have

chosen to forgo all regulation.

In answer to the question that the chairman posed in the title

to this hearing, regulation can be tailored so it does not disrupt

this new exciting technology.

The VOIP services attracting the most attention today are actually hybrids that bundle telecom services. They combine packets

with origination of calls with completion of calls; in fact, 90 percent

of VOIP calls are completed to the PSTN. They are marketed as

substitutes for traditional telecom service and consumers are actually purchasing a means of connecting to the PSTN. In our view,

84

services that rely on healthy publicly switch telephone networks

should support that network through universal service and participation in the carrier compensation. Without the support, the customers without access to broadband will be asked to share an even

increasing burden to sustain this network.

We believe that consumer protection should apply to VOIP. Services that replace traditional phone services should meet consumer

expectations. Consumers depends on their phones on ways they

don’t even realize. State commissions handle tens of thousands of

consumer complaints every year on issues like slamming like cramming, service outages and service quality, clarity and honesty in

billing and truths of deceptive marketing, privacy of customer billing, emergency dialing and these protections should apply to VOIP

as well.

State commissions are well suited to be the watchdog and referee

in these proceedings. We are the laboratories of democracy, if you

will. We are local and staffed to be responsive. We provide a

human voice to sort out these complaints and usually mediating or

explaining the complaint to consumers. Distant Federal agencies

would be hard pressed to handle this case load.

Cable industry representatives have suggested that States

should arbitrate interconnection agreements for facilities-based

GOIP providers as we have for wireless and CLECs. It is a role we

are very much attuned to.

Chairman Powell and Ms. Martine have indicated that independent VOIP providers with no call origination facilities may not

survive in the near future, And indeed, incumbent providers will

step into VOIP and be the dominate providers. This indicates to me

the packets which alone should not be a shield against all economic

regulation. Market power is a better measure of that. Most VOIP

providers have none of this market power, but we shouldn’t unwittingly created a loophole for incumbents.

As Ms. Greene indicated earlier, we should look at the function

nature of the service and not the underlying technology in developing our polices, otherwise we will create winners and losers as

Congressman Dingell has indicated we should not do.

A consensus of State commissions have concluded that writing

new polices around specific technologies will always leave us one

step behind. It’s tempting to put our thumb on the scale for new

hot technologies, but that would actually distort the market.

Now, the New York Commission has taken this functional approach to heart and it looked at specific service offered by Vonage

Holdings and found that economic regulations should not apply,

but that 911 emergency dialing should apply. Vonage’s web based

form contract had some alarming terms, including the fact that it

might not work after business hours. This would have dire consequences for a consumer who replaced his phone with a Vonage

phone and had a heart attack after business hours. He might be

very much out of luck. This is an interesting thing that Congressman Shimkus raised and something that this committee should be

very much attuned to.

In addressing this dilemma the New York Commission’s action

were very narrowly tailored, flexible and practical. Both the New

York and Minnesota Commissions have issued orders that have

85

now been enjoined by the courts, but they provide a worthwhile

road map to a ‘‘light touch‘’’ approach.

In terms of Representative Pickering’s bill, I believe it is constructive in recognizing the interdependency of the VOIP service

with the public switch network, and it does require participation in

Federal USF, intercarrier comp and CELEA. Unfortunately,

though, it pursues a technology specific approach that will build a

new silo for VOIP and ultimately distort the market. By dismissing

a State role out of hand it shortchanges consumers on consumer

protection, interconnection, emergency dialing and competition.

While we have just begin studying the Stearns-Boucher Bill, it too

may have some of the same problems that the Pickering bill has.

But it does leave out as well consumer protection in our view.

We appreciate and respect the dialog these bills have spurred,

but at this time we cannot support them. We look forward, however, to participating in that dialog to see that new technologies

like VOIP are allowed to flourish and achieve the promise that

they hold within the framework of a ‘‘light touch’’ regulatory policy.

Thank you very much.

[The prepared statement of Robert B. Nelson follows:]

PREPARED STATEMENT OF HON. ROBERT NELSON, COMMISSIONER, MICHIGAN PUBLIC

SERVICE COMMISSION AND CHAIRMAN, COMMITTEE ON TELECOMMUNICATIONS, NA- TIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

Mr. Chairman, Ranking Member Markey and members of the Subcommittee, I am

Robert Nelson, Commissioner with the Michigan Public Service Commission and

Chairman of the National Association of Regulatory Utility Commissioners’

(NARUC) Committee on Telecommunications. Founded in 1889, NARUC represents

the interests and consensus policy positions of State public utility commissions.

NARUC applauds your leadership for calling this hearing and appreciates the opportunity to testify today on the impact of Voice-Over-Internet-Protocol (VOIP) and

other technologies on the ever-changing telecom market. Now is an exciting time for

the telecom industry because so many innovative technologies are entering the market to enrich the lives of consumers and the productivity of businesses.

The challenge of policymakers is to stand aside and let innovation take its course

wherever we can, while still preserving the services and features consumers care

about and expect in their telecom system. This philosophy guides our inquiries at

State commissions and will undoubtedly guide this Committee as it examines not

just VOIP technologies but all the aspects of the Federal Telecommunications Act

and its interaction with the evolving telecom marketplace.

State commissions are committed to making sure VOIP can reach its full potential

for consumers and the marketplace. Just like members of Congress, State commissioners are constantly gathering information from industry and the various stakeholders to understand the unique business models, services, and consumer opportunities that have sprung up around VOIP technology. Several States have pursued

a ‘‘light touch’’ regulation of VOIP services, while most have declined to regulate

VOIP at all thus far. No state has pursued any degree of economic regulation of

VOIP.

PSTN/VOIP HYBRID SERVICES

The VOIP services attracting the most attention are actually hybrid services that

bundle together packet-switched origination of calls with the services of traditional

competitive and long-distance phone companies, terminating well over 90 percent of

their calls to the Public-Switched Telephone Network. Such services are generally

marketed as replacements for traditional phone service and the product they are actually selling is access to (and the ability to receive calls from) millions of traditional

PSTN phones in every home and office around the nation.

These PSTN hybrid services are more than just an ‘‘application,’’ because unlike

with any Internet application, the service provider must hand the traffic off to a traditional telecom carrier like Qwest or Level 3, convert the traffic to analog and avail

itself of the interconnection agreements that have been negotiated with the local exchange carrier of the called party. Even the FCC has conceded that at least some

86

hybrid services, such as that featured in AT&T’s petition, should be regulated as

telecommunications services.

The vast majority of VOIP customers would never pay a dime for the service if

they didn’t have that universal access to the PSTN. As such, it is entirely appropriate for VOIP carriers to support the universality of the phone network that completes their business model, and for local exchange carriers to receive the same compensation for terminating their calls that similarly situated traditional telecom carriers must pay.

State universal service programs are an integral part of the universal service system because they fill in gaps that the federal program misses. Without state programs, consumers in many states would be shortchanged by the nationwide proxy

formulas of the federal program. Making sure those state programs have a support

base as the technology of the phone system evolves is critical to their long-term

health. Such a support base is even more critical in light of the substantial contributions to the PSTN made by carriers and customers in the form of intercarrier compensation and federal universal service, which may be significantly depleted

through the emergence of hybrid VOIP services.

CONSUMER PROTECTION

Consumers should also receive effective, responsive local consumer protection in

the phone system of the future. If VOIP providers achieve even a measure of the

success they have promised their share holders and venture capitalists, they will

quickly progress beyond the technology-savvy early adopters and begin offering services to the average consumer.

Whether we realize it or not, we build our lives around a phone system that is

reliable and dependable. The telecom business continues to be one where an ongoing

consumer relationship is formed through an extensive and detailed legalese-laden

contract that goes largely unread until there is a problem with the service. Often

the contract locks the consumer into a year or more of services with stiff financial

penalties for quitting the relationship early.

State Commissions handle tens of thousands of individual consumer complaints

every year, covering such issues as:

• Slamming and cramming;

• Timely response to service outages, quality deterioration, etc.;

• Clarity and honesty in billing;

• Intrusive or deceptive marketing;

• Access to telecommunications services by blind and disabled consumers.

• Privacy of customer billing or calling records; and

• Making sure the emergency dialing service lives up to the trust that consumers

put in it.

While much has been written about a new telecom system where different ‘‘layers’’

of service (transmission, application, etc) are offered by different companies, consumer protection obligations generally apply to whichever company maintains the

consumer relationship (and collects the bill). Most complaints are resolved through

Commission mediation or often just explanation, although some merit intervention

and enforcement.

State Commissions are well suited to the watch dog and referee role because they

are in the local communities, staffed to be responsive and have unique expertise in

the telecom business. Depriving states of their consumer protection role would fragment the response effort and confuse consumers as they were shuffled from one

agency to another based on the technology they were using—a federally mandated

runaround. Distant federal agencies would be hard-pressed to handle the load.

INTERCONNECTION AND COMPETITION

Cable industry representatives recently commented that State commissions will

likely have a critical role to play in arbitration of interconnection agreements as the

facilities-based VOIP carriers seek to knit themselves into the larger phone network.

State commissions have fulfilled this important role for years already and are prepared to safeguard the same rules of nondiscrimination and fair dealing for the

VOIP industry as they have for CLECs and others.

Congressman Pickering’s bill raises a related issue—also highlighted recently by

FCC Chairman Michael Powell—of whether ‘‘independent’’ VOIP carriers with no

call-originating facilities of their own will be able to survive if the facilities owners

choose to favor their own VOIP products in the long run with preferential packet

treatment. Vonage CEO Jeffrey Citron recently commented to the Washington Post

that this might be an area that merits government intervention.

87

1The Terms of Service agreement is contained in a small window that consumers may scroll

through when signing up for Vonage service online. If copied and pasted into a Word document,

it takes up 15 single-spaced pages. The document quoted above was last updated on April 27,

2004.

Also, it is important to clarify that simple use of packet switching should not absolve a company of all its competitive obligations. While a company like Pulver,

Packet8 or Vonage may not be positioned to exert market power when it acts independently, it is entirely foreseeable that a traditional incumbent could migrate customers to VOIP service en masse and still position itself to exert market power, especially in regions where it was the exclusive facilities-based broadband provider.

FUNCTIONAL NATURE TEST

In assessing the impact of new communications technologies, a consensus of

NARUC commissioners have come to the conclusion that writing broad new policies

around specific technologies will always leave us one step behind and may even hurt

the development of technology by sending distorted signals to the marketplace. Instead, NARUC’s resolutions addressing VOIP emphasize that regulatory treatment

should follow the functional nature of the service, not the way it works under the

hood. Rather than looking to the technology itself, policymakers should look at the

salient features of a service. In most cases, the starting point in our analysis should

be what the service provides to the consumer.

The ‘‘functional nature’’ approach does not mean regulating new VOIP services

just as if they were traditional circuit-switched service from Ma Bell. Rather it

means a rigorous, intellectually honest dialogue about which public interest obligations are attached to which features of a particular service. If the physical structure

of a particular service makes its carrier unable to exert market power, for example,

that may impact whether the full panoply of economic regulations ought to apply.

The New York Public Service Commission took the functional nature approach to

heart in its recent decision regarding Vonage Holdings Corp. It examined a specific

service offered to New York consumers and found it to be a telecom service. Based

on the salient traits of that service, the NY PSC found traditional economic regulations inapplicable, but it did rule that consumers should receive reliable 911 emergency dialing services.

The service was marketed as a replacement for traditional phone service but the

lengthy standard contract that consumers had to sign contained some alarming provisions. Specifically, the company’s Terms of Service agreement, on page 7 of a 15

page single-spaced document 1 said:

‘‘You acknowledge and understand that 911 dialing from your Vonage equipment will be routed to the general telephone number for the local emergency

service provider (which may not be answered outside business hours), and will

not be routed to the 911 dispatcher(s) who are specifically designated to receive

incoming 911 calls at such local provider’s facilities when such calls are routed

using traditional 911 dialing.’’ (emphasis added)

Imagine if a consumer in upstate New York who replaced his traditional phone

line with this service had the rotten luck of experiencing a heart attack or stroke

after ‘‘normal business hours.’’ He dials 911 and, because it only goes to the business line, no one picks up. Brutal as it sounds, he is simply out of luck!!

The New York PSC’s order suggested this was unacceptable but actually invited

the company to work with them on an acceptable framework for achieving these important goals and to apply for waivers where traditional phone regulations did not

apply. While the actions of New York and Minnesota have been enjoined by federal

courts for the time being, they provide a worthwhile roadmap that illustrates a

‘‘light touch’’ approach that so many leaders of industry and government have

sought.

THE ‘‘VOIP REGULATORY FREEDOM ACT’’

By requiring the PSTN hybrid services (‘‘connected VOIP applications’’) to participate in universal service and intercarrier compensation, H.R. 4129 recognizes those

services’ relationship with, and dependence on, the Public-Switched Telephone Network. This recognition is telling and crucial as we lay the foundations for a broader

debate about telecom policy that this Committee will undoubtedly lead.

Unfortunately, H.R. 4129 suffers from a technology-specific approach that will

only serve to create a new market-distorting regulatory ‘‘silo’’ or ‘‘stovepipe’’ for one

particular technology, even though that technology will almost certainly evolve in

unanticipated directions. With more time, state and federal policymakers could coVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6621 95448.TXT HCOM1 PsN: HCOM1
88

operate in parsing out functionalities and features that deserve more precise regulatory treatment and, in some cases, strategic forbearance.

We are also concerned that H.R. 4129, by dismissing a state role out of hand on

such core issues as consumer protection, interconnection, emergency dialing, market

power and state universal service programs, would deal consumers and competitors

a poor hand at the outset of a new era in telecommunications.

NARUC commends Congressman Pickering and his cosponsors for their leadership in introducing the VOIP Regulatory Freedom Act because we appreciate and

respect the dialogue it has spurred here in Congress and among other federal policymakers. While we cannot support H.R. 4129, we look forward to participating in

that dialogue, on VOIP and the full range of telecom issues before this Committee,

to craft a comprehensive federal telecom policy that will serve consumers well for

decades to come.

Mr. UPTON. Mr. Rutledge?

STATEMENT OF THOMAS M. RUTLEDGE

Mr. RUTLEDGE. Mr. Chairman, Congressman Markey, members

of the committee, my name is Tom Rutledge. I am the chief operating officer of Cablevision Systems Corporation in New York.

Thank you for the opportunity to appear before the committee.

Eight years after the Telecommunications Act of 1996 advances

in technology are giving consumers unprecedented ability to choose

and create communications packages that meet their individual

needs. Consumers can choose among wired and wireless platforms

for a combination of waste, data and tech services regularly substituting different, newer products for old ways of communicating.

Voice over IP service is an example of this competition, a true facilities-based service offering consumers greater choice and more

value enabled by broadband networks and improved technologies

over IP.

Since 1998, Cablevision has invested $5 billion in an advanced

two-way broadband network that reaches 4.4 million homes in the

New York metropolitan area. That investment enables us to offer

consumers a range of more robust and valuable services, including

our high speed broadband service, digital video, video on demand,

15 high definition television services, interactive services, and voice

service.

Offered on our high speed broadband platform, ‘‘Optimum Voice,’’

our QoS, quality of voice over IP service, is among the most successful products we have ever offered. Launched late last year, Optimum Voice today has more than 100,000 customers and is winning new customers at a rate of more than 3,000 per week.

Voice over IP is poised to evolve in conjunction with enhanced

data and mobile services, such that the concept of voice service will

mean something far different to users in the coming years than

what it does today. Prior technological innovations did not change

the fundamental character of plain old telephone service, POTS.

VOIP, by contrast, will usher in a whole new kind of communications markets.

Our service, Optimum Voice, is already more than a tradition

phone service, and this is just the beginning. In addition to offering

our customers limitless local, regional and long distance calling and

all the advanced features available from a traditional phone service, Optimum Vice is a suite of IP applications that includes

functionality never offered before. Advanced call forwarding options

let customers route calls to up to three different locations simultaVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6602 95448.TXT HCOM1 PsN: HCOM1
89

neously. The data platform allows them to send and review voice

messages on email. An interactive web portal lets subscribers customize the way they want to receive communications day-by-day,

hour-by-hour, and with total control from any location. And it includes E911 and is capable of meeting all law enforcement access

and surveillance requests.

It is notable that Optimum Voice today is totally unregulated by

the States in which it is being provided. Because of this deregulatory environment, not in spite of it, Optimum Voice is succeeding

with customers by meeting their needs, providing value and competing in the marketplace.

Technological advances in VOIP and related services are quickly

overtaking specific regulations based on the legacy networks. The

pace of these changes will quickly render inapplicable any very specific rule or classification based on what is even current technology.

Even what appears to fit today will no longer fit tomorrow.

In this new world, I encourage policymakers to embrace the potential for consumer choice by establishing a broad, deregulatory,

national framework that encourages new services and technological

advancement. It is important that a new framework be developed

that allows consistent State rules that foster growth of IP-based

voice applications and permits the discipline of choice to ensure

protection and value to consumers.

I commend Congressman Pickering for advancing a forward looking, deregulatory legislative approach to VOIP. Of special importance, the legislation establishes the principle that there must be

a predictable, national framework for the development of these inherently mobile and borderless services that allows providers to respond to the marketplace, not the government, in designing, pricing and selling services. While some States understandably have

an interest in VOIP, there must be recognition that clear rules of

the road that operate on a national basis are essential for the service to expand and to offer the kind of choice and value envisioned

by the 1996 Telecommunications Act.

In the tradition from legacy telephone regulation toward a modern, deregulatory framework appropriate for the new marketplace,

we recognize that a number of existing policies must be rationalized. I commend Chairman Powell and his colleagues on the FCC

for initiating proceedings to address each of these transitional

issues. These include the legacy of access charges and intercarrier

compensation, and creating new mechanisms for supporting universal service. The timely resolution of these issues by the Commission by Congress will provide much needed certainty to the providers seeking to grow and improve on this fledgling service.

We also recognize that there will continue to be need to address

significant public safety and security issues. VOIP customers must

have ready access to E911 and emergency services. Law enforcement must have access to VOIP applications to support the national security interests. These targeted policy goals can be

achieved by narrowly tailored regulation or industry commitments

without carrying forward the costly and dates regime of local retail

phone regulation from a monopoly era.

Mr. Chairman, members of the committee, we are at the beginning of a realignment of mass-market communications, InternetVerDate 11-MAY-2000 08:05 Oct 25, 2004 Jkt 000000 PO 00000 Frm 00093 Fmt 6633 Sfmt 6602 95448.TXT HCOM1 PsN: HCOM1
90

based voice applications promise to give consumers real communications choices. These choices will not be limited to less expensive versions of POTS, although that is possible, but will include

access to totally new products and services that will remake the entire concept of voice service. This is an exciting new market for Cablevision and our customers. We are proud to be a leader in offering voice over IP services at the forefront of this transition and look

forward to working with this committee to establish policies that

maximize its potential.

Thank you again for this opportunity. And I welcome questions

from the panel.

[The prepared statement of Thomas M. Rutledge follows:]

PREPARED STATEMENT OF THOMAS RUTLEDGE, CHIEF OPERATING OFFICER,

CABLEVISION SYSTEMS CORP.

Mr. Chairman, Congressman Markey, members of the Committee, my name is

Tom Rutledge; I am the Chief Operating Officer of Cablevision Systems Corporation

in New York. Thank you for the opportunity to appear before the Committee.

INTRODUCTION

Eight years after the Telecommunications Act of 1996, advances in technology are

giving consumers unprecedented ability to choose and create communications packages that meet their individual needs. Consumers can choose among wired and

wireless platforms for a combination of voice, data, and text services, regularly substituting different, newer products for old ways of communicating. Voice over IP

service is an example of this competition, a true facilities-based service offering consumers greater choice and more value, enabled by broadband networks and improved voice technologies over IP.

BACKGROUND

Since 1998, Cablevision has invested $5 billion in an advanced two-way

broadband network that reaches 4.4 million homes in the New York metro area.

That investment enables us to offer consumers a range of more robust and valuable

services, including our high speed broadband service, digital video, video on demand, 15 High-Definition television services, interactive services, and voice service.

Offered on our high-speed broadband platform, ‘‘Optimum Voice’’—our QoS (Quality of Service) voice over IP service—is among the most successful products we have

ever offered. Launched late last year, ‘‘Optimum Voice’’ today has more than

100,000 customers and is winning new customers at a rate of more than 3,000 per

week.

‘‘Voice over IP’’ is poised to evolve, in conjunction with enhanced data and mobile

services, such that the concept of ‘‘voice service’’ will mean something far different

to users in the coming years from what it does today. Prior technological innovations did not change the fundamental character of plain old telephone service

(POTS). VOIP, by contrast, will usher in a whole new kind of communications market.

Our service, Optimum Voice, is already much more than traditional phone service,

and this is just the beginning. In addition to offering our customers limitless local,

regional and long distance calling and all the advanced features available from a

traditional phone service, Optimum Voice is a suite of IP applications that includes

functionality never offered before. Advanced call forwarding options let customers

route calls to up to three different locations simultaneously. The data platform allows them to send and review voice messages on e-mail. An interactive Web portal

lets subscribers customize the way they want to receive communications day-by-day,

hour-by-hour, with total control from any location. And it includes E911 and is capable of meeting all law enforcement access and surveillance requests.

It is notable that Optimum Voice today is totally unregulated by the States in

which it is being provided. Because of this deregulatory environment—not in spite

of it—Optimum Voice is succeeding with customers by meeting their needs, providing value and competing in the marketplace.

91

POLICY

Technological advances in VOIP and related services are quickly overtaking specific regulations based on the legacy network. The pace of these changes will quickly

render inapplicable any very specific rules or classifications based on what is even

current technology. Even what appears to fit today will no longer fit tomorrow.

In this new world, I encourage policymakers to embrace the potential for consumer choice by establishing a broad, deregulatory, national framework that encourages new services and technological advancement. It is important that a new framework be developed that allows consistent state rules that foster growth of IP-based

voice applications and that permits the discipline of choice to ensure protection and

value to consumers.

I commend Congressman Pickering for advancing a forward-looking, deregulatory

legislative approach to VOIP. Of special importance, the legislation establishes the

principle that there must be a predictable, national framework for the development

of these inherently mobile and borderless services that allows providers to respond

to the marketplace, not to government, in designing, pricing, and selling services.

While some states understandably have an interest in VOIP, there must be recognition that clear rules of the road that operate on a national basis are essential for

the service to expand and to offer the kind of choice and value envisioned by the

1996 Telecommunications Act.

In the transition from legacy telephone regulation toward a modern, deregulatory

framework appropriate for the new marketplace, we recognize that a number of existing policies must be rationalized. I commend Chairman Powell and his colleagues

on the Federal Communications Commission for initiating proceedings to address

each of these transitional issues. These include the legacy of access charges and

inter-carrier compensation, and creating new mechanisms for supporting universal

service. The timely resolution of these issues by the Commission or by Congress will

provide much needed certainty to the providers seeking to grow and improve on this

fledgling service.

We also recognize there will continue to be a need to address significant public

safety and security issues. VOIP customers must have ready access to E911 and

emergency services. Law enforcement must have access to Voice over IP applications

to support the nation’s security interests. These targeted policy goals can be

achieved by narrowly tailored regulation or industry commitments without carrying

forward the costly and dated regime of local retail phone regulation from a monopoly era.

CONCLUSION

Mr. Chairman, members of the Committee, we are at the beginning of a realignment of mass-market communications. Internet-based voice applications promise to

give consumers real communications choices. These choices will not be limited to

less expensive versions of POTS—although that, too, is possible—but will include

access to totally new products and services that will remake the entire concept of

voice service. This is an exciting new market for Cablevision and for our customers.

We are proud to be a leader in offering Voice over IP services at the forefront of

this transition and look forward to working with this committee to establish policies

that maximize its potential.

Thank you again for this opportunity and I welcome questions from the panel.

Mr. UPTON. Thank you.

Mr. Vidal?

STATEMENT OF RONALD J. VIDAL

Mr. VIDAL. Thank you, Chairman Upton, Congressman Markey,

members of the subcommittee for inviting me here today to share

my thoughts on Voice over Internet Protocol or VOIP.

I am Ron Vidal, I am the Group Vice President of Emerging Opportunities for Level 3 Communications. Part of my responsibility

is looking into the future for new technologies and services on behalf of our company. But first a bit of background about Level 3

Communications.

Level 3 owns a 23,000 mole fiber optic long haul and metro network spanning both North American and Europe, which we built

92

between 1998 and 2001 at a cost of over $9 billion. Today we are

a Fortune 500 company which operates one of the largest Internet

protocol or IP backbones in the world and we sell our services

wholesale to many of the world’s leading communications and content companies.

We have also been an industry pioneer in softswitch, the core

technology of VOIP. In fact, we hold patents on connecting packets

switch data networks with the legacy public switch telephone network or PSTN.

Over the last 5 years we have carried over 250 billion minutes

over our softswitch platform. Today we offer a full suite of wholesale VOIP services to our business and consumer customers. There

is not a single circuit switch in our entire network.

Now let me turn to the regulation of VOIP. You know, it was not

that long ago that VOIP occupied the fringes of the telecom world.

Recently, however, VOIP has been able to replicate the quality of

the PSTN at lower costs while delivering new features not possible

over the PSTN. Well, why is that?

Well, first we have had 25 years of incredible performance improvements in computing, software and hardware all at affordable

prices. And many of these technologies were invented and developed in districts represented by members of this committee.

Second, and in parallel, the development and worldwide adoption

of the Internet connected those computers in ways unimagined just

decades earlier. Again, a set of technologies largely invented and

developed in the United States. Third, broadband has been rapidly

adopted by businesses and in homes using many different technologies and many different services providers. With residential

broadband adoption at over 20 percent, consumers in nearly every

district represented by this Congress are voting with their checkbooks for the benefits of high speed Internet access.

Bottom line: All things digital are getting better, faster and more

affordable. The fundamental technology building blocks are now in

place to extend those benefits to voice. But the fate of VOIP does

not rest with market forces or technology advances alone. In the

past, all calls were PSTN-to-PSTN. Perhaps in the future all calls

will be IP to IP. But for the foreseeable future we will have two

different networks, each born in a different century connected to

each other with different technologies and with different rules.

At the moment VOIP service providers and their customers continue to live in a kind of regulatory no-man’s-land with much uncertainty. Fortunately, many members of this committee and the

House recognize this and are acting to clarify the VOIP regulatory

through bills recently introduced by Congressman Pickering,

Stearns and Boucher. As you consider a course of action, I would

urge you to keep three points in mind.

Point one, there is a strong need for Federal preemption. In the

absence of clear Federal rules individual State PUCs have begun

issuing conflicting rulings on VOIP. Congress needs to occupy the

field on this important issue. Recently Commissioner Susan Kennedy of the California PUC and Commissioner Charles Davidson of

the Florida PSC have both asked FCC Chairman Michael Powell

to have the Federal Government preempt State jurisdiction no

VOIP.

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Point two: Legislate it with a light hand. Congress should not

force VOIP into outmoded laws and regulations devised for the

PSTN which were created at different times in history and largely

to protect consumers from monopolies. In particular, the existing

intercarrier compensation regime creates irrational economic incentives that distort the market. A free market economic model must

be put in place.

Point three: VOIP service providers have an obligation to support

social policies that the government has identified is in the public

interest. This includes making sure that IP networks are compliant

with industry standards for CELEA, E911 and access for the disabled, and that they contribute appropriately to Universal Service

Funding. It is also appropriate for government to enact rules for

VOIP services providers in these important areas.

With the history of computing and the Internet as a guide, extraordinary innovations are on the horizon for voice over IP. For

example, we have a vision for how VOIP can improve E911 in ways

that the PSTN simply cannot match.

Furthermore, VOIP shows promise as a killer application that

will drive broadband penetration in this country. American companies, entrepreneurs and our capital markets have always been in

the vanguard of technology innovation. Today they are again poised

to lead the way in VOIP. But to be successful, however, these

innovators and investors require a stable regulatory environment.

Remember, our leadership in computing and the Internet largely

developed with little government regulation. I urge you to treat

broadband and VOIP in much the same way. Congress has a real

opportunity today to create an environment that will extend the

country’s long history of innovation into VOIP.

With that, I would be happy to answer any questions that you

have, but thank you for the opportunity.

[The prepared statement of Ronald J. Vidal follows:]

PREPARED STATEMENT OF RON VIDAL, GROUP VICE PRESIDENT, EMERGING

OPPORTUNITIES, LEVEL 3 COMMUNICATIONS, LLC

Thank you, Chairman Upton and members of the subcommittee for inviting me

here today to share my thoughts on Voice over Internet Protocol (VOIP) services.

First I’d like to provide some background about our company. Level 3 owns a

23,000-mile fiber-optic long haul and metro network spanning both North America

and Europe, which we built between 1998 and 2001 at a cost of $9 billion. Today

it is one of the largest Internet backbones in the world.

Level 3 is less well known than some of the other telecom service providers here

today. Besides being a young company, we sell our services on a wholesale basis to

large communications and content companies, and do not sell directly to residential

or business customers.

Today, we are a Fortune 500 company and our customers include:

• The ten largest communications carriers in the world;

• The nation’s four largest local telephone companies;

• The nation’s top 10 Internet Service Providers (ISPs);

• The six largest cable companies in the U.S.;

• Wireless companies serving more than 140 million U.S. subscribers;

• The 10 largest carriers in Europe;

• And many of the world’s leading satellite companies, Internet content providers,

media and entertainment companies, research and academic institutions, and

government agencies.

Level 3 has been an industry pioneer in softswitch, the core technology of VOIP.

In fact, we hold patents on a system and method for communicating voice and data

over a packet-switched network that is adapted to coexist and communicate with a

legacy Public switched Telecommunications Network (PSTN). Over the last five

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years, we have carried over 250 billion minutes of dial-up traffic over our softswitch

platform. We introduced the world’s first carrier-grade, VOIP long distance service

back in 1999, and today we offer a full suite of business, consumer and wholesale

Voice-over-IP services to our customers. There is not a single circuit switch in our

network.

Now let me turn to the regulation of VOIP.

It wasn’t long ago that VOIP occupied the fringes of the telecom world—as a niche

application of interest only to hard-core technologists.

Recently, however, VOIP has been able to replicate the quality of the public

switched telephone network at far lower cost, while delivering new features and

functionality not possible over older, legacy network systems.

Why is that?

First, we’ve had 25 years of incredible performance improvements in computers,

software and hardware, all at affordable prices. Many of those technologies were invented and developed in districts represented by members of this Committee.

Second, and in parallel, the development and worldwide adoption of the Internet

connected those computers in ways unimagined just decades earlier. Again, a set of

technologies largely invented and developed in the United States.

Third, broadband has been rapidly adopted in businesses and homes, using many

different technologies and many different service providers. With residential

broadband adoption at over 20 percent, consumers in nearly every district represented by this Congress are voting with their checkbooks for the benefits of high

speed Internet access.

Bottom line: All things digital are getting better, faster and more affordable, from

word processing to entertainment. The fundamental technology building blocks are

in now in place to extend those benefits to voice.

But the fate of Voice over IP does not rest with market forces or technology advancements alone. As most members of Congress know, government regulators will

exercise significant influence over how VOIP technologies are deployed. I’m confident that technology questions will be answered by the market, but many remaining questions reside in the regulatory arena.

Today, there are misguided calls from some to regulate VOIP with the same policies that were developed for the PSTN, as a utility business. Others understand that

VOIP requires a new approach more appropriate to the age of Internet Protocol, as

a technology business. Twenty years ago, all calls were PSTN-PSTN. Perhaps 20

years from now, all calls will be IP-IP. But, for the foreseeable future, we will have

two different networks connected to each other with different rules. As of yet, however, VOIP service providers, and their customers, continue to live in a kind of regulatory No Man’s Land, with no clear direction from regulators.

This regulatory uncertainty, if it is prolonged, may undermine VOIP deployment

in this country. Fortunately, many members of this committee and the House recognize this, and are acting to clarify the VOIP regulatory framework through bills like

the one recently introduced by Congressman Chip Pickering.

As you consider a course of action, I would urge you to keep three points in mind:

There’s a strong need for federal pre-emption. In the absence of clear federal rules,

individual states PUCs have been begun issuing conflicting rulings on Voice

over IP. Congress needs to occupy the field on this important issue. Recently,

Commissioner Susan Kennedy of the California PUC and Commissioner Charles

Davidson of Florida PSC have both asked FCC Chairman Michael Powell to

have the federal government pre-empt state jurisdiction on VOIP.

Legislate with a light-hand. Congress should not force-fit VOIP into outmoded regulatory constructs devised for the PSTN, at a different time in history and to protect consumers from monopolies. In particular, the existing inter-carrier compensation regime creates irrational economic incentives that distort the market.

In order to truly maximize the benefits of VOIP, a free-market economic model

must be put in place.

VOIP service providers have an obligation to support social policies that the government has identified as in the public interest. This includes making sure that

IP networks are compliant with industry standards for CALEA, E911 and access for the disabled, and that they contribute appropriately to Universal Service funding. It’s entirely appropriate for government to enact rules for VOIP

service providers in these important areas.

With the history of computing and the Internet as a guide, extraordinary innovations are on the horizon for VOIP. For example, we have a vision for how VOIP can

improve E-911 by providing first responders with more accurate information as incidents develop, in ways that the PSTN simply can’t match. Furthermore, VOIP

shows promise as a ‘‘killer app’’ that will drive broadband penetration by enhancing

the consumer value of broadband Internet service.

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American companies, entrepreneurs and our capital markets have always been in

the vanguard of technology innovation. Today, they are again poised to lead the way

in VOIP, with new technologies and applications that will fundamentally change

how we communicate. To be successful, however, these innovators and investors require a stable regulatory environment. Remember, our leadership in computers,

software and the Internet largely developed with little government regulation. I

urge you to treat broadband and VOIP in much the same way. Congress has a real

opportunity today to help foster an environment that will ensure the country’s long

history of innovation continues with VOIP.

With that, I’d be happy to answer any questions you might have. Thank you.

Mr. UPTON. Well thank you very much.

I would like to say at the outset we are very appreciative of the

member’s attention, and I think we have had 25 members for opening statements and for much of the testimony. I am also very

pleased that I followed the advice of Mr. Markey when I took the

helm of this subcommittee Mr. Barton, that we have only one

panel, not two. So I appreciate that.

A couple of questions. As Mr. Carlisle mentioned, the FCC’s rulemaking asked the question as to whether the economic common

carrier regulations are relevant for VOIP providers. And I would

like to know if, maybe a yes, no, if there is a maybe perhaps. But

we will go right down the row, Mr. Citron, do you think that common carrier regulations are relevant for VOIP provider?

Mr. CITRON. Absolutely not.

Mr. UPTON. Ms. Greene?

Ms. GREENE. Most of the common carrier regulations would not

be. There are some very clear concerns about 911, USF, several

others that have been mentioned.

Mr. UPTON. Mr. Jensen?

Mr. JENSEN. Common carrier rules probably are not in their entirety applicable. I think that is one of the complicating factors that

we have and we need to work carefully on this through the future.

Mr. UPTON. Mr. Kirkland? You had better hit that mike button.

Mr. KIRKLAND. Sorry. Turned it off.

We believe that common carrier regulations should not apply to

the service aspect of VOIP services. It is important, though, to distinguish that from the regulation of the underlying facilities over

which they are carried. And we do believe there should continue to

be obligations to unbundle facilities and provide access to competitors such as Covad.

Mr. UPTON. Ms. Martine?

Ms. MARTINE. We believe it should not.

Mr. UPTON. Mr. Nelson?

Mr. NELSON. Yes. I would agree with Ms. Greene that there are

certain aspects of common carrier regulations that might apply, but

for the most part we would support full scale common carrier regulations.

Mr. UPTON. Mr. Rutledge?

Mr. RUTLEDGE. We believe they should not apply.

Mr. UPTON. Mr. Vidal?

Mr. VIDAL. We believe they should not apply.

Mr. UPTON. Now, second question is is the regulatory uncertainty

at both the State and the Federal level at all impeded the roll out

of your VOIP services as you have looked at them.

Mr. Citron?

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Mr. CITRON. Yes, it has. The clear uncertainty has made difficult

for capital to be raised not only for service buyers like ourselves to

deploy services, but also for the funding of the hundreds of different companies that will develop the technology and the equipment that goes into building these new advanced networks.

Furthermore, as we get attacked State by State, recently in New

York and formerly in Minnesota and soon to be potentially from

California, this gives us second thoughts about how we want to deploy our networks and where we should deploy those assets.

Mr. UPTON. Let me just ask as a follow up to that then part of

your answer, Mr. Citron, if in fact it has impeded the unveiling of

VOIP, what additional resources do you think you would need to

deal with I guess you would have to say 51 different regulatory

groups, 52 if you include the Federal Government.

Mr. CITRON. Yes. It’s the opposite problem, is that right now we

spend an inordinate amount of money in resources both internally

and externally dealing with the regulatory landscape where for a

company of our nature where a year ago we had 100 employees sit

there and go with 51 jurisdiction PSCs, very difficult for us in

order to allow us the freedom to really innovate and deploy resources in getting the service in the hands of Americans who really

do need a national framework that provides clarity.

Mr. UPTON. Ms. Greene?

Ms. GREENE. Well, I feel Mr. Citron’s pain here. We, too, believe

that the lack of clarity has clouded our ability to invest at

BellSouth. We need to have a national framework. We also need to

have relief from computer inquiry rules which make us spend an

inordinate amount of time deciding where we need to place investment, how that investment will be treated, how we need to classify,

if there’s anything we can do to protect from regulation. And then

in addition, we need to have clarify and recognition of the fact that

the broadband market is deeply competitive even at the network

level and there needs to be a different hand in regulation.

Mr. UPTON. Mr. Jensen?

Mr. JENSEN. I think our challenge in ruling out the new services

is more economic than anything else. We deal in one State. We

have also had to up our regulatory and legislative representation,

but we find it more on the Federal level than we do on the State

level. We find ourselves coming to Washington much more than we

did in the past, and that is a very costly trip for us. Our commission, on the other hand, understands what it is our customers need

and to the extent that they can help us with the economics of rural

America, they have been very helpful in this regard.

Mr. UPTON. Mr. Kirkland?

Mr. KIRKLAND. Yes. Covad uses a fairly limited set of unbundled

elements including T1s and others in access to loops. And I think

the fundamental uncertainty with the court decision around the

disruption of that unbundling regime and the vacuum now does

create uncertainty and inhibits our ability to invest. So we really

look forward to the FCC, hopefully, working very hard to ensure

a smooth transition with respect to fallout. But anytime you

change the rules, you know, we raised private capital. We raised

$125 million dollars to roll out VOIP, and we would like to know

the ground rules that we are operating under both with respect to

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regulation of VOIP itself, but also in the telecom regulatory framework in general.

Mr. UPTON. Ms. Martine?

Ms. MARTINE. Yes. We actually have been concerned about this

because we think the Internet is not just a national opportunity for

us, it is a global opportunity and uncertainty requires us to really

establish a principle by which we invest our limited capital. So in

some cases we have found the global reaction to our VOIP trials

in some selective countries more open and predictable than we

have seen so far in the U.S. But we definitely have a duty to our

shareholders to ensure we invest in the most profitable opportunities for payback and we need to make certain we have servitude

here.

Mr. NELSON. Yes. I would take issue with the fact that we may

have 51 different forms of regulatory framework here. We really

have just two models here. We have a lot of States who don’t do

anything on VOIP, who have made a decision not to regulate.

Other States who have entertained a very light touch regulation focusing on consumer protection issues and 911. And I think it is important that certain cable companies have come in and asked for

certificates. It is not a very onerous process, not very costly and the

States can then have the discretion to decide how much regulation

is warranted.

Mr. UPTON. Mr. Rutledge?

Mr. RUTLEDGE. As we made the investments in our cable system

and expanded the capacity of those networks, we envisioned that

we would have opportunities to involve ourselves in new telecommunication businesses. And, actually, making it work technically has been fairly simple.

The biggest issue we have, and we have been rolling out as fast

as we can go, is that we really do not know what our costs our.

And so we have a risk from a regulatory perspective that we are

not sure of and cannot really quantify. And as that compounds,

that creates issues for us.

So I think we need to go very quickly here and eliminate the risk

of the marketplace that is caused by the regulatory uncertainty.

Mr. UPTON. Mr. Vidal?

Mr. VIDAL. Yes. I would just add anytime you are going to roll

out a new product or service you have to ask yourself a few basic

questions, such as what is it; how much does it cost to produce and

how much can you sell it for in the marketplace. And whereas you

can see a set of technologies available today that you can purchase

and implement yourself, put them in a network, if it is strictly an

Internet application such as email or supporting MP3 or any other

myriad of Internet applications, that is a very straightforward answer to a fairly straightforward question. If, however, the application turns out to be voice, then you have to say what is going to

cost for me to complete this set of packets over my network? You

don’t have an idea what your costs are, therefore it is difficult to

figure out if you have an ongoing liability or not and what you

should charge your customers for.

And part of this is also the fact that we need to interconnect

these two disparate networks, as I mentioned in my testimony,

that have completely different characteristics. And so we connect in

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with the public switch telephone network, in our case, to 93 percent of the United States population also. That is also a fairly intensive activity in terms of dealing with every different telephone

company and in front of every different State public utility commission. And so we would echo the fact that you do not know what

your costs are and it is a laborious process to do so.

Mr. UPTON. Ms. Eshoo?

Ms. ESHOO. Thank you, again, Mr. Chairman for holding this

hearing. And to all of the witnesses, thank you for your testimony.

I have four questions. The first one, and I am sure you have

given thought to this but I do not know, I would like to hear what

your thinking in preparation for this: In case of an emergency the

telephone lines do not normally go down but the Internet can.

What is the backup for voice over the Internet?

My second question is, and I think this is directed more to Covad

and to AT&T, you are obviously bullish on voice over the Internet

and you are moving quickly to make it available. Can you explain

to what is left of the committee here today why you continue to

need access to unbundled network elements?

My third question is to the FCC, and that is as we move toward

a packet switched model for voice communications does not the contents of the packet become less and less relevant? I mean when do

we get to the point where an email and a phone call are given

equal treatment and subject to similar regulations?

And my last question, I think to Covad, is what are the alternatives to reach the last mile for most residential customers? If you

are unable to negotiate that with an ILEC, what can you do to provide service?

So those are my four questions, and let us make time for whomever to answer them. Whoever would like to start on the whole

issue of an emergency and voice over the Internet.

Mr. CITRON. Sure. I will take the first one.

First, one point in fact, POTS lines do go down, and they go

down and 911 does not work.

Point two in fact, PSAPs, people who operate 911 response centers, do go down. We all remember New York City lost their entire

911 operation for almost an entire day due to a technical malfunction.

Third point. The Internet itself was designed in a manor in

which for single point to failure. In theory, and in practicality, the

Internet is much more resilient to any kind of disaster or problem

which allow for the seamless of rerouting of packets in real time.

Now, I will admit the last mile of these networks are all——

Ms. ESHOO. But what do you do about electricity?

Mr. CITRON. Electricity is a great question.

Ms. ESHOO. Well, that is my question.

Mr. CITRON. Sure. No. In the area of electricity, our customers

who have that concern will use a battery backup. These battery

backups are available two ways. One, increasingly imbedded in the

physical devices and, two, also stand alone units that can provide

an easily 8 hours worth of standby power in the event of a power

outage.

Ms. ESHOO. Does anyone else want to respond briefly—because

I have three other questions.

99

Mr. RUTLEDGE. At Cablevision we offer a similar battery backup

for modems, but we also—you have to consider our cable plant

itself is powered by the power grid. So if power goes out, we have

built battery backup into our cable system at all the power supply

locations that allows 4 hours of standby power.

The other thing that we have done, though, by upgrading our

networks we have made them a lot more reliable. And we explain

to our customers the kind of reliability we have built and we have

done that through our high speed access business. So when we sell

a voice over IP products we explain to customers that they are getting the same kind of reliability they get on their high speed access

service. So they have a way of judging what they are buying. And

so we think there is a marketplace expectation. Many customers

also have cell phones today, in fact the vast majority of our customers have cell phones with similar E911 capabilities so that——

Ms. ESHOO. I wish there were more.

Mr. RUTLEDGE. [continuing] if there is a failure, it can work in.

Ms. ESHOO. Being very familiar with it.

Ms. MARTINE. I would like to support Mr. Rutledge’s comments.

Ms. ESHOO. Yes.

Ms. MARTINE. We have seen also with customers full disclosure

matters. Clearly with the amount of customers today that have

broadband and in fact have taken advantage of web services it is

very clear about 911 capability. We have actually marked it on the

TA so people are fully aware of that.

Most customers who are early adopters and very technologically

savvy have suggested, as Mr. Rutledge suggested as well, they

have backup services with mobility services if their house phone

does not work and they happen to have a VOIP phone as well, they

go to their car if their cell phone is not working and charge it up.

So that has not been barrier.

But again, we have to remember this is not a service that we expect all 100 million households in America to adopt overnight. This

will take time and people will self-select who are willing to deal

with those issues.

Ms. ESHOO. Yes. I think it is a good point to raise, though, given

our heightened sensibilities about emergencies now.

Maybe we can get to the other three questions.

Mr. KIRKLAND. Sure. Maybe I’ll take since you have a question

in there for us.

Ms. ESHOO. Okay. Be as brief as possible.

Mr. KIRKLAND. Yes.

With respect to the emergency service issue, again this is the importance of facilities-based competition. Covad manages its own

network, so the Internet goes down, our network goes down.

Whereas, I think where you are relying on the facilities of a second

provider, you are not in a position to control that critical input. So

having multiple people doing that.

With respect to access to UNIs, the 1996 Act set forth a very

flexible framework to manage the transition from local monopoly to

competition. That transition is still at a very early stage, just like

VOIP is at a very early stage.

We serve small businesses who often have only one option, which

is the phone company, and we provide those small businesses with

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an alternative. There are still consumers out there who do not have

access to multiple alternatives. So, until there is full competition

unbundling the framework of an Act is still critical.

We are looking at things like wireless, those technologies are

available in very, very small percentages of the country. So there

is really not an alternative to that ubiquitous phone network at

this point.

Mr. STEARNS [presiding]. The time of the gentlelady has expired.

Ms. ESHOO. I did not make an opening statement.

Mr. STEARNS. I think we gave the extra time to you, as I understand. Did we do that?

We do not have you recorded as being here when the opening

statement—it did not record you with an extra 3 minutes. That is

what the staff shows.

Chairman BARTON. Well, Mr. Chairman, could I ask unanimous

consent that the gentlelady from California have 2 additional minutes.

Mr. STEARNS. Yes. She has asked four questions, Mr. Chairman,

and I am just thinking if all four questions are answered, it will

be well over. And I would be glad to do what you suggest. I am

just trying to in deference to all the other members that are here

that if she has four questions, that we should try—and those questions can be submitted for the record to her and not necessarily

take the entire time to answer those four questions. But if that is

your——

Chairman BARTON. She should not ask such hard questions, see.

Mr. STEARNS. Yes. Yes. So——

Ms. ESHOO. By the time we comment on this we will use up another 3 minutes. So it is up to you gentlemen.

Mr. STEARNS. Mr. Chairman, what is your unanimous——

Chairman BARTON. I would yield to whatever the——

Mr. STEARNS. Well, I would say at this point the other three remaining questions that I suggest the panel submit those to us for

the answer, and possibly we might have a second round.

With that, I would go to the chairman.

Chairman BARTON. Well, I do not want to cutoff the gentlelady.

I would be happy to yield my time to the gentlelady from California.

Mr. STEARNS. The gentleman yields his time.

Ms. ESHOO. Mr. Chairman, you are enormously generous.

And I would just ask that two be answered in writing and that

the gentleman from the FCC just briefly comment on the question

to him, and then I will yield back.

Thank you very, very much, Chairman Barton.

Mr. CARLISLE. I can do so very briefly.

You asked when content of a packet becomes irrelevant. We are

already there. That is the central issue in why this is an important

and controversial debate.

You can look at VOIP from the point of view of telephony and

say it looks like what a telephone does, or you can look at it from

the point of the Internet and say it is one bit stream just like any

other bit stream on the Internet and why are we taking that one

bit stream out and treating it differently from email and file sharing and web browsing?

101

We are already there.

Ms. ESHOO. Thank you.

Thanks again.

Mr. STEARNS. I thank the gentlelady.

And the chairman is recognized for a remaining 4 minutes.

Chairman BARTON. I did have four questions, but I am just going

to put one of them on the record and if we have time, I will get

the others.

I am going to go to what I call the $64,000 question. Does everybody on this panel support a Federal bill that would preempt State

regulation of VOIP? And if somebody says no, why not?

Mr. Nelson?

Mr. NELSON. Yes, Mr. Chairman. My testimony indicates that we

believe there are certain meaningful roles the States can play in

this debate, again under a light touch regulatory policy but working in cooperation with the Federal regulators as well. Such things

as I have indicated, the enforcement of 911 provisions, the consumer protection provisions that we have outlined in our testimony

and the interconnections agreements that have to be made between

right now wireless companies and wireline companies, between

CELECs and ILECs. Those same types of agreements can be arbitrated between VOIP providers and traditional wireline companies

under the auspices of State commissions.

Chairman BARTON. Okay. Other than the person who regulates

the State PUCs, does anybody oppose a Federal bill?

Mr. JENSEN. Mr. Chairman, I do not know that I would oppose

a Federal bill if it were in concert with allowing input from the

States.

I come from Nebraska, and we were required to provide equal access a number of years ago, we had long distance providers crop

up faster than the dot.com mania that went around. And there

were hearings for certification and rural setup. And as far as I

know, we had one long distance company that locked its doors over

1 weekend and just abandoned the customers that they had signed

up. I think that is a pretty good record when you consider all the

number of people that were there.

I think our State commissions have the opportunity to know

what my customers much more quickly than perhaps in Washington, DC. And our customers would have much greater access

than they would having to come to Washington to work on quality

of service, universal service and the other myriad of——

Chairman BARTON. Well, I think any Federal bill that passes is

going to have adequate input from State regulatory authorities.

But ultimately there has to be one final arbitrator, and it just

seems to me self-evident that a service is not only national and

interstate, but international, it seems to be an absolute no-brainer

that there should be a Federal statute.

Now I understand what the gentleman is saying and I understand what you are saying, but when we created the existing telephone system, I mean there was obviously it was done on a monopolistic model based on local service and State service with some

interstate service. I am old enough to remember when somebody

said you had a long distance phone call, that was a big deal and

you went right to the phone because you are getting charged a

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$1.00 or something and it must be important; somebody had died

or been born or something had happened because you just did not

make long distance calls other than that.

Mr. JENSEN. One statistic that I might bring to your attention,

and if I have it correctly it is subject to check, but 73 percent of

our customers do not make an interstate phone call.

Chairman BARTON. Yes.

Mr. JENSEN. And so there is a lot of intrastate that goes on in

our States, and I believe the State commissioners are useful in determining what should be happening there.

Chairman BARTON. My last question, I will put the others in the

record, assuming that there is going to be a Federal bill that preempts State regulation, do we need to put a definition in the bill

explicitly certifying in which cases these services are FCC jurisdictional? In other words, do we need to put a definition that defines

an information service if it is purely a local loop, purely within a

physical headquarters location or that that is not jurisdictional but

if it goes across State boundaries or between buildings, or between

different entities. Do we need to define what is jurisdictional if we

pass a Federal statute or is that not necessary? Who wants to answer that one?

You want to think about it? I want to ask that they submit—get

their lawyers to give them a credible answer to put that in the

record, Mr. Chairman. And I have several other questions I will

submit for the record.

And I yield back.

Mr. STEARNS. Thank you, Chairman.

Mr. Boucher?

Mr. BOUCHER. Thank you very much, Mr. Chairman. And I also

want to thank the witnesses for taking their time today to educate

us with respect their views on this very important matter.

I think it is has become increasingly clear that we are going to

legislate with regard to Internet-based communication services in

the next Congress. And I have perceived from your testimony basic

anticipation of that legislation. And so I have several questions

that are directed toward what the various elements of that legislative approach should be.

I think that in answer to Mr. Barton’s question and to some of

the previous questions including those of Ms. Eshoo, you have commented on whether or not there should be exclusive Federal authority. You have probably also commented to some extent on the

need for basic consumer protection regulation. I heard Mr. Nelson

comment on that.

And by the way, Mr. Nelson, the Stearns-Boucher Bill does leave

open the opportunity for basic consumer protection regulation. That

certainly is our intent.

So let me start by asking three basic questions, and you can

make notes on these if you would like, and I appreciate your response to these general principles and whether or not you think a

bill should contain them.

First of all, would you agree that we need a broad framework

that encompasses all Internet-based communications, not just

VOIP but a broader framework that, for example, would encompass

video-based communications when the services that accommodate

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that emerge in the future. That way we would not have to come

back and legislate again and again every time there is a new Internet-based more sophisticated and capable Internet application.

As a second matter, would you agree that we should clearly say

that these advanced Internet-based communication services are

neither information services nor telecommunication services so that

we make a clean break from the current regulatory regime into

which existing services are required to fit?

And then third, would you agree that we should treat the

offerors of all of these advanced services equally so that a cable

service that is identical to a telephone service does not receive

treatment from a regulatory standpoint that is different from that

which the telephone services receives? Should we declare regulatory parity and neutrality with respect to all broadband platforms

offering advanced communication services?

I have some other questions which I will also submit for the

record, but those are the three that I would quickly like to have

your responses to. And please be as brief as you can.

Mr. Carlisle, would you like to begin?

Mr. CARLISLE. Certainly. I would agree first that we should be

looking at a broad framework again out of administrative efficiency

if nothing else. The IP-enabled services NPRM was written deliberately to have a broad scope so once we issue an order, when

somebody shows up with video and voice over IP we do not have

to go back and formulate an entirely new regulatory system.

So a broad scope makes sense, although we have to be concerned

about making sure that we do not then fade over into unintentionally regulating vast other portions of the Internet that have never

been subject to regulation and nobody reasonably would argue that

they should be brought into any regulatory regime.

Second, should we say they are neither information or telecom

services and make a clean break? The NPRM raises these questions, and I think under our current rules there may be flavors of

VOIP that clearly could be considered information services. I think

the larger question, though, is whether we want to make a clean

break.

In my written testimony I make the statement that I believe we

should not be getting trapped into the definitional fight as opposed

to figuring out what kind of world we actually want to live in for

these services. And that would argue for a more sophisticated approach that allows a higher level of nuance to be applied to these

services.

You may not want to say everything is a telecommunication service or everything is an information service. You may want to acknowledge there are different flavors.

And finally, should we treat all providers equally? I think there

are very strong arguments for regulatory parity between industry

actors that are in a similar positions. If you have two actors who

are investing hundreds of millions if not billions of dollars in infrastructure, there may be very good arguments to say treat them the

same, otherwise the regulation is driving investment in a specific

direction.

Mr. BOUCHER. Thank you, Mr. Carlisle. I think we are going to

move along given the time.

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Mr. Citron?

Mr. CITRON. Thank you. One, yes, we do agree that there needs

to be a broad framework that gives us all application that live

above the physical layer.

I cannot give a comment as to whether we need to make a clean

break from a telecom service or information service what is clear

is it is definitely not a telecom service.

On the final point, regulatory parity. That is a very difficult

question as you echo Mr. Carlisle’s comments. Clearly, we have to

recognize that voice over OP is not the same as wireline, and thus

there never can be regulatory parity. Much in the same way, the

wireline and wireless networks are not the same, and thus there

is no regulatory parity there either. But within inside anyone in

the industry, VOIP players against VOIP players, then clearly regulatory parity should exist.

Mr. BOUCHER. Thank you.

Ms. Greene?

Ms. GREENE. Yes, yes and yes.

Mr. BOUCHER. Thank you, Ms. Greene. That is the kind of answer I was looking for. You get the gold star.

Ms. GREENE. Thank you.

Mr. BOUCHER. Mr. Jensen?

Mr. JENSEN. I concur with Ms. Greene.

Mr. BOUCHER. Wonderful. Can we move along? Thank you very

much.

Mr. Kirkland?

Mr. KIRKLAND. Yes, yes and it depends.

Mr. BOUCHER. Well, elaborate on depends just briefly.

Mr. KIRKLAND. Yes. I think, again, the distinction is to the extent

people are providing like services, if BellSouth is providing the

same service as Covad, as Vonage, then clearly regulatory parity

should apply. I just think we need to be very careful about identifying situations in which market power still exists, people do not

have alternative facilities. And the fact that those facilities may

carry traffic that is IP or is voice over IP does not necessarily

change the equation on market power——

Mr. BOUCHER. I understand. You want unbundling and interconnection to meet that. I understand it.

Ms. Martine?

Ms. MARTINE. Yes, but it is interesting VOIP is something that

is being the catalyst to ask this question. There are many other applications on the Internet that are not regulated.

Mr. BOUCHER. So that is three yeses or one yes?

Ms. MARTINE. No, that is just the first one.

Mr. BOUCHER. I’m sorry.

Ms. MARTINE. The second one is yes.

And the third one I think we have not had a lot of time to digest

your bill, but I think there are some issues that I support Mr.

Kirkland’s points with regard to IP UEL and facilities-based competition. We can’t have the RBOCs being advantaged and the others not capable of supporting.

Mr. BOUCHER. Thank you.

Mr. Nelson?

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Mr. NELSON. Yes. I would say yes, no and yes. And I can explain

the no.

It is our position that many VOIP services should be classified

as telecom services, such as Ms. Martine’s service was classified by

the FCC earlier this year. And it does not make any difference I

think whether the digital conversation occurs in the network or at

the customer location, as with Mr. Citron’s product. But, having

said that, there should be some forbearance because of the nature

of this technology so that the full scale of common carrier regulation, as I indicated earlier, should not be applied.

Mr. BOUCHER. Thank you.

Mr. Rutledge?

Mr. RUTLEDGE. I think the answer to the first question is probably no that I think that most communications, most video will ultimately end up in an IP format. And so I just think that there is

a opportunity now to get this nascent business off the ground with

VOIP voice communications. But to take all IP and subject it to a

new paradigm, I am not sure where that would go.

The classification question I am not sure matters.

And the last question, VOIP is not a traditional voice service and

not a legacy telecom service. And we think it is a completely different product. And so if we were doing is lumped under the kind

of treatment that currently exists to traditional phone companies,

that would not be good.

Mr. BOUCHER. Okay. Thank you very much.

Mr. Vidal?

Mr. VIDAL. Yes. On the first no.

On the second we need to see a bit more details.

And on the third, regulatory parity presumes a parity amongst

size, breadth scope of offers and I am not sure that is exactly the

situation that——

Mr. BOUCHER. Yes. Let me say, Mr. Chairman, I appreciate your

indulgence. And I am not going to ask another question in view of

the time.

But, Mr. Vidal, I am surprised by your answer to the first one,

and I would like to have an exchange with you——

Mr. VIDAL. Certainly.

Mr. BOUCHER. [continuing] subsequentially either verbally or in

writing as to why you would say. That really does surprise me.

Mr. VIDAL. Certainly.

Mr. BOUCHER. Thanks to each of you. And thank you, Mr. Chairman.

Mr. STEARNS. The gentleman’s time has expired.

Mr. Shimkus?

Mr. SHIMKUS. Thank you, Mr. Chairman.

Two questions that I will just put out in the open and for submission, because this line of questions has raised a question in my

mind and a point I want to discuss.

Would you respond back to the committee who should be responsible to make sure that Voice over Internet Protocol service also includes E911 service? Is that something the State commissions, the

FCC or the industry have to tackle? And it is listed on the questionnaire E911, but E stands for enhanced, which means cellular.

We are eventually going to go to laptops, probably voice over IP.

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So if you have got a laptop somewhere accessing enhanced 911, I

mean do you have to have a GPS chip?

This is a great hearing because of all the different aspects.

So answer that for me if you can.

And the second question is can you tell what you are doing to

make sure that consumers who use Voice over Internet Protocol

service also can access 911, E911 services? If Voice over Internet

Protocol services not today capable of supporting enhanced 911,

when you believe you believe you will have E911 capable service?

Now, the question that has stirred my thoughts in this is a whole

facilities-based discussion, which reminded me of other facilitybased debates that we have had here, whether it was Tauzin-Dingell, my facilities-based discussion in telecommunications after visiting with Chairman Upton at the Verizon building after September 11. The Verizon building is right across the World Trade

Towers, which had great damage. Verizon, obviously being a big

company, could get that up and running relatively quick. Talks

about entrenched regional Bells being able to reconnect where

when you have what is not facility-based, how does a competitor

who is using parts of the system get up?

So, the first question, and I know that Mr. Kirkland has said he

is a facility-based operation; would anyone else claim to be a facilities-based operation by whatever definition you want to define

that? And you can help education us on that?

Yes?

Mr. CITRON. Yes. Vonage would be considered a facilities-based

operation with the perspective that we deploy network assets into

the network but acts as bridges, both to bridge the current IP network to the legacy PSTN network, to also bridge to other IP networks and of course finally to also bridge to next generation wireless networks.

Mr. RUTLEDGE. Cablevision is also a different kind of facilitiesbased network in a sense that we have our own plant, our own

wire that goes to every customer we serve. And it is complete and

differentiated from the public switch network. So it is truly a facilities-based network.

Mr. SHIMKUS. So that is why your answers to some of these questions deal with if it is the regulation aspects under traditional

phone regulation would not in your opinion be appropriate because

you are not using the regular phone systems?

Mr. RUTLEDGE. That is correct. Now, we actually terminate calls

to the public switching network——

Mr. SHIMKUS. Right.

Mr. RUTLEDGE. [continuing] through a CLEC that we happen to

own called Lightpath, which also provides redundancy to the public

switch network to big companies in New York, for instance, that

want redundant routing in case there is an emergency of some

kind. So we are actually in the business of selling redundancy as

a communications business.

But separate from that we have a cable television network which

is also capable of this IP communication system. And so we are

selling IP communications on a cable network which is separate

and distinct from the public switch network, which we do connect

to, though.

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Mr. VIDAL. If I may, I think it is worthwhile so we are all on the

same page here, for what would be a consensus of facilities-based,

right? Is it facilities-based in what used to be called the local loop

or in the local access system, is it facilities-based in the long haul,

is it facilities-based in the international, is it facilities-based inside

the premise on each end?

In our particular case our facilities are literally about 36 inches

deep across almost 23,000 miles of property in North America and

Europe. I mean, we would consider that to be facilities-based. At

some point in time there is going to be a facility there. It depends

on who owns it, who has control of it and/or who is reselling it.

So I think maybe a definition or at least a consistent definition

might be useful.

Mr. SHIMKUS. Just confirms my statement that I always make

that the more you learn, the more you realize you do not know. It

is a great job of being a Member of Congress.

Thank you.

Mr. STEARNS. The gentleman’s time has expired.

The gentleman from Florida, Mr. Davis?

Mr. DAVIS. Thank you, Mr. Chairman.

My first question is for those of you who think that the Congress

needs to act urgently to preempt State regulation. My question is

which of you think that Congress needs to proceed urgently to preempt State regulation and if so, why do you think that is urgent?

Mr. RUTLEDGE. Cablevision thinks that you should act urgently

because we are rapidly growing our business by thousands of customers per week in our service area and we really do not know

what the regulatory treatment will be, what our costs are really

going to be. You know, we are making estimates but we have no

assurance that the cost estimates that we put in our business models are in fact correct. And as that base of customers gets bigger

and bigger, the risk to us gets greater and greater. So we would

like certainly.

Another thing is that we operate in the New York metropolitan

area, which happens to be 3 States. So we have one television marketplace, one community with three different States that have potential regulatory authority and yet we are selling a single product

and servicing a single product across that entire service area. And

so we think that in order to get the same quality and the same

pricing across our footprint, that you urgently need to preempt in

this particular limited way for VOIP.

Ms. MARTINE. I would like to support that position. In addition

to the comments made about the 3 States, many of you know VOIP

is a mobile service so you could sign up for service in New York

and move to Florida and keep your phone number. We need to

have Federal regulation so that you do not have Florida regulating

one way if you happen to live there then and a different way when

you signed up for the service in New York. So it is very critical that

there is national policy on this so you do not subject yourself to

customer confusion and dissatisfaction saying I do not understand

these are the rules under which I bought the service, why is not

changing. And one of the features is mobility in addition to unlimited local and long distance service.

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Mr. CITRON. I would like to echo the statements of Ms. Martine

and Mr. Rutledge. I would also like to add that Vonage operates

and has customers in all 50 States inside the United States. And

from our perspective, we have already been attacked by a number

of State regulators to try and take voice over IP and put it into

common carrier regulation. Of course, we have successfully fended

off all such attacks to date but at a price, and a very expensive

price that causes us to rethink which markets we are going to go

ahead and deploy assets in.

Ms. GREENE. Well, I do not disagree with anything that the previous witnesses have said in response to your question. I think that

those are all reasons why we need to have a Federal policy. It is

important that we get a timely Federal policy, but there are some

real issues here about consumer protection that need to be addressed comprehensively and fully. It is more important to get it

right than to get it done quickly.

Mr. JENSEN. If I might add just one more element. My segment

of the industry being very rural and high cost serves 7 percent of

the population of the United States, but we serve 40 percent of the

land mass. And, unfortunately, many times in Washington and

other places they forget about us when they are talking about all

of the rules and regulations and parameters that you need to work

with. And it just seems to me that a comprehensive rewrite rather

than a piecemeal rewrite would better serve our customers in

rural.

Mr. CARLISLE. I’ll just briefly say that in a letter dated July 6

to Congressman Pickering, Chairman Powell stated: ‘‘The time has

come for Congress and this Commission to confront the legal and

policy environment for IP-enabled services, including VOIP services.’’

As I mentioned in my oral testimony and in more detail in my

written testimony, the FCC can act and is moving forward to act

as best we can. And it is a top priority for the Bureau to work on

this. However, there are limits to our flexibility and if Congress believes that we need more sophisticated tools, then we are certainly

in favor of Congress acting.

Mr. VIDAL. If I may, I would like to add just an add on to that,

which is if we look at the problem from a different perspective, and

that is the benefit of delay or is there a benefit of delay? So far

we have heard a lot of comments about why there should be a benefit to moving quickly and I think my definition of quickly would

implicitly include an accurately and correctly and rightly. But I

have yet to hear an argument that suggests that the strains that

VOIP is putting on universal service or the reduction in wireline

access line counts is going to slow down anytime in the future. I

do not see any indications from anyone that said that the consumers are going to turn around and not continue to operate in

which they have been operating.

Thank you.

Mr. NELSON. Let me just add, if I may, I would support Mr. Jensen’s call for a comprehensive review of the situation. The two

States that have been most active, Minnesota and New York, have

been enjoined by Federal courts. So there really is no urgency in

my view.

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Mr. DAVIS. For those of you that advocate a slower approach, a

more comprehensive approach which I certainly understand, would

you agree that this Congress could be at that issue for 2 or 3 years

and that as time goes by, some States will at least begin to regulate all of you in terms of the delivery of the VOIP and further

complicate the issue?

Mr. JENSEN. I can speak for one State; I would not see them as

wanting to complicate the issue terribly. Their goal, like ours, is to

get these services out as quickly as possible yet maintain the consumer protections that need to be there; CALEA, 911, TDD and

these types of activities plus the quality of service. So, from our

perspective I do not think that would be a problem.

Mr. NELSON. I would agree with that, too. I think most States

are like Nebraska in that regard. They want to see this technology

develop and they are not going to put unnecessary roadblocks in

the way.

Ms. GREENE. Since I did put a caveat on my response to your

question, this issue cannot go 2 or 3 years without being resolved.

Mr. CITRON. Well, from Vonage’s perspective, the one who gets

all the inquiries from the States, we do not have 2 or 3 years to

wait. It will take that long and clearly if we listen to other commissioners in States, while Nebraska may—I am not sure if you are

speaking for Nebraska, but whereas Nebraska may not act, may

not move, surely Susan Kennedy from California has told us that

California will regulate and trying to force a common carrier relation on voice over IP if the Federal Government does not step in,

and I expect other States will follow.

Mr. DAVIS. I think all of us here appreciate your alls expression

of confidence and how quickly this Congress can act on the broader

rewrite. I hope you are correct.

But for those of you who all that advocate preemption at whatever particular time and as part of a particular package, should

there be some carve out for State regulation in matters such a

fraudulent advertising or billing?

Mr. RUTLEDGE. Yes. I think that you can certainly preempt VOIP

regulation at the State level while not undercutting any of the consumer protection laws of the States. And, obviously, different

States treat different consumer issues legally differently. And we

already live in that world and are prepared to continue to live in

that world. So I do not think that promoting this legislation as it

is currently written you will undercut the State’s authority generally to protect consumers.

Mr. CITRON. I would like to echo Mr. Rutledge’s comments and

further state that Vonage would not be opposed to States taking on

that role. But just to make this committee aware that the States

already have that role. Vonage today is already subject to a number of State laws throughout the land that deal with things like

truth in advertising and other disputes that may arise with constituents that live with inside that State.

Mr. CARLISLE. If I may point out, if you think about it from the

perspective of a function operating on a computer, for example, if

you have a problem with your spreadsheet program or you have a

problem with your word processing program, that is subject to action by State attorneys general enforcing consumer protection laws.

110

That does not necessarily need something like common carrier regulation as an additional layer in order to protect consumers.

You can think of it similarly for VOIP. We have asked those

questions about consumer protection within the NPRM. We will be

receiving comment on that, and considering it seriously.

Mr. DAVIS. Thank you.

Thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman.

The gentlelady from New Mexico, Ms. Wilson.

Ms. WILSON. Thank you, Mr. Chairman.

I would like to yield 3 minutes to my colleague from Mississippi,

Mr. Pickering.

Mr. PICKERING. I thank the gentlelady from New Mexico.

And I just have a quick comment, and it is basically focused on

our most recent conversation here.

Everyone knows a broad telecom reform act will be very intensive and it will take at the minimum from today 3 years. I do not

think anybody here who has ever done telecom policy has ever

thought that we could do a broad telecom reform in the next year.

At the very least it will take both years of the next Congress to get

to comprehensive reform.

The other reality is that most people project that VOIP is going

to have a rapid emergence in the marketplace. Some project up to

30 percent of the U.S. market will be voice over Internet within 3

years. That gives us great urgency to try to get where we have consensus. Where we have consensus among the industry from

BellSouth to AT&T to cable to Covad to wireless where the lions

and the lambs have lain down together is Federal preemption. And

for the certainty of capital and for the certainly of new competition

we need to in this Congress in this year go forward on the Federal

preemption.

Now what else does that mean? In 911 my friend John Shimkus

and Anne Eshoo both raised questions on public safety. We can

have an industry led process with a date certain to make sure that

everyone knows that we will have E911 and public safety as we

have preemption.

To my friends at the State level, I would say we want to affirm

that you continue to have consumer protections against fraud. And

nothing in this bill or in a preemption would undermine that.

To my friends in rural areas, and I am from a rural area, this

is not only a catalyst for capital and competition, but this would

be a catalyst to reach universal service reform that will be sustainable.

We need to do the preemption now. We can do it in a way that

acknowledges the USF intercarrier comp relationship between

VOIP and the public switch telephone network. We can do those

things, find consensus, move forward quickly so that we can unleash this new application, the capital, the competition and find

ways to make sure that we do it in a reasoned wise way as it relates to public service, universal service or public safety, universal

service and law enforcement.

Mr. Chairman, I would hope that we could find a way to get it

done this year because if we wait, it will be 3 years and the market

and the technology cannot wait that long.

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Ms. WILSON. I had a couple of questions that I wanted to ask

with respect to this technology, but I am in an interesting position

of watching our incumbent telephone company in New Mexico do

some really innovative things.

About a week ago they announced, Qwest announced that it is

going to start offering Voice over Internet Protocol to business customers, and not just in places like Casper, Wyoming and Albuquerque, New Mexico and Billings, Montana but the list of cities

that are going to be covered in their first year, 22 cities included

Baltimore and Boston, Washington, DC and San Francisco, Seattle,

Los Angeles, San Jose so that it is a nationwide business footprint

from an incumbent carrier offering voice over IP. It is an interesting approach to business. And I also understand that they have

a different way of charging carriers, voice over IP carriers for access charges.

And, Mr. Citron, I wanted to ask you how Qwest does access fees

differently than other incumbent carriers and what that means?

How does this work?

Mr. CITRON. Sure. Well, we are not 100 percent sure yet on how

it is going to work. We have read Qwest’s public announcement

that they would no longer charge access fees on terminating VOIP

traffic. We have contacted Qwest regarding that offering and we

are currently in active discussions about putting together an interconnection agreement that would take advantage of that item.

I would welcome the opportunity to report back to you on the

progress of those negotiations.

Ms. WILSON. I would be very interested in that and what that

means. Because it looks as though we have one incumbent company that is kind of out there on the leading edge of this change

of being both, a voice over IP offerer nationwide and an incumbent

carrier. And I would be very interested to see what kind of business model you come up with that as that goes along.

I also understand that Qwest is offering something they call

naked DSL, which is where a subscriber can purchase DSL from

Qwest without also having to buy the local service form Qwest.

And I wanted to ask Ms. Green does BellSouth plan to offer DSL

on a stand alone basis to somebody who may want to come in and

just buy DSL from BellSouth or do you believe that consumers who

want to get DSL should also have to subscribe to BellSouth’s local

phone service?

Ms. GREENE. We do not currently offer naked DSL. Our DSL

subscribers have to have our voice service at this point in time. But

it is something that we are always looking at. Because as the wireless market matures, a stand alone DSL is a product that may be

something that we need to put into the marketplace. We do not

currently offer it.

Ms. WILSON. What do you think about another ILEC coming into

your territory and offering VOIP?

Ms. GREENE. You know, one of the things that is interesting

about your question and the thought that was going through my

mind is we tend to think about the ILECs and the telecommunications industry as a monolithic industry, and we are not. We are

very different companies. Each of us have different business plans.

And one of the problems that we have with the current regulatory

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regime is it treats everybody, including all the CLEC customers as

if they have the same business model.

In fact, Qwest has the bulk of its revenues now, I believe, come

from its long distance operation. And it in many ways are much

more like Level 3 than it is like a BellSouth.

So each of our companies are different and we no longer have a

monolithic telecommunications industry.

Ms. WILSON. Mr. Rutledge, I wanted to ask you does Cablevision

require cable modem customers to buy VOIP service from Cablevision.

Mr. RUTLEDGE. No. In fact, most of our modem business was developed before we launched VOIP. So the vast majority of our

modem customers do not have yet to buy VOIP.

Ms. WILSON. But if a cable modem subscriber wanted to get

VOIP from one of your competitors——

Mr. RUTLEDGE. Oh, they do and can. Some of them are Vonage

customers or AT&T customers. Yes, we do not prohibit them.

Ms. WILSON. Thank you.

I think this is one of the most interesting issue facing telecommunication, and it likely to cause tremendous changes in the

way that we are able to communicate with friends and neighbors

and do business around world. And I think I agree with my colleagues here on both sides of the aisle that this is an issue we will

have to deal with sooner rather than later, because if we delay too

long we end up preempting certain business models without giving

guidelines up front as to what the rules of the game should be.

And I thank all of you for your time and helping to educate us.

Thank you, Mr. Chairman.

Mr. STEARNS. Then gentleman from New York, Mr. Engel.

Mr. ENGEL. Thank you, Mr. Chairman.

Mr. Pickering before he left gave an impassioned plea for Congress to act quickly saying that if we did not, it would take 3 years

for us to do a total rewrite. My experience, I do not necessarily disagree with what he said, however my experience in Congress has

told me that sometimes there are bigger and broader issues and

you can use the need to deal with the smaller issue as a catalyst

to deal with all the issues.

My concern would be that if we start dealing with VOIP on its

own, that we never quite get to the total rewrite because there is

really no impetus for doing that.

I do not know that we should try to keep plugging holes in a law

that was written for the analog age with digital age Band-Aids. I

think that we might be better to address this in context of a larger

rewrite. I know that Mr. Davis, others, have asked the questions

and that many of you have responded. But I am wondering if anybody else would care to comment?

Ms. GREENE. Well, you have more articulately expressed what

my concerns are. Voice over IP is a tremendous pressure point in

an obvious kind of sexy new technology. It is symptomatic of the

tremendous disruption that the telecommunications industry has

undergone. And to treat VOIP by itself I think could possibly be a

mistake.

Mr. ENGEL. Well, anybody else?

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Ms. MARTINE. I would suggest that this is a very new and nascent technology. As I mentioned, there are several hundred thousand customers and to overly handicap that with regulation at this

stage we think is unnecessary and not relevant.

It needs the opportunity to grow without being handicapped by

old regulation policies that were done in a very age of the telecommunications business where there was monopolistic incumbency to which degree is still in place, by the way.

Mr. CITRON. If I might add, if we do not take action in a relatively short period of time, not 3 years, something less than 3

years, there is a big risk of this issue will be oppressed to the point

where all the new competitive players that come to the marketplace, both old world and new world companies, will be permanently impaired. And that would be unfortunate because the benefit of VOIP to consumers is very dramatic.

Mr. ENGEL. Let me ask Mr. Rutledge who was about to

speak——

Mr. RUTLEDGE. Well, I was just going to say that—thank you,

Congressman Engel. That a lot of customers, thousands of customers a week in our area are adopting this service. And so it is

a very attractive product and it is rapidly becoming the communications choice of the New York marketplace. And so to impede it

while granted there are lots of telecommunications issues that have

to be resolved and there are a lot of open questions that are quite

complicated in this changing landscape that have to be dealt with,

we are really looking for an opportunity here to set a level field and

set a ground work so we can develop this business and add a lot

of value to consumers. And then over the period of time that it will

take to develop the rest of the regulatory regime, I think you are

going to have rapid adoption of this service. And so I think it would

be a shame to hold up regulatory reform in the meantime for this

particular application.

Mr. ENGEL. Mr. Rutledge, let me ask you, because I am a Cablevision consumer, I have it in my apartment in New York and I am

told that 11,000 people just in my district alone have already

signed up for VOIP, which is an——

Mr. RUTLEDGE. That is correct.

Mr. ENGEL. [continuing] unbelievable phenomenon. For your

VOIP service you chose to deliver all your calls to a traditional telecommunication service provider called Lightpath. Can you tell us

why Cablevision chose this business model.

Mr. RUTLEDGE. That is right. Well, it is because as customers

make calls to each other, to the extent that the 11,000 customers

in your district call each other, there is no actual termination of

those calls anywhere outside the cable system. But in order to call

someone who is on NYNEX or Verizon or SBC, or any other local

exchange carriers in our service area, you have to terminate the

call on their network. And so you have to have an interconnection

agreement and you have to pay for that termination.

And so Lightpath is Cablevision’s CLEC, and it is licensed

tariffed company that has interconnection agreements. And so in

order to actually transmit the call to the public switch network, we

have to go through a regulated entity to do that. And that is why

we chose the business model we did.

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Mr. ENGEL. Thank you.

I am wondering if I could ask Ms. Greene a question. I’m quoting

your testimony, and you stated that ‘‘we believe the legislation

should not, as these bills both do, address only a single application

such as VOIP as Congress will if this approach is taken surely

wind up having to legislate on each flavor of new communications

technology.’’ That is what I asked before. Now, you said that you

support a more holistic approach, and I do as well. My concern is

funding for the E-rate program, but I want a clear level playing

field that it is capable of being adapted to new technologies. So

those are my goals that I mentioned before for a rewrite.

What are the top issues that BellSouth believes Congress needs

to address?

Ms. GREENE. Well, I think that we need to have a Federal unified perspective. We need to be sure that the continuing support for

access charges and universal service is a burden that is shared

equally. We need to have technology neutral platforms and not isolate out an application without dealing with the underlying service

networks and service providers as well. And then there are some

very real social concerns.

I do not think that we want to have responsibility on our consumers to know whether or not the phone that they are picking up

is 911 capable or to run out in the yard and pick up the cell phone

if something happens. I think those are very real social concerns

and they need to be addressed.

Mr. ENGEL. Okay. Thank you.

And thank you, Mr. Chairman, for your indulgence.

Mr. STEARNS. Mr. Buyer?

Mr. BUYER. Thank you for the help with the clerk.

I am going to ask some questions and we are going to go right

down the line with the questions.

First question is, and we do not need long answers here, what

is the right statutory classification? The IP-enabled services and

VOIP, are they telecommunication services or are they information

services? So just tell me; telecommunication services or information

services. And we are going to go right down the line. Start with the

FCC.

Mr. CARLISLE. Well, it depends on the flavor. Under our current

rules some might be telecom services, as we found the AT&T service to be. Some might be information services as we found

pulver.com’s Free World Dialup to be. We have asked questions as

to how the regulations might change.

Mr. BUYER. Next?

Mr. CITRON. Sure. Vonage’s service should be an information

service.

Mr. BUYER. Next?

Ms. MCCARTHY. I agree with Mr. Carlisle. Right now we do not

have a clear way of separating. Whoever put in their testimony we

need a Title 1.5, I think that I agree with that.

Mr. BUYER. All right.

Mr. JENSEN. I would go call them telecom, but I am not sure it

makes any difference. I think they are still carried across our network and they need to be handled and charged the same as if they

are all the same.

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Mr. BUYER. Okay.

Mr. KIRKLAND. In Covad’s view VOIP applications are generally

information services.

Ms. MARTINE. At AT&T they are information services because

they are stored content interacting with advanced features.

Mr. BUYER. All right.

Mr. NELSON. Any service that connects that PSTN should be the

telecommunication service.

Mr. RUTLEDGE. At Cablevision we think they are an information

service and are acting accordingly.

Mr. VIDAL. Yes. And last but not least here, if we think about

things that have a computer on one end that transmits out Internet protocol, packets; it sure looks like an information service to us.

Mr. BUYER. Now with the CALEA, since CALEA does not apply

to information services, should Voice over Internet Protocol providers comply with CALEA? Go right down the line, yes or no.

Mr. CITRON. Yes.

Ms. GREENE. Yes.

Mr. JENSEN. Absolutely.

Mr. KIRKLAND. Yes, and we do it today.

Ms. MARTINE. Yes.

Mr. NELSON. Yes.

Mr. RUTLEDGE. Yes, and we do it today.

Mr. VIDAL. Yes.

Mr. CARLISLE. Yes.

Mr. BUYER. Thank you for the confusion.

I do it but do not classify me as information services. Mmm.

To BellSouth, you just answered a question just a few moments

ago about a shared burden, and I suppose you are referring to

avoiding cost shifts that occur in the marketplace since you and

others bear a pretty strong burden with the national telephone network. And if there is not a shared burden, then you obviously are

shifting costs to customers. Is that what you were referring to?

Ms. GREENE. Well, really, there is two different levels that I am

talking at. One of them is that there are the social costs of 911,

CALEA and also universal service support. Those are things that

are enjoyed by the wireline telecommunications industry today. But

in addition to that there is the burden the social pricing that we

have as an industry, meaning that we have a 100 years of social

pricing where business subsidizes residential and urban subsidizes

rural, and our State commissions still exercise control over our retail pricing. Access charges were put in place to help offset some

of that burden. So our position is that if VOIP or another application that has a telecommunications substitute flavor and accesses

the public switch telephone network, that access charges should

apply at that.

Mr. BUYER. Well, let us go right to this one. How should Voice

over Internet Protocol providers compensate local exchange carriers

for the use of the public circuit switch telephone network? How

should that be compensated? Go right down the line.

Mr. CARLISLE. We have already stated in the Pulver.com order

and also in the NPRM that we believe services that use the PSTN

in a similar manner should compensate it in an equitable way.

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Mr. CITRON. Vonage believes that there needs to be broad based

reforms on intercarrier compensation and until such time of reforms, it would be difficult to burden us with a method of compensation. For example, it can cost as much as .14 cents to terminate a call intrastate, yet to terminate a call just a few miles away

may be as low as half a penny. The system is clearly broken and

it needs to be fixed. But once it is uniform and national and treats

all participants fairly, we would be glad to participate.

Ms. GREENE. And I do not disagree that there needs to be intercarrier compensation reform. But in the meantime, services like

VOIP do not ride over air. They ride over existing networks.

Mr. JENSEN. There may be a need for intercarrier compensation

reform, but today we must be compensated for people that use our

network, especially in rural.

Mr. KIRKLAND. We agree that there are fundamental issues that

need to be resolved. For example, mobile carriers terminate and

use the ILEC network and pay a lot less than access charges. This

is a new technology and it really should not be subject to a legacy

regime. The legacy regime should be reformed.

Ms. MARTINE. We agree that the regime needs to be reformed

and we should treat this traffic like ISP traffic is treated when

they are terminate with an ILEC facility today.

Mr. NELSON. We at NARUC have embraced the need for intercompensation reform. And in that context we believe that there

should be some contribution from all VOIP providers that touch the

network.

Mr. RUTLEDGE. WE are currently paying on the unreformed

intercarrier compensation structure and do think it needs to be reformed. But we are paying under it.

Mr. VIDAL. Yes. A clear agreement that the intercarrier compensation mechanism is broke and getting more broken by the day.

In fact, we took the step about 6 or 7 months ago of filing a forbearance petition at the FCC for IP calls. One of the provisions

that we believe is a key provision is to make sure that access

charges continue to get paid to those rural carriers that currently

have the rural exemption.

Mr. BUYER. Thank you.

Ms. Greene, what are you doing at BellSouth to offer the Voice

over Internet Protocol to your customers and business and your

consumers?

Ms. GREENE. We have several business services that we have put

into the marketplace, both for our enterprise customers and small

and mid size businesses. We are exploring putting voice over IP

into our mass market consumer offer.

The problem that you have as a legacy company is that right now

the functions that are available using voice over IP technology are

not compelling to our customers. The price point is compelling to

our customers. And I think that is why you have a lot of customers

are making the move right now primarily for price. But we are constantly looking at the technology and we are also looking at how

we can use voice over IP technology to transform our own cost

structure to be able to better serve our consumers.

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Mr. BUYER. So to an earlier question, you would consider offering

a broadband service an a VOIP even if they did not sign up for

your local service?

Ms. GREENE. We are considering it. We do not have that offer in

place today.

Mr. BUYER. All right. Thank you.

Mr. STEARNS. Mr. Walden?

Mr. WALDEN. Thank you, Mr. Chairman.

Mr. Kirkland, I believe you said a couple of times that VOIP

should not have to pay for the legacy costs of the network, is that

correct?

Mr. KIRKLAND. No. In response to the last question, the question

was should VOIP pay access charges. And I said that there is a legacy structure or framework that needs to be reformed. And as Ms.

Martine pointed out, information services do not pay access charges

now. As I said, the mobile carriers just as an illustration pay a different set of charges and access charges.

So my point was just to reform that legacy structure and, as I

think, we are willing to pay to cover those costs if they are cost

based. But part of the problem is they are not cost based right now.

Mr. WALDEN. But you would not be in any hurry necessarily to

start paying those charges?

Mr. KIRKLAND. Well, from Covad’s standpoint, you know we enable voice over IP carriers. We will be terminating traffic and we

do expect that we will be paying access charges under the existing

rules of the FCC in certain circumstances. So I was addressing

what I thought the right outcome was.

Mr. WALDEN. I see.

Mr. KIRKLAND. And we pay for services from the ILECs all the

time. We use their network on a regular basis and pay the costs

for that.

Mr. WALDEN. All right. Ms. Martine, one of the issues I have is

Universal Service Fund. I represent a very, very rural district,

some areas less than one person per square mile. And I know there

was comment made earlier, I think by Mr. Rutledge, that you cannot have VOIP without broadband.

And I guess the question I have is connecting those two. And the

concern I have is that I think VOIP is going to take off like wild

fire in the west in the summer for those who have access to

broadband. And how do we maintain access to phone service at all

in the very remote areas if you narrow that base of subscribers on

the ILECs over the old legacy network, how do you maintain that

infrastructure? Because it would seem to me if I am an ILEC in

that model, it is the last group that I am going to have to deal with

at all if the new wave of technology is over here on VOIP. What

happens in these rural areas?

Cable will be there to the extent it is practical. But let us face

it, you are not going to string out into some of these service areas,

or if you did your investors would probably have you. So what do

we here on Universal Service Fund?

And perhaps Ms. Martine, you could start, because I am curious

about your comment about doing it by phone number and the affect

that has in interindustry. Who loses——

Ms. MARTINE. Well, thank you for the question.

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I think we believe that the USF regime needs to be reformed because the industry has changed from when it was first set up. We

believe that the economics, and we could describe this to you in a

formal writing if you would like, is just by using phone numbers

or some other equivalence where you charged a fixed rate per number so that wireless companies, VOIP companies, telephone companies are all required to pay that, it is not like anyone gets a free

ride. If you have a number, they have to pay a dollar or some associated fee that is recommended. And we believe there could be

equivalence in the USF to that number, but it is not going to require—with declining interstate revenues, there is no way for USF

to keep up with what the numbers used to be unless the numbers

paid go up. And I think that is unfair to those carriers that are currently involved in intrastate that they have to pay more just because the overall utilization is going down.

So we want to see equality for wireless companies as well as traditional phone companies, as well as VOIP providers that everyone

should be required to pay, not just those that do interstate.

Mr. WALDEN. All right.

Mr. VIDAL. Congressman Walden, it seems to me that one way

of the many ways to look at the Universal Funding debate is financially as there are sources of cash that fund that program and

there are uses of cash which are disbursements that are made to

the high cost fund, to the low income fund and to Internet for

Schools, etcetera, and a myriad of other programs.

Mr. WALDEN. For just Mississippi. No. Go ahead.

Mr. VIDAL. I did not quite get all that.

But it seems to me that the concentration today is on the sources

of funds, not necessarily on the uses of funds. As near as I can tell,

there is about $6.5 billion a year that goes into and out of the Universal Service Administrative—and it is distributed out by high

cost, low cost and Internet to Schools. And I am not so sure I have

heard anybody suggesting that the sources of funds—that the uses

of funds should be different. It is just how do you fund a

program——

Mr. WALDEN. No, I understand that.

Mr. VIDAL. Yes. And so I think to go back to the idea of there

needs to be another mechanism, whether is on numbers or something that is a nondiscriminatory non-arbitrage type of funding

mechanism that could stay in place for a long time so we are not

back here in a few years.

Mr. WALDEN. Okay. Anyone else? Mr. Jensen?

Mr. JENSEN. One way to work through USF problem, and it is

a problem and it is becoming worse and worse, is to enhance the

number of participants that contribute to that fund as they utilize

it. In other words, you use it you pay for it and help with the USF

Fund.

One of the problems I have with Ms. Martine’s analysis is I am

not sure that that sends correct pricing signals. If you have flat

rate, I am afraid that that would send some incorrect utilization of

the resources that we have available and it needs much more discussion. But we need to enlarge the contribution base.

Mr. WALDEN. And Mr. Rutledge, tell me cable’s role in USF,

what it should be, what it is?

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Mr. RUTLEDGE. Well, today we pay USF fees through the interconnection agreements that we have and through our Lightpath

subsidiary which does call terminations in both directions.

But I do think that we do need a mechanism that will support

the needs of the country. About 88 percent of the country through

cable is serviceable with high speed access, so broadband. That

leaves well over 10 million homes that are not. And what the communications technologies in those homes should be, what the most

appropriate way to do it is, I really do not know. But we recognize

that something has to be done. And so picking the appropriate

mechanism to subsidize I think is also important. And we are willing to work out an equitable payment structure as an industry and

contribute to that. But we need to work with you in doing that.

Mr. WALDEN. Do you have recommendation on what you would

like to see on the cable side?

Mr. RUTLEDGE. I do not think we do today, but we would be glad

to make some.

Mr. WALDEN. Okay. I would welcome those, from all of you, actually. Because I think this is an issue—well, I know it is an issue

that the committee is going to address. It is one we need to address

just as we need to address the whole regulatory framework governing telecommunication and voice. I mean, I cannot tell the difference between a packet of voice and a packet of data. It is all the

same thing, it seems to me, technologically when it goes down the

line or through the airwaves, or whatever. And it seems to me we

have got these legacy regulations that every time we had a new development in telecommunication, we regulated it differently. And

that, you cannot change this it seems to me without having winners and losers. If you change how USF is collected, somebody on

this panel is going to benefit and somebody is going to lose, it

seems to me. So I think we are going to have to balance this out

so that it is fair, but in my mind there are going to be winners and

losers. And the key is to make sure the consumers benefit in the

end and we do not totally upend the business structure somewhere.

So I thank you for your testimony. It has been most helpful.

Thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman.

My turn is next.

Mr. Carlisle, let me talk to you. California was one of the first

and few States in the Nation to declare VOIP to be a telecommunication service. Now we have had other members ask how many

people think VOIP is an information service. And we did not have

a complete agreement on the panel here today.

I guess the question would be for you assuming that we have to

come up with a Federal bill for a preemption that almost everybody

agrees on, should we not come up with almost a new definition that

would include voice, video, high speed data; and it might be something new? And I suggest that something new might be where you

would take a letter and put it into the Internet function and it

would have a dictation mode, and you would call up and it would

come in and it would be dictated. So I could have a voice over delayed in which the computer would speak to me from a letter from

you from yesterday.

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Now, that is still voice over the Internet. But there are so many

different things you could emerging technologies. Should we not rewrite the Telecom Act of 1996 to include maybe a new definition

for voice, data, video and this emerging possible new technology?

That way we would get out of this California deciding that it is a

telecommunication service, Nevada an information service, Virginia

a telecommunication and we would not have this disagreement.

Why do we not go above all this and give it a new name and new

regulation and set in place a new rewrite of the Telecom Act? What

is wrong with that or is that okay?

Mr. CARLISLE. Well, one of the problems with the current structure that we have under the Act is that everything depends on an

off/on switch. Is it a telecommunication service, is it an information

service. So the dynamic that that creates is, is that groups that

want to have a specific regulation applied say it is a telecommunication service without regard to any of the other number of things

that might flow from applying that definition. It is a very sort of

broad, sort of meat cleaver way toward approaching regulation.

Now we do have some flexibility. We can forebear from applying

regulation to telecommunication service, and we may have some

ability to apply regulations under our ancillary jurisdiction to an

information service. But again, these are sort of making up for the

fact that the structure is bipolar.

If Congress were to tackle this issue, I think a very useful way

of starting is to avoid that debate entirely and define it as something different. Start from the point of view of what kind of regulation you want to have apply to it, if any, and define the service appropriately. That is a simpler way of approaching it. It starts from

the ground up as opposed to——

Mr. STEARNS. Can I use your words? Then you would say if you

were in the driver’s seat and you could determine what would happen, you would go back to the Telecom Act, rewrite it such that you

would establish what you want and then put it all into a new

structure? Are you suggesting we rewrite the Telecom Act to take

care of this?

For example, we have this intercarrier compensation system that

they are asking forbearance for, you know. I mean, we just have

this constant reiteration of problems. Should we not just come up

with a whole new process here and rewrite it?

Mr. CARLISLE. Well, I think the FCC has ability under the current Act to address many issues in intercarrier compensation and

Universal Service Fund.

Mr. STEARNS. So you think you can solve all these problems that

we have talked today through the FCC?

Mr. CARLISLE. About VOIP today.

Mr. STEARNS. Yes.

Mr. CARLISLE. I think we can provide a certain amount of clarity.

And when I say ‘‘certain amount,’’ we can provide a lot. But we

have to acknowledge that whatever we do we are going to be sued.

There are going to be people who do not agree with our interpretation and implementation of the Act. So ultimately clarification will

depend on whether whatever we do can be sustained in the courts.

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Congress may also have to weather scrutiny in the courts. But,

obviously, you have much more flexibility to start out from ground

zero and buildup.

Mr. STEARNS. Mr. Rutledge, if your cable modem system was

subject to regulation as the other transmission providers are, would

you still be able to roll out the services as quickly as possible?

Mr. RUTLEDGE. First of all, we think the 1996 Act was generally

successful and that you have a very competitive telecommunications marketplace. You have true facilities-based competition.

You have the broadband roll out that has occurred since the Act

was put in place. You have multiple competitors. And now you

have very low cost voice services on a facilities-based competition

level being provided.

So we think the Act needs some tinkering, and we think this particular bill is appropriate, but not necessarily a whole rewrite.

Mr. STEARNS. No, I do not mean a whole rewrite, but just maybe

establish in the area of VOIP and video and data that we come up

with a new name that includes the telecommunication service, information services and just blend them in together and then just

have one establishment, a new definition and a new regulation that

applies to everybody who is dealing with those services?

Mr. RUTLEDGE. Well, I guess I would have to see that.

Mr. STEARNS. Yes. I know. I know. I know.

Mr. RUTLEDGE. Before I said it was a good idea.

Mr. STEARNS. Yes.

Mr. Vidal?

Mr. VIDAL. I guess the key question here is how good do we think

we are going be at in predicting the future. Right? In 1996 we

thought we had a pretty good crystal ball into the future. And as

I have heard someone say today, the Internet was given only collateral treatment in something that took 3 years to build.

So, what kind of accuracy can we build into the future for things

not yet invented? I mean, VOIP was exactly this type of not yet invented a few years ago.

I would also submit to you I think that VOIP today may look a

bit like an overnight phenomenon, but the stresses that have been

occurring on the intercarrier compensation scheme, the seeds of

those were sown long along. VOIP just happens to bring it to a

head.

And I am not trying to get a particular answer on this as much

as trying to raise a question, which is how should you treat things

that have yet to be contemplated? Because whereas in the telephone industry, which I think was largely a centrally planned economy with centralized standards, bodies that met every couple of

years over at the International Telecommunications Union. Today

you have technologists around the world with a lot of capital or little capital building servers themselves and writing applications.

It just seems to me that it is tough to get ahead of the curve.

Mr. STEARNS. Anyone else? We have no more series of questions

and we are getting to close out the hearing. And if there is anyone

else who wanted to make a few concluding comments, we are very

respective to that.

If not, we are not appreciate your time and effort.

Yes, Mr. Vidal?

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Mr. VIDAL. Yes. I just wanted to leave with one thing, and that

is that we have talked about a lot of things whereas voice over IP

needs to be able to be backward capable into what the public

switch telephone network functionality is today, like E911, CELEA,

etcetera. But I would urge you to consider the fact that we may

miss a golden opportunity if we do not think about the things that

VOIP can do that the PSTN simply cannot do.

What is possible, for instance, in the E911 community if you are

dispatcher is significantly different with VOIP than it is with simply getting a screen pop on a computer that shows a dialing number and a street address. We think that there are significant opportunities to increase public safety, to increase first responder safety,

to bring interconnection in amongst organizations that have never

had interconnection before.

So I would urge you to think that no only should we consider

what we do to be backward compatible to the existing system, but

to also give our imagination an opportunity to prosper into what

is possible.

Mr. STEARNS. On that positive note, the subcommittee will adjourn.

[Whereupon, the subcommittee was adjourned at 1:11 p.m.]

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