```

[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

  THE REGULATORY STATUS OF BROADBAND SERVICES: INFORMATION SERVICES, 
               COMMON CARRIAGE, OR SOMETHING IN BETWEEN?

=======================================================================

                                HEARING

                               before the

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 21, 2003

                               __________

                           Serial No. 108-40

                               __________

       Printed for the use of the Committee on Energy and Commerce

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

                               __________

89-000              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                      Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
CLIFF STEARNS, Florida               EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio                RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania     RICK BOUCHER, Virginia
CHRISTOPHER COX, California          EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina         SHERROD BROWN, Ohio
  Vice Chairman                      BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia             BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois               BART STUPAK, Michigan
HEATHER WILSON, New Mexico           ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        TOM ALLEN, Maine
MARY BONO, California                JIM DAVIS, Florida
GREG WALDEN, Oregon                  JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                   Dan R. Brouillette, 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           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                      Ranking Member
CLIFF STEARNS, Florida               BOBBY L. RUSH, Illinois
  Vice Chairman                      KAREN McCARTHY, Missouri
PAUL E. GILLMOR, Ohio                MICHAEL F. DOYLE, Pennsylvania
CHRISTOPHER COX, California          JIM DAVIS, Florida
NATHAN DEAL, Georgia                 RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky               EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               BART GORDON, Tennessee
JOHN SHIMKUS, Illinois               PETER DEUTSCH, Florida
HEATHER WILSON, New Mexico           ANNA G. ESHOO, California
CHARLES W. ``CHIP'' PICKERING,       BART STUPAK, Michigan
Mississippi                          ELIOT L. ENGEL, New York
VITO FOSSELLA, New York              ALBERT R. WYNN, Maryland
CHARLES F. BASS, New Hampshire       GENE GREEN, Texas
MARY BONO, California                JOHN D. DINGELL, Michigan,
GREG WALDEN, Oregon                    (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Baker, David, Vice President, Law and Public Policy, 
      Earthlink, Inc.............................................    42
    Davidson, Charles M., Commissioner, Florida Public Service 
      Commission.................................................    22
    Goldman, Debbie, Policy Committee Chairwoman, Alliance for 
      Public Technology..........................................    47
    Jones, Thomas, Willkie Farr & Gallagher......................    36
    Misener, Paul, Vice President for Global Public Policy, 
      Amazon.com.................................................    50
    Nelson, Robert B., Commissioner, Michigan Public Service 
      Commission, Chairman, Committee on Telecommunications, 
      National Association of Regulatory Utility Commissioners...    15
    Pepper, Robert, Chief, Policy Development, Office of 
      Strategic Planning and Policy Analysis, Federal 
      Communications Commission..................................    10
    Sachs, Robert, President and Chief Executive Officer, 
      National Cable and Telecommunications Association..........    39
    Tauke, Thomas J., Senior Vice President, Government 
      Relations, Verizon Communications, Inc.....................    30
Material submitted for the record by:
    Allegiance Telecom; Conversent Communications; and Time 
      Warner Telecom, prepared statement of......................    95
    National League of Cities; United States Conference of 
      Mayors; National Association of Counties; National 
      Association of Telecommunications Officers and Advisors; 
      and TeleCommUnity, prepared statement of...................    78

                                 (iii)

  

 
  THE REGULATORY STATUS OF BROADBAND SERVICES: INFORMATION SERVICES, 
               COMMON CARRIAGE, OR SOMETHING IN BETWEEN?

                              ----------                              

                         MONDAY, JULY 21, 2003

              House of Representatives,    
              Committee on Energy and Commerce,    
                     Subcommittee on Telecommunications    
                                          and the Internet,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 3:05 p.m., in 
room 2123, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Stearns, Shimkus, 
Walden, Tauzin (ex officio); Markey, Davis, Engel, Wynn, and 
Dingell (ex officio).
    Staff present: Howard Waltzman, majority counsel; Will 
Nordwind, majority counsel and policy coordinator; Will Carty, 
legislative clerk; Gregg Rothschild, minority counsel; and 
Peter Filon, minority Counsel.
    Mr. Upton. Good afternoon.
    To a casual observer, the discussions of Title I and Title 
II and classifications of broadband as either a 
telecommunications service or an information service may seem 
mind-numbingly arcane. However, the distinctions are critically 
important, and the FCC's decisions in this regard may have a 
profound effect on our Nation's consumers and our economy.
    On July 15, Alan Greenspan suggested that corporate 
executives are still sitting out this recovery. He seemed to 
suggest that everyone else is on board the flight, but 
businesses remain in the waiting area. We need to ask why this 
is the case in the telecommunications sector.
    The short answer is that outmoded regulation is getting in 
the way of investment in broadband deployment. The FCC needs to 
act now, and I hope that the FCC is listening, because I expect 
to have the Commission back shortly after we return in 
September and we will be asking them to explain if they have 
not acted by then.
    Our Nation's economy is hanging in the balance. I commend 
Chairman Powell for his vision and efforts to create a national 
broadband policy. I share that vision, and I believe that it 
should be accomplished through deregulatory parity, not 
regulatory parity, and I have said that a number of times.
    In my view, we should endeavor to provide the same 
deregulatory treatment to all broadband services, regardless of 
the platform by which they are delivered. We need to knock down 
regulatory barriers which are stifling incentives to invest if 
we are to bring the promise of broadband to the American people 
and realize the economic stimulus which this will create. In 
fact, some experts suggest that the widespread adoption of 
broadband will increase the efficiency and productivity in the 
American workplace to the tune of half a trillion dollars.
    Of course, the multiplier effect of investment in the 
telecommunications sector is enormous. Every dollar of 
investment in telecommunications infrastructure results in 
almost $3 in economic output.
    In February, the Commission announced the results of its 
Triennial Review. Five months later, the Commission still has 
not issued its order. It seems that the Commission is moving at 
dial-up speeds. Nevertheless, I am cautiously optimistic that 
the Commission's order once issued will remove significant 
regulatory shackles from the backs of the ILEC's broadband 
facilities. This would be a welcome regulatory change, and it 
will promote investment in broadband which will be good for the 
consumer and the economy.
    Today we will turn our attention to two proceedings which 
will determine how broadband services offered by telephone 
companies and cable companies are defined. These proceedings 
will also have a significant bearing on whether we create the 
right incentives to invest in broadband and promote real 
competition.
    So far, the Commission has declared that broadband services 
provided by cable companies are information services, not 
telecommunications services. The Commission is right on the 
mark, both as a matter of policy and as a matter of law. 
Moreover, the Commission has tentatively concluded that 
broadband services provided by phone companies are also 
information services, not telecommunications services; and I 
hope that the Commission continues down the same logistical 
path in this proceeding as it did in the cable broadband 
proceeding and removes the tentiveness of this conclusion.
    What such classifications would promote is the notion that 
old legacy telephone regs are simply not appropriate for 
broadband services, particularly given that there are numerous 
technological platforms by which broadband services are 
delivered, and it makes no sense to tie one hand behind the 
backs of the telephone companies seeking to provide the same 
service as the cable companies or, for that matter, satellite 
TV companies, wireless companies or, hopefully in the not-too-
distant future, power line carrier companies.
    Again, this is not to suggest that we should tie one hand 
behind the back of all other broadband service providers to put 
them on the same regulatory playing field of the telephone 
companies either. That would be a big mistake. What we need is 
deregulatory parity, and we need both Federal and State 
regulators to be involved in promoting real competition and 
stimulating investment in the broadband marketplace.
    I am convinced that this would create real, sustainable 
economic growth, provide the jobs and ensure the most 
competitive broadband marketplace which would lead to the most 
rapid deployment of broadband to the American people. Now is 
the time for the FCC to act. We will hear from the FCC today, 
and I look forward to hearing from the Commission again this 
fall, and the news, I hope, better be good.
    I yield to the ranking member of the subcommittee, Mr. 
Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much, and thank 
you for putting together this extremely distinguished panel.
    I am glad to see Mr. Tauke's name elevated in the center of 
the panel, reflecting the exalted status which he holds and the 
memory of this committee as a former member of it. Although I 
would say that the concomitant reality is not true for you, Mr. 
Misener, and your status. That is unrelated to why you are 
sitting at that table, and we also hold Amazon in very high 
status as well.
    The purpose of this hearing, Mr. Chairman, is to discuss 
the regulatory classification that should be accorded to 
broadband access to the Internet, whether it is over a cable 
facility or over a telephone wire. There are some who assert 
that such services are information services, others who 
stipulate that they are telecommunications services. The 
distinction in nomenclature is important, because the providers 
of information services have differing legal and regulatory 
obligations than those entities providing telecommunications 
services.
    Information services are largely unregulated, as opposed to 
providers of telecommunications services. Providers of 
information services do not currently have the universal 
service, consumer privacy, law enforcement, interconnection, 
unbundling or resale obligations that telecommunications 
carriers have, just to name a few items.
    By recently classifying broadband access to the Internet 
over cable systems as an interstate information service, the 
FCC took jurisdiction away from State regulators and local 
franchising authorities for such services offered by cable 
operators and rendered cable modem broadband services 
unregulated.
    The telephone companies, who compete with cable broadband 
offerings in the residential marketplace with their DSL 
offerings, correctly point out that their service is comparable 
to that offered by cable operators. It certainly is similar in 
the eyes of millions of consumers.
    DSL services are fungible substitutes in the marketplace 
for cable broadband offerings. They are marketed as competing 
products, and they are essentially priced the same.
    The fact that the telephone companies seek equal treatment 
for cable, modem and DSL offerings is understandable. They 
should be treated the same way. The phone company's desire to 
achieve parity by deregulating down to the unregulated 
offerings of the cable industry is also a perfectly 
understandable goal from their point of view. The law compels 
parity and like treatment, however, not by deregulating the 
phone industry by redefining their services so that they have 
minimal obligations in the public interest, but to spur on 
digital technologies and competition.
    Congress enacted the Telecommunications Act of 1996. That 
Act broke down historic barriers to competition and was 
designed to unleash a digital free-for-all across all market 
sectors and industries.
    Central to the Act was the notion that we would treat 
entities based on the services that they were providing rather 
than based on their pedigree as a cable company or phone 
company or on the particular type of facilities used to deliver 
the service. The law, therefore, is intended to treat cable 
modem and DSL services similarly.
    Clearly, Congress built much of the Act and its structure 
upon the definitions of telecommunications services and 
telecommunications carriers. To believe, therefore, that when 
we achieve the digital convergence and deployment of such 
services to the American people that we also meant to obviate a 
phone company's or cable company's obligations to law 
enforcement, interconnection, equal access, universal service 
or consumer privacy is mistaken. Simply put, it could not have 
been what Congress intended, because no one would have voted 
for that.
    We must remember that when this subcommittee worked in the 
1990's to get the phone industry and the cable industry to 
deploy digital services to consumers we did so not for the sake 
of such deployment itself. We did so for the widespread 
benefits of harnessing the best of the digital revolution, for 
the entrepreneurs and the businesses at the end of the line, 
for those that would innovate and contribute to economic growth 
and job creation.
    There may be better ways to achieve the type of broadband 
competition that drives deployment and consumer affordability, 
and we may hear some new ideas today that the subcommittee 
could pursue. The latitude, however, that the Commission has 
afforded itself to redefine the very services we sought to 
promote in the Telecommunications Act puts in jeopardy not only 
many current provisions of law, it also undermines our ability 
to legislate effectively in the future, especially if the words 
and terms we use to describe the rights and obligations of 
unregulated entities may be subsequently swapped for others by 
regulatory fiat and in headlong pursuit of obtaining a level of 
deregulation that Congress itself did not endorse.
    Again, I commend the chairman for calling this hearing; and 
I look forward to hearing from our witnesses.
    Mr. Upton. Thank you, Mr. Markey.
    I will recognize the chairman of the full committee, Mr. 
Tauzin.
    Chairman Tauzin. Thank you, Chairman Upton.
    Let me congratulate and offer my welcome to all of the 
witnesses who are here today. It seems whenever we have a 
telecom hearing we have more witnesses requesting attendance 
than we have space in the committee. Today is no exception. And 
I want you all to know that while we hold you all in very deep 
and personal affection and equal respect, that we hold Mr. 
Tauke in greater equal respect and admiration, simply because 
he has served with us and we have developed over the years such 
an admiration of him. Mr. Tauke and I, in fact, from different 
sides of the aisle, then led the effort together to begin 
deregulating free speech in America, and in essence we are 
still on that track.
    What we are talking about today again is an area of free 
speech in a new form, and every time we talk about the capacity 
or the power of the Federal Government and local governments to 
regulate the manner which Americans speak to one another in 
whatever new form they find, I generally fall on the side of 
less regulation rather than more, not just to incentivize the 
new entrants into the marketplace but because I think our 
Founding Fathers meant for us to fall on that side wherever 
possible. Because when it comes to the speech of Americans, 
however they wish to speak, whether it is over a telephone or 
over an Internet line or a broadband facility provided by a 
telephone company or a cable company, we ought to, as much as 
we can, facilitate that freedom.
    That is why the Founding Fathers meant and wrote so 
carefully a first amendment to our U.S. Constitution. It was 
not designed to protect citizens from one another. It was 
designed to protect citizens from a government that might 
regulate the way in which they speak and what they might say 
and how they might be heard or viewed throughout the 
generations.
    So we start from that principle, and the chairman and Mr. 
Markey have outlined to some degree the technicality of today's 
hearing, and while it bears repeating, this is a technical 
hearing to some degree, because it is government-speak. It is 
government-speak as to whether or not this new digital world is 
really information or telecommunications.
    Let me first say that I think Chairman Powell has done us 
all a service by making the right decision when he decided on 
the underlying question here, that broadband facilities should 
not have to be provided on an unbundled basis. That was right. 
It is a good decision.
    I only wish we could see it all. I don't know why it is 
taking so long. It is incomprehensible. Maybe that is why they 
call it a Triennial Review, because it is going to take 3 years 
to roll out the decision. But it is time for us to see that 
decision and begin to see the effects of it.
    Now, as you know, the Commission is also getting into the 
question of what are the services; and the fact that they have 
decided these are not telecommunication services is a good 
start. But the underlying transmission component of broadband 
services is also at stake here, and if you decide that that 
underlying transmission is going to be subjected to the same 
sort of regulations by which telephone traffic was formally 
regulated, then I think we can get into some deep trouble here.
    So we are all interested in knowing, both from a State and 
Federal standpoint, as to how we can advance the cause of 
freedom of speech here, at the same time advance the deployment 
of broadband services so that Americans can as freely and as 
unfettered as possible engage in all the new forms of 
communication that the digital broadband world might offer 
them.
    So with all the technical speak we are going to hear today, 
I hope we remember what it is all about. It is all about 
whether we are going to continue these old forms of regulation 
that were designed in a day and age of analog transmission when 
your pedigree did matter because you were different then. As we 
move into an age when it is all the same, it is all digital 
broadband transmission of data that could be voice, could be 
pictures, could be information or could be entertainment, could 
be technical, could be medical help, could be educational 
services, who knows; and as we enter that new world can we 
enter it with the first amendment in mind, or do we have to 
just regulate it to death?
    I particularly want to welcome Commissioner Davidson of 
Florida, because you present a refreshing perspective from 
State commissions. You basically start with the notion, as I 
do, that it would be awfully good not to regulate it to death. 
Too much of our State commissioners believe that they have got 
to regulate everything that walks or crawls or if it threatens 
to walk or crawl they are going to regulate it. I appreciate 
your fresh approach.
    As Mr. Markey said, I hope we get some good new ideas 
today. Through all the technical discussions, all that 
technical FCC and PUCA rigmarole, if we can just all agree that 
in a broadband world it is all the same and Americans ought to 
have access to it as unfettered as we can make it available to 
them.
    I yield back. Thank you, Mr. Chairman.
    Mr. Upton. Thank you.
    Recognize the ranking member of the full committee, the 
gentleman from the great State of Michigan, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, I thank you, and I commend you 
for holding this hearing on the regulatory status of broadband.
    I particularly want to welcome our panel. It is a 
distinguished one, and thank you gentlemen and ladies for being 
with us today. We appreciate your presence and your assistance.
    I want to particularly welcome Commissioner Nelson from the 
Michigan Public Service Commission; our old friend Mr. Tauke, 
who I hope is feeling well and doing well, we miss you here on 
the committee; and also Mr. Sachs; and to the rest of the panel 
members, my welcome and my appreciation to each of you, too.
    Mr. Chairman, this is a timely hearing. It has been more 
than 7 years since we passed the legislation which came to be 
known as the Telecommunications Act of 1996. With that Act, it 
was the intention and the hope of this committee and the 
Congress that we would see competition enter into the 
telecommunications business. People would be able to enter it. 
There would be few regulatory barriers to the entry or to the 
conduct of the business so that we might see a situation, in 
the mind of the Congress, where consumers would have options of 
many kinds of services where entry would be easy, where 
competition would be brisk and vigorous and where we would 
remove what the Congress found to be essentially the dead hand 
of regulation.
    We find that we were mistaken. We find that that statute 
has been much disregarded by the regulatory agencies, 
particularly the FCC. In fact, there is a publication by a 
former FCC employee in which he virtually told us how the FCC 
had reinterpreted the statute, much in defiance of the wishes 
of the Congress and the committee. We have, from time to time, 
had members of the Commission up here to discuss these matters 
and to inquire of them how they could interpret the statute in 
the curious way in which they have, but we find ourselves now 
confronted with a rather remarkable series of roadblocks in 
which the Justice Department and the FCC are able to find new 
and unique mechanisms for denying the public the benefits of 
the congressionally mandated deregulation.
    The telecommunications industry continues to suffer, as 
does the economy in general. Likewise, consumers of 
telecommunications services continue to suffer and have the 
lack of availability of high-speed service.
    Other countries do splendidly. The United States does not. 
This is not a coincidence. Telecommunications is a large part 
of the national economy, and it played a central role in the 
boom which existed until just a few years ago. As I have said 
before and will say again, revitalizing this industry can do a 
lot to improve the fiscal health of this Nation. Promoting 
broadband development, I believe, is the key to helping this 
ailing sector, and one way to promote such development is to 
eliminate roadblocks of a regulatory character which are 
constantly being placed in the way of that industry by the FCC, 
the Department and occasionally by State agencies.
    Those companies that have weathered the storm so far have 
had no choice but to reduce capital budgets. Investments in 
capital expenditures have plummeted, as have company valuations 
and the stock market, too. The corporate and economic 
consequences are grave, but the personal consequences in terms 
of lost jobs and lost retirement savings are even more 
profound.
    The largest of the telecommunications failures, that of MCI 
WorldCom, was a result of egregious fiscal malfeasance, or 
perhaps worse; but regulatory mismanagement must accept its 
fair share of blame for the industry's current state. Applying 
old rules to new broadband facilities discourages investment, 
and I find myself constantly trying to understand why it is 
that different offerers of service in this precise area, 
substitutable exactly in kind one for another, are treated so 
differently.
    We need to end such regulatory nonsense as we try to 
transition from narrowband to broadband technologies. DSL has 
its limits as it rides over the old copper network. Next-
generation services and applications, those that will offer 
broadband, including Internet, voice and video services, will 
require significant upgrades of current copper-based networks.
    We in Congress and those currently at the FCC have an 
obligation to adopt smart policies so that the marketplace can 
fund investment and reward those companies willing to risk 
capital and permit them to do so. We have a responsibility to 
our constituents who can benefit from the next-generation 
broadband services and applications and who often have suffered 
lost jobs and savings.
    We must start by freeing new broadband investment from 
inappropriate regulation such as that curious TELRIC pricing 
device. We must also create a regulatory regime that does not 
favor one technology or provider but instead creates parity and 
opportunity for the smart, the vigorous, the capable and the 
hard working.
    Other opportunities lie ahead, however. We must await the 
full text of the FCC's long overdue Triennial Review. By all 
accounts the decision appears to have made some progress, at 
least with respect to broadband. Having been disappointed many 
times, I have some curiosity as to whether this is, in fact, 
so--but from what I am told, if it is finally released someday, 
if that day comes, it will adopt much of what this committee 
tried to achieve in the Tauzin-Dingell bill by ending outmoded 
regulation of new fiber networks.
    I fear, however, that it does little to rationalize the 
FCC's destructive pricing rules. My understanding is that it 
preserves the so-called TELRIC methodology with only slight 
modifications. Such a heavily and artificially discounted 
pricing mechanism only skews incentives. It robs the incumbents 
not only of a reasonable return but also of valuable resources 
they could use to build out robust broadband facilities.
    To add insult to injury, it pads the coffers of those who 
merely sit on the sidelines, doing nothing to improve the 
telecommunications infrastructure or increase its reach. The 
FCC should provide for sensible rates to be sure these rates 
will be wholesale, but they should reflect at least some 
resemblance of a fair market price.
    Further FCC decisions on the regulatory treatment of cable 
and wire-line broadband services are around the corner. The FCC 
has already ruled that the cable broadband falls under Title I 
rather than Title II.
    Absent another Triennial Review-type delay, we will soon 
learn how the FCC will regulate a telephone company's provision 
of DSL. My position on this matter is clear. If cable broadband 
deserves Title I treatment, so does wire-line broadband. We 
will see if the FCC can rise to the occasion. It has 
disappointed us many times and in serious fashion. If it does 
not rise to the occasion, then the Congress must.
    I look for today's witnesses to give us suggestions on how 
we can do so. Thank you, Mr. Chairman, and thank you, members 
of the panel.
    Mr. Upton. Thank you.
    Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. I will just defer my 
opening statement.
    Mr. Upton. Mr. Wynn defers.
    [Additional statements submitted for the record follow:]

Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming

    Thank you, Mr. Chairman.
    I would like to thank you for holding this hearing to address an 
important component of life in the Twenty-First Century. Affordable, 
reliable and rapid access to the Internet is integral to the evolution 
of this new, modern means of communication. It also affects how well it 
can be integrated into our daily lives. Those of us who have broadband 
connections at work and a dial-up, or narrowband, connection at home 
know firsthand how a slow connection can impede modern and 
sophisticated Internet services. That's why properly incenting 
broadband deployment is a worthy goal for Congress.
    Often, however, properly incenting means simply doing no harm. The 
federal government ought not be in the business of picking winners and 
losers, so a uniform and non-discriminatory regulatory environment 
ought to be the policy of this Congress, the Commission and those who 
seek to apply anti-growth regulations across the nation. That is not to 
say, however, we need to apply more regulations to more industries just 
to achieve uniformity--honestly we need less regulation, and I am 
pleased that it appears this is the direction the Commission is headed. 
Additionally, if there is an asymmetrical treatment of technologies, it 
will present troubles in the future as to how classify new and emerging 
technologies by trying to apply the present scheme.
    Of course my overarching concern on broadband is the treatment of 
rural areas. The more barriers we erect the less likely it is for a 
company to put capital on the line only to end up bankrupt. There are 
already impediments that exist all over rural America--and in my state 
of Wyoming--that discourage broadband service. There are costs that a 
service provider has to bear in Wyoming that are relatively tiny in 
more dense population centers. You find miles and miles of roads and 
acres of majestic beauty in Wyoming. But with a population of around 
half a million, there is no density to make laying all of those lines 
and cables profitable.
    We do, however, have federal programs that provide assistance to 
encourage broadband deployment and I also note that they do not 
discriminate against any specific technology. I think that's a good 
model to serve consumers and I will continue seeking solutions to 
encourage broadband service to high-cost rural areas.
    I thank our witnesses for coming today and I look forward to 
hearing their comments on this matter and thoughts about where we go 
from here.

                                 ______
                                 
Prepared Statement of Hon. Vito Fossella, a Representative in Congress 
                       from the State of New York

    Mr. Chairman, I'd like to thank you for convening this hearing 
today. Our Subcommittee has a history of involvement in the development 
of broadband policy, and our hearing today provides a tangible reminder 
of our commitment to accelerating broadband deployment.
    Many of my colleagues will remember our efforts to enact the 
Tauzin-Dingell bill in the last Congress. While we were successful in 
getting that bill passed in the House, unfortunately our counterpart 
was not able to take up similar legislation. Had we been successful, 
this hearing might have been very different.
    Mr. Tauke states in his testimony that Wall Street is skeptical of 
increased capital spending and rather has been rewarding cutbacks in 
investments. He goes on to say that investors believe the regulatory 
rules make it nearly impossible to realize any return from investments 
in new technologies. Even though most of my colleagues would agree that 
telecommunications has changed significantly since the 1996 Act, we 
still have some people in the decision making process ignoring what the 
experts are saying and basing their decision on detrimental regulations 
put in place during an entirely different era of the telecommunications 
industry.
    The FCC had the opportunity to address these issues in its 
``Triennial Review'' proceeding that was concluded earlier this year. 
While we've all seen the press reports describing the Commission's 
actions, the text of its decision has not yet been released. I hope 
that when the Commission's report is released, that those of us who 
favor the rapid rollout of broadband will be pleased.
    I look forward to hearing our testimony here this morning, and 
yield back the balance of my time.

    Mr. Upton. Well, we are delighted with the panel that we 
have assembled this afternoon. We will lead off with Dr. Robert 
Pepper, Chief of Policy Development, Office of Strategic 
Planning and Policy Analysis at the FCC; followed by Michigan 
Public Service Commissioner Robert Nelson; Mr. Charles 
Davidson, Commissioner of the Florida Public Service 
Commission; Mr. Tom Tauke, our former colleague and now Senior 
Vice President of Verizon; Mr. Thomas Jones from Willkie Farr & 
Gallagher; Mr. Robert Sachs, President and Chief Executive 
Officer of the National Cable and Telecommunications 
Association; Mr. David Baker, Vice President of Law and Public 
Policy at EarthLink; Ms. Debbie Goldman, Policy Committee Chair 
of the Alliance for Public Technology; and Mr. Paul Misener, 
Vice President of Global Public Policy for Amazon.com.
    Dr. Pepper, we will start with you. We appreciate your 
testimony. All of you that submitted it in advance will try to 
limit your remarks to 5 minutes.
    Dr. Pepper.

STATEMENTS OF ROBERT PEPPER, CHIEF, POLICY DEVELOPMENT, OFFICE 
      OF STRATEGIC PLANNING AND POLICY ANALYSIS, FEDERAL 
  COMMUNICATIONS COMMISSION; ROBERT B. NELSON, COMMISSIONER, 
  MICHIGAN PUBLIC SERVICE COMMISSION, CHAIRMAN, COMMITTEE ON 
TELECOMMUNICATIONS, NATIONAL ASSOCIATION OF REGULATORY UTILITY 
   COMMISSIONERS; CHARLES M. DAVIDSON, COMMISSIONER, FLORIDA 
    PUBLIC SERVICE COMMISSION; THOMAS J. TAUKE, SENIOR VICE 
PRESIDENT, GOVERNMENT RELATIONS, VERIZON COMMUNICATIONS, INC.; 
THOMAS JONES, WILLKIE FARR & GALLAGHER; ROBERT SACHS, PRESIDENT 
        AND CHIEF EXECUTIVE OFFICER, NATIONAL CABLE AND 
 TELECOMMUNICATIONS ASSOCIATION; DAVID BAKER, VICE PRESIDENT, 
LAW AND PUBLIC POLICY, EARTHLINK, INC.; DEBBIE GOLDMAN, POLICY 
COMMITTEE CHAIRWOMAN, ALLIANCE FOR PUBLIC TECHNOLOGY; AND PAUL 
  MISENER, VICE PRESIDENT FOR GLOBAL PUBLIC POLICY, AMAZON.COM

    Mr. Pepper. Good afternoon, Mr. Chairman, Ranking Member 
Markey, distinguished members of the subcommittee. It is my 
pleasure to come before you today on behalf of the FCC to 
discuss broadband policy. There are three essential points I 
would like to make.
    First, we believe that widespread broadband deployment will 
bring valuable new services to consumers, stimulate economic 
activity, improve national productivity and advance economic, 
educational and social opportunities for the American public. 
Second, the Commission has taken a number of actions to foster 
investment and innovation in competitive broadband platforms. 
And, third, we are beginning to see the positive results of our 
actions.
    The Commission's broadband policy is guided by several 
principles and goals.
    First, it is the Commission's primary goal to encourage the 
ubiquitous availability of broadband to all Americans. Creating 
incentives for innovation and investment in the broadband 
digital migration stands as a companion alongside our 
commitment to traditional universal service goals. Second, the 
Commission is committed to promoting competition across all 
platforms for broadband services. Third, the Commission's 
broadband policy is designed to promote investment and 
innovation in a competitive market by ensuring the broadband 
services exist in a minimally regulated environment. And, 
fourth, the Commission is striving to develop an analytical 
framework that is consistent to the extent possible across 
multiple platforms.
    Over the past 2 years the Commission has taken a number of 
important steps to implement its broadband policy. The 
Commission has authorized new broadband technologies. For 
example, the Commission has opened the proceeding evaluating 
using existing electric power lines to provide Internet and 
broadband services. It has also initiated a number of spectrum-
related proceedings geared toward broadband, including a 
proceeding to encourage more efficient use of the 2.5 gigahertz 
band, authorizing ultrawideband technologies, clearing the way 
for advanced wireless data networks, also known as 3G services, 
and more recently the Commission initiated proceedings to 
provide more unlicensed spectrum and band such as the 5.8 
gigahertz band.
    In addition to authorizing these new technologies, the 
Commission also has revisited certain rules and proposed to 
modify others in order to reduce regulatory costs and 
uncertainty.
    In its cable modem declaratory ruling, the Commission 
determined the cable modem service is appropriately classified 
as Title I interstate information service and thus is not 
subject to Title II traditional common carrier regulation.
    In a companion notice of proposed rulemaking, the 
Commission sought comment on the implications of this finding, 
and that proceeding is still pending.
    The Commission also has a proceeding on broadband over 
telephone networks and in a notice of proposed rulemaking 
tentatively concluded that wire-line broadband Internet access 
is also an information service. The Commission has requested 
comment on this tentative conclusion and its implications; and 
this proceeding also, Mr. Chairman, is pending.
    As you have noted, the Commission's decision in its 
Triennial Review proceeding, although not yet released, is 
important for creating incentives to invest in new-generation 
networks for broadband services. The Commission's press release 
at the time of adoption was absolutely clear that fiber-to-the-
home loops would not have to be unbundled.
    The Commission's broadband policies are beginning to have 
real results. According to the most recent data available, 
nearly 20 percent of U.S. households subscribe to a broadband 
service, and this represents about 30 percent of Internet 
households. A little less than two-thirds of these subscribers 
use cable modem service, and the vast majority of the remaining 
households subscribe to DSL. And according to FCC year-end 2002 
data, the number of ZIP codes with at least one broadband 
provider serving at least one broadband customer grew from 81 
percent to 88 percent. These ZIP codes include 99 percent of 
the U.S. population.
    Recent developments also indicate that competition is 
heating up with consumers as the beneficiaries.
    First, the recent announcement by major phone companies 
that they are coalescing around a single fiber-to-the-home 
standard is an indication that they are putting new emphasis on 
lowering costs in order to deploy fiber faster. Second, several 
of the largest phone companies have lowered their DSL retail 
prices by more than 40 percent in an effort to stimulate demand 
and gain market share in cable operators. And, third, new 
wireless ISPs are emerging that use unlicensed devices to 
provide Wi-Fi-based broadband.
    In conclusion, while first-generation broadband deployment 
and adoption has been successful, in large portions of the U.S. 
our job is not done. Not everyone has access to even one, let 
alone multiple, broadband providers.
    In addition, while the experience with first-generation 
broadband indicates a substantial appetite for broadband, 
today's networks will not support future broadband and 
bandwidth-hungry applications. Therefore, the Commission is 
pursuing actions and policies that create incentives for new 
innovation and new investment in competing advanced broadband 
platforms that will benefit all Americans.
    Thank you very much.
    [The prepared statement of Robert Pepper follows:]

Prepared Statement of Robert Pepper, Chief, Policy Development, Federal 
                       Communications Commission

    Good afternoon, Mr. Chairman, Ranking Member Markey and 
distinguished Members of the Subcommittee. It is my pleasure to come 
before you today on behalf of the Federal Communications Commission to 
discuss broadband policy. There are three essential points that I would 
like to make.
    First, we believe that widespread broadband deployment will bring 
valuable new services to consumers, stimulate economic activity, 
improve national productivity, and advance economic, educational and 
social opportunities for the American public. Recognizing this, 
Chairman Powell has noted that the development and deployment of 
broadband infrastructure is the central communications policy of the 
day.
    Second, the Commission has taken a number of actions to foster 
investment and innovation in competitive broadband platforms.
    Third, we are beginning to see the positive results from the 
direction of our broadband policies.

Goals for Broadband Policy
    The Commission's broadband policy is guided by several principles 
and policy goals. First, it is the Commission's primary policy goal to 
encourage the ubiquitous availability of broadband to all Americans. 
Indeed, Congress has explicitly charged the Commission to ``encourage 
the deployment on a reasonable and timely basis'' of broadband 
capabilities to ``all Americans.'' In addition, Congress has expressly 
stated that it is the policy of United States to ``promote the 
continued development of the Internet and other interactive computer 
services and other interactive media.''
    Second, the Commission is committed to promoting competition across 
all platforms for broadband services. The Commission's regulatory 
framework conceptualizes broadband to include any and all platforms 
capable of combining the power of communications and computing to carry 
bandwidth hungry applications and offer access to the Internet. The 
migration to broadband is occurring across multiple electronic 
platforms including traditional telephone, cable, and mobile wireless 
providers, as well as those developing new technological architectures 
using unlicensed wireless devices such as WiFi, digital television and 
even electric power lines. Broadband is based upon a digital migration 
from traditional technical/industry/legal silos in which the platform 
on which a communications traveled was integrated with and optimized 
for a specific service such as voice or video. In the future broadband 
world, any of the competitive broadband platforms can support any of 
these services and emerging broadband applications--no platform will be 
tied to a particular service or application.
    The third goal of the Commission's broadband policy is to promote 
investment and innovation in a competitive market by ensuring that 
broadband services exist in a minimal regulatory environment. We 
recognize that substantial investment is required to build out the 
networks that will support future broadband capabilities and 
applications. Therefore, our policy and regulatory framework is 
designed to foster investment and innovation by limiting regulatory 
uncertainty and unnecessary or unduly burdensome regulatory costs. The 
need for regulation greatly diminishes as the new and multiple 
platforms described above develop. At the same time, however, the 
Commission remains alert and ready to act against anticompetitive 
behavior by industry players that result in consumer harm. Regardless 
of the paradigm, the Commission will remain vigilant in monitoring for 
such behavior.
    Fourth, the Commission is striving to develop an analytical 
framework that is consistent, to the extent possible, across multiple 
platforms. As service providers re-engineer their systems to provide 
broadband services, we recognize that because these legacy networks 
have historically been regulated differently, the migration to digital 
broadband platforms may raise different questions for different 
platforms. Stemming from these differing legacies, a consistent 
analytical framework may or may not lead to identical regulatory models 
across all platforms. It is entirely plausible that legal, market, or 
technological distinctions may require different regulatory 
requirements between platforms, or between certain types of providers 
of one particular platform. At the same time, there are overarching 
policy objectives that are similar regardless of platform and should be 
harmonized to the greatest extent possible.
    The technological changes driving the broadband digital migration 
are unrelenting. With this approach the Commission's aim is to ensure 
that this migration serves the public interest and that all Americans 
can benefit from advanced services. Universal service has been very 
successful in bringing telephone service to Americans, including dial-
up Internet service. The Commission remains committed to promoting the 
enormous value of universal service. Creating incentives for innovation 
and investment in the broadband digital migration stands as a companion 
alongside our traditional universal service goals.

Implementing the Policy
    Over the past two years, the Commission has taken a number of 
important steps to implement its broadband policy, focusing 
particularly on creating incentives for the development and deployment 
of multiple new facilities-based broadband platforms and services. The 
first group of proceedings focus on authorizing new, potential 
broadband technologies/platforms while the second group of actions 
fashion better incentives for additional investment in broadband 
platforms by reducing unnecessary regulatory costs.
    Among the Commission's actions authorizing new technologies/
platforms are efforts to reform spectrum policy and to authorize new 
power line and wireless communications networks.
     Broadband Over Power Line Notice of Inquiry (NOI). The Commission 
is seeking comment to evaluate the current state of using existing 
electrical power lines to provide Internet and broadband services to 
homes and offices and to evaluate whether rule changes may be plausible 
to facilitate the deployment of this technology.
     MMDS/ITFS. The Commission initiated a proceeding to facilitate 
the provision of fixed and mobile broadband access and other advanced 
wireless services by encouraging more efficient use of the 2500-2690 
MHz bands.
     Spectrum Policy Task Force/Secondary Markets. The Commission 
completed first phase of its ``Secondary Markets'' proceeding, which 
will provide more flexibility for non-licensee broadband providers to 
lease spectrum for last-mile connections to homes and businesses, as 
well as backhaul connections to fiber/broadband networks.
     Ultrawideband. The Commission modified Part 15 rules to permit 
marketing and operation of certain types of new products incorporating 
ultrawideband technology, including short-range, high-speed data 
transmissions such as high-speed home and business networking devices.
     3G/Advanced Wireless Services. The pending allocation and service 
rule proceedings will clear the way for auctions (involving, in part, 
former government spectrum) to provide significant opportunities for 
high-speed wireless data communications.
     Additional Unlicensed Spectrum. The Commission has initiated 
proceedings to provide more spectrum for the use of unlicensed devices 
in bands such as the 5.8 GHz band for WiFi, as well as using new and 
innovative concepts such as ``spectrum easements'' to enable operation 
of low-powered unlicensed devices in unused portions of the spectrum.
    The Commission also has reformed certain rules and proposed to 
modify others in order to reduce regulatory costs and uncertainty to 
investment in new broadband networks and services. These decisions 
include:
     Cable Modem Declaratory Ruling and Notice of Proposed Rulemaking 
(NPRM). In March of last year, The Commission determined that cable 
modem service is appropriately classified as a Title I interstate 
information service under the Communications Act, and does not include 
a separate offering of a telecommunications service, and therefore, is 
not subject to Title II common carrier regulation. Historically, the 
Commission has refrained from regulating services it has classified as 
interstate ``enhanced'' or information services. In a companion NPRM, 
the Commission sought comment on the regulatory implications of this 
determination and sought comment on (1) legal and policy reasons that 
might justify different regulatory treatment of cable modem and 
wireline broadband Internet access services; (2) any constitutional 
limitations to the Commission's authority to regulate these services; 
(3) on whether it is appropriate to require multiple ISP access; and 
(4) the scope of state and local authority to regulate cable modem 
service.
     Wireline Broadband NPRM. In February of last year, the Commission 
tentatively concluded that wireline broadband Internet access service--
whether provided over a third party's facilities or self-provisioned 
facilities, is an ``information service.'' It also tentatively 
concluded that, when a provider is self-providing the transmission 
component of wireline broadband Internet access, this transmission 
component is properly classified under the Act as 
``telecommunications,'' as opposed to a ``telecommunications service.'' 
The Commission requested comment on this tentative conclusion and 
whether the Commission's Computer Inquiry requirements be maintained, 
modified or eliminated and whether important national security, network 
reliability, and consumer protection obligations should apply to 
providers of wireline broadband Internet access services.
     Dominance/Non-Dominance NPRM. The Commission is seeking comment 
on what regulatory changes, if any, should apply to the provision of 
wireline broadband telecommunications services, including whether 
dominant carrier safeguards should govern incumbent LEC provision of 
such service, based on an assessment of incumbents' market power in any 
relevant product or geographic market.
     Triennial Review of Unbundled Network Elements Order. Although 
the final Order has not yet been released, the Commission's press 
release at the time of adoption was clear that a key component of that 
decision provides substantial broadband unbundling relief, particularly 
the determination that fiber-to-the-home loops would not have to be 
unbundled.

Broadband Deployment
    The Commission's broadband policies are beginning to have results 
in the marketplace. According to the most recent data available, as of 
the end of March this year, nearly 20 percent of U.S. households 
subscribed to a broadband service which represents about 30 percent of 
Internet households. A little less than \2/3\ of these broadband 
subscribers use cable modem service while the remaining \1/3\ subscribe 
to a digital subscriber line (``DSL'') service. The number of zipcodes 
with at least one broadband provider grew from 81 percent to 88 percent 
(representing 99% of the population) in 2002.
    A recent Nielsen/Net Ratings Report found that broadband's 
acceptance is growing dramatically. The report states that nearly 40 
million people use broadband connections, 49 percent more than a year 
ago. The fastest growing group of broadband subscribers are seniors 
over 65, increasing 64 percent over the last year, and broadband use by 
students grew by 51 percent in the same period.
    Although these levels of broadband adoption indicate a strong 
appetite for broadband service, they also indicate a need to foster 
broadband deployment to those households that have either no or limited 
broadband service available. In addition, the success of first 
generation broadband adoption is a clear indicator that there is a need 
for incentives for investment in the next generation of broadband 
technologies that will support and stimulate higher capacity services 
and applications.
    Recent developments appear to be strong indications that 
competition in broadband is heating up with consumers as the ultimate 
beneficiaries. First, the recent announcement by incumbent local 
exchange companies (``ILECs'') that they are coalescing around a single 
fiber to the home architecture/standard is an indication that they are 
putting new emphasis on lowering fiber deployment costs in order to 
deploy fiber more ubiquitously. Second, while it is too soon to tell 
how adoption rates will be affected, several of the largest ILECs, 
including Verizon, have lowered their DSL retail prices by more than 40 
percent in an effort to stimulate demand and gain market share on cable 
operators. And third, new wireless ISPs (``WISPs'') are emerging using 
unlicensed devices to provide WiFi-based broadband service to areas not 
served by either cable modem or DSL service or only one of the two. In 
time, these kinds of unlicensed wireless services appear to be emerging 
as some of the most exciting and potentially viable competitors to 
existing broadband providers. In addition to providing competition to 
cable modem and DSL providers, WiFi is proving to be an important 
broadband driver in another respect. Home WiFi networks are proving to 
be significant drivers for cable modem and DSL broadband subscriptions.

Conclusion
    First generation broadband deployment and adoption has been 
successful to date in large portions of the United States but the job 
is not done. Not everyone yet has access to even one, let alone 
multiple, broadband service providers. Using existing copper network 
architectures and technology, it's been estimated that DSL will 
probably not be available to about a fifth of U.S. households. In 
addition, while the experience with first generation broadband 
indicates a substantial appetite for high speed Internet access, 
today's broadband networks will not support the kinds of bandwidth 
hungry applications now being contemplated by application developers. 
Therefore, the Commission has undertaken actions and is pursuing 
policies that create incentives for innovation and new investment in 
multiple competing advanced broadband platforms that will benefit 
American consumers.
    Thank you.

    Mr. Upton. Thank you.
    Mr. Nelson.

                  STATEMENT OF ROBERT B. NELSON

    Mr. Nelson. Thank you, Mr. Chairman. I appreciate the 
opportunity to address the subcommittee today, and I commend 
the chairman for calling this hearing on this very important 
topic.
    I represent the National Association of Regulatory Utility 
Commissioners and also the Michigan Public Service Commission, 
and it is our belief that now is not the time to undue the 
framework for regulation of telecommunications services, 
including wire-line broadband services.
    The 1996 Act is bearing fruit, and in Michigan today more 
than 30 percent of access lines in SBC's Michigan territory are 
in the hands of competitive providers. This represents about 1 
million residential customers. The framework is working. It has 
been a joint effort of Congress, FCC and the State commissions. 
The commissions have taken the tools that Congress has given us 
and have provided for competition, both in voice lines and in 
broadband.
    Indeed, the FCC pricing rules that have been referred to 
have been upheld by the U.S. Supreme Court, and the court in 
that action indicated that some asymmetrical regulation was 
indeed called for because of the monopoly power of the regional 
Bell operating companies.
    While voice competition is increasing in Michigan, 
unfortunately broadband competition is not. There seems to be a 
dramatic increase in Michigan and other States, and the market 
share and competitor providers and indeed the market share of 
SBC has increased threefold in the last 2 years.
    Now, this is important, because I believe that conclusion 
may jeopardize some efforts that our State has made in recent 
past. As you know Mr. Chairman, Michigan passed last year some 
significant broadband legislation. It was recognized last week 
by Technology Network as the leader in broadband policies 
throughout the States, both in supply and demand policies. That 
broadband legislation in Michigan includes financial incentives 
for all forms of broadband, for providers and users, 
competitive providers and incumbent providers, but so far none 
of the grants that have been issued by the broadband authority 
in Michigan have gone to DSL. That is, in my view, because of 
the dominance of SBC in the DSL market.
    We need to continue to impose the provisions of section 251 
and 252 on these providers to allow competition to flourish in 
that market.
    One of the issues that our Michigan legislation addressed 
was the access to right of way, and in my testimony you will 
see that we have torn down the barriers of right of way access 
in Michigan, and this has been recognized by technology 
networks as one of the key reasons that we are the leader in 
broadband policies throughout the country.
    However, the right of way provisions in Michigan law depend 
on the definition of Federal law, which is the definition of 
telecommunications services. If that definition is indeed 
changed to mean that only information services are provided for 
right of way access, it could very well do serious damage to 
Michigan's broadband policies and the deployment of broadband 
in Michigan.
    Similarly, there are other unintended consequences of 
characterizing wireline broadband services as information 
services that is detailed in my testimony, the consequences in 
terms of universal service, 911, consumer protection, including 
slamming, entry into rural markets by small providers and, 
indeed, consequences for voice service as well.
    We believe that reclassifying wireline broadband services 
as an information service will lead to more litigation, and 
there are ways the FCC can address this issue without so 
reclassifying this service. They can forebear under the Act and 
comply with the conditions for forbearance that are spelled out 
there. They have chosen not to do so.
    Now on the eve of the Triennial Review decision, which will 
bring significant regulatory relief to the regional Bell 
operating companies, we believe it is not the time to abrogate 
any vestige of competition in the DSL market. Indeed, 7\1/2\ 
years of litigation under the old framework is just about over. 
We don't need 7\1/2\ years of litigation under the new 
framework. Let us continue to allow the States to do the job 
the Congress has given us so that we will spur innovation, 
lower prices and bring broadband to all providers in Michigan.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Robert B. Nelson follows:]

  Prepared Statement of Hon. Robert B. Nelson, Commissioner, Michigan 
    Public Service Commission and Chairman, National Association of 
   Regulatory Utility Commissioners' Committee on Telecommunications

    Mr. Chairman and members of the Committee, I am Robert B. Nelson, a 
Commissioner with the Michigan Public Service Commission and the 
Chairman of the Telecommunications Committee of the National 
Association of Regulatory Utility Commissioners (NARUC). I would like 
to thank you for providing me the opportunity to testify today on 
behalf of NARUC. As many of you know, NARUC, founded in 1889, is 
recognized in Sections 410(c) and 254 of the Communications Act by this 
esteemed body as the organization that represents the interests of 
State Public Service Commissions operating in each of your home States. 
Communications Act of 1934, as amended by the Telecommunications Act of 
1996, 47 U.S.C. 151 et seq., Pub.L. No. 101-104, 110 Stat. 56 (1996) 
(West Supp. 1998) (``1996 Act'' or ``Act'').
    Your State commissions, like each of you, have a direct interest in 
promoting vigorous competition in the intrastate telecommunications 
market. Each of NARUC's member commissions is responsible for 
implementing: (1) State telecommunications laws; and (2) federal 
statutory provisions specifying incumbent local exchange company 
obligations to interconnect and provide nondiscriminatory access to 
competitors. See, 47 U.S.C. 252 (1996). Federal law requires the 
States (and the FCC) to promote advanced telecommunications services 
like those at issue here. See, 47 U.S.C. 706 (1996).
    Before turning to NARUC's views on the FCC's current initiative to 
reclassify all high speed data services as ``information services,'' I 
want to briefly discuss the negative impact these proceedings could 
have on Michigan's efforts to promote broadband deployment and economic 
growth in the telecommunications market throughout the state.
    Michigan's Broadband Deployment Initiatives Could Be Undermined.
    The concept of ``regulatory parity'' is compelling to policy-makers 
of all stripes. The FCC is attempting to promote broadband deployment 
by minimizing the regulation of DSL and other Internet platforms. 
However, the agency's approach, which is based on an obvious misreading 
of text of the Act is misguided as a matter of both the law and policy. 
While I am sympathetic to the overall policy goal of making it easier 
for providers to invest in innovative technologies and services, I have 
serious reservations regarding the FCC's creation of a whole new 
federal regulatory oversight system by reclassifying services--services 
that even the FCC, until recently, agreed were stand-alone common 
carrier service regulated under Title II of the Act--as ``information 
services.'' I am even more concerned about recent agency action that 
threatens to eliminate State-imposed line-sharing requirements over the 
existing network designed to enable multiple providers to offer a 
choice in voice and broadband services to end-users.
    In 1996, Congress authorized the regulatory treatment of bottleneck 
transmission facilities of the incumbent Local Exchange Carriers 
(ILECS) as common carrier services under Title II of the Communications 
Act. It did not leave the FCC to freely reclassify these services at 
its own discretion. To endorse the FCC's new approach, one must believe 
that Congress knew nothing about either the Internet or high-speed data 
services--a notion that ignores the clear text of the 1996 Act and 
common sense.\1\
    High-speed data services/ISDN existed well before 1996, and nothing 
in the Act suggests these facilities should be exempt from the scope of 
Title II requirements simply because they employ a broadband 
technology. Section 251 of the Act makes no distinction between 
conventional common carrier service and high-speed transmission 
technologies in defining the obligations of incumbent local exchange 
carriers.
    Moreover, in Section 706, Congress made clear its desire for the 
States and the FCC to use their regulatory mandate over common carrier 
services to further the deployment of advanced Internet services. Among 
the tools identified is ``forbearance'' under Section 10 of the 1996 
Act, which gives the FCC authority to forbear from applying Title II 
requirements to telecommunications services under specified criteria. 
The proposal to reclassify broadband transmission service that the FCC 
itself has, until 2002, consistently classified as common carriage 
constitutes an impermissible end-run around that section.\2\
    As you know, Mr. Chairman, our home State of Michigan has been at 
the forefront of State broadband policy initiatives, enacting a 
comprehensive package of bills in 2002 \3\ that were designed to 
stimulate the availability of high-speed Internet connections in rural 
and urban areas of Michigan. These initiatives have resulted in 
Michigan being rated #1 in both supply-side policies and demand-side 
policies by Technology Network (TechNet) in its recently released 
``State broadband Index,'' which can be found at www.technet.org. 
Michigan's extensive work in creating a positive environment for 
broadband investment could be seriously undermined if either Congress 
or the FCC moves forward to classify wireline broadband services as an 
``information'' service under Title I of the Communications Act. For 
example, one key component of Michigan's broadband deployment 
initiative lauded by TechNet, is its dependence on reform of right-of-
way access policies. Specifically, the Michigan legislation, among 
other things, streamlined the process for authorizing access to rights-
of-way by providers of telecommunications services, which is defined in 
much the same way as the 1996 Act defines them. If Section 251(b)(4), 
which requires local exchange carriers to provide access to rights-of-
way by competing providers of telecommunications services, is defined 
to exclude broadband access services, it could undo Michigan's attempt 
to reform its policies and promote greater broadband deployment.
    Nothing under Title I allows the States to exercise any specific 
authority to ensure open access for ISPs or any other service provider, 
as is the case under Title II. Even with the authority provided under 
Title II, Michigan and the surrounding States have still seen an 
alarming surge in SBC's dominance over the residential DSL market in 
the last two years. Simply put, Michigan needs the ability to apply the 
provisions of Sections 251 and 252 of the 1996 Act to require RBOCs to 
provide nondiscriminatory access to the underlying facilities necessary 
for competitive, non-dominant providers to provide Internet access 
services to their customers. Michigan could provide all the financial 
incentives to spur broadband deployment imaginable but if competitive 
providers are unable to interconnect with SBC's facilities, the 
incentives are worthless.
    Michigan is not the only State with programs focused on broadband 
deployment. Several other States like Minnesota, California, Texas and 
others, have, as a matter of State law, imposed various access 
requirements on facilities, e.g., ``line sharing''--which could face 
court challenges once the long-awaited Triennial Review decision is 
released. Many other State initiatives like those in Michigan have 
targeted programs designed to encourage the deployment of broadband 
facilities rather than encumber it with additional direct regulation. 
We believe this is the right path toward invigorating the entire 
sector.
    The Current Framework under title ii of the communications Act.
    Today, ILECS' provide their own DSL service as a stand-alone 
telecommunications service over their own bottleneck local loop 
facilities. These services are governed by the Act's Title II (common 
carrier) regulations that prohibit a carrier from charging unjust and 
unreasonable rates. At the federal level, such services are also 
subject to the FCC's Computer II and Computer III rules, which require 
the ILECs to provide non-affiliated information service providers 
(ISPs) with non-discriminatory access to their facilities so that all 
non-incumbent ISPs can compete with the ILEC ISPs (e.g. Verizon.Net, 
SBC Yahoo!). The broadband sections of the recently passed Triennial 
Review Order appears to offer significant regulatory relief for the 
incumbents from access requirements to new facilities and overbuilds of 
existing facilities.

         THE FCC'S APPROACH TO PROMOTING BROADBAND INVESTMENT.

    In the FCC's Broadband Framework proceeding, the ILECs have urged 
the FCC to declare that Internet access over DSL is an information 
service provided via telecommunications, rather than a 
telecommunications service. The ILECs want the FCC to find that DSL 
Internet access is an integrated information service, subject to Title 
I, and that there is no common carriage component of the offering that 
is subject to Title II safeguards.

   THE IMPACT OF RECLASSIFYING BROADBAND SERVICES ON VOICE SERVICES.

    If the FCC proceeds in making this new paradigm shift in the 
current rules, the requirement that ILECs provide DSL as a 
telecommunications service regulated under Title II of the 
Communications Act, and consequently their obligations under FCC's 
Computer II and III rules to provide non-discriminatory access to non-
affiliated ISPs, will be eliminated.
    Although the scope of the FCC notice apparently is limited to 
``broadband'' information services, once the legal principle has been 
established, it will be difficult to prevent ILECs from offering an 
``information service,'' such as voicemail integrated with every voice 
product, and declaring those voice services (which are virtually always 
offered to consumers over bottleneck local loop facilities) to be 
information services that are not subject to common carrier regulation 
by either the States or the FCC. At best, such questions will have to 
be litigated.
    As voice traffic continues to migrate to the broadband platform, 
all of the consumer protections attendant to even the most basic common 
carrier voice service will no longer automatically apply if the FCC 
declares that broadband services are a ``deregulated information 
service'' instead of a common carrier service, as it is currently 
classified. The current common carrier protections under Title II also 
include the assurance of fair and reliable service at just and 
reasonable rates; the assurance of just and reasonable terms and 
conditions of service such as billing and service termination 
practices; and the assurance of compliance with basic service quality 
standards. The FCC's reclassification also undercuts additional goals 
that Congress established to ensure that low-income customers who live 
in rural high-cost areas, and disabled customers have reasonable and 
affordable access to the network. See 47 U.S.C. 254, 255. Congress 
further sought to ensure that confidential customer information would 
be safeguarded from disclosure to commercial entities without customer 
consent. See 47 U.S.C. 258. All of these provisions, however, apply 
solely to ``telecommunications services.''
    Nothing in the Act demonstrates that all of these public interest 
safeguards should be left to the FCC, in its sole discretion under its 
vaguely-defined authority under Title I, to decide unilaterally where 
and how to regulate essential bottleneck transmission services to 
further the Act's goals. Nor is it clear how the FCC could simply 
assert its Title I ``ancillary authority'' to extend basic consumer 
protections applicable to Title II services to Title I services.

 THE CONSUMER IMPACT MUST BE CONSIDERED CAREFULLY BEFORE GOING FORWARD.

    The ILECs have already received substantial unbundling relief for 
new facilities and overbuilds of existing facilities in the FCC's soon-
to-be released Triennial Review order. In addition, the FCC's proposed 
``information services'' approach also recently received a chilly 
reception in the 9th Circuit Court of Appeals. These events suggest 
that the FCC should proceed with its ``information services'' 
initiative with caution--if at all. For either the FCC or Congress to 
alter the current regulatory structure for broadband and access to 
telecommunications facilities is a risky undertaking that at best is 
premature. The FCC is basically proposing, through the use of Title I, 
a new, undefined, and potentially unlimited paradigm shift in federal 
authority over ILEC ``information services.'' NARUC is on record 
opposing the legal rationale the FCC used to justify this action. If 
the agency chooses to proceed, Congress should urge them to carefully 
consider the following issues before making any final determinations.

1. Impact on Intra-Platform Competition:
    Broadband services are provided over several different technology 
platforms: wireline broadband Internet access (primarily via xDSL 
service provided over the legacy telephone infrastructure); wireless 
broadband Internet access; cable modem broadband Internet access; 
powerline, and satellite broadband Internet access. All these platforms 
have different availability and performance characteristics, some of 
which are substitutes for others and some of which are not. Most 
consumers live in communities where they receive only one provider per 
technology platform and some consumers have no choice at all. The FCC's 
approach may allow specific platform technologies, e.g., cable modem or 
ILEC DSL facilities, to maintain their dominance over specific 
facilities in specific geographic areas. Before taking any action, the 
FCC should seek additional comment on the potential impact its proposed 
revised regulatory structure may have on intra-platform competition and 
innovation.

2. Examine The Current Demand for Existing Facilities:
    Before moving forward with deregulation, the FCC and Congress 
should examine the current status of demand-side issues and solutions. 
In  3 of the Notice, the FCC suggests that the primary focus of this 
proceeding is to promote broadband offerings. As Chairman Powell 
suggested in his October 24, 2001 presentation to the National Summit 
on Broadband Deployment, the existing regulatory structure may not be 
the root cause of the existing penetration problem. In his 
presentation, Chairman Powell noted: ``According to J.P. Morgan, 73% of 
households have cable modem service available, and 45% of households 
have access to DSL. Combined broadband availability is estimated to be 
this year almost 85%. The intriguing statistic is that though this many 
households have availability, only 12% of these households have chosen 
to subscribe.''
    Although the gap between availability and subscriptions is 
narrowing, it remains substantial. For example, in October of last 
year, the National Cable Association announced that the cable industry 
finished the third quarter with 10 million broadband subscribers 
nationwide out of 75 million U.S. households then passed by broadband-
enabled cable networks. These reports suggest demand and not supply is 
the primary existing impediment to the expansion of this market. The 
lack of demand has been identified, but the reasons for that lack of 
demand have not been fully explored. The United Kingdom's recent 
experience suggests that one major factor limiting demand may be the 
way current services are priced.\4\ Others have suggested copyright and 
content issues have negatively affected demand. A more careful 
examination of what factors affect take rates for broadband Internet 
access will help the FCC determine when it should act.

3. Impact on State Proceedings to Promote Competition and Broadband 
        investment:
    The FCC's new definition of ``information services'' will 
significantly enhance the prospect for protracted litigation over 
``authority'' questions at both the State and federal level. 
Introducing a new and wholly unknown scheme of regulation into the 
market at this point injects a substantial level of legal and economic 
uncertainty. Any regulations that the FCC adopts in this area must not 
preempt the extensive work already done in a number of States, pursuant 
to Federal law and following FCC guidelines to promote competition. 
There are many ongoing proceedings/initiatives designed to foster 
competition and facilitate broadband deployment, (271 proceedings, DSL 
transport proceedings, comprehensive OSS third-party testing, UNE 
pricing dockets), that should be concluded before significant changes 
are made to the existing regulatory paradigm. The Notice, at  61, 
explicitly leaves open the possibility that such access would not be 
subject to provisions of the Act that require unbundled access to 
competitors. Under that scenario, access to the transmission path by 
telecommunications competitors is foreclosed. As a result, a 
significant number of those competitors may lose the ability to compete 
for the whole package of services demanded by today's telephone 
consumers.

4. The Impact On State/Federal Universal Service/Protections That Apply 
        Only To Common Carrier Services:
    Adding to the difficulty of analyzing the impact and applicability 
of the FCC proposals, the Notice applies only to ``domestic wireline 
broadband Internet access services,'' but does not fully define 
``broadband.'' Notice at footnote 1. Specifically, the Notice is not 
explicit on whether ``broadband wireline Internet access'' includes all 
of a customer's communications, such as voice traffic. It describes 
``broadband'' as an ``elusive concept,'' and reports on two earlier 
Commission efforts to define similar terms. Notice at footnote 2. It 
does specify that broadband ``presently'' consists primarily of DSL 
services, but nowhere addresses explicitly how the FCC will treat voice 
service associated with such a DSL service. Significantly, nothing in 
the Notice suggests that the FCC anticipates a different regulatory 
scheme in which only Internet access over DSL is subject to the scheme 
instigated by the Notice, and voice service is subject to some other 
kind of regulation. The Notice itself, in  82 raises the specter of 
problems with universal service, asking ``[s]pecifically, if voice 
traffic over broadband Internet platforms increases and traditional 
circuit-switched voice traffic decreases, how, if at all, will that 
impact our ability to support universal service in an equitable and 
non-discriminatory manner? Will migration lower or raise the cost of 
providing service? What, if any, will be the impact on the level of 
high-cost universal service support needed as voice traffic migrates 
from traditional circuit switched networks to broadband Internet 
platforms?'' See also  62 where the FCC first notes its expectation 
that ``traditional services [will] migrate to broadband platforms.''
    These questions raise a myriad of concerns regarding the FCC's 
perception of regulatory oversight of voice over DSL services. Aside 
from the possible impact on State and Federal universal service 
programs raised in the Notice, for customers who communicate (both 
voice and data) only through an integrated DSL service, the 
Commission's decision in this proceeding could eliminate many 
protections now in place under common carriage principles and Title II 
of the Communications Act.\5\ It could also have a substantial impact 
on State authority over any local/toll voice service integrated with an 
ILEC ``information service.''

5. The Impact on Citizen Access to Internet Content:
    Customers using a common carrier today have the ability to send and 
receive lawful information of their own design and choosing. Title II 
of the Communications Act's prohibition against unreasonable 
discrimination has historically protected the rights of those citizens 
to transmit and receive information without change in its form or 
content. Some citizens today use broadband services and facilities as 
their chief source of information and news, even to the point of 
replacing newspapers. Some citizens can get broadband service only 
through wireline telephone facilities, and others can get broadband 
service only through cable modem facilities. In such cases, providers 
of broadband services or facilities have the technical capability to 
create a ``walled garden'' or ``fenced prairie,'' designed to attract 
customers to preferred content while preventing customers from reaching 
content other than those of the providers' choosing. Certain broadband 
providers may have an incentive to restrict Internet access to favored 
news sources or unaffiliated content providers, and if they chose to do 
so, could significantly limit free speech.
    Although the issue of ``open access'' has been debated largely as a 
question of fairness among different kinds of broadband providers, the 
restriction of user access and its effect on informed citizenship is an 
issue of real significance in a democratic society. Last November, 
NARUC adopted a resolution which resulted in the Association urging the 
FCC, in this proceeding, to assure that: (1) all Internet users, 
including broadband wireline and cable modem users have a right to 
access to the Internet that is unrestricted as to viewpoint and that is 
provided without unreasonable discrimination as to lawful choice of 
content (including software applications) and receive meaningful 
information regarding the technical limitations of their broadband 
service; and (2) where a broadband facilities provider furnishes 
facilities on a nondiscriminatory basis to ISPs, including an 
affiliated ISP, nothing prohibits the affiliated ISP from promoting or 
preferring particular content. If broadband access services are 
classified as ``information services,'' the ability of the FCC to 
provide such assurances will be non-existent.

     WHAT CAN CONGRESS DO TO PROTECT CONSUMERS UNDER THIS SCENARIO?

    Congress should encourage the FCC to delay further action until, at 
a minimum, the 9th Circuit has ruled in the related Cable Modem 
proceeding. We further suggest that the Agency should watch the 
aftermath of the Triennial Review order to see if the promised 
explosion in ILEC deployment actually occurs before taking action in 
its pending proceedings. Congress may also wish to review the success 
of various State and local initiatives to promote broadband deployment, 
many of which were dependent on the tools provided them under Title II.

                               CONCLUSION

    Congress, the FCC, and the State commissions have worked in tandem 
to take significant steps to achieve deregulation of the local exchange 
carriers and to promote competition in telecommunications services. 
These efforts must be continued jointly. Telecommunications and 
broadband markets are linked. The approach offered by the FCC in its 
broadband dockets is inconsistent with the Act and will disrupt 
existing State broadband and competition-related initiatives. The 
action proposed in those dockets is, at best, premature and at most a 
misguided approach to a problem that doesn't even exist--lack of 
investment and growth in broadband subscribership
    After seven-and-a-half years since the 1996 Act was passed, 
competition in the provision of local voice service is a reality in 
Michigan and other States, thanks to the tools Congress and the FCC 
have given us. However, the ``last mile'' facilities are still owned 
largely by ILECs, who have used this ownership to dominate the DSL 
market. Now is not the time to remove all semblance of competition in 
the provision of wireline broadband services.

                                ENDNOTES

    1 It is clear from the Act's explicit textual 
references, that Congress was aware of and very interested in broadband 
deployment issues. It is hard to square the Act's numerous specific 
provisions addressing both ``advanced'' and ``information'' services, 
with the Notice's implied contention that Congress wants the FCC to 
assert sweeping and undefined Title I authority over the ``internet and 
other interactive computer services'' through what the Notice concedes 
is a new approach to defining ``information service.'' When Congress 
wishes to discourage regulatory oversight, it has no difficulty doing 
so. See, e.g., 47 U.S.C 160, 161, & 274(g)(2). The FCC's view of 
Congressional intent is inconsistent with (1) the very limited 
legislative history of the ``information service'' definition in the 
Act, (See, e.g., House Conference Report 104-458 (January 31, 1996) at 
114--116, where Congress chose not to go with the ``Senate definition'' 
which arguably can be read to support the FCC's view, but rather went 
with the House version.) and (2) the uses of the term ``information 
services'' elsewhere in the Act. The Notice's view of ``information 
service'' specifically includes what the FCC has already found to be a 
common carrier ``telecommunications service.'' Other uses of the term 
``information service'' in the Act undercut such an interpretation of 
Congressional intent. The Act repeatedly uses the term ``information 
service'' in a much narrower context, that of a consumer purchase of 
information that is delivered to the customer through a 
telecommunications service.
    2 Treatment of an ILEC consolidated DSL-ISP offering, as 
not including a ``telecommunications service'' is also inconsistent 
with the FCC's numerous findings that DSL is a Title II 
telecommunications service that can be tariffed. See, e.g., GTE 
Operating Companies Tariff No. 1, 13 F.C.C.R. 22466, 1998 WL 758441 
(1998) at  16. (``We agree that GTE's DSL Solutions-ADSL service 
offering is an interstate service that is properly tariffed at the 
federal level.'') A recent FCC report to Congress found that, to the 
extent certain forms of phonetophone IP telephony are interstate 
``telecommunications,'' and to the extent that providers of such 
services offer such services directly to the public for a fee, those 
providers would be classified as ``telecommunications carriers'' and 
therefore subject to the requirement to contribute to universal service 
mechanisms.'' As the FCC acknowledges in  15 of the Notice, that 
report, in suggesting transmission of an information service is 
separate from the information service itself, also conflicts with the 
tentative conclusions in the Notice. FederalState Joint Board on 
Universal Service, CC Docket No. 9645, Report to Congress, 13 FCC Rcd 
11501, 11529,  57 (rel. Apr. 10, 1998). In the Advanced Services 
Second Report and Order at  17, the FCC observed that Internet Service 
Providers ``. . . combine a regulated telecommunications service with 
an enhancement, internet service, and offer the resulting service, and 
unregulated information service, to the ultimate end user. (emphasis 
added) See also Id at  14, 19 (note 41) & 21 all referring to DSL 
service as ``telecommunications services'' under the Act). In re 
Deployment of Wireline Services Offering Advanced Telecommunications 
Capability, CC Docket No. 98-147 (November 9, 1999), 1999WL 1016447.
    3 In 2002, Michigan passed three laws to stimulate the 
availability of affordable high-speed Internet connections. Act 48 of 
the Public Acts of 2002 creates a Telecommunication Rights-of-Way 
Oversight Authority to help telecommunication providers cut through red 
tape and get projects done without having to pay excessive fees or 
endure unnecessary delays. Act 50 provides tax credits to providers 
that invest in new broadband infrastructure and, upon certification of 
the MPSC, right-of-way fees paid under the first bill. Act 49 creates 
the Michigan Broadband Development Authority to help fund rollout of 
broadband services in underserved areas.
    4 See, e.g., Playing to Lose in the DSL Pricing Game, 
BROADBAND NETWORKING NEWS, Vol. 12, No. 8 (April 9, 2002) (``Even as 
cable companies eat their lunch, U.S. DSL providers are raising prices 
looking for a sweet spot where they can make money. Indeed a 
forthcoming Yankee Group study reportedly calls high prices the 
greatest factor preventing broadband adoption from hitting the marks 
predicted a couple years ago. In the U.K. they've suddenly inverted the 
situation. BT Group's recent move to slash the wholesale prices it 
charges British ISPs for providing service through its network has 
thrown the market into a tizzy. BT announced earlier this year that, as 
of April 1, it would cut wholesale rates by some 40 percent.'') See 
also--Emling, Shelley, ``Broadband Providers Moving to Tiered Fees'', 
Austin American-Statesman April 11, 2002. ``Companies say tiered 
pricing gives them the chance to attract customers who haven't signed 
up for broadband because of the price.''
    5 See Notice at  61-63 acknowledging and seeking 
comment on the potential impact of the new classification scheme on 
existing consumer protection requirements, including, e.g., 47 U.S.C. 
258 protections against ``slamming'', 47 U.S.C. 214's limitations on 
the ability of a telecommunications carrier to unilaterally discontinue 
telecommunications service to customers, 47 C.F.R. 64.2001-2009 rules 
restricting carrier use and disclosure of customer proprietary network 
information derived from the provision of a ``telecommunications 
service'' 47 U.S.C. 255's requires a provider of ``telecommunications 
service'' to ensure the service is accessible and usable by individuals 
with disabilities, if that is readily achievable. 47 U.S.C. 201's 
obligations applicable to the furnishing of service and charges for 
``communication service'' and 202 restriction preventing ``common 
carriers'' from ``unreasonably discriminat[ing] with regard to like 
``communications services.''

    Mr. Upton. Thank you.
    Mr. Davidson.

                STATEMENT OF CHARLES M. DAVIDSON

    Mr. Davidson. Thank you, Mr. Chairman, ranking member and 
honorable members of the committee. Thank you very much for 
inviting me here today. I would specifically like to thank the 
Florida delegation represented on this committee for its 
ongoing consultation with the Florida Commission on utility-
related issues. I am testifying here today as an individual 
commissioner, and the views expressed herein are my own. That 
is my disclaimer.
    Mr. Chairman, as you know, TechNet recently ranked Michigan 
in the No. 1 spot on broadband issues, but I have to warn you, 
Florida is very competitive; and under the leadership of our 
legislature and Governor Bush in trying to promote economic 
development, we intend to grab that top spot next year.
    Mr. Upton. Sort of like the Gators last January against the 
Mighty Wolverines.
    Mr. Tauke. No. More like the Bucks, Mr. Chairman.
    Mr. Davidson. All right. There you go. Maybe we are ready 
to move on to Mr. Tauke now. I have no credible comeback.
    Allow me to begin by stating that the policy positions in 
which I believe are shaped by the goals of Congress and by 
Florida's interest in having a robust, competitive broadband 
market. I fundamentally believe in a free market economy and 
that the market ultimately is the best tool we have to 
stimulate investment, economic growth, innovation and to 
maximize consumer welfare.
    As our political leaders, you also have recognized and 
instructed that broadband plays a critical role in ensuring the 
competitive strength of our Nation. I believe that in tough 
times regulators have to have the courage to embrace change and 
think beyond the traditional roles of regulating the price, 
terms and conditions of access to a monopoly market.
    Broadband is an emerging market. Candidly, I don't believe 
that issues of greater consumer choice, lower prices, 
marketplace innovation and competition are necessarily best 
addressed by a fixed application of a preexisting regulatory 
paradigm that is focused on a monopoly market.
    Policymakers to be successful must be willing to consider 
new and different regulatory schemes, and we must be willing to 
consider not regulating at all, to put ourselves out of a job 
if that is what it takes. Our focus in this must not be on 
which industry group will benefit or lose, and that is a hard 
issue to deal with here, as we are all lobbied day in and day 
out, but we have to be focused on ensuring that our consumers 
win and protecting fair rules of competition, rather than 
competitors will assure that consumers win.
    Chairman and honorable members, I am a mass consumer of 
technology. I have multiple devices, multiple ISPs, digital 
cameras. I spend so much money. I want more capacity, and I 
want better prices, and I trust as a consumer the market to get 
me there. As this committee has emphasized repeatedly, 
broadband development and deployment are critically important, 
to people specifically and to economic well-being generally. 
Broadband has an immeasurable potential to enhance the lives of 
our children, our elderly, our sick, our displaced workers; and 
the benefits are real.
    The December, 2002, report of President Bush's Council of 
Advisors on Science and Technology on building out broadband 
found, for example, that broadband telemedicine--and it is not 
even widely adopted yet, but broadband telemedicine can result 
in a 15 to 20 percent reduction in mortality rates in intensive 
care units. Those are the goals that we need to be focused on.
    Economists and analysts estimate, as the committee has 
noted, that accelerating the deployment and installation of 
broadband could generate billions of dollars annually in 
economic benefits for the country. Experts also agree that that 
is going to take a lot of investment up front in technology 
networks and deployment, and the State of the telecom industry 
makes this task very, very difficult. Capital spending has 
fallen over 40 percent, and people are out of work. The 
industry has experienced an increase of some $800 billion in 
corporate debt, most of which won't be repaid, and a $2 
trillion decrease in market valuation. Market valuation for 
telecommunications equipment manufacturers alone fell $1 
trillion in 1 year.
    The willingness of telecom companies to invest is 
critically important in States like Florida. We, like many 
States, are facing serious budget deficits; and unemployment 
levels are a concern. If additional regulatory certainty can be 
had, whether it be the FCC or this committee, then it should be 
had.
    From my vantage as a regulator, a national broadband policy 
framework, whatever that framework is, that is deregulatory in 
nature as opposed to a patchwork of State frameworks makes good 
policy for a variety of reasons.
    First, regulation poses investment risk, and 50 regimes 
pose a lot of investment risk.
    Second, a national policy is consistent with the overall 
intent of the 1996 Act to provide for a pro-competitive, 
deregulatory national policy framework.
    Third, a national policy is consistent with the inherently 
interstate nature of broadband. It is, in essence, a 
jurisdictionless, borderless technology; and with FCC rulings 
on the interstate and information nature of cable modem service 
and DSL, such a policy is also consistent with the treatment of 
other interstate regimes such as wireless.
    Fourth, a national policy is best suited to reflect the 
notion that technological parity should result in regulatory 
parity, a principle that everyone here seems to agree with. To 
the extent different platforms provide the same service and 
customers want high-speed connectivity and data transfer, then 
those platforms should be subject to regulatory parity, again, 
whatever that parity may be.
    Fifth, as President Bush noted at the August, 2002, Waco 
Economic Forum, the private sector will deploy broadband, but 
government at all levels should remove hurdles that slow the 
pace of deployment.
    However crafted, the ultimate policy outcome ought to 
reflect at least two core principles, parity and a trust in 
markets. On the first point, again, any regime should reflect 
the basic notion that technological parity should result in 
regulatory parity. If regulation responds to technological 
parity with regulatory disparity, that disparity is a hurdle to 
greater deployment.
    Where two products are potential substitutes, competition 
is simply not sustainable where the substitutable products are 
subject to asymmetrical regulation, because the market will 
always, always, always reward the less regulated technology.
    Mr. Upton. Mr. Davidson, you need to finish.
    Mr. Davidson. Thank you, Mr. Chairman. I will conclude on 
that point and be glad to answer any questions you all may 
have. Thank you.
    [The prepared statement of Charles M. Davidson follows:]

Prepared Statement of Charles M. Davidson, Commissioner, Florida Public 
                           Service Commission

                            I. INTRODUCTION

    Thank you, Mr. Chairman. My name is Charles M. Davidson. I am a 
Commissioner at the Florida Public Service Commission, the agency with 
regulatory jurisdiction over Florida's investor-owned telephone, 
electric, natural gas, water and wastewater utilities, in accordance 
with Florida law. My comments here today are those of an individual 
Commissioner. I would like to thank the Committee for inviting me here 
to testify. I would also like to thank the Florida delegation 
represented on this Committee for its consultation with the Florida 
Commission on utility-related issues. Finally, I would like to thank 
the House for its leadership on the matter before you today.
    Chairman Upton, I am sure you are aware that as recently as last 
Thursday, TechNet, a national network of CEOs and senior executives of 
leading companies in the fields of IT, biotechnology, venture capital, 
investment banking, and law, released a state-by-state ranking of 
broadband deployment policies with Michigan and Florida leading the 
way. So, Mr. Chairman, I wanted to congratulate the great State of 
Michigan on that designation, but I have to warn you--Florida is very 
competitive, and with the continued leadership of Governor Bush and the 
Florida Legislature on making our state increasingly more conducive to 
high-tech investment and economic development, we intend to grab the 
top spot.

                        II. OVERVIEW OF COMMENTS

    The communications market is characterized by competing and rapidly 
evolving technologies, by new business models and by consumer choice. 
Experts and analysts are in wide agreement that investment in broadband 
technologies and networks is vital for the long-term economic strength 
of the country. They also agree that realizing economic benefits will 
require billions in additional up-front investments in technology, 
networks, and deployment. A sagging tech sector, capital scarcity, and 
a market that is averse to committing capital in an uncertain 
regulatory climate argue for as rational a regulatory approach as can 
be had.
    The broadband sector is characterized by fairly robust intermodal 
competition. While cable modem service and DSL dominate the broadband 
market, overall take rates for other technologies (e.g., fixed 
wireless, Wi-Fi, satellite) are increasing. Of the competing 
technologies, DSL is potentially subject to greater regulation than the 
others. Where there is technological parity confronted with a 
regulatory disparity (i.e., where substitutable products are subject to 
asymmetrical regulation), the predicted economic outcomes in the long 
run include: a competitive advantage for the less burdened product; 
decreased investment in the more burdened technology; and less consumer 
choice.
    Technological parity should result in regulatory parity. This 
principle, the intent of the 1996 Act, FCC precedent, and the 
interstate nature of broadband all argue strongly for a national 
broadband policy. Within that policy, there will clearly be many 
opportunities for state to articulate policies designed to attract 
investment in, and deployment of, broadband infrastructure within their 
borders.

                 III. THE COMMUNICATIONS MARKET IN 2003

A. The Traditional Telephony Market
    The regulatory regime embodied in the1996 Act and its progeny 
presupposes that the relevant market is local telephony, and the 
regulatory approach is fundamentally grounded in a wireline paradigm. 
In the regulated market, for example, LATA boundaries matter. In the 
unregulated market, they do not. The regulated telephony regime 
presupposes that consumer choice is primarily a function of the ILEC 
vs. CLEC competition; it is not focused on other competitors or other 
technologies that may be competing with traditional telephony.

B. The Emerging Market
    Competing and rapidly evolving technologies, new business models, 
and consumer choice characterize the communications market of today. 
Cable, DSL, Wi-Fi, fixed wireless and satellite technologies are 
competing for market share. Data, not traditional telephony, is the 
predominantly stronger growth segment. Convergence of content and 
conduits is resulting in new corporate strategies (e.g., mergers of 
service providers and content providers, horizontal and vertical 
integration) and in bundled product offerings to consumers. The result: 
customers have greater choice between competing platforms and competing 
applications.
    The largest growth segments have been in the less regulated market. 
For example, the wireless segment has expanded from roughly 38 million 
users in 1996 to over 136 million subscribers as of December 2002 (and 
this estimate may be substantially lower than actual results because 
carriers with under 10,000 subscribers in a state were not required to 
report). The stable and deregulatory nature of the FCC's wireless 
policies is credited for much of this growth.

C. The Importance of Broadband
    Experts and analysts are in wide agreement that investment in 
broadband technologies and networks is vital for the long-term economic 
strength of the country and, in the short run, central to jump start 
the economy. Florida's economic development--including skills and job 
training, education and health care services, and the recruitment and 
retention of businesses--is increasingly linked to an advanced 
communications infrastructure. The high-tech, IT, and telecom sectors, 
which drove economic growth for so long, are suffering. Investments are 
down; capital is scarce. Broadband enabled activities (streaming video, 
exchanging music, photography) have the potential to spur new rounds of 
upstream and downstream investments and consumer spending--in content, 
in software and applications, on device makers (MP3 players, digital 
cameras, multimedia PCs, etc.) and in retail channels. The oft-cited 
estimate (of economist Robert Crandall who recently appeared before 
this Committee regarding the health of the telecom sector) is that 
accelerating the deployment and installation of broadband could 
generate $500 billion a year in economic benefits for the country. 
Whether that estimate is too high or too low, consensus exists that 
realization of this economic outcome will require billions in 
additional up-front investments in technology, networks, and 
deployment.

D. A Sagging Tech Economy
    In the past 7 years, the industry has moved from a position of 
capital abundance to a position of capital shortage. Venture 
capitalists in the United States roughly quintupled their investments 
in the telecommunications and media, entertainment and Internet sectors 
from 1996 to 2000. Investments in the telecommunications and related 
sectors are a fraction of what they were just three years ago.
    That the high-tech sector, particularly the telecommunications 
industry, has been in a lingering slump is an understatement. A June 
2003 report by the New Millennium Research Council and the Competitive 
Enterprise Institute characterized the state of the industry:

 Telecommunications capital spending has fallen over forty percent.
 One-half million jobs have been lost in the IT sector during that 
        time.
 The telecommunications industry has experienced an increase of $800 
        billion in corporate debt and a two trillion dollar decrease in 
        market valuation.
 Market valuation for telecommunications equipment manufacturers alone 
        fell one trillion dollars in one year.
    A July 1, 2003 Wall Street Journal article reports equally dismal 
statistics for the nation's telecommunications sector:

 Telecom investment is down 75% since 2000.
 There have been more than 1,000 telecom bankruptcies.
 The market has witnessed a nine-year low in venture capital 
        investments.
 There is a 28-year low in initial public offerings.
    Still, this and other recent articles appear to indicate a renewed 
optimism based on substantial growth in broadband subscribership. I too 
hold out hope for the industry, and if anything can reverse the 
downward spiral of this ailing sector, it is broadband. That is why it 
is so critical for regulators such as myself to practice restraint in 
areas where basic economics dictate that the market provides its own, 
more efficient policing mechanism. To do otherwise would risk stifling 
investment and further setbacks to our economy.

E. Companies Face a Critical Paradox
    Communications companies face a critical paradox: they must respond 
to the constant need for innovation and growth while at the same time 
they must manage profitability and cash flow in very constricted 
capital markets. A recurring topic is the role that the current 
regulatory regime has had in creating this paradox. The issue is of 
obvious, and critical, importance--given the central role that our 
communications infrastructure plays in the nation's economic 
development and given that billions of dollars of future investment 
will be required for broadband to reach its full potential.
    The constriction in the capital markets will impact business 
strategy and should impact regulatory policy. Investors increasingly 
value companies based on available internal cash flow. The constriction 
of capital markets means that companies that can self-finance projects 
from internal free cash flow will have a strategic advantage over those 
companies seeking cash from Wall Street. It also means that companies 
will invest their cash flow cautiously. As such, it is critically 
important that regulation not misalign investment incentives by 
treating similarly situated competitors dissimilarly.

            IV. THE REGULATORY DISPARITY INVOLVING BROADBAND

    Based on FCC data released in June 2003, cable remains the dominant 
provider in the broadband market. In December 2002, cable held 
approximately 57% market share. DSL accounted for 33% of the market. 
Broadband technologies such as fiber, satellite, fixed wireless, and 
other wireline services (excluding DSL) roughly accounted for the 
remaining 10%. With the exception of fiber and other wireline service, 
these technologies experienced approximately 25% growth over the last 
half of 2002. From the consumer's vantage, a strong argument exists 
that DSL and cable and other platforms are substitutes for one another 
in the delivery of broadband services. Consumers can receive similar 
services over different platforms and could, if the price of one 
platform is ``too high,'' switch to another platform.Of the four major 
competing broadband-delivery platforms (i.e., cable, DSL, satellite, 
wireless), DSL is the most regulated platform. Cable firms can package, 
price, invest in and sell services, including broadband, as they deem 
appropriate. Economics 101 teaches that where two products are 
substitutes for one another, competition is not sustainable where the 
substitutable products are subject to asymmetrical regulation. In a 
market characterized by competing, substitutable technologies but also 
by asymmetric regulation, investors and companies will compare the 
anticipated ROI of a dollar of capital when it is invested in the 
regulated sector to a dollar of capital invested in the non- or less-
regulated sectors. A rational investor seeking a maximum return on its 
investment would, all else equal, choose ``non-regulated'' investments.
    The stakes of this debate are high. Competition law is not about 
protecting competitors or categories of competitors, whether they are 
cable companies, RBOCs, CLECs, or wireless companies--it is about 
protecting competition, which, in turn, protects consumers. With its 
market share, cable has the greatest potential at present to obtain 
market power, i.e., the ability to ``lock in'' customers for its 
broadband, content services, and pricing. As a substitute for cable 
broadband and with roughly one-third of the market, DSL is currently 
the best positioned to compete with cable. The asymmetric regulation of 
DSL (i.e., treating DSL like traditional telephony), however, will 
likely deter optimal investments in the development and deployment of a 
competitive broadband infrastructure. Any regulatory misalignment of 
capital flows is especially acute in view of the current capital issues 
faced in the communications market.

         V. THE RATIONALE FOR REMEDYING REGULATORY DISPARITIES

A. General Considerations
    Economic theory argues for a level playing field--let the 
competitors compete, and competition will yield optimal results. If the 
goal is a level playing field, then two basic questions are begged: (i) 
what is the market, and (ii) who are the competitors? A realistic 
characterization of the communications marketplace requires that it be 
considered broader than wireline. Competing platforms can offer 
relatively comparable applications and services. For competing 
platforms to be able to meaningfully and fairly compete on a level 
playing field, either the mandates to which DSL may be subjected should 
be removed, or similar mandates would have to be imposed on cable 
broadband and other broadband providers.
    The 1996 Act, designed to deal with an established market and 
established networks and regional monopolies, is not well-suited to the 
development of a competitive, facilities-based broadband market. The 
Act presents three approaches to competition and, related, three 
strategies for competing: resale, unbundling, and facilities-based 
competition. Facilities-based competition is the desired outcome. The 
resale components of the Act, confining a competitor to deriving 
revenue between resale and retail rates, is not a viable long-term 
strategy and would not encourage optimal investment in broadband 
infrastructure. Unbundling presents more of a mixed, though still 
problematic, picture in the broadband market. With an unbundling 
strategy, a competitor does have some latitude to provide 
differentiated services that combine unbundled elements from the ILEC 
with elements provided by the competitor. And the unbundling of 
existing facilities has contributed to the deployment of broadband. For 
example, through the unbundling of existing local loops, CLECs have 
provided DSL service in some areas underserved by ILECS, and they may 
have stimulated greater deployment by ILECs.
    Unbundling, as premised in the 1996 Act, connotes an unbundling of 
existing (static) facilities. Upgrades and improvements to networks are 
constantly required--especially in the context of broadband development 
and deployment. Broadband providers would have less of an incentive to 
invest in upgrades and improvements if they would ultimately be forced 
to provide access to the broadband network on terms & conditions other 
than those that are market-based.
    While the rules regarding local phone service were appropriate for 
opening established networks that were built when traditional telephony 
was the market and when that market was dominated by regional 
monopolies, the rules do not apply well to emerging markets where 
constant innovation is characteristic--as in the broadband market. 
Whereas much of the risk in developing the traditional telephony 
networks was shouldered long ago, in a market where the incumbents had 
monopoly power, the development and deployment of broadband presents an 
enormous and immediate financial risk for firms. In contrast to the 
traditional telephony market, where there has historically been a 
guaranteed customer base from which a service provider could expect a 
certain minimum return on its investment, there is no such guaranteed 
customer base for competitors in the broadband market. Applying a 
monopoly-focused regulatory regime to an emerging market characterized 
by competing technologies and companies may disincent players from 
investing in broadband.

          VI. CORE ELEMENTS OF A BROADBAND POLICY 1
---------------------------------------------------------------------------
    \1\ While I believe that a sound deregulatory approach to broadband 
will best serve the consumers of Florida (and across the country), my 
responsibility, as a state Commissioner, is to apply federal and state 
laws on the books.
---------------------------------------------------------------------------
A. A National Policy for an Interstate Service
    1. The Interstate Nature of Broadband--Based on the nature of the 
technology and the reality of the market, broadband service should be 
treated as interstate in nature because broadband is interstate in 
nature. Broadband technologies and platforms exist and function for the 
most part without regard to state boundaries and as part of a national 
(indeed, global) communications infrastructure.2 This 
inherently interstate nature of broadband argues strongly for a single, 
coordinated federal policy (either via legislation or FCC action) that 
is economically rational and respects markets.
---------------------------------------------------------------------------
    \2\ Broadband is used almost entirely for Internet service. 
Internet access is likely to include communication with websites in 
multiple states (and multiple countries). The substantial majority of 
communications over the web are interstate on an end-to-end basis. This 
is the FCC's longstanding and consistent basis for determining the 
jurisdiction of traffic. Treating the entire broadband medium as 
interstate in nature reflects that there is no reasonable way to 
segregate Internet communications into intrastate and interstate 
communications.
---------------------------------------------------------------------------
    2. The Intent of the 1996 Act--A national broadband policy is 
fundamentally consistent with (if not required by) the 
Telecommunications Act of 1996, which was designed ``to provide for a 
pro-competitive, de-regulatory national policy framework designed to 
accelerate rapidly private sector deployment of advanced 
telecommunications and information technology and services . . .''). 
See H.R. Conf. Rep. No. 104-458, at 1, reprinted in 1996 U.S.C.C.A.N. 
10 (emphasis added).
    Further, Section 706 of the 1996 Act provides the FCC with the 
ability to create a minimalist regulatory regime. Indeed, Section 706 
imposes upon the FCC the obligation to ``encourage the deployment on a 
reasonable and timely basis of advanced telecommunications capability 
to all Americans . . . by utilizing, in a manner consistent with the 
public interest, convenience, and necessity, price cap regulation, 
regulatory forbearance, measures that promote competition in the local 
telecommunications market, or other regulating methods that remove 
barriers to infrastructure investment'' (emphasis added).
    3. FCC Precedent--Recognizing broadband to be interstate in nature 
and an information service 3 is entirely consistent with FCC 
precedent. In 1998, the FCC determined DSL service to be an interstate 
service. In 2001, the FCC determined Internet access to be an 
interstate service. In 2002, the FCC determined cable modem service to 
be an interstate information service. In its Wireline Broadband NPRM, 
the FCC tentatively concluded that wireline broadband is an information 
service. Numerous broadband platforms and information services exist 
(and new ones will surely emerge).
---------------------------------------------------------------------------
    \3\ Telecommunications Service means ``the offering of 
telecommunications for a fee directly to the public, or to such classes 
of users as to be effectively available to the public, regardless of 
the facilities used.'' 47 U.S.C.  153(46). Information Service means 
``the offering of a capability for generating, acquiring, storing, 
transforming, processing, retrieving, utilizing, or making available 
information via telecommunications . . .'' 47 U.S.C.  153(20).
---------------------------------------------------------------------------
    The need for regulatory consistency and stability argue for 
determining ``broadband'' generally to be an interstate information 
service subject to regulation, if any, pursuant to the FCC's Title I 
ancillary jurisdiction. If the FCC were inclined to regulate DSL under 
Title II, then, given DSL's lack of dominance in a competitive 
broadband sector and based on established law and practice, federal 
policymakers should consider forbearing from applying Title II access-
like obligations on broadband platforms and services. Related, to the 
extent that Title II obligations are imposed on one platform, such 
obligations should be applied symmetrically across platforms and should 
not intentionally or inadvertently pick winners and losers.4
---------------------------------------------------------------------------
    \4\ Consideration should be given to allowing DSL providers to opt 
to provide broadband within Title II, as an argument exists that 
providing DSL service as common carriage is important to the deployment 
in rural America.
---------------------------------------------------------------------------
    4. Regulatory Parity--Any national policy regime should reflect the 
basic notion that technological parity should result in regulatory 
parity. Whatever Congress or the FCC decide, 5 as the case 
may be, the ultimate policy should not discriminate based on the 
underlying technology and platform used for the delivery of broadband. 
From the vantage of the consumer, there is no reason for regulating 
non-dominant broadband providers differently. Although via different 
platforms, consumers seek essentially the same service from broadband 
providers--namely, high-speed connectivity and data transfer.
---------------------------------------------------------------------------
    \5\ A blanket FCC policy to treat all broadband services as 
information services may be argued by some to be a usurpation of 
Congress' power to legislate. As such, a legislative deregulation of 
broadband, if that were ultimately the goal of Congress, would provide 
greater certainty up-front.
---------------------------------------------------------------------------
    Two avenues exist for achieving regulatory parity: ``regulating 
up'' or ``deregulating down.'' Because the broadband market is 
competitive and because consumers have choice, deregulating broadband 
to the point of regulatory symmetry amongst platforms would likely do 
more to encourage investment in broadband than would regulating up to 
the point of symmetry.
    5. The Risks of State Regulation--State regulators are, and have 
historically been, concerned with price (i.e., the price that historic 
monopolists in local telephony charged consumers and the price at which 
parts of the monopolist's network were unbundled or resold to 
competitors). Given the lack of fully competitive local markets, the 
1996 Act (and the U.S. Supreme Court's May 2002 decision upholding the 
FCC's pricing/access rules) instructs regulators to focus on price and 
the other terms and conditions of access to local markets. As Chairman 
Powell has cautioned, regulators must ``vigilantly guard against the 
regulatory creep of existing models into broadband, in order to 
encourage investment.''
    Absent a national policy, there is a risk that, at least in some 
states, the existing model for regulating local competition may creep 
into broadband. Because DSL is an emerging technology housed on a 
regulated platform (i.e., an incumbent telecommunications network), a 
real risk exists that regulators may assume that DSL should be dealt 
with in the same manner as the regulated platform on which it is 
housed. The risk is that state regulators may seek to regulate the 
deployment of broadband using the existing telecom laws and may treat 
broadband networks no differently than local phone networks--by 
focusing on price and other terms and conditions of broadband. It is 
respectfully submitted that in our free market economy, regulation must 
not substitute for what markets do best.
    The challenge facing state regulators is, thus, to avoid regulation 
of the advanced technology while simultaneously fulfilling their 
mandate with regard to the regulated technology. A national policy on 
the former would help address that challenge.

B. The Roles for the States
    As a preliminary matter, regulators should avoid the temptation to 
cast the issue as one of states' rights versus federal preemption. 
State and federal policymakers should be pursuing the same core goal--
that being to promote investment in the development and deployment of 
broadband infrastructure. Fifty states with potentially fifty different 
regulatory policies will not further that goal.6
---------------------------------------------------------------------------
    \6\ The reasoning of states-rights supporter Justice Scalia on the 
local competition issue supports the notion of a national broadband 
policy. As Justice Scalia has stated, ``[T]he question . . . is not 
whether the Federal Government has taken the regulation of local 
competition away from the states. With regard to the matters addressed 
by the 1996 Act, it unquestionably has. The question is whether the 
state commissions' participation in the administration of the new 
federal regime is to be guided by federal agency regulations. If there 
is any presumption applicable to this question, it should arise from 
the fact that a federal program administered by 50 independent state 
agencies is surpassing strange.''
---------------------------------------------------------------------------
    The market teaches that one outcome of national broadband policy 
will be greater regulatory certainty. To the extent that a national, 
markets-based policy is adopted, as opposed to a patchwork of varying 
state rules (some of which may be economically rational and some of 
which may not), greater certainty (i.e., less investment risk) will 
result. An industry that faces fifty potentially divergent 
jurisdictional approaches to broadband will have less of an incentive 
to invest than would an industry that faces a more uniform, 
deregulatory national policy.7
---------------------------------------------------------------------------
    \7\ The process of reducing the burden of regulation is not an easy 
one, however. It may take some time for the FCC to remove all of the 
restrictions that potentially stifle the investment needed to develop a 
truly vibrant and pervasive national broadband market. Should the FCC 
lose heart at some stage in that process, it may fall to the states to 
stay the course and continue efforts to ensure that their citizens get 
the benefits of a robust market-driven broadband infrastructure.
---------------------------------------------------------------------------
    The states clearly have a fundamental role in ensuring that the 
benefits of broadband are--available to its citizens. States can and 
should work to remove unnecessary barriers to broadband deployment. In 
particular, states can work with local governments on rights-of-way 
access and permitting issues. To address the supply side, states can 
also create financial and non-financial incentives for build-out of the 
broadband network. To address the demand side, states can offer e-
learning applications and other e-government initiatives to promote the 
value of using broadband technology to carry out day-to-day functions. 
If states act quickly to bring broadband to its citizens and to provide 
valuable services that can be most effectively utilized by broadband 
technology, those states and the citizens within the states can look 
forward to reaping the economic rewards that follow investment in 
broadband infrastructure.

C. The Common Carriage Argument
    Opponents of broadband regulatory reform--or proponents of open 
access--argue that to exempt DSL from regulation would undo key 
provisions of the 1996 Act and would undermine local phone competition. 
Critics of reform argue that the system that has worked for local phone 
competition--i.e., incumbents opening their networks at rates set by 
the federal government, resulting in more competitors--should be the 
same system for regulating broadband. In short, because the broadband 
market is competitive, the open access required in a common carriage 
regime should not be mandated--though it should certainly be 
encouraged. To the extent, open access would be required, such access 
should reflect market-based pricing (and other terms and conditions).

                            VII. CONCLUSION

    Advocates for a national broadband policy argue that the potential 
for broadband to serve as the engine for (or at least stimulate) the 
nation's economic growth is not yet being met. Advocates point to a 
number of justifications: the regulatory disparate treatment of 
similarly-situated competitors, capital market constriction, sub-
optimal state regulatory philosophies, poor demand for broadband and 
related applications, concerns about copyright infringement, etc.
    These concerns argue for reform in a variety of arenas: at the FCC, 
in Congress, by state regulators and in the private sector. Meaningful 
change will not occur in one sphere alone. The FCC's classification of 
DSL as an ``interstate information service'' rather than a 
``telecommunications service'' would be less significant if broadband 
providers do not meaningfully address the business challenges 
confronting them--such as getting broadband to the last mile, 
stimulating demand, dealing with convergence, etc. Congress legislating 
supply-side development or deployment incentives will have a sub-
optimal impact if regulators treat broadband like traditional 
telephony. Development of a competitive, fully-functioning broadband 
market poses multi-pronged challenges and calls for a multi-pronged 
solution by various actors.
    My policy positions are based on a fundamental belief that the real 
beneficiaries of a robust broadband market are the consumers. Those 
entrusted with making public policy decisions must be relentless in 
their pursuit of broadband policies that ensure we expeditiously 
provide consumers with more choices of innovative technologies at the 
most efficient prices.

    Mr. Upton. Thank you.
    Mr. Tauke.

                  STATEMENT OF THOMAS J. TAUKE

    Mr. Tauke. Thank you, Mr. Chairman and distinguished 
members of the committee.
    I am before you today to tell you that, without changes in 
regulation, the deployment of high-speed Internet access will 
be significantly impeded to the detriment of all Americans. 
That is how I began my testimony in 1999 before this 
subcommittee. I have testified five times in the subsequent 4 
years since then. This is becoming a habit; and, as much as I 
love all you guys, it is a habit I would like to break.
    But at the rate we are going I think the real world on MTV 
will take place in a geriatric unit before we see a national 
broadband policy coming out of the FCC, not of course that I 
have ever seen the real world.
    But, in any event, why should you care about a national 
broadband policy? Well, I have three reasons.
    Reason one is it is the economy. The fact is, is that 
sometimes we are so close to the telecom sector that we forget 
how important it is to the economy as a whole. Just a few years 
ago in the year 2000 this wireline, just the wireline sector of 
this industry, had a capital budget of $104 billion. Now to put 
that in a little perspective, that is five times the capital 
budget of the auto industry.
    Second, you should note that now, instead of $104 billion, 
the wireline sector has a capital budget of $42 billion, a drop 
of some $60 billion, and that is last year's number. This year 
it will probably be a little lower.
    If you look at a company like Verizon, we had a capital 
budget a couple years ago of $18.5 billion. We haven't dropped 
as much as the industry as a whole. We are down to $12.5 
billion. But that $6 billion reduction in capital investment 
means a lot of jobs. For every $100 million we spend, we create 
some say 700, other economists say up to 1,000, but 700 to 
1,000 jobs.
    So if you take the reduction of $6 billion annually in 
capital investment that is occurring in our company, that is 45 
to 60,000 jobs. But that is only the tip of the iceberg, 
because for every job in our company created through capital 
investment, there are four more jobs created in other companies 
for another 200,000 or so jobs.
    Now you can get carried away with this stuff, but if you 
think a $60 billion drop in capital investment, five jobs 
created for every thousand dollars or--or 5,000 jobs created 
for every hundred thousand dollars spent, even if you take the 
statistics and cut them in half, it is about 2 million jobs 
that this has cost this economy as a result of the decline in 
investment in the wireline sector.
    Why have we had this decline in investment in the wireline 
sector? Because we haven't known what the rules were to make 
the transition from the old network to the new network; and if 
you don't know what the rules are, it is hard to make a 
business case for investment in that new network. So this is 
important to infrastructure investment, which now is critically 
important to the economy.
    Reason two: Consumers are being denied services, 
competition and choice. The fact is that uncertain policies 
stalls deployment, and when deployment is stalled, consumers 
suffer, because services and applications are not developed and 
delivered to those consumers.
    Reason three: Government policy is unfair, and that is what 
you do, government policy. It is unfair. It is wrong. It is 
outdated. We love our friends in the cable industry, but the 
cable industry has over 65 percent of the consumer broadband 
market, yet they aren't regulated. We have about 31 percent of 
that market. Our sector of the industry, we are regulated to 
beat the band. This isn't right. It is wrong.
    So what can be done? Well, first, you need to establish a 
national policy, a national broadband policy. The country has 
been waiting for 4 or 5 years for this. And as you do that, 
bring speed, clarity and decisiveness to this effort.
    More specifically, the Triennial Review needs to come out. 
We need to know what the FCC did so that we can begin to move 
forward with our plans for deployment. We have been marching 
forward with the setting of standards. We have been working 
with our suppliers, but until you know what the rules are, it 
is pretty hard to finalize the business case or even know what 
kind of network you are deploying.
    Second, we need the proceedings on definitions to be 
finalized so we know what rules will govern broadband networks 
and services. Right now, we are under Title II, which is voice 
telephony. It is complicated regulation. It is arcane 
regulation. It is costly regulation. Broadband is not 
traditional voice telephony. We are not a utility in the 
broadband marketplace. We are not a monopoly in the broadband 
marketplace. We are a competitor who is trying to fight for 
market share and deliver new services in this marketplace.
    So we believe that the FCC should not apply Title II 
regulation to us but apply Title I, what the FCC has used in 
the past for Internet services and the way it is already 
classified cable broadband.
    If the FCC acts, it is going to permit the transition of 
the wireline industry and the Nation's wireline infrastructure 
to move forward. We need that transition in the jobs and 
investment to go with it. It is going to provide a boost to the 
economy and jobs; and, third, it is going to deliver more 
services and more choice to consumers.
    Thank you, Mr. Chairman.
    [The prepared statement of Thomas J. Tauke follows:]

  Prepared Statement of Thomas Tauke, Senior Vice President, Verizon 
                             Communications

    Mr. Chairman, thank you for this opportunity to testify before the 
Committee. I am Tom Tauke, Senior Vice President for Public Policy and 
External Affairs at Verizon Communications. I am before you today to 
discuss broadband telecommunications and what the federal government 
should do to help broadband achieve its full potential. Unless there 
are changes in the current regulatory regime, the deployment of 
broadband will be significantly impeded, to the detriment of the 
American economy as a whole, and to all Americans.
    My message today is simple. There is general consensus that broad 
deployment of broadband is a good thing, that it will benefit the 
economy and consumers, and that we need a coherent national policy that 
fosters the deployment of broadband and all the benefits it promises. 
This deployment will require significant additional investment, and 
government policy therefore needs to be conducive to that investment.
    We believe that the FCC took the first step in that direction in 
the broadband sections of the Triennial Review order, limiting some of 
the ``old rules'' to the ``old wires'' of traditional telephony. And 
Verizon has reacted in the marketplace to what it believes that order 
says. The FCC now needs to finish the job and free the ``new wires'' 
from the remaining ``old rules'' by acting promptly to establish a 
consistent national policy that does not interfere with industry's 
deployment of broadband capabilities. If the Commission does that, 
Verizon and, I believe, others will respond with greater investment in 
and deployment of broadband.

                      THE IMPORTANCE OF BROADBAND

    Broadband is the capacity to deliver high-speed data communications 
access with a continuous ``always on'' connection and the ability to 
both receive and transmit digital content or services at high speeds. 
It can provide the stimulus that the economy needs, and transform the 
way we live, learn, work and play. The high-speed networking of digital 
devices of all kinds--from PCs to digital health monitoring devices is 
vital to our economy and the advancement of society.
    Mr. Chairman, the Internet is a wonderful tool that developed far 
faster than anyone imagined. Use of personal computers and dial-up 
access to the Internet fueled the growth the U.S. and world economy 
enjoyed in the late 1990's. This growth has reached a plateau. More is 
needed now to move the economy to the next level. And that stimulus--
stimulus to the economy as a whole--could be provided by greater 
deployment of high-speed, broadband telecommunications. The widespread 
adoption of broadband will increase the efficiency and productivity of 
Americans at work and at home--with a potential $500 billion impact on 
the United States economy 1. The benefits to the quality of 
life are immeasurable.
---------------------------------------------------------------------------
    \1\ R. Crandall & C. Jackson, The $500 Billion Opportunity: The 
Potential Economic Benefit of Widespread Diffusion of Broadband 
Internet Access, Executive Summary, page iii (July 2001).
---------------------------------------------------------------------------
    There is broad recognition that as a mainstay of the Internet's 
development and growth, the telecommunications sector is hurting. 
Between 2000 and 2002, overall annual investment by wireline 
telecommunications carriers, including Verizon, declined from $104.8 
billion to $42.8 billion, a reduction of over $60 billion in just those 
two years.2 Spending on new equipment is down 19% in 2003 
from the already depressed levels of 2002,3 and R&D 
expenditures have plummeted.4 Over half a million jobs have 
been lost in the sector since 2000.5
---------------------------------------------------------------------------
    \2\ Skyline Marketing Group, CapEx Report: 2002 Annual Report, 
Carrier Data Sheet 1 (June 2003); see also TIA, 2003 Telecommunications 
Market Review and Forecast at 56, Tables II-4.1 & II-4.2 (2003) 
(spending by carriers on telecommunications equipment decreased by 26.2 
percent in 2001 (from $58B to $43B) and by 49.1 percent in 2002 (from 
$43B to $22B). Despite cut-backs, Verizon's capital budget that remains 
among the largest of all companies in America. It spends more than the 
big three auto companies combined, for example. It employs over 250,000 
people in 31states, who maintain and build its networks.
    \3\ A. Latour et al., A Wrong Number for Telecom: Big Operators Cut 
Spending by 19%, Wall St. J. (Apr. 28, 2003).
    \4\ M. Balhoff, CFA, Legg Mason, Investment and the Public 
Interest, Presentation at the Institute of Public Utilities Conference, 
December 10, 2002, page 7 (investment in R&D by Lucent fell 28% from 
2001 to 2002 and R&D investment by Nortel fell 39% during the same time 
period).
    \5\ M. Balhoff, CFA, Legg Mason, Investment and the Public 
Interest, Presentation at the Institute of Public Utilities Conference, 
December 10, 2002, page 6.
---------------------------------------------------------------------------
    Because of the importance of our sector to the economy overall, 
this is bad not just for our companies but for the national economy as 
well. Historically, almost a quarter of GDP growth in the 1990's was 
the result of investment by IT and telecom companies.6 
Investments by the telecom sector have huge multiplier effects. Each 
dollar invested in telecommunications infrastructure results in almost 
three dollars in economic output.7 For every $100 million of 
capital spending by telecommunications companies, about 700 jobs are 
created,8 and spending these capital dollars on broadband 
means even more job growth. For every job created in building broadband 
networks, four more jobs are created in related industries.9
---------------------------------------------------------------------------
    \6\ D. Jorgensen, American Economic Report (March 2001).
    \7\ Input-Output Accounts Data: 1999 Annual I-O Table Two Digit at 
Table IOTotReqIxCSum.xIs, http://www.bea.doc.gov/dn2/I-o.htm#annual.
    \8\ Telnomics Research, 2003, Washington, D.C.
    \9\ M.J. Mandel, ``The New Business Cycle,'' Business Week, March 
31, 1997, and S. Pociask, ``Building a Nationwide Broadband Network: 
Speeding Job Growth'' New Millennium Research Council (February 15, 
2001).
---------------------------------------------------------------------------
    Broadband deployment will benefit the people of America directly 
and personally, in addition to the benefits they will receive from a 
healthier national economy. These benefits go well beyond e-mail, 
instant messaging and web surfing.
    For example, telemedicine over a high-speed network will improve 
the quality of medical care in remote or rural areas. But broadband 
will also make receiving medical care less of a burden for patients 
everywhere by, for example, finally making it unnecessary for the 
patient to run around from lab to doctor to specialist picking up and 
delivering copies of her x-rays and test results.
    And we all know the power of broadband for entertainment and the 
promise of video-on-demand and similar services. But broadband will 
also let parents send home movies of their children to their 
grandparents across the country, instantly and cheaply.
    It is these benefits that make Verizon believe in the future of 
broadband telecommunications and want to be part of that future.

             WHAT ARE THE BARRIERS TO BROADBAND DEPLOYMENT?

    Verizon broadband today is primarily DSL services, which provide 
significant improvements in data transmission speeds. But DSL is only a 
first step, with the goal being fiber optic deployment into 
neighborhoods and homes. But as costly as the job is of making DSL 
capabilities widely available, the task of rewiring the country with 
fiber makes DSL deployment look like pocket change. Though the 
investments necessary to make this a reality are massive, Verizon 
realizes that this is where its future, and the future of the industry, 
lies.
    But very real external forces inhibit what Verizon can do.
    First and foremost is regulation--both bad rules and regulatory 
uncertainty have slowed and continued to slow deployment. When Congress 
passed the Telecom Act, it thought competition could work for consumers 
in the telecommunications market. That part was right; but regulators 
implemented the law by forcing competition through the transfer of 
revenues from the telephone companies to firms entering the market. 
This was done primarily by making incumbents sell services to the new 
firms at below-cost prices, allowing the new entrants to win customers 
and make profits without paying the true costs of what they bought and 
without making any investments whatever. With this regulatory scheme, 
why would any company take the risk of making massive investments to 
provide broadband services? The FCC appears to understand that this 
scheme will be a disaster for broadband, but it must issue an order to 
that effect.
    But that's only part of the problem. The FCC has an entire body of 
additional regulations developed under Title II of the Act for 
traditional telephone services. Those rules limit telephone companies 
to recovering the cost of risky new investments that succeed, while 
forcing them to absorb the cost of any that don't. They impose still 
another set of unbundling obligations that increase both the cost and 
risk of investing in new broadband services. And they impose arcane 
advance approval requirements that delay the roll out of competitive 
new broadband services that our customers want. Applying these rules to 
broadband makes no sense, and deters investment.
    Given the deep roots of regulation in the telecommunications 
sector, policy matters a great deal. It sends important signals to 
investors and creates expectations about the relative merits of 
investing in new technologies, cutting costs and employing more 
workers. Wall Street is skeptical of increasing capital spending in 
telecommunications and instead is now rewarding cutbacks in investment. 
This skepticism is based, in part, on the normal factors of the 
competition and the state of the economy. But in the telecommunications 
industry, a significant factor is investors' belief that the regulatory 
rules simply make it nearly impossible to realize any return from 
investments in new technologies and services. We need to reverse these 
trends for the good of the economy, the industry and consumers.

                             WHAT'S NEEDED?

    What's needed is a new approach that takes account of competitive 
broadband deployment. The broadband marketplace of today has a number 
of competing technologies vying for the consumer's attention and 
wallet. Cable companies, telephone companies, wireless companies, 
satellite companies and, now, WIFI networks compete aggressively 
offering broadband services that consumers regard as interchangeable.
    Cable companies, free of regulation, are among the most active 
competitors. They have invested $70 billion in upgrading and digitizing 
their networks and have the capability of offering hundreds of digital 
TV channels and broadband services. They are moving to use this same 
platform to offer voice telecommunications services employing efficient 
Internet protocols.10 They are dominant in the broadband 
market with two-thirds of the households (12 million) that have signed 
up for broadband to date.11 And they are not regulated.
---------------------------------------------------------------------------
    \10\ R. Sachs, President, National Cable Telecommunications 
Association, ``The New Broadband Internet Paradigm,'' Remarks to NARUC/
NECA Summit on Broadband Deployment II, Arlington, Virginia April 28, 
2003, page 1.
    \11\ National Cable and Telecommunications Association web site, 
accessed July 16, 2003, http://www.ncta.com/industry--overview/
indStats.cfm?statID=15.
---------------------------------------------------------------------------
    Verizon is eager to compete head on with cable and other 
technologies that are vying for costumer's attention. We are willing to 
enter these new and unproven markets and to take the risks involved in 
doing so. But we--Verizon, the industry and the public--need government 
to do its part to reform current regulations that affirmatively hold 
back investment.
    First, we need a Triennial Review order on broadband that is clear 
and that cannot be gamed. We need the FCC to finally declare that 
Broadband technologies will not be subject to the unbundling rules that 
were devised for a voice network.
    Second, we need a sound national policy that permits all 
infrastructure providers to compete. Cable has over 65 per cent of the 
high-speed broadband consumer market. Cable's broadband network and 
services are not regulated. So what is the justification for regulating 
the broadband network and services of companies that have a market 
share of less than 35 per cent? Why is government continuing to stymie 
one group of companies that is trying to invest in the infrastructure 
that will serve consumers and provide full competition in the wireline 
broadband market? Regulation is appropriate only where markets have 
failed, and it should not be imposed in anticipation of problems that 
do not exist. Cable was freed of this burden by the ``96 Act and 
transformed its coaxial network into the high-speed network it now 
touts.
    Third, we need the FCC to finish the job on broadband NOW. It needs 
to classify our broadband services the same way it already has 
classified comparable services provided by the dominant cable 
companies. The FCC should first decide that all broadband services 
should not be regulated under Title II, and instead should be 
classified under Title I of the Communications Act. Broadband is not 
telephony, and it should not be regulated like telephony. Imposing old 
telephony rules on broadband makes no sense.
    And we need the FCC to reform the irrational and destructive 
pricing rules that are siphoning away money that could otherwise go to 
support new investment, and that instead is going to line the pockets 
of arbitrageurs who make no investment. To the extent we have 
continuing obligations to make elements of our network available for 
use by competitors, we should receive a fair price that lets us recover 
the prices we incur in the real world to provide those elements.
    And, if investments and deployment plans are to be made now, we--
Verizon, the industry and the public ``need these things done now, 
without further delay.

                         OTHER INTERNET ISSUES

    As we move toward a broadband world, the Commission is being asked 
at the same time to put new rules in place relating to broadband. Some 
have expressed concern that broadband network providers could 
discriminate against application providers or Internet service 
providers or try to keep customers from accessing services on the 
Internet that compete with services, like VOIP, that the broadband 
providers are offering.
    The Internet is built on layers of services, networks and 
technologies. The operating system in your PC is at one layer or level; 
the ISPs are another layer; applications, like e-mail, are another 
layer; and the network infrastructure--the broadband loop into your 
home--is another. Every layer is distinct but they all must work 
together in order to provide consumers with information or services 
they want. This is what I call the ``Internet's Value Chain'' and in 
order for it to work for the consumer, every layer--or link in the 
chain--must do its part.
    Microsoft, Amazon, Earthlink, and many other players provide links 
or parts of links in the Internet's Value Chain. There are things that 
any one of these players might do that could be harmful to the openness 
of the Internet--but they aren't regulated, and I don't think anyone 
would seriously suggest they should be regulated. Yet, that is what 
some are advocating for network providers like Verizon. What is being 
suggested is pure anticipatory regulation. There is no need for this. 
We should be patient and not permit the heavy hand of regulation to 
skew the market forces that will determine what consumers want, how 
they want it, and what they are willing to pay for it. I do not see how 
it is in the interest of any player in Internet space, in the market 
right now, to be enacting anticipatory regulation of the Internet 
experience.
    We think that the High Tech Broadband Coalition principles are 
worthy of being embraced by the FCC. Those principles are designed to 
ensure that the consumer has access all the services available on the 
Internet. And we believe that it's important that consumers have access 
to the Internet no matter whether the wires belong to Verizon or 
someone else.
    There is no need, however, to chisel these principles into 
regulation. Rather, the FCC should allow the industry to follow this 
vision. The FCC, by endorsing these principles, can put the industry on 
notice. This will have tremendous impact on the way in which the market 
develops.
    Put in simple terms the FCC should endorse these important industry 
principles, let the market develop and allow all new services to be 
offered in a ``regulatory free'' zone.

                               CONCLUSION

    The key to reinvigorating the telecommunications industry is to 
send strong, consistent signals that uncertainty in policy is about to 
end and national policies will be adopted forthwith that support, not 
impede, investment. We're ready to do our part. If the government soon 
makes the right policy changes, broadband can be a true American 
success story and help to re-ignite the economy.Thank you.

    Mr. Upton. Mr. Jones, before you go, I want to recognize 
the chairman for a point of personal privilege.
    Chairman Tauzin. I thank the chairman for that privilege.
    Let me, first of all, announce to the members of the 
committee and the audience that we are privileged to have with 
us a group of young people in the audience who have just shown 
up. They are from my home district in Louisiana. They are all 
high schoolers, and they just attended a session at Nicholls 
State University. Mr. Markey, that is my alma mater. We 
affectionately call it ``Harvard on the Bayou'' in Louisiana. 
These young people attended a session known as Free Enterprise 
Institute which is a session where they learn the principles of 
free market and free enterprise. What a great time for them to 
be here visiting the committee at this time.
    But I wanted to welcome them all. They are winners of the 
right to attend a week here in Washington where they can see 
their government at work, and they are accompanied by a very 
special lady in my life. My daughter Kristie Tauzin is with 
them. If you will please give all of them a big welcome, I 
would appreciate it.
    And I yield to my friend Mr. Markey.
    Mr. Markey. I think it is important to note that you are a 
graduate of Nicholls State University.
    Chairman Tauzin. It is important to know I graduated 
anywhere, Mr. Markey.
    Mr. Markey. Well, I know. I think the audience should know 
that. And as a result, you know, up in Boston we oftentimes 
refer to Harvard as the Nicholls State University of 
Massachusetts, because of the obvious intelligence and fine 
education that you----
    Chairman Tauzin. I appreciate that. We park our cars down 
on the bayou, too, Mr. Markey.
    Mr. Upton. Mr. Jones.

                   STATEMENT OF THOMAS JONES

    Mr. Jones. Thank you, Chairman Upton, ranking member and 
members of the subcommittee for the opportunity to testify 
today.
    My name is Thomas Jones. I am a partner in the law firm of 
Willkie Farr & Gallagher. I am testifying today on behalf of 
three competitive local exchange carriers, or CLECs: Allegiance 
Telecom, Conversent Communications and Time Warner Telecom.
    Allegiance, Conversent and Time Warner Telecom are all 
facilities-based CLECs that serve business customers. 
Allegiance and Conversent deploy their own switches, but they 
rely on the right established in the Telecommunications Act of 
1996 to use unbundled broadband loops from the ILECs to provide 
telephone and broadband data services to small- and medium-
sized business customers. Time Warner Telecom uses its own 
facilities to provide voice and broadband services to medium 
and large business customers but must still purchase broadband 
end user connections from ILECs to serve many of its business 
customers.
    I would like to explain today why the FCC's proposal to 
reclassify the transmission used in ILEC broadband Internet 
access as an unregulated Title I service threatens Congress' 
established telecommunications policy goals in two fundamental 
ways. First, by reclassifying these services out of Title II 
and reversing decades of precedent, the FCC would eliminate the 
ILEC's obligation to sell broadband loops to their CLEC 
competitors. For most small- and medium-sized business 
customers, the ILECs own the only broadband loops. No other 
service provider, including cable, wireless or satellite, has 
deployed ubiquitous business end user connections that have the 
upstream capacity, reliability and security features that the 
ILEC loops have.
    Therefore, the only way for CLECs to serve the business 
market is by purchasing ILEC broadband loops. Eliminating their 
right to do so under Title II, which mandates reasonable prices 
and service quality, will likely destroy competition in this 
dynamic and innovative segment of the economy.
    The purported goal of the FCC's proposal is to treat ILEC 
broadband and cable modem services the same way. However, the 
end result of reclassifying ILEC broadband transmission as a 
Title I service would be to throw the baby out with the bath 
water. ILECs would no longer be required to share broadband 
loops in the residential mass market in which the cable 
companies do compete, but ILECs would also no longer be 
required to provide broadband loops in the business broadband 
markets in which cable usually does not compete and in which 
the ILECs usually have the only viable end user connections.
    If the FCC wants to consider deregulating certain aspects 
of ILEC broadband transmission, it can only do so within the 
scope of its statutory authority established by Congress in the 
Communications Act. To the extent that there is any 
justification for deregulating the ILECs--and it is our 
testimony that the ILEC's market power does continue to warrant 
regulation--then the FCC must justify such deregulation under 
the standards set forth by Congress in section 10 of the Act. 
That provision gives the FCC the authority to target 
forbearance to markets where the ILECs lack market power. For 
both a policy and legal perspective, section 10 is the only 
legitimate vehicle for deregulating ILEC broadband.
    Second, reclassifying the broadband transmission used to 
provide ILEC Internet access as a Title I service threatens 
many core social and national security policy objectives 
established by Congress. For example, the FCC's proposal could 
cause statutory requirements regarding universal service, 
privacy, access to the disabled and unauthorized changes in 
service providers to become inapplicable to broadband. 
Moreover, the requirements of the Communications Assistance for 
Law Enforcement Act, or CALEA, might not apply.
    While some observers belief that the FCC can selectively 
reimpose these requirements under Title II, I respectfully 
submit that such an effort is beyond the FCC's jurisdiction. 
The Communications Act specifically states that the 
requirements of Title II only apply to the extent a 
telecommunications carrier is engaged in providing 
telecommunications services. Reclassification would mean that 
the ILECs would not be providing broadband as a 
telecommunications service, and the Supreme Court precedent 
does teach that the FCC may not rely on Title I authority to 
change that fact.
    In sum, we urge Congress to remind the FCC that it lacks 
the authority to interpret Title II out of the Act whenever it 
pleases. Congress has specified the mechanism that the agency 
may use to deregulate as warranted without negative 
consequences for competition and other congressional goals. 
That mechanism is selective deregulation under section 10, not 
reclassification.
    Again, thank you for allowing me to participate here today, 
and I would be happy to answer any questions.
    [The prepared statement of Thomas Jones follows:]

Prepared Statement of Thomas Jones, Willkie Farr & Gallagher, on Behalf 
   of Allegiance Telecom, Conversent Communications and Time Warner 
                                Telecom

    I want to begin by thanking Chairman Upton, Ranking Member Markey, 
and the Members of the subcommittee for the opportunity to testify 
today. My name is Thomas Jones. I am a partner in the law firm of 
Willkie Farr & Gallagher. I am testifying today on behalf of three 
competitive local exchange carriers or ``CLECs'': Allegiance Telecom, 
Conversent Communications, and Time Warner Telecom. I would ask that in 
addition to my testimony today, you include in the record a joint paper 
to be filed by these companies in the FCC's Title I proceeding.
    Allegiance, Conversent and Time Warner Telecom are all facilities-
based CLECs that serve business customers. Allegiance and Conversent 
deploy their own switches, but they rely on the right established in 
the Telecommunications Act of 1996 to use unbundled broadband loops 
from the ILECs to provide telephone and broadband data services to 
small and medium-sized business customers. Time Warner Telecom uses its 
own facilities to provide voice and broadband services to medium and 
large business customers, but must still purchase broadband loops from 
the ILECs to serve many of its business customers.
    I would like to explain today why the FCC's proposal to reclassify 
the transmission used in ILEC broadband Internet access as an 
unregulated Title I service threatens Congress' established 
telecommunications policies in two fundamental ways. First, by 
reclassifying these services out of Title II and reversing decades of 
precedent, the FCC would eliminate the ILECs' obligation to sell 
broadband loops to their CLEC competitors. For most small and medium-
sized business customers, the ILECs own the only broadband loops. No 
other service provider, including cable, wireless or satellite, has 
deployed ubiquitous business end user connections that have the 
upstream capacity, reliability and security features of ILEC loops. The 
ILECs' market power over business loops remains, regardless of what is 
sent over its loop facilities, whether it be broadband or narrowband, 
or if the loop is old, new, borrowed or blue. Therefore, the only way 
for CLECs to serve the business market is by purchasing ILEC broadband 
loops. Eliminating their right to do so under Title II, which mandates 
reasonable prices and service quality, will likely destroy competition 
in this dynamic and innovative segment of the economy.
    The purported goal of the FCC's proposal is to treat ILEC broadband 
and cable modem services the same way. However, the end result of 
reclassifying ILEC broadband transmission as a Title I service would be 
to throw the baby out with the bath water. ILECs would no longer be 
required to share broadband loops in the residential/mass market in 
which cable competes, but ILECs would also no longer be required to 
provide broadband loops in the business broadband markets in which 
cable usually does not compete and in which the ILECs usually own the 
only broadband end user connections.
    If the FCC wants to consider deregulating certain aspects of ILEC 
broadband transmission, it can only do so within the scope of its 
statutory authority established by Congress in the Communications Act. 
To the extent that there is any justification for deregulating the 
ILECs, and it is our testimony that ILECs' market power continues to 
warrant regulation, then the FCC must justify such deregulation under 
the standards set forth by Congress in Section 10 of the 
Act.1 That provision gives the FCC the authority to target 
forbearance to markets where the ILECs lack market power. From both a 
policy and legal perspective, Section 10 is the only legitimate vehicle 
for deregulating ILEC broadband.
---------------------------------------------------------------------------
    \1\ The full text of Section 10 is set forth in an appendix to this 
testimony.
---------------------------------------------------------------------------
    Second, reclassifying the broadband transmission used to provide 
ILEC Internet access as a Title I service threatens many core social 
and national security policy objectives established by Congress. For 
example, the FCC's proposal could cause statutory requirements 
regarding universal service, privacy, access to the disabled, and 
unauthorized changes in service providers to become inapplicable to 
broadband. Moreover, the requirements of the Communications Assistance 
for Law Enforcement Act (CALEA) might not apply to transmissions 
delivered over broadband, including voice over IP.
    While some observers believe the FCC can selectively reimpose these 
requirements under Title I, I respectfully submit that such an effort 
is beyond the FCC's jurisdiction. The Communications Act specifically 
states that the requirements of Title II only apply to the extent a 
telecommunications carrier is engaged in providing telecommunications 
services. Reclassification would mean that ILECs would not be providing 
broadband as telecommunications services, and Supreme Court precedent 
teaches that the FCC may not rely on its Title I authority to change 
that fact.
    In sum, we urge Congress to remind the FCC that it lacks the 
authority to interpret Title II out of the Act whenever it pleases. 
Congress has specified the mechanism that the agency may use to 
deregulate as warranted without negative consequences for competition 
and other congressional goals--that mechanism is Section 10, not 
reclassification.
    Again, thank you for allowing me to participate here today, and I 
would be happy to answer any questions.

                                APPENDIX

SEC. 10. [47 U.S.C. 160] COMPETITION IN PROVISION OF TELECOMMUNICATIONS 
        SERVICE.
    (a) REGULATORY FLEXIBILITY.--Notwithstanding section 332(c)(1)(A) 
of this Act, the Commission shall forbear from applying any regulation 
or any provision of this Act to a telecommunications carrier or 
telecommunications service, or class of telecommunications carriers or 
telecommunications services, in any or some of its or their geographic 
markets, if the Commission determines that--
        (1) enforcement of such regulation or provision is not 
        necessary to ensure that the charges, practices, 
        classifications, or regulations by, for, or in connection with 
        that telecommunications carrier or telecommunications service 
        are just and reasonable and are not unjustly or unreasonably 
        discriminatory;
        (2) enforcement of such regulation or provision is not 
        necessary for the protection of consumers, and
        (3) forbearance from applying such provision or regulation is 
        consistent with the public interest.
    (b) COMPETITIVE EFFECT TO BE WEIGHED.--In making the determination 
under subsection (a)(3), the Commission shall consider whether 
forbearance from enforcing the provision or regulation will promote 
competitive market conditions, including the extent to which such 
forbearance will enhance competition among providers of 
telecommunications services. If the Commission determines that such 
forbearance will promote competition among providers of 
telecommunications services, that determination may be the basis for a 
Commission finding that forbearance is in the public interest.
    (c) PETITION FOR FORBEARANCE.--Any telecommunications carrier, or 
class of telecommunications carriers, may submit a petition to the 
Commission requesting that the Commission exercise the authority 
granted under this section with respect to that carrier or those 
carriers, or any services offered by that carrier or carriers. Any such 
petition shall be deemed granted if the Commission does not deny the 
petition for failure to meet the requirements for forbearance under 
subsection (a) within one year after the Commission receives it, unless 
the one-year period is extended by the Commission. The Commission may 
extend the initial one-year period by an additional 90 days if the 
Commission finds that an extension is necessary to meet the 
requirements of subsection (a). The Commission may grant or deny a 
petition in whole or in part and shall explain its decision in writing.
    (d) LIMITATION.--Except as provided in section 251(f), the 
Commission may not forbear from applying the requirements of section 
251(c) or 271 under subsection (a) of this section until it determines 
that those requirements have been fully implemented.
    (e) STATE ENFORCEMENT AFTER COMMISSION FORBEARANCE.--A State 
commission may not continue to apply or enforce any provision of this 
Act that the Commission has determined to forbear from applying under 
subsection (a).

    Mr. Upton. Thank you. Mr. Sachs.

                    STATEMENT OF ROBERT SACHS

    Mr. Sachs. Chairman Upton, Ranking Member Markey and 
members of the subcommittee, I appreciate this opportunity to 
share with you the cable industry's views regarding what 
regulation, if any, is appropriate for broadband Internet 
services. I would like to make three points.
    First, the widespread availability of broadband Internet 
service across the U.S. Is largely the result of the cable 
industry's massive investment of private risk capital. This 
multibillion dollar investment has created a service that has 
proved to be a fast growing, highly valued consumer service.
    Second, an important reason why the cable industry's risk 
taking has greatly enhanced the use of the Internet for 
millions of Americans is because FCC policies have avoided 
unnecessary regulation.
    Third, the cable industry supports policies that favor 
broadband competition over regulation. In the absence of any 
market failure, and there is none in the broadband market, any 
government intervention should be aimed at deregulatory parity; 
that is, regulate down, not up.
    It is really hard to believe that cable modem service has 
existed as a consumer service for only 7 years. I remember well 
one of the earliest public demonstrations of this new 
technology that my then employer Continental Cablevision 
conducted in the early nineties at the Museum of Science in 
Boston. Frankly few at the time believed that cable's hybrid 
fiber coax networks were suitable for data transmission. After 
all, cable was low tech, but the demo made instant converts.
    To the credit of an entrepreneurial industry that was 
willing to take the risks, broadband has come a long way in a 
relatively short period of time. Cable broadband is now 
available to almost 85 percent of U.S. Households. This massive 
undertaking has involved upgrading over a million miles of 
cable plant with fiber optics and the latest digital 
technology.
    More than 12 million households today subscribe to cable 
modem service. Among cable households that own PCs, over 25 
percent are cable modem customers. Cable modem service gives 
consumers instantaneous access to the Internet and everything 
that is available on it.
    Companies have experimented with different business models. 
Some offer tiers. Some offer unique broadband content. All 
allow customers to choose their own home page with unfettered 
access to any content on the Internet.
    Government regulatory policies can have strong effects on 
how rapidly broadband gains mass market. The FCC's approach to 
cable modem services certainly helped its development. In 1999, 
at the urging of dial-up ISPs and our telephone competitors, 
the FCC intensively studied whether it should mandate access 
for competitive ISPs on the cable platform on government-set 
terms and conditions; in other words, common carriage.
    Our industry argued, indeed we committed that we would 
build out our broadband networks aggressively if we were not 
burdened by this type of costly and intrusive regulation. 
Forcing common carriage on cable would only delay deployment, 
we said. The FCC's decision not to head down the road of 
regulation allowed us to keep our commitment.
    By 2002, court cases led the FCC to decide the regulatory 
classification of cable modem service. The FCC concluded that 
this service is an interstate information service and not a 
cable service nor a telecommunications service. In a further 
rulemaking the FCC is currently considering the full 
implications of its classification of cable modem service as an 
information service, which brings me to my final point.
    To the extent the FCC believes that cable modem and DSL 
services should be subject to some version of equivalent 
regulation, it should adopt, as you said, Mr. Chairman, 
deregulatory parity; that is, the Commission should remove 
regulatory constraints, not add new ones.
    NCTA has not participated in the FCC's rulemaking on the 
regulatory treatment of DSL. However, as a general principle we 
favor market competition over regulation and do not seek to 
impose regulatory requirements on competitors.
    We do take issue with the suggestion by some companies that 
if DSL service remains subject in whole or in part to Title II 
regulation, cable modem service should be subjected to 
equivalent regulation. ILECs are subject to Title II 
constraints for reasons related to their unique history and 
network characteristics. Imposing legacy phone regulations on 
cable for no reason other than to achieve regulatory parity 
would harm consumers by raising the price or lowering the 
quality of cable modem service. It would also provide a 
disincentive for new investment.
    Promoting competition rather than regulating competitors 
should be the cornerstone of U.S. Broadband policy.
    [The prepared statement of Robert Sachs follows:]

 Prepared Statement of Robert Sachs, President and CEO, National Cable 
                   and Telecommunications Association

    Mr. Chairman, Ranking Member Markey, and Members of the 
Subcommittee: On behalf of the National Cable & Telecommunications 
Association, I appreciate this opportunity to share with you the cable 
industry's views regarding what regulatory treatment, if any, is 
appropriate for broadband Internet services.
    In my testimony today, I'd like to make three points. First, the 
widespread availability of broadband Internet service across the U.S. 
is largely the result of the cable industry's massive investment of 
private risk capital. This multi-billion dollar investment has created 
a service that has proved to be a fast-growing, highly valued service 
by consumers. Second, an important reason that the cable industry's 
risk taking has greatly enhanced use of the Internet for millions of 
Americans is because FCC policies have avoided unnecessary regulation. 
Third, the cable industry supports policies that favor broadband 
competition over regulation. In the absence of any market failure--and 
there is none in the broadband market--any government intervention 
should be aimed at ``deregulatory parity,'' that is, regulate down, not 
up.
    It's really hard to believe that cable modem service has existed as 
a consumer service only for about seven years, with most deployment and 
growth taking place since 1999.
    I remember well one of the earliest public demonstrations of this 
new technology that my then employer, Continental Cablevision, 
conducted in the early-1990's at the Museum of Science in Boston. 
Frankly, few at the time believed that cable's hybrid fiber coax 
networks were suitable for data transport. After all, cable was ``low-
tech.'' But the demo made instant converts.
    To the credit of an entrepreneurial industry that was willing to 
take the risks, broadband has come a long way in a relatively short 
period of time. Cable operators made this investment without any clear 
understanding of how or whether government might decide to regulate 
this new service. And we continue to operate under some regulatory 
uncertainty.
    Due in large measure to efforts of the cable industry, broadband is 
now available to more than 85% of U.S. households. This massive 
undertaking has involved upgrading over a million miles of plant with 
fiber optics and the latest digital technology.
    More than 12 million consumer households subscribe to cable modem 
service. Over 15% of cable households today are cable modem customers. 
And among cable households that own PC's, over 25% are cable modem 
customers.
    Cable internet access has been just that--access to the Internet 
and everything that's available on it. Companies have experimented with 
different business models. All allow consumers to choose their own home 
page with unfettered access to any content on the Internet.
    Government regulatory policies can have strong effects on how 
rapidly broadband gains a mass market. The FCC's approach to cable 
modem service has certainly helped its development. In 1999, at the 
urging of dial-up ISP's and our telephone competitors, the FCC 
intensively studied whether it should mandate access for competitive 
ISP's on the cable platform on government-set terms and conditions. In 
other words, common carriage.
    Some insisted that unless the FCC acted to mandate carriage of 
multiple ISPs before cable's networks were even built, the end-to-end 
openness of the Internet would be lost. Our industry argued--indeed, we 
committed--that we would build out our broadband networks aggressively 
if we were not burdened by this type of unnecessary regulatory 
restraint. Forcing common carriage on cable would only delay 
deployment, we said. The FCC's decision not to head down the road of 
regulation allowed us to keep our commitment. The FCC announced a 
policy of vigilant monitoring of developments and has since reported to 
Congress on the successful rapid deployment of broadband by cable.
    By 2002, court cases led the FCC to decide the regulatory 
classification of cable modem service. The FCC concluded that cable 
modem service is an ``interstate information service'' and not a 
``cable service'' nor a ``telecommunications service.''
    The Commission examined the legislative history of the definition 
of ``cable service'' and concluded that it did not encompass the 
interactive access to the Internet that cable modem service affords to 
subscribers.
    The Commission also found that the Communications Act did not 
permit the classification of cable modem service as a common carrier 
``telecommunications service.'' Such a service, by definition requires 
that the provider offer ``telecommunications''--transmission capacity--
directly to the public for a fee, something cable operators do not do 
in the provision of cable modem service (or, for that matter, in 
providing traditional video programming services).
    The Commission found that the transmission component of Internet 
access provided by cable operators is ``part and parcel of cable modem 
service--integral to its other capabilities,'' not a separate transport 
facility made available for public use. It therefore concluded that 
cable modem service, like Internet access service offered by other 
entities, is an ``information service'' delivered to subscribers ``via 
telecommunications'' rather than separate offerings of content and 
common carrier transport.
    The Commission's finding that the ``information service'' 
classification best fits the attributes of cable modem service is also 
consistent with Congress' direction to insure that the Internet remains 
``unfettered by Federal or State regulation,'' as much as possible. As 
you know, in a further rulemaking, the FCC is currently considering the 
full implications of its March 2002 decision.
    Which brings me to my final point: to the extent the FCC believes 
that cable modem and DSL services should be subject to some version of 
equivalent regulation, it should adopt ``deregulatory parity''--that 
is, the Commission should remove regulatory constraints, not add new 
ones.
    NCTA has not participated in the FCC's rulemaking on the regulatory 
treatment of DSL, which the FCC is studying concurrently with its 
further notice on cable modem service. However, as a general matter, we 
favor market competition over regulation and do not seek to impose 
regulatory requirements on competitors.
    We do take issue with the suggestion by some companies that if DSL 
service remains subject, in whole or in part, to Title II regulation, 
cable modem service should be subjected to equivalent regulation. 
ILEC's are subject to Title II constraints for reasons related to their 
unique history, system architecture, and past conduct--none of which 
pertain to cable. Imposing those legacy regulations--and the costs 
associated with them--on cable for no reason other than to achieve 
regulatory parity will harm consumers by raising the price or lowering 
the quality of cable modem service. It would also provide a 
disincentive for new investment.
    Promoting competition rather than regulating competitors should be 
the cornerstone of U.S. broadband policy. The cable industry's record 
with respect to broadband deployment clearly demonstrates that consumer 
benefits result when government policies encourage companies to invest 
and compete in the market.
    In closing, I'm reminded of the wisdom of Thomas Jefferson, himself 
one of America's greatest innovators, who said: ``That government is 
best which governs the least, because its people discipline 
themselves.'' A modern-day corollary for broadband Internet might be: 
That government is best which governs the least, because market forces 
provide discipline.
    Mr. Chairman, we've come a long way in relatively short period of 
time in making broadband services widely available in the U.S. The 
challenges ahead are to make broadband ubiquitous in rural and urban 
America alike, enhance network capabilities and develop unique 
broadband content and applications that will further drive market 
penetration. I urge you and your colleagues to encourage the FCC to 
continue to give broadband Internet providers the market freedom to 
achieve these goals.
    Thank you.

    Mr. Upton. Thank you very much. Mr. Baker.

                    STATEMENT OF DAVID BAKER

    Mr. Baker. Chairman Upton, Ranking Member Markey and 
members of the subcommittee, thank you for the opportunity to 
testify before you today. I am Dave Baker, Vice President for 
Law and Public Policy with EarthLink. EarthLink is the Nation's 
third largest Internet service provider, serving 5 million 
customers nationwide with dial-up, broadband, Web posting and 
wireless Internet services.
    This hearing is about the regulatory status of broadband 
services. As members of the subcommittee are aware, this 
question has been the focus of several ongoing proceedings at 
the Federal Communications Commission. The law is clear about 
this regulatory status, and EarthLink is dismayed that the FCC 
is misconstruing the law and tilting the playing field in favor 
of incoming providers.
    What is particularly troubling to EarthLink, and I would 
hope would be troubling to members of this subcommittee and the 
Congress as well, is the tremendous and far reaching effort of 
classifying the facilities used to provide broadband services 
as information services under the Communications Act. Common 
carrier transmission services that are the foundation of the 
information economy would no longer be required to be made 
available to information service providers upon reasonable 
requests on nondiscriminatory terms and conditions. Network 
owners would be free to arbitrarily decide who can use their 
networks, at what price and on what terms. This would not only 
work against consumer interests but even laws like CALEA would 
no longer apply.
    The central question of this hearing and of several current 
FCC proceedings is the regulatory classification of broadband 
services. Let me be clear in answering this question. All 
Internet services, whether provided by an independent ISP like 
EarthLink, a telco affiliate like Verizon Online or a cable 
company like Comcast, are information services. Let me be 
equally clear that all information services are by definition 
delivered via telecommunications and that offering of such 
telecommunications, whether by a telco or a cable company, 
makes them telecommunication services. This is true whether the 
Internet access is provided by an independent ISP or the 
network operators themselves. Internet access, broadband or 
otherwise, is therefore an information service riding on top of 
a transmission component which is a telecommunications service.
    In the world of dial-up Internet access these two 
components are easy to see. Consumers purchase their phone line 
from their telephone company and their Internet service from an 
ISP such as EarthLink. The telephone company provides the 
telecommunications service which can be used to transmit voice 
or data. The ISP provides an information service. The 
underlying transmission link is regulated. The Internet access 
is an unregulated information service.
    Now suppose the ISP I just described was Verizon Online. It 
would make no difference. The underlying transmission provided 
by Verizon would still be a regulated common carrier 
telecommunications service and Verizon Online's Internet access 
service would still be an unregulated information service. This 
is the regime that the FCC crafted in its seminal 1980 Computer 
II proceeding, which has been affirmed by the FCC and Federal 
courts many times in the intervening years and which Congress 
adopted in the Telecommunications Act of 1996.
    Broadband access is similar, with two exceptions. First, it 
is obviously faster because the transmission link has better 
electronics and greater capacity. Second, in most cases the end 
user is not given the option of buying the transmission link 
separately from the information service. Rather they buy a 
bundled package which combines the two. Further, most broadband 
ISPs are affiliated with or directly owned by the transmission 
facility owner.
    In the case of broadband Internet access, the FCC is taking 
an approach opposite from the one which proved so successful in 
the narrowband world. For broadband the FCC suggests that so 
long as the facility owner refuses to offer consumers a 
separate transmission link, the bundled package of transmission 
and information is an information service. As a result facility 
owners are able to shield their transmission networks from 
requirements for nondiscriminatory access that would otherwise 
apply. This all but eliminates competition among broadband 
ISPs, violating not only the letter and intent of the 
Telecommunications Act but also doing great harm to small 
businesses and consumers.
    The structure that Congress enacted in the 1996 act mirrors 
the structure the FCC adopted in its Computer II decision. The 
transmission component integral to delivery and definition of 
information service is treated separately under the act just as 
the FCC treated it separately in its rulemakings 15 years prior 
to that. Only by adding words that don't exist such as separate 
and stand-alone does the FCC make their version and definitions 
work.
    Telephone companies enjoyed a government grant of monopoly 
market for almost a century in which to build their 
transmission networks. Cable companies had similar monopoly 
franchises, the cable-telco cross ownership ban, and below cost 
access to ducts and poles in time to build out their networks. 
Telcos and cable enjoy 85 percent market share in their core 
businesses, which draws a steady stream of revenue to push into 
the information services market, and they have some 95 percent 
market share in broadband, DSL and cable modem markets 
respectively.
    In summary, it is crucial to distinguish between broadband 
information services and the underlying telecom services which 
deliver them. Internet access services, whether narrowband or 
broadband, whether offered by an independent ISP or a cable 
company, remain unregulated information services but the 
transmission facilities which underlie them remain common 
carrier telecommunications services. To allow facility owners 
to now repudiate their obligation to share their transmission 
networks on a nondiscriminatory basis is an abuse of the law 
and is anticompetitive. Clearly that is not what Congress 
intended when it passed the 1996 act.
    Thank you for giving me the opportunity to testify today.
    [The prepared statement of David Baker follows:]

  Prepared Statement of Dave Baker, Vice President of Law and Public 
                        Policy, Earthlink, Inc.

    Mr. Chairman and members of the Subcommittee. Thank you for the 
opportunity to testify before you today. My name is Dave Baker. I am 
Vice President for Law and Public Policy for EarthLink. EarthLink is 
the nation's 3rd largest Internet Service Provider (ISP), serving 5 
million customers nationwide with dial-up, broadband (DSL, cable and 
satellite), web hosting and wireless internet services. EarthLink 
regularly receives awards for its customer service and innovation, 
including the J.D. Power and Associates award for highest customer 
satisfaction among dial-up ISPs and (tie) highest customer satisfaction 
among broadband ISPs.
    This hearing is about the regulatory status of broadband services, 
and in particular whether those services should be classified as 
``information services,'' ``common carrier'' services, or ``something 
in between.'' As the members of the subcommittee are aware, this 
question has been the focus of several ongoing proceedings at the 
Federal Communications Commission (FCC). EarthLink is presently 
appealing in court the FCC's declaratory order in the proceeding 
dealing with the provision of broadband service over cable facilities, 
and is anxiously awaiting the FCC's action in the proceeding dealing 
with the provision of broadband services over telephone facilities.
    To be frank, EarthLink is dismayed with the answers regarding the 
regulatory classification of broadband services that the FCC seems 
determined to reach. The law is clear about that regulatory status, and 
we are dismayed that the FCC seems determined to ignore the law in an 
effort to tilt the playing field in favor of incumbent providers who 
have built their networks over public rights of way using federal 
authorization while protected from competition by federal, state or 
local government-granted monopolies.
    What is particularly troubling to EarthLink, and I hope would be 
troubling to the members of this subcommittee and the Congress as a 
whole, is the tremendous and far reaching effect of classifying all 
broadband services as ``information services'' under the Communications 
Act. The effect is tremendous because of technology convergence. 
Digital, packet-switched transmission networks are replacing analog, 
circuit switched networks at an ever increasing rate. It will not be 
long before most, if not all, of the major network operators are able 
to provide all of their services--voice, data, and video--over packet-
switched networks also used to provide Internet services.
    The effect would be far reaching because the common carrier 
transmission services that are the foundation of the information 
economy would no longer be required to be made available to information 
service providers upon reasonable request on non-discriminatory terms 
and conditions. Network owners would be free to arbitrarily decide who 
can use their networks, at what price, and on what terms. This would 
not only work against consumer interests, but vital communications 
links that can be reached today under court order by law enforcement 
agencies would suddenly be beyond reach because laws like the 
Communications Assistance to Law Enforcement Act (CALEA) would no 
longer apply. Congress would have re-write an entire body of laws that 
have been carefully enacted over the years to promote competition, 
protect consumers, and provide for public safety. All because the FCC 
is ignoring not only its own precedents, but also the plain language 
that Congress wrote in the Telecommunications Act of 1996.
    The central question of this hearing (and of several current FCC 
proceedings) is the regulatory classification of broadband services. 
Let me be clear in answering this question. All internet access 
services--whether provided by an independent ISP like EarthLink, a 
telco affiliate like Verizon Online, or a cable company like Comcast--
are information services. Let me be equally clear that all information 
services are, by definition, delivered via telecommunications, and the 
offering of such telecommunications, whether by a telco or a cable 
company, for a fee to the public makes them telecommunications 
services. This is true whether the Internet access is provided by an 
independent ISP or by the network operators themselves. Internet 
access, broadband or otherwise, is therefore an information service 
riding on top of a transmission component which is a telecommunications 
service.
    In the world of dial-up Internet access these two components are 
easy to see. Consumers purchase their phone line from their telephone 
company and their Internet service from an ISP such as EarthLink. The 
telephone company provides a telecommunications service which can be 
used to transmit voice or data. The ISP provides an information 
service. The consumer dials an EarthLink access number, which 
establishes an underlying transmission link through the customer's 
phone line; the consumer can then use EarthLink's services to access 
the Internet. The underlying transmission link is a regulated common 
carrier telecommunications service. The Internet access service is an 
unregulated information service.
    Now suppose that the ISP in the dial-up scenario I just outlined 
was not EarthLink but Verizon Online. It would make no difference. The 
underlying transmission link (provided by Verizon in this case) would 
be regulated as a common carrier telecommunications service, but 
Verizon Online's Internet access service would still be an unregulated 
information service. This is the regime that the FCC crafted in its 
seminal 1980 Computer II proceeding, which has been affirmed by the FCC 
and federal courts many times in the intervening years, and which 
Congress adopted in the Telecommunications Act of 1996. The FCC created 
a level playing field by requiring that the underlying transmission 
link be made available by facility owners on a non-discriminatory basis 
to all ISPs and then treating all ISPs the same with respect to the 
unregulated nature of the information service component, regardless of 
whether or not the ISP was owned by the owner of the underlying 
transmission facility. As a result, competition in the provision of 
information services flourished because the facility owners--the 
telephone companies in the dial-up world--could not use their ownership 
of the underlying transmission facilities to leverage their position in 
the information services market.
    Broadband Internet access works much the same as dial-up Internet 
access, with two exceptions. First, it is faster, because the 
transmission link has better electronics or greater capacity. Second, 
in most cases the end user isn't given the option of buying separately 
the transmission link from their home or office to the switch. Rather, 
they have to buy that portion of the link as part of a bundled package 
of services which combines the information service component provided 
by an ISP with the transmission component provided by the telco or 
cable company. Furthermore, most broadband ISPs are affiliated with or 
directly owned by the transmission facility owner.
    In the case of broadband Internet access, the FCC seems determined 
to take the exact opposite approach from the one that proved so 
successful for promoting competition in the dial-up world. For 
broadband, the FCC suggests that, so long as the facility owner refuses 
to offer consumers the option of buying the transmission link 
separately from the information services component, the bundled package 
of transmission and information service is an ``information service'' 
under the Communications Act. Therefore neither the information service 
component nor the underlying common carrier transmission link would be 
subject to regulation. As a result, facility operators are able to 
shield their transmission networks from requirements for non-
discriminatory access by other ISPs. This all but eliminates 
competition among broadband Internet service providers and not only 
violates the letter and intent of the Telecommunications Act, but also 
does great harm to independent businesses and to consumers.
    The FCC's interpretation is at odds with both the letter and the 
spirit of the Telecommunications Act of 1996. The Communications Act of 
1934, as amended by the Telecommunications Act, defines ``information 
service'' as ``the offering of a capability for generating, acquiring, 
storing, transforming, processing, retrieving, utilizing, or making 
available information via telecommunications.'' 47 U.S.C. 153(20). The 
term ``telecommunications'' is defined as ``the 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 U.S.C. 153(43). As the statutory language makes 
clear, information services are made available to consumers using a 
transmission network. Up to this point I believe there is no 
disagreement among any of us sitting at the table. It is the next step 
which the Commission refuses to take, and over which there is 
disagreement among the witnesses today.
    In 1996, when Congress added the terms ``information service'' and 
``telecommunications'' to the Communications Act, they also added the 
terms ``telecommunications service'' and ``telecommunications 
carrier.'' A ``telecommunications service'' is ``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 U.S.C. 153(46). Any provider of 
telecommunications service is a ``telecommunications carrier,'' and 
telecommunications carriers are to be treated as ``common carriers'' 
subject to regulation under Title II of the Communications Act. 47 
U.S.C. 153(44).
    The structure Congress enacted in 1996 mirrors the structure the 
FCC adopted in its 1980 Computer II decision. The definition of 
``information services'' cross references the defined term 
``telecommunications,'' which in turn is incorporated in the 
definitions of both ``telecommunications service'' and 
``telecommunications carrier.'' The transmission component that is 
integral to the delivery and definition of ``information service'' is 
treated separately under the Act for regulatory purposes, just as 
transmission had been treated separately by the FCC for 15 years prior 
to the passage of the 1996 Act. The language of the definition of both 
``telecommunications carrier'' and ``telecommunications service'' make 
plain that they are intended to apply broadly; they apply to ``any 
provider'' ``regardless of the facilities used.''
    ``Telecommunications carriers'' and ``telecommunications services'' 
are the key terms that Congress used to define the pro-competitive 
provisions of the 1996 Act. Almost all of the rights and 
responsibilities in the 1996 Act attach or apply to telecommunications 
carriers, which the statute says are to be treated as common carriers 
to the extent they provide telecommunications services. Yet under the 
FCC's interpretation those terms would apply only to those facility 
owners who chose to make a ``separate'' or ``stand-alone'' offering of 
telecommunications to the public--those facility owners that chose 
instead to offer their telecommunications to the public only if the 
public also buys the facility owner's chosen information service get to 
escape regulation as a common carrier.
    Two examples illustrate severe problems with the FCC's approach. 
First, consider the case of a competitor who seeks to offer information 
services in competition with the information services offered by a 
facility owner--say an RBOC or a cable company. If EarthLink wants to 
continue to compete in the information services market, but is now 
denied access to the broadband transmission networks needed to offer 
its services to consumers, then presumably EarthLink would have to 
build its own broadband facilities to reach consumers. Yet to build 
those facilities, EarthLink would have to become a common carrier in 
order to take advantage of any of the market opening provisions 
Congress enacted in 1996. Those provisions only apply to 
telecommunications carriers and telecommunications services. At the 
same time, EarthLink's competitors, the RBOCs and cable companies, who 
already have existing transmission networks that reach almost every 
customer, would be unregulated with respect to the same transmission 
services for which EarthLink would be regulated.
    Going back to the days of old Ma Bell AT&T, the telephone companies 
enjoyed a government-granted monopoly market for almost a century in 
which to build out their transmission networks. The cable companies had 
monopoly franchises, the federal cable-telco cross ownership ban, and 
below cost access to ducts and poles for over 15 years in which to 
build out their networks. Today the telephone companies and the cable 
companies still each have 85% or more of the customers in their core 
business--phone or cable--from which to draw a steady revenue stream as 
they push into the information services market. And they have some 95% 
market share of all broadband DSL or cable modem customers, 
respectively. Yet EarthLink and other potential competitors to these 
incumbent facility owners would, under the FCC's interpretation, have 
to undertake the impossible task of building their own last-mile 
network--without any protection or subsidy--in order to continue to 
compete in the information services business. This result stands the 
1996 Act on its head.
    Second, the FCC's own documents demonstrate that their 
interpretation can only work if words are added to the statutory 
language that Congress adopted in 1996. The statutory definition of 
``telecommunications service'' states that such service is ``the 
offering telecommunications for a fee directly to the public'' without 
qualification. But the FCC, in both their declaratory order in the 
cable modem proceeding and in their briefs defending that order to the 
Court of Appeals for the Ninth Circuit, insists that a 
telecommunications service only exists if there is a ``stand-alone'' 
offering for a ``separate'' fee. Only by adding words that don't exist 
in the statute can the FCC make their version work.
    In summary, it is crucial to distinguish between broadband 
information services and the underlying telecommunications services 
which deliver them. Internet access services, whether narrowband or 
broadband, and whether offered by an independent ISP, an RBOC, or a 
cable company, remain unregulated information services. But the 
facility based transmission services that underlie all information 
services remain common carrier telecommunications services, regardless 
of whose broadband Internet service the customer subscribes to and 
whether or not the facilities operator offers those transmission 
services separately to consumers or as part of a combined package of 
services that includes information services. Consumers and the economy 
have benefited over the past twenty plus years from robust competition 
in an unregulated information services industry. That unregulated 
competition in information services was made possible because the 
underlying transmission networks remained subject to regulations that 
require that they be offered to all ISPs on non-discriminatory terms 
and conditions.
    In most areas of the country today there are at best two broadband 
networks; for many residential consumers there is effectively only one. 
Both the telephone networks and the cable networks were built with 
government-granted monopolies over public rights of ways using Federal 
authority using rate-payer money. To allow these facility owners to now 
repudiate their obligation to share those transmission networks on a 
non-discriminatory basis with others who seek to offer 
telecommunications or information services to the public is an abuse of 
the law and is anti-competitive. Such an approach would take a robustly 
competitive and level playing field and tilt it heavily in favor of a 
few players by allowing them to leverage their transmission facility 
monopoly into domination of new areas and services. Clearly that was 
not what Congress wrote or intended when it passed the 1996 Act.
    Thank you again for the opportunity to testify today. I would be 
happy to answer any questions.

    Mr. Upton. Ms. Goldman.

                   STATEMENT OF DEBBIE GOLDMAN

    Ms. Goldman. Good afternoon, Mr. Chairman and members of 
the committee. Thank you for the opportunity to appear before 
you today. My name is Debbie Goldman. I am the Policy Chair of 
the Alliance for Public Technology. I am also a research 
economist with the Communications Workers of America. However, 
I want to emphasize I am representing the Alliance for Public 
Technology.
    For nearly 15 years, the Alliance for Public Technology has 
promoted the benefits of universal affordable deployment of 
advanced telecommunication services. Many of our members 
represent traditionally underserved communities, rural 
residents, minorities, people with disabilities, low income 
households and senior citizens.
    It is critically important for the FCC to establish a 
regulatory framework that encourages investment in broadband 
technology to ensure affordable access for all Americans. High-
speed Internet access provides a multitude of social benefits 
from economic development and health care to education and 
lifelong learning for workers to public safety and independence 
for people with disabilities.
    I will include in the record a recent APT report entitled 
``A Broadband World: The Promise of Advanced Services.'' this 
report highlights the many social and economic benefits of 
broadband technology. It finds that the benefits of broadband 
grow exponentially, and prices become more affordable, as more 
people are connected to the network. Therefore, public policy 
must make sure that universal affordable broadband is available 
to everyone.
    The FCC must therefore adopt a common regulatory framework 
for all broadband services regardless of the technology. The 
emerging broadband market is characterized by fierce cross-
platform competition between cable and wireline telephony. The 
cable modems are beating DSL two to one, in large part due to 
regulatory advantage.
    The framework must facilitate a robust marketplace where 
multiple providers using a variety of technologies compete on a 
level regulatory playing field to offer consumers a wide 
variety of services at attractive prices. It must encourage 
investment and next generation broadband networks.
    The FCC took a step in the right direction in what we 
believe will be the final text of the Triennial Review. By 
freeing the broadband networks of the wireline carriers from 
unbundling and retail price regulation, the investment 
incentives are set in the right place.
    The regulatory framework must also continue the openness 
that has characterized the Internet in the narrowband 
environment where content providers have nondiscriminatory 
access to the networks. Regulatory policy must ensure that 
broadband networks remain open to all content providers so 
users have access to diverse information sources of their own 
choosing.
    The broadband regulatory framework must also continue 
consumer protections that have been so critical in the voice 
environment. These include accessibility requirements for 
people with disabilities. Currently the accessibility 
requirements are required only for voice telephone. Unless 
these protections are extended to broadband many people with 
disabilities will not be able to access much of the content 
available over broadband networks.
    And finally, we must update our universal service support 
system for the broadband world. All broadband providers 
regardless of the technology must be required to contribute to 
the universal service fund. All broadband providers regardless 
of the technology must be required to contribute to the 
universal service fund.
    In the current debate about the proper regulatory treatment 
of broadband, the Alliance for Public Technology has urged the 
FCC to develop a new framework modeled on using the language in 
section 706 of the Telecommunications Act, and this is the only 
section of that act that specifically addresses advanced 
telecom technology.
    Section 706 of the act establishes in law the goal of 
universal access to advanced telecommunications services by all 
Americans. Section 706 provides the FCC with the authority to 
develop regulating methods to achieve that goal. Therefore, the 
Alliance believes that the FCC should use the umbrella language 
of section 706 to craft a new regulatory framework for all 
broadband.
    When the FCC began and then completed these series of 
proceedings known as Computer I and then II and then III, the 
proceedings were designed to develop a regulatory framework for 
computer enabled services transmitted over the telephone 
network. The Commission developed a definition of information 
services that distinguished these unregulated offerings from 
the regulated monopoly telecom services.
    As the current definitional controversy demonstrates, it is 
becoming increasingly difficult to squeeze broadband into this 
framework. At the time of the Computer proceedings no one 
envisioned cable or wireless as technology platforms capable of 
delivering two-way high-speed digital information to homes and 
businesses, yet today that is where we are with the convergence 
of technology. Yet each technology platform is subject to a 
different regulatory regime.
    Therefore, we believe constructing a new regulatory 
framework consistent with the principles I have outlined using 
the language of section 706 would provide multiple advantages. 
It would allow for a single regulatory treatment for all 
broadband in a technology neutral fashion. It does not attempt 
to force broadband into definitions created for different 
services. It reduces regulatory barriers to deployment and 
investment, provides important consumer protections for people 
with disabilities and would allow updating the system of 
universal service support.
    Thank you, Mr. Chairman, and members of the committee.
    [The prepared statement of Debbie Goldman follows:]

Prepared Statement of Debbie Goldman, Policy Committee Chair, Alliance 
                         for Public Technology

    Good afternoon, Mr. Chairman and members of the committee. Thank 
you for the opportunity to appear before you today.
    My name is Debbie Goldman. I am the Policy Chair of the Alliance 
for Public Technology. I am also a Research Economist with the 
Communications Workers of America. Today, I am representing the 
Alliance.
    For nearly fifteen years, the Alliance for Public Technology, or 
APT, has promoted the benefits of universal, affordable deployment of 
broadband and advanced telecommunications services. Many members of APT 
represent traditionally underserved communities, including rural 
residents, minorities, people with disabilities, low-income households, 
and senior citizens.
     It is critically important for the FCC to establish a regulatory 
framework that encourages investment in broadband technology to ensure 
affordable access for all Americans. High-speed Internet access 
provides a multitude of social benefits, from economic development and 
health care, to education and lifelong learning for workers, to public 
safety and independence for people with disabilities.
    I will include in the record a recent APT report entitled ``A 
Broadband World: The Promise of Advanced Services.'' The report 
highlights the many social and economic benefits of broadband 
technology. It finds that the benefits of broadband technology grow 
exponentially--and prices become more affordable--as more people are 
connected to a broadband network. Thus, public policy must ensure 
universal, affordable broadband deployment in order to serve economic 
and social goals.
    It is imperative, therefore, that the FCC gets the regulatory 
framework right for broadband services. The FCC must adopt a common 
regulatory framework for all broadband services, regardless of the 
technology. The nascent broadband market is characterized by fierce 
cross-platform competition between cable and wireline telephony. But 
cable modems are beating DSL 2 to 1, in large part due to regulatory 
advantages.
    The framework must facilitate a robust marketplace where multiple 
providers compete on a level regulatory playing field to offer 
consumers a variety of services at attractive prices. It must encourage 
investment in next-generation broadband networks.
    The FCC took at step in the right direction in its Triennial 
Review. Freeing wireline carriers' broadband networks from unbundling 
and retail price regulation gets the investment incentives right.
     The framework must also continue the openness that has 
characterized the Internet in the narrowband environment, where content 
providers have nondiscriminatory access to the networks. Regulatory 
policy must ensure that broadband networks remain open to all content 
providers, so that users have access to diverse information sources of 
their own choosing. Open networks foster innovation of new services, 
and demand for even more network capacity.
    The new broadband regulatory framework must also continue consumer 
protections that have been so critical in the voice environment. These 
include accessibility requirements for people with disabilities. 
Currently, accessibility requirements are required only for voice 
telephony services. Unless these protections are extended to the 
broadband environment, many people with disabilities will not be able 
to access much of the content available over broadband networks.
    Finally, we must update our universal service support system for 
the increasingly broadband world. All broadband providers, regardless 
of the technology, must be required to contribute to the universal 
service fund.
    In the current debate about the proper regulatory treatment of 
broadband, APT has urged the FCC to develop a new regulatory framework 
for broadband. We have encouraged the FCC to build upon Section 706 of 
the Telecommunications Act, the only section of the Act that 
specifically addresses advanced telecommunications technology.
    Section 706 of the Act establishes in law the goal of universal 
access to advanced telecommunications services by all Americans. 
Section 706 also provides the FCC with the authority to develop 
``regulating methods'' to achieve that goal. APT believes that the FCC 
should use the umbrella language of Section 706 to craft a new 
regulatory framework for broadband.
    Decades ago, the FCC began a series of proceedings known as 
Computer I, II, and III. These proceedings were designed to develop a 
regulatory framework for computer-enabled services that were 
transmitted over the telephone network. The Commission developed a 
definition of ``information services'' that distinguished these 
unregulated offerings from the regulated, monopoly ``telecommunications 
services.''
    As the current definitional controversy demonstrates, it is 
becoming increasingly difficult to squeeze broadband into this 
framework. At the time of the Computer proceedings, none envisioned 
cable or wireless as technology platforms capable of delivering two-way 
high-speed digital information to homes and businesses. Yet, today we 
are experiencing a convergence of different technology platforms, each 
capable of delivering digital data over high-speed networks. But each 
technology platform is subject to a different regulatory regime.
    Constructing a new regulatory framework, consistent with the 
principles I have outlined, provides multiple advantages. It allows for 
a single regulatory treatment for all broadband services in a 
technology neutral fashion. It does not attempt to force broadband into 
definitions created for different technology platforms. It reduces 
regulatory barriers to deployment and investment, provides important 
consumer protections for people with disabilities, and updates the 
system of universal service support.
    APT believes this framework can provide a manageable regulatory 
structure that will increase investment and deployment, create 
meaningful facilities-based broadband competition between different 
technologies, and bring the benefits of broadband to more Americans.
    Thank you, Mr. Chairman and members of the committee.

    Mr. Upton. Thank you very much.
    Mr. Misener.

                    STATEMENT OF PAUL MISENER

    Mr. Misener. Good afternoon, Chairman Upton and members of 
the committee. My name is Paul Misener and I am Amazon.com's 
Vice President for Global Public Policy. I do appreciate very 
much being invited to testify today on this very important 
matter. Today I am representing not only my own company but 
also the Coalition of Broadband Users and Innovators, which is 
a collaboration of consumer groups and industry.
    Mr. Chairman, unimpeded connectivity is the defining 
characteristic of the Internet, which was developed during the 
cold war specifically as a means to communicate within the 
United States after a nuclear attack on our country. As the 
Internet evolved from its military origins to be used primarily 
for informational, social and commercial purposes, its 
unimpeded connectivity took on a new meaning. Almost overnight 
American consumers found they are able to obtain for free or 
purchase any information, products or services that other 
people made available on the Internet. Thus, consumer access to 
Internet content historically has not been blocked or otherwise 
impeded by network operators.
    The Coalition's sole purpose is to preserve the unimpeded 
connectivity of the Internet. We do not believe the network 
operators with market power should be permitted to impair 
access for any reason other than routine network management, 
and we have asked the FCC to adopt specific safeguards so 
unimpeded connectivity is maintained as American households 
increasingly rely on broadband connections.
    Mr. Chairman, there are three key reasons the Coalition 
fears impediments to broadband consumer access. First, through 
our technical opportunities broadband consumer access is 
completely digital and thus, as the FCC has already determined, 
service providers can impair connectivity in ways that were 
virtually impossible in the narrowband analog dial-up world. 
For instance, a consumer attempting to reach the Web site for 
Joe's Pizza might find access blocked or impaired by a network 
operator that has a contract with David's Pizza, a competitor 
to Joe's.
    Second, there are economic incentives. Broadband service 
providers, especially those that are vertically integrated, 
also have clear economic incentives to impair consumer access. 
The frequent allegation by some broadband network operators 
that an impairment prohibition would hurt investment makes 
sense only if these service providers count on profiting from 
impairments.
    And third, there is market power. For the next several 
years while broadband service providers have market power, 
competitive forces will not be able to check their technical 
opportunities and economic incentives to impair consumer 
access. Put another way, absent regulatory intervention, 
consumers will have no choice but to accept impairments until 
true competition emerges.
    The Coalition is aware of current impairments of consumer 
access and also has strong indications that strong broadband 
service providers are poised to exercise their market power to 
impair at will. But even if there were no current problems or 
if they were deemed too insignificant to matter, the Coalition 
believes that widespread current problems are not a necessary 
precondition for Commission action. To the contrary, the FCC by 
its very nature is a forward looking regulatory agency that is 
responsible not just for evaluating past and current 
conditions, but also predicting for future circumstances and 
acting in anticipation.
    The cable industry itself, notwithstanding its professed 
philosophical opposition to anticipatory regulation, has on 
many occasions sought government intervention to prevent purely 
prospective harms. Congress has already given the FCC the 
statutory authority to ban impairments of the sort the 
Coalition fears, and the Congressional mandate to the 
Commission is clear: Ensure that the Internet remains a viable 
source for consumers and adopt policies to promote its 
widespread use.
    We simply are urging the FCC to meet Congress's directive. 
FCC action is needed to prohibit impairments until true 
competition emerges. Without Commission action, broadband 
service providers with market power will have the technical 
opportunities and economic incentives to impair consumer 
access. If they were permitted to destroy unimpeded 
connectivity in this way, the anticompetitive exercise of 
market power by a handful of broadband network operators could 
do to the Internet what even a nuclear strike could not.
    In conclusion, Mr. Chairman, the defining characteristic of 
the Internet is unimpeded connectivity. Americans today may 
obtain on-line any lawful information, products or services 
available or sold on the Internet without any discriminatory 
impairment by network operators. The Coalition's sole purpose 
is to preserve this unimpeded connectivity, and we have asked 
the FCC to use its existing statutory authority to prohibit 
impairments unrelated to legitimate network management until 
true broadband access competition emerges.
    Mr. Chairman, we now ask that you and your subcommittee 
strongly urge the Commission to adopt this important safeguard 
to preserve unimpaired consumer connectivity to the Internet. 
Thank you again for inviting me to testify. I do look forward 
to your questions.
    [The prepared statement of Paul Misener follows:]

 Prepared Statement of Paul Misener, Vice President for Global Public 
                           Policy, Amazon.com

    Good afternoon, Chairman Upton, Mr. Markey, and members of the 
Subcommittee. My name is Paul Misener. I am Amazon.com's Vice President 
for Global Public Policy. Thank you very much for inviting me to 
testify on this important matter. Today I am representing both my 
company and the Coalition of Broadband Users and Innovators. I 
respectfully request that my entire written statement be included in 
the record of this hearing.
    Mr. Chairman, the defining characteristic of the Internet is 
unimpeded connectivity. Americans today may obtain online any lawful 
information, products, or services available or sold on the Internet, 
without any discriminatory interference or impairment by network 
operators. The Coalition's sole purpose is to preserve this unimpeded 
connectivity despite the changing technical, economic, and regulatory 
circumstances of consumer Internet access. Unfortunately, the Coalition 
has many reasons to fear for the future of unimpeded connectivity, 
because providers of broadband consumer access now have the technical 
opportunities, economic incentives and, most importantly, the market 
power to impair consumer access to Internet content. For these reasons, 
we have asked the FCC to use its existing statutory authority to 
prohibit any impairments unrelated to legitimate network management 
until true broadband access competition emerges. Mr. Chairman, we now 
ask that you and your Subcommittee strongly urge the Commission to 
adopt this important pro-consumer safeguard to preserve unimpaired 
connectivity to the Internet.

                   ABOUT AMAZON.COM AND THE COALITION

    Amazon.com is America's leading online retailer. We are not a 
provider of broadband or Internet access service, nor do we have plans 
to become one. Amazon.com is a member of the Coalition of Broadband 
Users and Innovators (the ``Coalition''), which represents twenty-five 
premier online content companies, consumer groups, and consumer 
electronics manufacturers who are collaborating to ensure the continued 
right of Americans to access their choice of lawful Internet-based 
information, products, and services, including by the attachment of any 
compatible device to the network. Amazon.com and the rest of the 
Coalition share the goal of this Subcommittee, the FCC, and the 
Administration to promote widespread consumer broadband deployment, and 
we want the companies that provide it to succeed. In my company's case, 
the Internet is the way our customers reach our store. On behalf of our 
customers and company, we certainly want to encourage the deployment of 
consumer broadband access and, just as certainly, do not want to do 
anything to discourage it.

 UNIMPEDED CONNECTIVITY IS THE DEFINING CHARACTERISTIC OF THE INTERNET

    Mr. Chairman, unimpeded connectivity is the defining characteristic 
of the Internet. The Internet and its predecessor network were 
developed during the Cold War specifically as a means to communicate 
within the United States after a nuclear attack on our country. In 
contrast to the contemporary telephone network, which relied on 
maintaining direct physical connections between points in 
communication, novel ``packet switching'' technology allowed Internet 
communications between two points to be maintained even if intermediate 
lines were destroyed. In short, not even a nuclear strike could impede 
the Internet's connectivity.
    As the Internet evolved from its military origins to be used 
primarily for informational, social, and commercial purposes, its 
unimpeded connectivity took on a new meaning. Almost overnight, 
American consumers found they were able to obtain for free or purchase 
any information, products, or services that other people made available 
on the Internet. Thus, consumer connectivity--i.e., access to Internet 
content--historically has not been blocked or otherwise impeded by 
network operators.

  CBUI'S SOLE PURPOSE IS TO PRESERVE THE EXTANT UNIMPEDED CONNECTIVITY

    Mr. Chairman, the Coalition's sole purpose is to preserve the 
unimpeded connectivity of the Internet. We believe Americans deserve to 
retain their longstanding ability to obtain for free or purchase any 
lawful information, products, or services that other people make 
available on the Internet and to use compliant devices. We do not 
believe that network operators with market power should be permitted to 
impede connectivity for any reason other than routine network 
management. For example, we believe that broadband service providers 
with market power should not be permitted, other than for purely 
technical or legal reasons, to block or impair access to Websites that 
espouse unpopular political ideas or that sell products in competition 
with entities that might want to pay network operators to block or 
otherwise interfere with such access.
    Although it may be self-evident, the issue of the unimpeded access 
that the Coalition seeks to preserve is distinct from the ``open 
access'' matter that has been under consideration by policymakers for 
several years. The open access question is whether and how broadband 
service providers should be required to allow unaffiliated ISPs access 
to broadband network infrastructure. Some members of the Coalition are 
strong advocates of open access for ISPs, while other members oppose 
it. Like some other members, including Amazon.com, the Coalition itself 
has no position on the matter, has not lobbied on it, and is not here 
to testify about it.
    Rather, the Coalition has asked the FCC to adopt specific 
safeguards so that unimpeded consumer connectivity to the Internet is 
maintained as American households increasingly rely on broadband 
connections. We have made this request in the context of the 
Commission's more expansive consideration of the regulatory status of 
consumer broadband, particularly offered by cable modem and DSL service 
providers. It bears mentioning what we are not suggesting. For example, 
we certainly are not suggesting that broadband network operators be 
subject to extensive, common carrier-style regulation with, for 
example, entry/exit rules, universal service obligations, rate 
regulation, et cetera. To the contrary, the Coalition merely seeks a 
narrow rule under existing FCC authority that would ensure that 
consumer expectations from the narrowband access world would carry 
forward to the broadband era by barring impairments based on criteria 
such as content type or source, yet permit differential pricing or 
other restrictions based on purely capacity-related network management 
considerations. Please allow me to explain.
    Contrary to some misinformation about what the Coalition seeks, we 
firmly believe that broadband service providers have legitimate reasons 
to seek to manage demands on their network infrastructure by even a 
small number of users. Such high-bandwidth users impose significant 
investment and maintenance costs on service providers and, in the view 
of the Coalition, should be charged accordingly. Why should one 
customer who sends only a few emails a week be charged as much as 
someone who watches Internet-delivered high definition videos all day 
long? Thus, we believe broadband service providers should be allowed to 
charge their customers on the basis of how many bits they receive or 
transmit over a given period so that they may manage their networks in 
a technically efficient manner. One way would be to offer tiers of 
service--e.g., ``Gold, Silver, and Bronze''--based on bits transmitted 
per month. The expensive Gold level service might provide unlimited 
bandwidth, while the less expensive Silver and Bronze levels would 
allow only limited monthly uploads or downloads. Once a consumer signs 
up for a particular level of service, however, she should be able to 
use it as she sees fit; network operators should not, within clearly 
defined bandwidth limits, be able to impair a consumer's access to 
particular information, products or services.
    Moreover, current service provider practices, like making 
promotional arrangements with third parties for advantageously 
positioned banner ads or links on the initial, or ``start-up'' page 
would be permitted to continue. The intent of the FCC rule we seek 
would not be to prohibit these or similar reasonable private 
contractual arrangements but, rather, to ensure unimpeded consumer 
access. And, of course, the Coalition certainly has no problem with--
and greatly appreciates--broadband service providers' efforts to 
prevent unlawful conduct on their networks.

 THERE ARE THREE KEY REASONS TO FEAR IMPEDIMENTS TO BROADBAND CONSUMER 
                                 ACCESS

    Mr. Chairman, there are three key reasons the Coalition fears 
impediments to broadband consumer access. The providers of broadband 
service have technical opportunities, economic incentives, and 
marketplace advantages unavailable to narrowband carriers and Internet 
service providers. And the vigorous protestations of broadband service 
providers against any non-impairment rule, coupled with their complete 
refusal to foreswear discriminatory impairment practices, make the 
Coalition deeply concerned that these service providers actually plan 
to impair consumer access in the ways we fear.
    Technical Opportunities. Broadband consumer access is completely 
digital and, thus, as the FCC already has determined, service providers 
can impair connectivity in ways that were virtually impossible in the 
narrowband, analog dial-up world. The most obvious impairment is 
blocking access to certain information, products, and services. For 
instance, a consumer attempting to reach the website for Joe's Pizza 
might find access blocked or impaired by a broadband service provider 
that has a contract or other business relationship with David's Pizza, 
a competitor to Joe's. Other likely impairments include the insertion 
of ``pop-up'' advertisements or slower delivery rates based on a 
consumer's intended type or source of information: A consumer, while 
accessing an online MP3 file, for example, could be deluged with pop-up 
advertisements from competing online music sources or could find the 
download to be particularly slow, merely because she was not pulling 
the content from a source that had a business relationship with her 
broadband service provider. As the Washington Post analogized, 
``[i]magine the outcry if a local phone company started preventing 
customers from calling Lands' End to place an order and redirected 
their calls to L.L. Bean, which had paid the phone company to be the 
exclusive purveyor of down jackets to its customers.''
    In addition to these commercial impairment concerns, of course, 
there are serious free speech problems with allowing network operators 
to block or filter, at their whim, access to political, religious, or 
other material on the Internet. It is not hard to imagine, for example, 
how a service provider might be pressured to obstruct access to sources 
of ``hate speech'' or information about a particular religious or 
political viewpoint, regardless of whether their individual subscribers 
want access to that content but, of course, consumer-controlled filters 
are not problematic.
    In sum, as the FCC itself has said, ``it is technically feasible 
for a cable operator to deny access to unaffiliated content or to 
relegate unaffiliated content to the `slow lane' of its residential 
high-speed Internet access service.''
    Economic Incentives. Broadband service providers, especially those 
that are vertically integrated, also have clear economic incentives to 
impair consumer access to certain Internet-based information, products, 
and services. The economic incentive is obvious when the service 
providers have collateral businesses in competition with other 
Internet-based enterprises. A broadband service provider that also 
holds the rights to audio or video products, for example, likely would 
seek to discourage its customers from accessing the audio or video 
products of a separate company. The unaffiliated content could be 
blocked, slowed, or deluged with advertisements for affiliated content. 
But broadband service providers need not have an ownership interest in 
a collateral business to have an economic incentive to impair consumer 
connectivity: third parties can be expected to contract with these 
service providers to introduce impairments designed to hurt their 
competitors. David's Pizza would gladly pay a network operator to 
impede access to the Joe's Pizza website.
    Market Power. For the next several years, while broadband service 
providers have market power, competitive forces will not be able to 
check their technical opportunities and economic incentives to impair 
consumer access to various Internet-based information, products, and 
services. Put another way, absent regulatory intervention, consumers 
will have no choice but to accept such impairments until true 
competition emerges. Currently, two-thirds of U.S. households have 
access to only one broadband provider or none at all. And, yet, as 
everyone who has observed the evolution of the wireless industry will 
recall, even two service providers in an area do not produce true 
competition, particularly when the friction costs of switching between 
them makes reconsidering a prior choice difficult and expensive. Yet 
the number of households with three or more broadband service providers 
is miniscule. The Coalition anticipates, of course, that the market 
eventually will become truly competitive. But it simply is not 
competitive now.
    The fact that broadband service providers are vigorously fighting 
against even a very narrowly tailored prohibition of impairments almost 
certainly means that they fully intend to impair consumer access. 
Indeed, the frequent allegation by some broadband network operators 
that such a regulatory prohibition would hurt investment makes sense 
only if these service providers count on profiting from impairments. 
If, as the broadband service providers claim, they are not currently 
impairing consumer access, and they have no plans to do so in the 
future, then why do they so strenuously oppose a rule that bans such 
impairments?
    The Coalition is aware of current, albeit modest, impairments of 
consumer access, and also has spotted strong indications that broadband 
service providers are poised to exercise their market power to impair 
at will. Several cable operators recently had terms in their subscriber 
agreements that explicitly banned ``virtual private networks,'' which 
are merely software arrangements that establish secure communications 
among groups of network users, yet place no special burdens on the 
underlying broadband network. When Coalition members and others showed 
these terms to the FCC, the cable operators hastily modified their 
subscriber agreements in a way that concealed the prohibition on VPNs, 
yet reserved the right to ban them at any point in the future. We 
cannot help but conclude that these operators merely are trying to mask 
their intentions while the Commission evaluates the regulatory status 
of broadband.
    Equally significantly, cable operators say they could block access 
to gaming sites. But this cannot be for the reason that gaming sites 
are more bandwidth-intensive; they simply are not. Perhaps it is only 
because so-called ``gamers'' greatly value that capability and could be 
forced to pay extra, even though they use no additional bandwidth. 
Lastly, cable operators have said that consumers cannot attach a device 
unless it meets with the operators' approval, regardless of what 
industry-wide approvals the device manufacturer may have. Imagine 
someone who wants to make a telephone having to obtain permission from 
each Verizon, BellSouth, SBC, Qwest, Alltel, and a few hundred other 
telephone companies. That has been unthinkable since the mid-1970s; 
yet, absent FCC action, consumers who want to buy devices in the cable 
broadband world will be at the mercy of their network operators.
    The cable industry has dismissively characterized the Coalition-
requested FCC safeguard as ``a solution in search of a problem'' but, 
for the foregoing reasons, the problem is evident; no search is 
necessary.

 WIDESPREAD CURRENT PROBLEMS ARE NOT A NECESSARY PRECONDITION FOR FCC 
                                 ACTION

    But even if there were no current problems, or if current problems 
were deemed too uncommon to matter, the Coalition believes that 
widespread current problems are not a necessary precondition for FCC 
action. To the contrary, the FCC, by its very nature, is a forward-
looking regulatory agency that is responsible not just for evaluating 
past and current conditions but also for predicting future 
circumstances and acting in anticipation.
    Notwithstanding its professed philosophical opposition to 
anticipatory regulation, the cable industry itself has on many 
occasions sought regulation to prevent purely prospective harms. For 
example, the industry asked Congress to ban telephone companies from 
entering the cable market because it feared that, in the future, the 
telcos would attempt to leverage their market power to cable's 
detriment. Later, and again because it anticipated harms from telephone 
companies, the cable industry successfully lobbied the FCC to adopt 
safeguards requiring telcos to provide competitors access to basic 
services on a nondiscriminatory basis. Just as the cable industry often 
has requested and received regulatory checks to future use of market 
power, the Coalition seeks the same protection for broadband consumers.

     THE FCC ALREADY HAS THE STATUTORY CHARGE AND AUTHORITY TO BAN 
                              IMPAIRMENTS

    Mr. Chairman, Congress already has given the FCC the statutory 
charge and authority to ban impairments of the sort the Coalition 
apprehends. The mandate to the FCC is clear to ensure that the Internet 
remains a viable source of information, products, and services for 
consumers, and that the FCC should adopt policies to promote its 
widespread use. We simply are urging the Commission to accept the same 
responsibility in did when it ruled in the seminal Carterfone case, 
which established that consumers can attach devices to the network, and 
in the Computer inquiries, in which it adopted prophylactic rules 
involving the Bell system because the dominant network operator had 
opportunities and incentives to discriminate. But, as distinct from 
these cases, the rule we envision would have a light touch and involves 
a straightforward declaration of network neutrality, not prescriptive 
filings that these other rules entailed.
    Title I of the Communications Act gives the FCC the authority to 
promulgate rules to carry out the goals and provisions of the Act in 
the absence of explicit authority, so long as such rules are reasonably 
``ancillary'' to existing Commission statutory authority and are 
directed at protecting or promoting a statutory purpose. This authority 
was validated by the Supreme Court over 30 years ago and many times 
since.
    There are two specific provisions of the Communications Act--
Sections 230 and 706, both established in the Telecommunications Act of 
1996--that give the FCC the policy direction sufficient to address the 
discriminatory impairments the Coalition apprehends. Section 230 of the 
Act makes it ``the policy of the United States to promote the continued 
development of the Internet and other interactive computer services and 
other interactive media; to preserve the vibrant and competitive free 
market that presently exists for the Internet and other interactive 
computer services, unfettered by Federal or State regulation; and to 
encourage the development of technologies which maximize user control 
over what information is received by individuals, families, and schools 
who use the Internet and other interactive computer services.''
    The Coalition's request that the FCC proscribe impediments to 
consumer Internet connectivity certainly would ``promote the continued 
development of the Internet,'' because Internet development is driven 
largely by the availability to consumers of the content and devices of 
their choice, and regulatory certainty from the Commission would spur 
investment by content providers and device manufacturers. Moreover, FCC 
action would ``preserve the vibrant and competitive free market that 
presently exists for the Internet,'' because a free market simply 
cannot exist without the consumer choice that FCC action would 
safeguard. Conversely, if broadband service providers were permitted to 
impair consumer access at will, the Commission would have manifestly 
failed Congress' directive to preserve the current vibrant free market.
    Section 706 of the Act requires the FCC to ``encourage the 
deployment on a reasonable and timely basis of advanced 
telecommunications capability to all Americans . . . by utilizing, in a 
manner consistent with the public interest, convenience, and necessity, 
price cap regulation, regulatory forbearance, measures that promote 
competition in the local telecommunications market, or other regulating 
methods that remove barriers to infrastructure investment.'' The Act 
defined this advanced telecommunications capability to cover all high-
speed services that ``enable[ ] users to originate and receive high-
quality voice, data, graphics, and video telecommunications.''
    Clearly, the FCC action proposed by the Coalition would be a 
``regulating method[ ] that remove[s] barriers to infrastructure 
investment,'' because infrastructure includes not only that employed by 
broadband service providers, but also consumer infrastructure (the 
devices consumers attach to the network to receive advanced services); 
and the Internet-based information, products, and services to which the 
Coalition seeks to preserve consumer access. It is noteworthy that the 
Commission relied on Section 706 in its 2000 decision extending the 
rules allowing consumers to install over the air reception devices, 
finding that consumer access ``foster[s] the deployment of advanced 
telecommunications services.'' The same undoubtedly is true for 
broadband: unimpaired consumer access to Internet-based information, 
products, and services drives the deployment of advanced services.

  FCC ACTION IS NEEDED TO PROHIBIT IMPAIRMENTS UNTIL TRUE COMPETITION 
                                EMERGES

    FCC action is needed to prohibit impairments until true competition 
emerges. Without such action, and for all of the foregoing reasons, 
broadband service providers with market power will have the technical 
opportunities and economic incentives to impair consumer access to 
Internet-based information, products, and services.
    Although perhaps subtle at first, the resulting change to the 
fundamental character of the Internet would be nothing short of radical 
and tragic. No longer would Americans be able to obtain for free or 
purchase all the myriad content they have grown accustomed to receiving 
at home. The Internet would metamorphose from being the ultimate 
``pull'' medium, in which consumer choice is paramount, to being yet 
another cable TV-style ``push'' medium, where gate-keeping service 
providers decide what content Americans are allowed to obtain. By 
destroying unimpeded connectivity, the anti-competitive exercise of 
market power by a handful of broadband service providers would do to 
the Internet what even a nuclear strike could not.
    The Coalition asks, therefore, that Congress urge the Commission in 
the strongest terms possible to preserve in the broadband era the 
unimpeded connectivity that has enabled the Internet to flourish to 
date. More specifically, the FCC should be urged to adopt a narrowly 
targeted rule that would, until true competition emerges, effectively 
bar broadband service providers from impeding consumer access to 
Internet-based information, products, and services. The exception to 
the rule would be purely capacity-based pricing or restrictions that 
would require high bandwidth subscribers to pay more in order to 
compensate service providers for the additional investments necessary 
to accommodate such use. In other words, discriminatory impairments 
must be banned, but bit rate-based pricing, such as ``gold-silver-
bronze'' tiering, and other purely network management limitations, 
should be permitted. Otherwise, unimpaired consumer connectivity will 
be lost.

                               CONCLUSION

    In conclusion, Mr. Chairman, the defining characteristic of the 
Internet is unimpeded connectivity. Americans today may obtain online 
any lawful information, products, or services available or sold on the 
Internet, without any discriminatory impairment by network operators. 
The Coalition's sole purpose is to preserve this unimpeded connectivity 
despite the changing technical, economic, and regulatory circumstances 
of consumer Internet access. Unfortunately, the Coalition has many 
reasons to fear for the future of unimpeded connectivity, because 
providers of broadband consumer access now have the technical 
opportunities, economic incentives and, most importantly, the market 
power to impair consumer access to Internet content. For these reasons, 
we have asked the FCC to use its existing statutory authority to 
prohibit impairments unrelated to legitimate network management until 
true broadband access competition emerges. Mr. Chairman, we now ask 
that you and your subcommittee strongly urge the Commission to adopt 
this important safeguard to preserve unimpaired consumer connectivity 
to the Internet.

    Mr. Upton. We appreciate all of your testimony this 
afternoon.
    Mr. Tauke, I want to talk about Verizon's potential 
investment in broadband and I thought you did a very good job 
talking about the industry's efforts. But assuming that the 
broadband piece of the Triennial Review delivers on its 
promise, what type of investment in broadband can we expect 
from Verizon in the next 12 to 18 months?
    Mr. Tauke. The head of our telco operations within Verizon 
has said to analysts on Wall Street that he has a billion 
dollars ready to start spending on fiber to the home. This 
would be a change in the direction which Verizon has pursued 
their broadband up until now where we have essentially focused 
on the expansion of DSL services and capability. We are now in 
an aggressive program to bring DSL to 80 percent of our 
customers by the end of the year. Then we hope that if the 
rules get in place, that we will be able to launch our fiber to 
the home or fiber to the premises initiative in early 2004.
    But what does it take to start that spending? Essentially 
two things. One, we need to know what the Triennial Review says 
and, second, what tells us what we do or don't have to do 
relating to the unbundling of the network. And second, we need 
to know what the other rules are. Those would be the rules that 
would presumably be articulated in the definitional proceeding 
that is currently at the FCC. If we can get those things done, 
then the money can start to flow.
    Mr. Upton. What would you say would be the time line at the 
point that the FCC makes those decisions in terms of when 
Verizon would announce such capital spending?
    Mr. Tauke. Two quarters from the time the decisions are 
made until you begin to place the orders, begin the deployment 
and so on. In order to jump-start the process back in early 
March after the FCC voted on the Triennial Review we started 
the process of working with manufacturers so we could set some 
standards, and other carriers and set some standards for the 
deployment of fiber. We have been doing what we think we can in 
order to move this forward. So we have perhaps shortened that a 
little bit, but it is going to be at least 4, 5 months before 
anything can move before a decision is made by the Commission.
    Mr. Upton. Your testimony indicated that Verizon had spent 
$18.5 billion and dropped to $12.5 billion for this. Is that 
per year?
    Mr. Tauke. Per year.
    Mr. Upton. So you are saying that should we get these 
decisions from the FCC, you would raise that $12.5 to $13.5 
billion, a billion dollar boost within 2 quarters?
    Mr. Tauke. I don't want to say what the capital budget is 
going to be next year because it depends on a variety of 
factors. We just don't know what the capital budget will be 
next year. We do know that if the decision had come earlier 
this year, there was the money ready to spend in the magnitude 
of $1 billion over the course of a year into fiber. But 
presumably, once you start deploying fiber you begin to put 
more resources into it as time goes by. There would be some of 
those resources which would come from traditional or previous 
capital spending that is redirected and hopefully there would 
be some additional spending that could go into the wireline 
network. But obviously that depends on a variety of factors.
    One of the problems we have right now is that Wall Street 
makes it very clear they want you to pay down debt rather than 
to invest in infrastructure. And this is really, in my view at 
least, a bad thing for the country especially at a time when we 
need investment and infrastructure, we need more capital 
spending and we need more jobs.
    So one of the things that could help the Wall Street 
attitude turn around is what the FCC does. If it turns around 
more rather than less, then we have more flexibility. If the 
FCC is ambiguous and leaves a lot of uncertainty and Wall 
Street doesn't think these are good investments, then we have 
less flexibility to move forward.
    Mr. Upton. Dr. Pepper, that seems to put you a little bit 
on the hot seat. Mr. Tauke indicated in his statement that this 
is his fifth time before the subcommittee and as much as he is 
a good guy and we would like to have him here a number of times 
in the future, we would like to see the FCC finish the job that 
is before them. And as I indicated in my opening statement, we 
are prepared to have another hearing when Congress returns 
after Labor Day. And at least from this member's standpoint I 
would like the decisions to be done, but I wonder if you could 
tell us where that time line is going to be.
    Mr. Pepper. Well, Mr. Chairman, we hear you loud and clear, 
and I can tell you that there are no people who would rather 
see the Triennial Review completed than the people at the FCC. 
In fact, even on a late Monday afternoon in July, I can tell 
you that there is staff right now, today, this afternoon back 
there working to get it done.
    Mr. Upton. Is it going to be done by Labor Day?
    Mr. Pepper. I certainly hope so.
    Mr. Upton. Okay. Mr. Markey.
    Mr. Markey. Thank you very much. The reality is that if 
there was no prospect of Tom Tauke having to appear before our 
committee at all ever in the future, it would reduce 
dramatically the compensation he would receive from Verizon. So 
there is a direct correlation between his appearance before us. 
Paranoia of executives above him in the corporation does 
determine it to a certain extent.
    Let me ask this, Dick Notebaert, remember him, former great 
CEO of Ameritech. I had this great hearing here in 1994. All 
the CEOs sat out here from the then seven Bells as they were 
then seeking to be properly included in the Telecommunications 
Act. And here is what Dick Notebaert said, which I believe was 
right on point. He said, quote, the open access and 
interconnection requirements placed on the telephone companies 
should be applied to the cable companies. The asymmetrical 
application of these provisions will frustrate the development 
of an integrated network of advanced networks. If we are to 
realize the full potential of the information highway, all 
telephone and cable networks should be open and unbundled. If 
some networks are opened and others are closed, we risk 
creating a tangle of private toll roads and not an open 
highway. With mandatory interconnection and equal access, 
customers on one network will be able to reach other networks. 
Open access requirements also encourages the robust development 
of niche information providers who can deliver their product 
with little or no capital investment. As the Nation makes the 
transition to a system of multiple networks, competition can be 
safeguarded if all information providers are guaranteed access.
    Now that was 1994. Very prescient testimony as we were 
voting on the Telecommunications Act of 1994, which morphed 
into the Telecommunications Act of 1996. Now Mr. Tauke and Mr. 
Sachs, you offer similar services and you both want to be 
deregulated. And I would like you to speak, however, to Mr. 
Notebaert's point. Was he totally wrong, Mr. Tauke, back in 
1994 in his testimony? And then I will go to you as well, 
Robert.
    Mr. Tauke. Actually I agree with Notebaert and I agreed 
with him in 1994 and I agree with him today as I understood 
what he just said. We believe in open networks. And you could 
find quotations from me of 3 or 5 years ago suggesting that the 
FCC should take steps to ensure that there are open networks on 
the cable side.
    What has happened since? Well, what has happened since is 
we have seen the marketplace at work as we had predicted; that 
the market would drive companies to have open network 
facilities because consumers would require that, and that is 
what we are seeing. The cable side does not have any regulatory 
requirement though to open their networks, but there has been a 
steady, strong and steady momentum for open networks on the 
cable side and they have many more ISPs provided over cable 
today than they did a few years ago. So we see the momentum in 
that direction.
    Now, I think it is also important to understand that we at 
least do not think that Title I means closed networks. In our 
view Title I is a title of the act under which the FCC can set 
some rules, including some rules for openness, 
nondiscrimination if they want to. Our recommendation to the 
FCC is that they lay out some core principles such as open 
networks, access for all consumers to any part of the Internet, 
but they don't need today to lay out all of these precise 
rules.
    Mr. Markey. Robert, do you agree with Tom that you are 
going to continue to increase the number of ISPs with no 
pressure, especially if the Bells no longer had any 
requirement? That is one of the attractive things increasingly 
about the Bells is that all the competitors can get on there as 
well. Maybe the cable industries should have competitors on as 
a way of making you more attractive as well. So was Dick 
Notebaert wrong back in 1994?
    Mr. Sachs. Mr. Notebaert defines open access as multiple 
ISPs. Mixed in that was the discussion of access to any 
information and any content. What has happened is that cable 
operators have offered choice of ISPs in a number of 
situations. But I think the market itself is questioning the 
viability of that model. You have seen Microsoft and AOL, two 
of the leading ISPs change their business model in the last 
year where they are focused on providing high quality broadband 
and unique broadband content rather than simply being an ISP 
that is reselling cables platform.
    The other point I think is worth making, if the regulation 
that Mr. Notebaert sought of cable in 1994 had been put in 
place in the 1996 act, we would not have seen the dynamic 
growth that has occurred in our industry. Today, there are more 
than 12 million cable modem customers and half that number of 
DSL. So the fact that cable was not regulated as he suggested 
and is totally open from a consumer's standpoint, I think does 
call into question the wisdom of what Mr. Notebaert offered 
back then.
    Mr. Markey. Mr. Nelson, could you give me a brief 
commentary on what you just heard?
    Mr. Nelson. I should indicate that this idea of either 
going, as Mr. Tauke says, to all out regulation or deregulation 
is not the only choice that Congress or FCC has. There are a 
number of intermediate steps. We advocate that as the FCC is 
doing the Triennial Review, you take a market-by-market 
analysis and in some markets there may be a need to deregulate 
broadband and others there won't be. But the forbearance 
provisions that Mr. Jones referred to should be applied. They 
should not be waived and not be through a sleight of hand 
ignored by the FCC by this change of classification.
    Mr. Upton. Mr. Tauzin?
    Chairman Tauzin. Thank you, Mr. Chairman. I want to go to 
Mr. Davidson's testimony and see if anybody disagrees with him 
on a couple points. Commissioner Davidson pointed out to us 
that of the four major competing broadband delivery platforms, 
cable, DSL, satellite and wireless, DSL is the most regulated 
platform. Anybody disagree with that? I see no hands.
    He goes on to say that Economics 101 teaches us that where 
two products are substitutes for one another, competition is 
not sustainable, where a substitutable product is subject to 
asymmetrical regulation. Anybody disagree with that? I see no 
one disagreeing.
    He goes on to point out that if we continue this process of 
regulating one of the competitors heavily and leaving the 
others generally unregulated, the competition suffers and 
therefore consumers suffer. Anybody disagree with that? 
Anybody? Can we adjourn the hearing?
    I mean basically that is what we are talking about. We are 
talking about a world where broadband service has substitutable 
products on different platforms, I mean coming from the air, 
satellites, some coming from wires on the ground, some coming 
perhaps from terrestrial wireless services. Substitutable 
products regulated very differently. And if Commissioner 
Davidson is correct, somebody has a huge advantage here at the 
expense of the other.
    I want to follow up on a thought now. Mr. Markey proposes 
following Mr. Notebaert's testimony that what we ought to do is 
regulate them all the same, just regulate them more than the 
least regulated entity cable. Mr. Dingell and I propose 
regulating them all less so that there is a deregulated 
competition going on. I think Commissioner Davidson seems to 
favor that proposition. Commissioner Nelson said there is 
something in the middle. There is something in the middle is 
what we got. All we got is regulating some of the parties to 
this competition and not others.
    Now, Commissioner Nelson, what is the status of competition 
in Michigan? What percentage of the consumers in Michigan use 
cable's broadband services as opposed to DSL? Do you have the 
numbers?
    Mr. Nelson. Yes. Approximately in Michigan we have over 
400,000 cable modem.
    Chairman Tauzin. 472,405.
    Mr. Nelson. Approximately over 120,000----
    Chairman Tauzin. It is 111,182, according the FCC, DSL 
subscribers, and that includes CLECs. It is 4 to 1. Isn't that 
approximately correct, 4 to 1 cable over DSL?
    Mr. Nelson. Of that DSL, Mr. Chairman, about 90 percent is 
in the incumbents' hands.
    Chairman Tauzin. I saw you complain about that. But in 
regards to the overall competition among these different 
platforms, cable is winning 4 to 1 in Michigan. Does that say 
to you that Commissioner Davidson has got it right, that cable 
has a huge advantage over DSL because DSL is the most regulated 
platform whether it is provided by a CLEC or the ILEC? Does 
that tell you maybe he has got it right?
    Mr. Nelson. Not necessarily.
    Chairman Tauzin. Tell us why not.
    Mr. Nelson. Well, first of all, I believe that there are a 
number of reasons why cable regulation has evolved separately 
from DSL regulation. You have local franchises involved. Some 
local franchises authorize more than one competitor and that is 
the case in many cities in Michigan right now. So you do have 
that competition amongst cable providers.
    Chairman Tauzin. Do you know how many places in America 
have two cable companies?
    Mr. Nelson. Mr. Sachs may know that. I don't.
    Mr. Sachs. Fewer than 5 percent.
    Chairman Tauzin. 95 percent of the cable market is a single 
provider. And in Michigan they got four times as many 
subscribers as the telephone providers of broadband. You don't 
think that is troublesome? You don't think it makes the case if 
you regulate the dickens out of DSL and you don't regulate 
cable that consumers, money, investors will flow to the least 
regulated?
    I am at a crossroads. I have tried with Mr. Dingell and I 
have done this to get Congress to adopt a deregulated approach 
for equal and fair treatment for good competition and so far we 
couldn't get the other body to even take it up even though we 
passed it on the House floor. Is it time for us to say to Bob 
Sachs and the others, it is time for us to start regulating 
cable the same way we regulate DSL? Is that the only answer? I 
would hope not.
    Mr. Nelson. I don't think it is the only answer.
    Chairman Tauzin. How can State commissioners, with the 
exception notably of Commissioner Davidson, take the view that 
you guys should market to market, keep regulating one provider 
so differently than another? I will tell you something, Mr. 
Tauke, the day you really win this battle, the day we don't 
have this disparity in regulation, this asymmetrical regulatory 
structure that favors one competitor over the other, the day 
that is over and you don't have to come back here, you get the 
biggest golden parachute from Verizon you ever saw. I mean 
seriously. How long do we keep this game up before we do for 
the American public what they are entitled to and that is give 
them the right to choose from similarly regulated entities and 
let the best service win? Let the one that offers Americans the 
most open access, the best content, the best interactivities, 
the faster speeds, the more competent service, the more 
reliable service, the more dependable service. It is a simple 
story. As long as you let two stores come into town without the 
government interfering, one of those stores is going to win 
over the other because he offered better products at better 
prices and better attitudes, too. But as long as the government 
is in the business of saying one store is going to be heavily 
regulated and the other won't, we can predict what people are 
going to do, they are going to go to the store that is least 
regulated and so will investors.
    Mr. Jones. I just wanted to point out that our concern--we 
actually don't have a dog in this fight, which is the mass 
market residential fight. We are concerned that there is only 
one store in the business market. And so the worry we have is 
that whatever may be done on the mass market side to 
deregulate, if you reclassify the transmission you are going to 
throw the baby out with the bath water.
    Chairman Tauzin. You mean the business market can't access 
cable modems and DSL simultaneously?
    Mr. Jones. Cable modems don't serve the business market.
    Chairman Tauzin. But cable modems could. In broadband I 
will bet you the cable industry would love to service a 
business model along with a residential model. You don't think 
so?
    Mr. Jones. The FCC has already found they don't and they 
have some severe technical problems in doing so because 
business customers need upstream capacity, security and 
reliability that the cable modem network----
    Chairman Tauzin. If I can go back, however, the business 
market is, however, usually competitive.
    Mr. Jones. Not for the end user connection.
    Chairman Tauzin. By all our analysis it is usually 
competitive. It is the residential consumer market that is 
suffering right now because the residential consumer in 
Michigan generally uses cable over DSL because cable is less 
regulated and cable can afford to make bigger investments and 
they do a better job than the telephone company, which is so 
heavily regulated. Is that so complicated?
    Mr. Jones. But that is only in the mass market that those 
statistics are being drawn from.
    Chairman Tauzin. We come out of the mass market, too. I 
think I used up my time.
    Mr. Upton. Gentleman, Mr. Davis is recognized for 5 
minutes.
    Mr. Davis. Thank you, Mr. Chairman. I willl start with my 
question to Dr. Pepper.
    Is the pending Ninth Circuit decision on classification of 
cable modem ultimately something the FCC needs to take into 
account before you reach the conclusions we have been talking 
about here today?
    Mr. Pepper. We are obviously watching that very carefully. 
That decision of course, as you know, addresses questions in 
the cable context and a challenge to our declaratory reliance 
on the cable side. We are continuing to proceed with our 
analysis on the wireline broadband proceeding and the 
definitional issues there because again there are differences 
between the two. But we are watching the court very carefully 
as we proceed internally with both proceedings.
    Mr. Davis. I guess I am still not clear on what you are 
saying. Is there any reason why the Commission needs to wait 
for the Ninth Circuit decision before you reach conclusions on 
this issue?
    Mr. Pepper. Well, on the cable side that is where the 
challenge has been and the case has been briefed. We are still 
moving forward continuing to do the analysis internally at the 
staff level on the wireline side. The Commission does not have 
a proceeding or a recommendation in front of it to vote on yet 
and the staff is continuing its analysis while we watch the 
Ninth Circuit and wait for its decision. We don't know yet when 
that is going to be.
    Mr. Davis. Do you intend to wait for the Ninth Circuit 
decision before the FCC acts then?
    Mr. Pepper. Probably not. Well, it depends upon how quickly 
they act. But the Ninth Circuit also is--you know, I talked to 
my colleagues and they have pointed out that the Ninth Circuit 
sometimes takes over a year or 2 years to issue its decisions.
    Mr. Davis. I would like to give Mr. Sachs an opportunity to 
respond to the points that were raised earlier by Mr. Jones in 
terms of what we might reasonably assume would be the 
availability of cable modem service to the types of users he 
was describing.
    Mr. Sachs. Historically cable systems were built to pass 
residential neighborhoods, not office parks, not downtown 
businesses. But as our networks are expanding, we are in a 
position to serve smaller and medium sized businesses. And as 
the cable modem technology itself is improved so that we can 
offer usage sensitive and tiered pricing arrangements, 
increasingly the small business market will be attractive to 
us.
    If I could comment for 1 second on the question of the 
Ninth Circuit, we would hope that the Commission would not wait 
for that three-member panel to decide. I think most observers 
believe that there will be further appeals to the full Ninth 
Circuit and eventually to the Supreme Court. And normally, 
where there are ambiguities in statutes and some which would 
allow different and reasonable interpretations, the Court would 
defer to the expert agencies. So in this case, we would hope 
that that would be the outcome in the Ninth Circuit, but 
certainly that the FCC should not forebear from reaching a 
decision because there is a case that has two more levels of 
appeal ahead of it.
    Mr. Davis. Can you be more specific as to when the changes 
in cable modem service you just described might be available in 
the marketplace to some of these end users?
    Mr. Sachs. I would be happy to supplement my testimony in 
writing. So we will talk to our member companies and will give 
you specific information on that.
    Mr. Davis. Mr. Jones, any further comment you want to make 
on this? You are welcome to talk about the availability of this 
service.
    Mr. Jones. Actually I wanted to respond to the notion of 
cable serving small and medium sized businesses. It is a 
twofold problem. Problem No. 1 is that cable networks generally 
were not built to reach the areas where most businesses are 
located. For example, the FCC concluded in its 2002 broadband 
report, high speed cable modem service is primarily available 
to the residential market rather than the business market. 
Cable networks were originally deployed to provide video 
programming and other programming services to residences 
throughout the United States. While some residences are located 
in areas where there are large and small businesses alike, most 
businesses were originally and still are not wired for cable 
services.
    So it is not even a question of upgrading the facilities. 
They are not even there. To the extent that they are there, 
recent testimony by Cox in Rhode Island illustrates exactly 
what is going on in these upgrades is that they are selecting 
very targeted business opportunities and they are by no means 
ubiquitous. The problem with the facilities that CLECs have is 
that they need a ubiquitous alternative. If the Title II 
regulation at least as to the business market is eliminated and 
they are not able to get those ILEC and user connections to 
compete in that business market, they will be left with no 
reasonably priced, reasonable quality service alternative and 
they will go out of business and the small business market will 
suffer greatly. In fact, Joe's Pizza and David's Pizza, 
mentioned by Mr. Misener earlier, will be paying much higher 
bills for broadband connections.
    Mr. Davis. Does anyone else want to comment on this 
particular point, availability of cable modem services and 
alternatives?
    Mr. Tauke. Thank you, Mr. Davis. When you look at the 
broadband market and look at residential customers you see 
cable as the dominant provider. When you look at the business 
provider, downtown Washington, it is not cable that is the 
primary competitor. There are a number of other facilities 
based providers, some of what are represented by Mr. Jones, but 
also companies like AT&T and MCI.
    My office is on 13th and I. I think that 13th street, 12th 
street have been dug up at least 10 times over the last 2 years 
to lay fiber by one company or another. If you go into 
Manhattan, the competition in the business market is severe. It 
is, you know, very robust, and lots of facilities based 
providers.
    I just observed--we don't know what the FCC decided in its 
Triennial Review for sure, but looking at the press release, we 
know these issues are addressed in the Triennial Review. We 
believe that if a business, let us say Joe's Pizza, is served 
by a copper wire, any carrier can come purchase that copper 
loop, put its DSL on that copper loop and serve the customer. 
If we replace that copper loop with a fiber loop, then they 
have the opportunity to build the fiber loop too and therefore 
we don't expect that we will have to provide that fiber loop to 
them. However, we may want to provide capacity to them. You 
don't have to have regulation to do it. We could provide and we 
want to provide capacity to other carriers on our network. If 
you are a network provider you want to sell capacity. The 
question is whether you need a lot of regulation to make that 
happen. In the wireless world and the long distance you don't 
have that regulation and you have a robust wholesale business. 
We think that will happen here, too.
    Mr. Davis. I assume that you would agree that Joe's Pizza 
on 13th Street, notwithstanding the road being torn up, has 
benefited from the type of competition you just described?
    Mr. Tauke. Joe's Pizza is benefiting from facilities based 
competition.
    Mr. Davis. And you are suggesting that if you were 
reclassified to an information service then perhaps the terms 
under which you make your facilities that these CLECs might not 
change very much?
    Mr. Tauke. Not to be picky, but to be clear. First, Title I 
is not just an information service. Title I is where we have 
private coverage. We have CPE. There are a number of things 
regulated under Title I. Doesn't mean that it is an information 
service.
    Two is that this issue of whether or not you have to share 
the network on an unbundled basis is a Triennial Review 
decision, as we see it, and as we understand what the FCC is 
saying they are going to say that trumps the definitional 
issue. So if they decide we have to provide it that way, 
unbundle it, we are going to have to do that. That issue is in 
a sense in the Triennial Review.
    Now what was your question?
    Mr. Davis. I think you have made your point. Let me go back 
to Dr. Pepper. All right, Mr. Chairman, time flies by.
    Mr. Upton. Mr. Shimkus, who deferred with his opening 
statement, gets an extra 3 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. And just before I go 
on my questions, I would say that Chairman Tauzin did a very 
good job addressing the State commissioners. And I think it 
would be incumbent upon all of us to go to the FCC and find out 
our ratio as far as residential connectivity. I know at home I 
am on a cable modem service. I was on--I had other services, 
but that was meeting the needs of mine right now. And I bet you 
I will find out the same story in the State of Illinois and I 
look forward to doing that.
    Mr. Baker has been sitting there quietly, and I have a 
couple of questions because it really does tie into all of this 
debate. I wasn't here when the Telecom Act was written or 
passed. I am a product of coming afterwards. And when I first 
got here, trying to figure it out, I always thought that the 
intent was multiple competition inside the pipes. And evolution 
is that we hopefully will have multiple pipes providing the 
competition, hence the number in Michigan of cable over phone 
service and the like. EarthLink has advocated open access 
requirements for cable operators and telephone companies. Do 
you advocate similar government mandate, open access 
requirements for your electric company associates in the Power 
Line Communication Association to hopefully roll out the 
broadband power line.
    Mr. Baker. We have not taken that position.
    Mr. Shimkus. Why not?
    Mr. Baker. Among other things, power line communications or 
broadband over power lines, as the FCC calls it, are still in 
the trial stages. And I know a lot of times when we talk about 
broadband access, people sort of run to a list of different 
platforms over which consumers can get Internet access. But in 
point of fact DSL and cable between them account for over 98 
percent of all broadband connections in the United States. And 
we can talk about satellite and talk about fixed wireless and 
we can talk about power line communications, but there is a 
rounding error in terms of a means of providing broadband 
connections to consumers.
    Mr. Shimkus. We are not even in the power line yet. There 
is--you are not in a position to penetrate between the two 
providers right now, is that correct?
    Mr. Baker. That is correct.
    Mr. Shimkus. So how long will we be until we broadband 
power line?
    Mr. Jones. It is in the trial stages and hopefully we will 
see commercial deployment in the next 12 to 18 months. Again we 
are talking trials while DSL and cable providers are signing up 
on the order of a million customers a month between the two of 
them at this point.
    Mr. Shimkus. Let us say you are available to commercially 
roll out between 12 and 18 months. Would you rather roll out 
under an environment where you had to go through the regulatory 
scheme of the wireline or the unregulated scheme of the cable 
industry?
    Mr. Jones. I would rather we didn't have to deal with these 
many regulations. We have to distinguish between what sectors 
in the market are competitive and which are not. Once we get to 
an environment hopefully where there are three or four 
broadband pipes that consumers have available to them, then it 
becomes less crucial to ensure that each of those pipes has--is 
an open platform because then consumers will have greater 
choice in who is providing the broadband. But in the situation 
today where there are essentially two broadband pipes that 
serve consumers where many consumers have available only one or 
the other of those two pipes, where the cost of switching 
between those two pipes, those two platforms is very high 
because of customer premises equipment costs, because of 
termination fees, you develop a situation where there are two 
broadband pipes at best available to most consumers and 
therefore two broadband providers, and that is a far, far 
different environment than what has made the Internet so 
ubiquitous.
    Mr. Shimkus. Let me ask this question, with all due respect 
to the great testimony we have. I am an old--I keep saying in 
this committee I am an old instrument with the acronym of KISS, 
keep it simple, and it is not politically correct to tell you 
what the last S is. Keep it simple.
    I think it is a pretty simple answer. If you want to roll 
out a competitive market product, and you have got two 
competitors and one is regulated and one is not, I would think 
I would want to enter the market as an unregulated entity. Does 
anyone disagree with that? You disagree?
    Mr. Baker. No, but I am saying I am not entering their 
market.
    Mr. Shimkus. The point is does not EarthLink, aren't you a 
member of the Power Line Communications Association broadband?
    Mr. Baker. Yes, we are.
    Mr. Shimkus. Isn't it one of the main purposes to promote 
broadband power line deployment?
    Mr. Baker. Yes.
    Mr. Shimkus. If you want to enter the broadband market, and 
you are going to do it through the electrical wires and you are 
going to compete with the telephone and the cable, would you 
rather do that unregulated or regulated?
    Mr. Baker. I would rather do it unregulated.
    Mr. Shimkus. I yield back my time.
    Mr. Upton. The gentleman from New York, Mr. Engel.
    Mr. Engel. Thank you. Thank you, Mr. Chairman. My good 
friend from Massachusetts was--gave us a quote before, and I 
wasn't on the committee in 1994 but it just strikes me that the 
one thing missing from that quote is when you add in the profit 
motive, you know, we--you run smack into the free-rider 
problems. Why spend billions of dollars for investment when you 
can rent something for a lot cheaper? I am wondering if Mr. 
Sachs would like to comment on that.
    Mr. Sachs. Our companies, since 1996, have invested more 
than $75 billion of private risk capital in upgrading networks 
for multiple purposes, to meet satellite competition, to offer 
new broadband services, enter markets which were unproven with 
respect to public demand for high-speed data services.
    It is understandable to me why EarthLink, which has not 
made this investment, would want the government to allocate a 
portion of Cable's pipe to EarthLink. The reality is that 
EarthLink has been able to negotiate business arrangements with 
the three largest companies in our industry. With Charter 
Communications going back 5 years, with AT&T, the predecessor 
to Comcast in several markets, and by virtue of the consent 
decree that AOL Time Warner had entered into in a number of 
Time Warner markets.
    It is perfectly understandable why EarthLink would want the 
government to intervene on its behalf in private business 
negotiations. But to the entrepreneur who is looking at 
investing money, taking risk, it is unacceptable to suggest 
that somebody else, who is not willing to take that same risk, 
should have all the benefits of that investment.
    Mr. Engel. Thank you. Mr. Tauke, can you cite--you 
mentioned several reasons why you believe things should be 
deregulated. Can you cite a few specific regulations that 
Verizon has to follow that cable does not have to follow when 
providing high speed services?
    Mr. Tauke. Well, one of them that we are just talking about 
was nondiscriminatory access to all Internet service providers. 
That is a requirement that we have. We have requirements 
relating to the structure of our business under the Computer 
Inquiry 3 Rules, which we are required to live with that the 
cable industry does not have to live with. We, at the current 
time, have unbundling requirements for our network that the 
cable does not have for its network.
    So there are a lot of, whole host of telephony regulations 
that are very severe that apply to our broadband activity 
today.
    Mr. Engel. But actually in both your testimonies, and I 
read both Mr. Sachs' and Mr. Tauke's testimonies, you are 
actually though, there is a convergence of interests here. I 
want to just say that I support the Chairman's remarks. I was, 
I am a strong supporter of Tauzin-Dingell.
    When I entered Congress, I thought regulation was the way 
to go. The more I am on this committee, I have a 180-degree 
opposite feeling about it. And I do feel that competition 
actually plays out. So it seems to me that there is a 
convergence of interests here.
    I was interested in your testimony, Mr. Tauke. I am quoting 
between 2000 and 2002 over annual investment by wireline 
telecommunication carriers, including Verizon, declined from 
$104 billion to $42 billion, spending on new equipment down 19 
percent. So on and so forth. I am wondering if you could expand 
on the reasons for that. You did talk a little bit about it, 
but I am wondering if you could do that.
    You also say in your testimony Wall Street is skeptical of 
increasing capital spending in telecommunications, and instead 
is awarding cutbacks in investment. You mentioned that in 
response to a question. In the telecommunications industry, I 
am quoting from you, a significant factor is investors believe 
that the regulatory rules simply make it nearly impossible to 
realize any return from investments in new technologies and 
services. We need to reverse these trends for the good of the 
economy, the industry and consumers.
    I just want to give you a chance to expand on that a little 
bit.
    Mr. Tauke. Thank you, Mr. Engel.
    First, I think you have to understand that in our industry 
today, we are in a transition in the wireline side of the 
industry. The voice traditional, voice telephony over the 
traditional wireline network is a rapidly shrinking business. 
So you have to adjust and make new investments to provide new 
capabilities and new services, new capabilities in the 
infrastructure, and new services to the consumers. Our problem, 
at the moment, is that that adjustment is being stymied by 
regulation because we don't know what the rules are. And as 
these rules oppress your ability to make this investment, it 
means reduced jobs and economic harm, but it also means the 
consumers aren't getting the benefits of this transition to a 
new network and the services it can provide.
    It is very hard--these are risky investments. I mean 
everybody will tell you this is a risky marketplace we are 
entering into. It is a new, undeveloped market. It is not a 
mature market. So as a result, it is, in our view, wrong for 
the government to have the rules that were written for a 
mature, highly developed market apply to this new market that 
we have new investment in and which is still very uncertain. 
And when you do apply those kinds of rules, you really reduce 
the possibility of getting investment in that new market and in 
that new infrastructure.
    So I guess our bottom line is we need clarity of what the 
rules are. The rules should be the light regulatory touch until 
you see how this market develops.
    Mr. Engel. Thank you. I believe my time is up.
    Mr. Upton. Time is expired. Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    First of all, let me welcome and thank Mr. Davidson for 
coming as Florida Public Service Commission. We welcome you 
here; appreciate your testimony.
    I was reading on your opening statement where you mentioned 
that a Wall Street Journal article said that telecom investment 
is down 75 percent since the year 2000. There have been more 
than 1,000 telecom bankruptcies, the market has witnessed a 9-
year low in venture capital investments. And there is a 28-year 
low in initial public offerings. This is as of July 1, 2003.
    Let me ask you, you have mentioned the roles of States in 
broadband deployment in your opinion, how have the various 
State laws affected broadband deployment? I guess both good and 
bad. And maybe have Mr. Nelson talk about it too, because, you 
know, we have all indicated here, Mr. Tauzin has made the point 
eloquently, that this regulatory uncertainty has created a 
desire in the minds' of investors to hold off. And so just in 
tune with that, what do you think that the States' rights role 
should be?
    Mr. Davidson. Thank you, Congressman.
    As I set forth in my testimony, I think the States do have 
a fundamental role here on the supply side, on the demand side, 
and on removing any State-specific, city-specific, 
municipality-specific barriers to deployment of new networks.
    A key problem, in my opinion, is that companies in all the 
different modes face this patchwork of different State rules, 
which from a planning standpoint is hard to deal with. It is 
hard to calculate how do we measure this investment risk when 
we may face a good situation in Florida, and I think companies 
do, and we may not face the same type of situation in another 
State.
    So States certainly impact the planning process. I think--
--
    Mr. Stearns. You don't think they would create regulatory 
uncertainty, this States' right regulation that you are talking 
about?
    Mr. Davidson. Oh, my view is that a uniform national policy 
is much better than a patchwork of different State policies. I 
think State-by-State regulations would create additional 
regulatory and investment risk.
    Mr. Stearns. Okay. Mr. Nelson do you have--want to comment?
    Mr. Nelson. Thank you, Congressman. I believe we can have 
both. I think State initiatives, like the ones I described for 
Michigan, where we have financial incentives that are made 
available to not only providers but users of broadband, a very 
light-handed regulatory approach will work very well in 
Michigan. In addition, tearing down the right-of-way access 
barriers, as we have done in Michigan, has been heralded by 
TechNet as a very significant step.
    But at the same time, I think you could look at regulation 
in some respects, some States have been very successful in 
using Section 251 of the Federal Act to deploy line sharing. 
Line sharing is somewhat up in the air now because of the FCC 
Triennial Review order and court review, but it has worked very 
well in many States. And they can use regulation or more light-
handed regulation, as we do in Michigan, to promote broadband, 
and both work.
    I think you can have national guidelines, but also the 
laboratories of democracy in each State should be able to 
deploy broadband as they see fit.
    Mr. Stearns. Dr. Pepper, let me have you elaborate on the 
record on why you believe that regulating broadband services, 
such as Title II common carrier services, would undermine 
investments in such services and the facilities used to provide 
such services. I guess the question is, what is it about, this 
Title II regulation that serves as a disincentive to 
investment? Maybe you could give us a capsuled version.
    Mr. Pepper. All regulations have cost. And we are very 
aware of that. And you know, the approach that we are taking is 
that--you know, the presumption we have a nascent market. The 
market is growing very rapidly. We have firms entering these 
markets. And the presumption is that we should wait and see how 
the market develops before imposing these costs. And frankly, 
if problems develop, we have the ability to address those 
problems. But at the moment, what we are seeing is entry--as 
Chairman Tauzin pointed out--nationwide happens to be three to 
two. For every three cable modem service customers, there are 
only two DSL customers. So we see this as a market that is 
growing. We see this as a market that, in fact, is one that we 
believe we should not impose burdensome costly regulations that 
are going to create disincentives to investment, unless there 
is the demonstrable, specific, identifiable problem. And at the 
moment what we see, frankly, is, you know, our competitors 
moving into the market to compete.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Walden.
    Mr. Walden. Thank you, Mr. Chairman. My apologies for being 
late. I took the fastest plane that would cross the country and 
got here as soon as I could.
    Dr. Pepper, I have a question for you and hopefully you 
will be able to address this. I was with a group of radio 
engineers a while back who expressed some real concern about 
whether or not the idea of putting broadband on power lines, 
basically, has been well-vetted from a technical standpoint as 
it relates to interference on some bands. Is the Commission 
looking at that? Have you looked at that? What have you found?
    Mr. Pepper. Yes, Congressman. We actually have a proceeding 
looking specifically at that question at the moment. There are 
issues having to do with radio emissions from power lines, but 
one of the things that we have been, you know, talking to the 
power line industry about is how to mitigate noise emissions. 
There also were questions about, frankly, how far those 
emissions go from the wires themselves, especially on the high 
tension wires. The falloff appears to be very, very severe. So 
it drops off very quickly. But those are precisely the kind of 
questions that we currently are looking at in our power-line 
proceeding.
    Mr. Walden. Are you also looking at the noise that is 
generated on the AM band, AM broadcast band?
    Mr. Pepper. All of those are related, those questions, yes.
    Mr. Walden. I have not had time to get through all the 
testimony in the little time I have been here, I do have one 
question, I represent a very, very rural district. I would be 
curious to hear from the various panel members who are in the 
business of deploying broadband or access to broadband, what do 
you do to get broadband into, I am talking, very remote areas? 
Or are these communities going to be left off the latest 
highway?
    Maybe we start with the FCC. From your standpoint, what, in 
your rulings, are going to guarantee folks in any district 
aren't going to be left behind again?
    Mr. Pepper. Congressman, under Section 706 that others have 
referred to earlier this afternoon, we periodically look at the 
deployment of broadband, especially in rural areas. And so we 
are monitoring this very carefully. What we are finding are 
several things.
    One is that the--some of the smallest cooperative, 
cooperative telephone companies, the little co-ops, the 
littlest of the little, they indeed are making the investments 
in broadband in many places, but not everywhere. We also 
recently have had a joint event with the Rural Utility Service 
at the Department of Agriculture.
    Of course, Congress has made, I think, it is $1.4 billion 
available for rural--for loans in rural America for broadband 
specifically. We are working very closely with the Department 
of Agriculture.
    We are working on issues and proceedings that will make 
more spectrum available because, frankly, getting wires out to 
some of the farmhouses and the ranches, that is tough. Using 
wireless technologies, we believe actually may be the answer 
for the least dense areas. And so we, in fact, are working with 
not only companies that have licenses to provide wireless 
services, but also with the community that they call WISPs or 
Wireless Internet Service Providers, many of whom are using 
some of the wireless devices like Wi-Fi. This getting broadband 
out to rural America is very very important. It is very high on 
our agenda.
    Mr. Walden. Anyone else?
    Mr. Nelson. Yes, Congressman. I believe the National 
Telecommunications Cooperative has filed comments in the docket 
on what we are talking about, that urge that the Commission not 
change its designation of broadband wireline services to 
information services. Because it would, in their view, be 
detrimental to rollout. And in rural areas, they indicate that 
one of these issues involves the authority of the States to 
authorize new entrants. This would be jeopardized if it was 
deemed an information service.
    Mr. Walden. Mr. Tauke.
    Mr. Tauke. I think it is interesting to note that in rural 
areas that are served by the thousand or so small independent 
telephone companies, that actually the broadband rollout in 
those areas is very rapid. And one of the reasons--I believe 
there are several reasons, but one of the reasons is they 
operate under a very different regulatory regime. So they have 
the ability to make this transition in networks more easily 
than companies that are highly regulated. They also have 
support, financial support, low-interest loans and so on that 
help with that.
    Second observation I would make is that we don't know 
exactly how technology is going to develop, wireless, Wi-Fi, 
maybe power lines, various other things. I think in a couple of 
years it would be appropriate to make an assessment, as this 
market develops, whether or not there is a problem in rolling 
out in rural areas, because there may be some need for 
additional assistance. I just don't think we know yet.
    Mr. Sachs. Congressman, if I could comment briefly. Cable 
today has about 97 percent of the homes in America and more 
than 80 percent of those are upgraded for broadband today. And 
we also represent smaller cable operators. And there are 
companies like Midcontinent in the Dakotas and Sjoberg Cable in 
Minnesota that are providing service to communities with as few 
as 100 people today.
    It may seem counterintuitive, but with the higher degree of 
satellite penetration in these smaller communities, operators 
are looking to upgrade, plant and extend it as deeply as 
possible, because then it creates the potential not only to 
offer video services, which alone were uneconomical, but to 
overlay that with cable modem service and potentially voice 
over IP may well change the economics there. I think we will 
know the outcome there within the next several years.
    Mr. Jones. Congressman, I wanted to point out to the extent 
that these buildouts actually don't take place and regulators 
need to rely on universal service subsidies, if the 
transmission component of incumbent broadband is reclassified, 
universal service subsidies will not be available. It will no 
longer apply to these services because they will no longer be 
telecommunications services, which are the subsidized services 
in the Act, they will be telecommunications. Those are not 
subject to the subsidy.
    And the Supreme Court has held that the FCC lacks the 
authority to fix that problem. When you change the categories, 
you are stuck with them. And Title I can't help you out.
    The other thing, I think, to be said about this is, to the 
extent you have rural carriers that are not RBOCs, that are 
widely deploying these facilities, they are benefiting from 
some cost allocation programs, NECA pooling and so forth, that 
currently apply that will also go away if you reclassify these 
services. So not only do the possible subsidies of tomorrow 
disappear, but the subsides of today that are allowing those 
rural carriers to deploy their networks will also go away.
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Upton. Thank you. I know members have just a couple 
more questions. So let me just start, I want to follow up on 
one of Mr. Engel's questions to Mr. Tauke with regard to the 
regulations that you all comply with that the cable company 
does not. You cited a number of them. Do you know what the cost 
is to Verizon?
    Mr. Tauke. No, Mr. Chairman, I am afraid I can't give you a 
sense of the cost. Essentially, while cable is able to do 
business with business-to-business arrangements with all of the 
other players in the Internet, we file tariffs, and we have to 
have everything approved through the FCC process, and so it 
is--it costs in terms of your inability to enter the market, 
capture the market, compete effectively, what--so that is the 
big cost. The actual cost of compliance, I am sure is 
significant, but it pales in comparison to the lost opportunity 
to fully engage in the market.
    Mr. Upton. In Commissioner Davidson's testimony, he says 
this: An industry that faces 50 potentially divergent 
jurisdictional approaches to broadband will have less of an 
incentive to invest than would an industry that faces a more 
uniform deregulatory national policy. Does anyone want to 
comment on that other than Mr. Davidson? Agree, disagree? No 
one disagrees? Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman.
    One of the disadvantages of having served on this 
subcommittee for 27 years is that I am too well aware of the 
high-hypocrisy coefficient which exists in much of the 
testimony that we hear which raises what we call the risibility 
coefficient, to use a Tony Blair word, in terms of my reaction 
to that testimony. And I remember the cable industry, and you 
should have been here Eliot, they were--it was kind it was 
compelling. It was a tear-stained bit of testimony back here in 
1978 how this nascent cable industry needed to have 
nondiscriminatory access to all the telephone poles of another 
industry because they weren't going to build their own 
telephone poles. And not only did they want nondiscriminatory 
access, they wanted preferential rates. They wanted the 
telephone company to subsidize them, the cable industry.
    And I being just a knee-jerk liberal that I am, I went for 
this cable industry. They needed help. They were kind of like 
the Amazon.com for the EarthLink of its time. They needed some 
help in the nascent so they could provide new services. So I 
went along with it. You might notice, to this day, there still 
is no cable pole going down the street. And that is all right, 
you know, because they didn't want to really buildup.
    And as many of the witnesses here know, I could go down a 
long litany list of other--we will call them asymmetries which 
both industries enjoy right now. If I did, I would consume all 
of the time that I have and it would not leave time for a 
question. But nonetheless, I just would want to point that out. 
And the fact that the cable industry is unregulated does lead 
to the 40 percent cashflow, which its industry does in fact 
enjoy, which no other industry in America can really quite 
compete with, and much of that is because they have unregulated 
rates, which does lead to an awful lot of private risk capital 
money to go to a business like that. But because it is totally 
unregulated with no real competitors, as someone pointed out, 
that only 5 percent of America really has competitors. That 
does lead to an awful of lot of risk capital going to a 
nonrisky investment, you know, because risk capital doesn't 
like risk. That is really the paradox and almost Orwellian way 
they try to describe themselves. That is not who venture 
capitalists are. They don't like the ``ad'' in the ``venture'', 
if you know what I mean. So they don't really go there. And the 
cable industry has become a very attractive, unregulated 
monopoly in almost every community in America. But I just put 
that in as a historical, a little observation right now.
    So I would like to go to kind of the Amazon.com and the 
EarthLink, you know, kind of what happened after the Telephone 
Act passed players in the marketplace today so that perhaps you 
could comment on Mr. Notebaert's observations back in 1994 on 
the equal access and interconnection and nondiscrimination and 
these advance networks, and what it means to your companies, 
and hundreds of other companies like your companies, who from 
the perspective of the concern that most people seem to have 
here that we are looking for more companies and more growth, 
you are the growth. We are still going to have the Bells, and 
we are still going to have the cable companies, but you are the 
new name, so could you give us your comments Mr. Misener?
    Mr. Misener. Thank you, Mr. Markey, very much.
    In some senses, it is less important what it means to our 
company as it does what it means to our customers. We really 
want our customers, both existing and future, to be able to get 
access to our site in an unimpeded fashion. If they had many 
choices of service providers, network operators, in between 
them and us, it would fine for them to choose the one that they 
thought best. But to the extent there is little, if any, 
competition in that pipe between them and us, they deserve to 
have this unfettered access to whatever content, be it ours or 
eBay's or anybody else's on line. I think there is an important 
subtlety that has been discussed here just momentarily, and it 
has to do with this unimpaired access idea. In reference to 
cable broadband service providers, Mr. Sachs in his testimony 
said, ``All offer unfettered access to Internet content.'' We 
disagree and for reasons that I explained in my written 
testimony, there are some examples. But notice what he didn't 
say. He did not say that cable will continue to offer 
unfettered access. In fact, he has never said that cable will 
continue to offer this unfettered access. It seems to me Mr. 
Markey----
    Mr. Markey. Can we ask him right now? Will you offer 
unfettered access to competitors in the future, Mr. Sachs?
    Mr. Sachs. We represent a large number of companies, large 
and small. And I have not seen any indication or any evidence 
whatsoever that these companies have either in the past not 
offered unfettered access or have any intention in the future 
of not offering----
    Mr. Markey. So can you make that promise for the future so 
that Mr. Misener can get a good night's sleep tonight?
    Mr. Sachs. I would make a representation to you if I had, 
you know, my--all my companies, you know, before me here, but I 
was going to say, in all the discussions that I have been privy 
to, in all the explanations of their business plans, there is 
no indication whatsoever of any desire to limit access. It is a 
little hard to make a blanket representation for an industry 
that has undergone consolidation and change with numerous 
players as to every company's business practices. But there is 
nothing----
    Mr. Markey. But, see, that is the point, though, from the 
perspective of the entrepreneurial information service company 
that you are creating an environment here where you are leaving 
this hearing telling them and potential risk capital investors 
and this is risky to go with these guys because you are saying, 
I am not sure I can promise in the future that they will be--so 
I would go with you, if I was a risk--if I was a venture 
capitalist. I wouldn't go with them because they don't--they 
can't be guaranteed.
    Mr. Sachs. This is no different than with Amazon.com which 
is a great service that we all use, and when you go to that 
site, and when you visit that site, you sign up for their user 
agreement and their privacy policies, and they reserve the 
right to change them without notice to you. I don't think that 
it is realistic for any association or company to come before 
you and say, ``for the future, forever, there will be no change 
whatsoever in our business plans, which may include legitimate 
business practices that will change over time depending on how 
business models change.'' But what I can say to you, and we 
have been in this business now for 7 years, we serve more than 
12 million customers, we are available across the country, and 
neither Amazon nor any other members of this Microsoft-led 
coalition can provide you with any evidence whatsoever of 
access.
    Mr. Markey. The problem, Mr. Sachs, is right now these 
companies have guaranteed access to all the Bell Companies that 
Mr. Tauke represents, and they don't have guaranteed access to 
you. But at least they know they can go that way, which kind of 
does put a pressure on you. If they are over here on this 
other, and there is only two pipelines going into homes, and 
they are on this other pipeline it gives you a lot of pressure, 
it seems to me, to carry them. So if you are saying you are not 
going to promise in the future that you are going to carry 
them, even if Mr. Tauke and his companies are no longer 
required to carry them, that is going to create an awful lot of 
investment uncertainty for hundreds, thousands of companies 
like EarthLink and Amazon and other companies that did create 
most of the job growth in the 1990's. The job growth wasn't 
created by the telephone or cable industry. They were created 
by these other companies whose names' nobody knew before the 
1996 Act passed.
    I will let Mr. Baker make a point.
    Mr. Baker. I agree with a lot of what Mr. Misener said, and 
let me point out that EarthLink is a member of the Innovators. 
But as far as ensuring that unfettered access, you know we view 
that there are really two ways you can do that. I am speaking 
as an individual company right now. No. 1, you can say the FCC 
can provide a rule on Internet providers, namely those 
associated with the telecoms or cable companies, that they not 
discriminate. The other is to lay the groundwork so customers 
can choose among multiple Internet providers on any given 
platform, and then that is a market-based solution which is 
actually less regulatory. And then if you know, one platform or 
one provider, you know, doesn't--you know, blocks access to a 
certain site, then the customer is able to vote with their feet 
and go to a different provider.
    Mr. Markey. Mr. Misener, 10 seconds to respond.
    Mr. Misener. It is really consumer access to all the myriad 
of content on the Internet. Mr. Sachs's analogy to our privacy 
policy not only is incorrect, but it is inappropriate because 
Amazon has literally thousands, if not tens of thousands, of 
competitors. If a consumer doesn't like what we offer in terms 
of service, product, price, whatever, they have elsewhere to 
go. They are captive to the single monopolistic service 
provider that he represents.
    Mr. Markey. Thank you.
    Mr. Upton. Mr. Tauke, did you want to say one thing?
    Mr. Tauke. Just would encourage the committee, as you are 
thinking about this issue, to recognize that when you speak of 
the customer experience on the Internet, there are various 
layers of companies who are involved in that customer 
experience. You have transport providers, you have application 
software people, you have operating systems people like the 
Microsoft windows, you have firewall people, you have the ISPs 
and the content providers. Right now where--I think it would be 
fair to say that there is as much concern about Microsoft, for 
example, doing something with software to restrict access. Yet, 
I haven't heard anybody suggesting that there be regulation of 
Microsoft. Certainly, there is concern that an AOL or an 
EarthLink, one of the significant ISP providers, will say to 
Amazon.com, we don't like Amazon.com, we prefer Barnes and 
Noble, and there is no regulation. Never has been anything to 
prevent them from doing that kind of thing.
    I guess that if you start going down the path of ensuring 
that through regulations that the customer is going to have 
unfettered access, you are going to start regulating a whole 
lot of companies. And the question really that you face is a 
classic one: Do you peremptorily regulate before you see how 
this market develops, or do you allow the market to develop and 
then see if there is regulation needed?
    And I would suggest to you, Mr. Markey, when you were the 
distinguished chairman of this committee, that you led the 
deregulation of wireless in part because you had faith in the 
way that market will develop. I think it has been a boon for 
the wireless industry. It seems to me that the same thing can 
happen here. That doesn't mean you have to give up the 
authority to do something down the road if any of these levels, 
the transport level, the ISP level, the software levels in any 
of them are doing things that are harmful to consumers.
    Mr. Markey. If I may just add, the reason that I did 
support the deregulation was we were adding in 1993, a third, 
fourth, fifth, sixth carrier in each marketplace. But what we 
found that was when there were only two, they stayed at analog 
and it was still 60 cents a minute. Once we went to digital the 
other five got in, it went down to 10 cents a minute and lower. 
So two, I have found, in every single industry, it just doesn't 
quite get that level of dynamic because you have two highways, 
but you have got hundreds of stores. So you can move over to 
Amazon.com, to Barnes and Noble, but there are plenty of other 
stores as well, but there are only two highways. The shoppers, 
the consumers should be king. They should be able to go 
anywhere. That is the--Mr. Sachs.
    Mr. Sachs. I was going to say, and Mr. Tauke said this on a 
panel we were on recently, that if any of our customers found 
their access to any Website in any way restricted, his company 
would seize that opportunity. We are advertising lightening-
fast access to any content of your choice. And for our 
companies to lose that contract with their customers because of 
impeding access to one or another Website, just goes against 
any good business sense.
    Mr. Upton. Mr. Engel.
    Mr. Engel. Well, after 27 years on the committee, I almost 
feel like I want to ask Mr. Markey a question. But I will do 
that in private. I just come from the belief that once the 
genie is out of the bottle, that it is very difficult, if not 
impossible, to put it back in again, in terms of regulation. 
The bottom line, and I think all of us feel the same way 
regardless of where we come down on the issue, is we want to 
see competition, and we want the consumers to have the best 
break. The question is how do we get it?
    I think Mr. Tauke said it all when he talked about 
preventing investment. To me that is bad for the consumers 
because if we don't have expansions, consumers won't get what 
they want. I want to, since I feel Mr. Sachs has kind of been 
beat up on at the end, I read some of the testimony that Mr. 
Tauke had given earlier, I wanted just, Mr. Sachs, to read some 
of yours and give you a chance to expand on it. You say 
promoting competition rather than regulating competitors should 
be the cornerstone of U.S. broadband policy. You also in line 
with that say, which brings me to my final point, to the extent 
the FCC believes that cable modem and DSL services should be 
subject to some version of equivalent regulation, it should 
adopt a regulatory parity, that is, the Commission should 
remove regulatory constraints, not add new ones.
    I thought you might want to comment on that. You have said 
it.
    Mr. Sachs. First, if I could say I don't feel at all beaten 
up on by my friend, Mr. Markey, who I go back with a full 27 
years. And I also remember the discussions concerning the Pole 
Attachment Act back in 1978, when poll attachments were and 
still remain essential.
    Mr. Markey. I think Mr. Sachs wrote the language to be 
honest with you.
    Mr. Sachs. As a staff for this committee, in fact. But fast 
forward to the present, and we visited a few months back and 
Congressman Markey told me that he felt he had started to 
mellow over time. And I do note that. I mean this is a very, 
you know, pleasant repartee.
    Mr. Engel. Let me just say, Mr. Sachs, you are the only one 
in this room that thinks that Congressman Markey has mellowed.
    Mr. Sachs. He thought he had mellowed as well. But we 
really are--our industry had experience from 1992 through 1996 
and then for 3 more years because deregulation of our core 
video service didn't take place until April 1999. And we saw 
the impact of regulation on this business. Capital spending, at 
that time period, averaged $3 to $4 billion a year for the 
entire industry. It wasn't until the 1996 Telecommunications 
Act and the prospect of deregulation 3 years later, with 
respect to our video services, that we were able to raise 
capital, and investors were willing to take the risk on this 
business. So--and since 1996, that capital investment has 
averaged more than $10 billion a year. The contrast is stark. 
So given our own experience with very invasive regulation for 
that period of time, we came away from that experience 
chastened and also with the recognition that we don't want to 
come before Congress or the FCC as an industry and seek to tie 
up other industries in this sort of regulation. We would rather 
compete on every street and for every household's business.
    Mr. Engel. Thank you. Thank you, Mr. Chairman.
    Mr. Upton. Well, we appreciate everybody's testimony this 
afternoon. And we look forward to hearing from some of you in 
September, when we hope that this, at least part of this, issue 
is over and done with. And I know, Dr. Pepper, if you take that 
back to the Chairman, it would be most appreciated.
    We will consider this hearing for today adjourned.
    [Whereupon, at 5:43 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

  Prepared Statement of the National League of Cities, United States 
   Conference of Mayors, National Association of Counties, National 
      Association of Telecommunications Officers and Advisors and 
                             TeleCommUnity

                            I. INTRODUCTION

    This testimony is submitted on behalf of the National League of 
Cities (``NLC''), the U.S. Conference of Mayors (``USCM''), the 
National Association of Counties (``NACO''), the National Association 
of Telecommunications Officers and Advisors (``NATOA'') and 
TeleCommUnity (collectively referred to as ``Local Government.''). The 
National League of Cities, United States Conference of Mayors and 
National Association of Counties collectively represent the interests 
of almost every local government in the United States. NATOA's members 
include telecommunications and cable officers who are on the front 
lines of communications policy development in hundreds of local 
governments. TeleCommUnity is an alliance of individual local 
governments and their associations, which seeks to refocus attention in 
Washington on the principles of federalism and comity for local 
governments' interests in telecommunications.

               II. LOCAL GOVERNMENT'S UNIQUE PERSPECTIVE

    The Subcommittee at its hearing on July 21st chose to limit the 
regulatory witnesses from whom it heard to federal and state broadband 
regulators. Local government offers this testimony to clarify for the 
Subcommittee the numerous roles local government plays in broadband 
services such as:

 Enforcers on behalf of citizens of customer service and privacy 
        requirements relating to the provision of services over the 
        cable system,
 Regulators and administrators of cable systems and services,
 Extensive users of telecommunications resources,
 Developers and promoters of broadband applications,
 Economic development agencies in promoting deployment of broadband 
        facilities,
 Trustees, owners, and managers of valuable public property, and
 Mediators among competing uses of the public rights of way
    As confirmed by all at the hearing, cable modem services are the 
most universally available broadband service to residential consumers. 
Local cable franchising requirements and enforcement played a large 
role in the wide availability of cable modem service as this testimony 
will clarify.
    Local government also files this testimony to document that it has 
unique experiences, wisdom and perspective that must be heard in this 
debate if the policies which the Congress creates for broadband 
services are to benefit consumers, not merely focus on the treatment of 
broadband service.
    Finally, the Subcommittee would be well served to be informed of 
some of the other challenges local governments face as we seek to 
protect consumers in their dealings with cable operators in their roles 
as cable providers.

A. How Local Government differs from FCC and state PUCs.
    The role of local governments is far more complex than that of the 
Federal Communications Commission and state public service commissions 
who have traditionally been pure regulators. Local governments have a 
significant proprietary interest in the property used by communications 
systems to deliver service to end-users. It is well known that wireline 
systems use and depend upon public rights-of-way to provide 
service.1 But local governments also own and maintain 
streetlights, traffic signals, water towers, poles, conduits and other 
structures that are used by both wireline and wireless providers to 
reach their customers.2
---------------------------------------------------------------------------
    \1\ See Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 627-
28 (1994) (``Cable systems, by contrast, rely upon a physical, point-
to-point connection between a transmission facility and the television 
sets of individual subscribers. Cable systems make this connection much 
like telephone companies, using cable or optical fibers strung 
aboveground or buried in ducts to reach the homes or businesses of 
subscribers. The construction of this physical infrastructure entails 
the use of public rights-of-way and easements and often results in the 
disruption of traffic on streets and other public property. As a 
result, the cable medium may depend for its very existence upon express 
permission from local governing authorities. See generally Community 
Communications Co. v. City of Boulder, 660 F.2d 1370, 1377-78 (10th 
Cir. 1981).'')
    \2\ In Coral Springs, Florida, for example, the City established a 
procedure for leasing municipal property for use by wireless providers 
for placement of antennas. The City owned several structures that made 
it easier for service providers to reach cars passing by the City on 
the interstate. Coral Springs, Fla., Land Development Code, Ch. 25, 
art. XIV,  2501012.
---------------------------------------------------------------------------
    In addition, perhaps more than any other level of government, local 
governments are actively engaged in promoting economic development. 
Local governments have attempted to promote economic development by 
encouraging competition in communications markets. Communities have, 
for example, built ``conduit freeways'' in conjunction with public 
works projects in order to make it easier for competitors to enter the 
market, developed local networks in conjunction with private industry 
to promote facilities-based competition, and devised public rights-of-
way policies that protect vital infrastructure, while making it easier 
for companies to enter the market.3
---------------------------------------------------------------------------
    \3\ See National Research Council, Broadband Bringing Home the 
Bits, National Academy Press (2002), at 206.
---------------------------------------------------------------------------
    Economic development is not just about placing hardware in the 
ground, however. Consumers will not take advantage of broadband unless 
broadband offers beneficial, real world applications.4 Local 
governments are developing and promoting applications that take 
advantage of the promise of broadband through a variety of initiatives, 
including distance learning initiatives, and initiatives designed to 
make broadband universally available.
---------------------------------------------------------------------------
    \4\ Little Demand For Paid Consumer Online Services, Reports 
Jupiter Media Metrix, PR Newswire, May 22, 2002 (``Jupiter's latest 
research indicates that there is no obvious killer-app online service 
that consumers would pay for,'' said David Card, Jupiter Research vice 
president and senior analyst.''); BUSH ADMINISTRATION FOCUSES ON 
INCREASING DEMAND FOR BROADBAND, Communications Daily, March 6, 2002 
(``Many consumers don't yet see the value of broadband,'' . . . in 
Atlanta, price point of zero still wasn't sufficient motivation for 
half of consumers.''); Broadband waits for `killer app', analysts say: 
Average consumers see no reason to move to high-speed,'' Dallas Morning 
News, Sept. 18, 2001.
---------------------------------------------------------------------------
    Because local governments are so diverse, and because they work so 
closely with the public, local governments--assuming they have adequate 
resources--offer the best hope for development of robust e-government 
applications. To paraphrase the Communications Act, the goal at the 
local level is to ``make available, so far as possible, to all the 
people'' in the community ``without discrimination on the basis of 
race, color, religion, national origin, or sex,'' rapid, efficient, 
advanced communications systems and to encourage the use of these 
systems. See 47 U.S.C.  151.
    Local governments thus act as trustees/owners/managers of valuable 
public property, mediators among competing uses of the public rights-
of-way, economic development agencies in promoting deployment of 
broadband facilities, users of extensive communications resources, and 
developers and promoters of broadband applications and protectors of 
consumer services and privacy. This is not to say the regulatory role 
of local government is unimportant or insignificant: local governments 
have had traditional responsibilities for protecting consumers and 
promoting competition dating back to the beginning of the Republic. 
Charles River Bridge at 547. The point is that any Congressional 
discussion of broadband services can not simply be about regulation. 
Congressional oversight of the FCC treatment of cable modem services 
and other broadband service providers vitally affects local governments 
in all of their roles.

B. Local Franchising Benefits Cable Operators and Protects Local 
        Communities and Subscribers.
    Local governments 5 grant cable franchises as a means 
of:
---------------------------------------------------------------------------
    \5\ In a small number of states, franchising is performed by a 
state agency.

 Promoting deployment and competition;
 Protecting the public rights-of-way and the vital facilities located 
        therein;
 Promoting localism and viewpoint diversity in video programming and 
        ensuring that the future cable-related needs of the community 
        will be met; and
 Protecting subscriber privacy rights, enforcing consumer protection 
        statutes, and ensuring compliance with customer service 
        standards.
    Through the franchising process, cable operators have obtained the 
special privilege to semi-permanently use and occupy the public rights-
of-way with over one million miles of cable plant as a means to 
annually deliver almost $50 billion worth of cable and other services 
to almost 69 million subscribers. In return, cable operators agree to 
comply with local government right-of-way regulations, construction 
standards, and customer service regulations; to provide rental 
compensation, both monetary and in-kind services and facilities; and 
agree to provide access channels and support for local public, 
educational and governmental (``PEG'') programming, as well as 
municipal institutional network facilities and support services.
    While cable operators built their broadband systems based on cash 
flow from all subscribers, absent a the ability of local government to 
enforce its universal service or availability requirements, cable 
operators will be free to cherry pick to whom they will offer broadband 
services.

C. Local Franchising Promotes Broadband Competition and Deployment.
    Local governments grant incumbent cable operators and competitive 
broadband providers non-exclusive franchises to use public property to 
provide cable service and non-cable services.6 Build-out 
schedules, system upgrade requirements, and anti-redlining provisions 
have long been among the core franchise conditions negotiated by local 
governments.7
---------------------------------------------------------------------------
    \6\ Grants of exclusive franchises, rare in any case, were 
prohibited by the 1992 Cable Act. 47 U.S.C.  541(a)(1). New entrants 
and incumbent cable operators are using new and upgraded systems to 
offer bundled combinations of video programming, Internet access, and 
telephone service to increase per subscriber revenues.
    \7\ See also 47 U.S.C.  541(a)(3); 47 U.S.C.  541(a)(4)(A).
---------------------------------------------------------------------------
    A local government cable franchise regime--i.e., operators and 
local governments negotiate franchise requirements, operators pay five 
percent franchise fees and provide PEG channel capacity and support, 
local governments enforce customer service standards and regulate 
rates--has been in place for more than seventeen years and it has been 
a highly successful industry model. For example, as of June 2002:

 Cable plant reaches 97% of all households.8
---------------------------------------------------------------------------
    \8\ In re Annual Assessment of the Status of Competition in the 
Market For the Delivery of Video Programming, MB Docket No. 02-145, 
Ninth Annual Report, 17 FCC Rcd 26,901, Table 1 (2002)(``Ninth Annual 
Report'') http://gullfoss2.fcc.gov/prod/ecfs/
retrieve.cgi?nativeXorXpdf=pdf&
idXdocument=6513404824
---------------------------------------------------------------------------
 80% of all cable plant has been rebuilt since 1996 to be capable of 
        providing digital services.9
---------------------------------------------------------------------------
    \9\ Ninth Annual Report at  33.
---------------------------------------------------------------------------
 There are approximately 16 million cable modem lines deployed, 
        10 reaching 50 million homes, and serving between 
        6.9 and 7.4 million subscribers. (It should be noted that the 
        FCC required cable receive a jump start on this number. Under 
        the ``social contracts'' the FCC required of Time Warner 
        systems to deploy modems to all schools.)
---------------------------------------------------------------------------
    \10\ FCC Wireline Competition Bureau Industry Analysis and 
Technology Division, High Speed Services for Internet Access: Status as 
of June 30, 2002 at Tables 1, 2 (``June 2002 High Speed Report''), 
available at http://www.fcc.gov/wcb/stats.html (9.2 million high-speed 
[200 kbps in one direction] and 6.8 million advanced service [200 kbps 
in both directions] lines).
---------------------------------------------------------------------------
    In contrast, as of June 2002, ADSL 11 and other forms of 
broadband which have not generally been subject to local franchise 
fees, franchise build-out and anti-red-lining requirements have 
deployed only 6.3 million high-speed and advanced service lines to 
residential and small businesses, and serve between 3 and 3.3 million 
residential subscribers.12
---------------------------------------------------------------------------
    \11\ Asymmetrical Digital Subscriber Line service is faster in one 
direction, usually subscriber downloading, and is primary used to serve 
residential areas. Symmetrical DSL provides equal speeds in both 
directions is typically deployed to serve large businesses.
    \12\ June 2002 High Speed Report at Tables 3 and 4.
---------------------------------------------------------------------------
D. Local Franchising and Regulation Protects All Right-of-Way Users.
    Cable operators are not the only users of the public rights-of-way. 
The public rights-of-way also contain millions of miles of 
telecommunications fiber, copper telephone wiring, electrical lines, 
and millions more miles of gas, water and sewer pipes and mains. 
Automobiles and mass transit, as well as pedestrians and bicyclists, 
rely on use of the public rights-of-way as well, often necessitating 
installation and maintenance of thousands of traffic control signals, 
cameras, and even speed detectors. All told, the combined value of the 
public rights-of-way owned (or held-in-trust for public use) by local 
governments is over $7.1 trillion.13 And in most cases, it 
falls to local governments to exercise both proprietary and police 
powers to coordinate and manage these diverse and competing uses, 
protect all users from damages by other users, and to prevent waste or 
premature exhaustion of this valuable public asset.
---------------------------------------------------------------------------
    \13\ TeleCommUnity, ``Valuation of the Public Right-of-Way Asset,'' 
March 2002, available at http://www.telecommunityalliance.org/images/
valuation2002.doc.
---------------------------------------------------------------------------
E. Local Franchising Promotes Local Programming, Viewpoint Diversity, 
        and the Community's Cable-Related Needs and Interests.
    Local governments negotiate with cable operators to obtain channel 
capacity on cable systems for the purpose of presenting primarily 
local, public, educational, and government access programming. Cable is 
the primary means of communicating with over 76% of all television 
households 14 and access channels are the primary means of 
ensuring that programming content is not exclusively controlled by the 
owners of these powerful communications systems. Access channels are 
used by a wide range of community groups to carry local community 
programming, educational K-12 programming, distance learning courses 
for students of all ages, federal and local government programming, and 
emergency information alerts.15 (Many Members of the House 
of Representative are familiar with PEG channels as they use these 
channels to communicate with constitutes while back in the district or 
from Washington.). Local governments have also used the franchising 
process to bring Internet access to schools and to create municipal 
institutional networks (``I-Nets'') to support e-government 
initiatives. These institutional networks provide vital redundant 
telecommunications infrastructure. For example, some of the New York 
City communications infrastructure was destroyed in the September 11, 
2001 World Trade Center attack, but the New York I-Net system rerouted 
signals as it was designed to do, and provided vital communications 
links during the emergency crisis period.
---------------------------------------------------------------------------
    \14\ Ninth Annual Report at App. B, Table B-1. This table has been 
attached as an Appendix to this testimony.
    \15\ ``Public, Educational and Governmental (PEG) access television 
channels on cable television systems serve a wide range of community 
groups including: the Lions, Kiwanis and Rotary Clubs, the League of 
Women Voters, NAACP, AARP, the Urban League, public schools, local 
Chambers of Commerce, religious institutions, colleges and 
universities, community theaters, labor unions, veterans groups, second 
language communities, the disabled, politicians, and political 
organizations. Additionally, PEG channels carry programming from NASA, 
the US Department of Education, the Organization of American States, 
Members of Congress, the National Guard, the US Army, the US Air Force, 
the Federal Emergency Management Administration (FEMA), the US 
Department of Housing and Urban Development (HUD), and various arts 
organizations such as Annenberg/CPB and Classic Arts Showcase.'' 
Alliance for Community Media, ``About Community Media,'' available at 
http://www.alliancecm.org/.
---------------------------------------------------------------------------
F. Local Governments Enforce Customer Service Standards and Privacy 
        Protections.
    Local governments have broad authority under federal and state law 
to protect subscriber privacy and to enforce customer service standards 
against cable operators.16 Local governments use this 
authority to ensure that subscribers receive what they paid for at the 
level and quality of service advertised; as incentive to persuade cable 
operators to resolve service and billing complaints in a timely manner; 
and to make certain that subscriber privacy is protected to the fullest 
extent permitted under law.17 The need to protect subscriber 
privacy becomes even more important as more broadband services are 
offered over cable systems.18
---------------------------------------------------------------------------
    \16\ 47 U.S.C.  551, 552.
    \17\ See e.g., Seattle, WA Ordinance No. 12775, available at http:/
/www.cityofseattle.net/cable/customerXservice.htm (customer service 
standards, customer credits and privacy policy).
    \18\ See e.g., Christopher Stern, ``Comcast Halts Tracking of Its 
Subscribers; Privacy Activists Had Criticized Practice of Collecting 
Data on Visits to Web Sites,'' Washington Post, Feb. 14, 2002, at E4; 
Brigitte Greenberg, ``Privacy Complaints Prompt Change in Comcast Web 
Policy'', Communications Daily, Feb. 14, 2002.
---------------------------------------------------------------------------
     Cable Modem. Congress empowered local governments to enforce 
``customer service requirements of the cable operator,'' not merely 
requirements related to ``cable service.'' 19 Thus, 
regardless of whether cable modem service is classified as a cable, 
information or telecommunications service, local governments have 
authority to continue to require cable operators to comply with local 
customer service standards and consumer and privacy protections, 
regardless of the type of service offered.
---------------------------------------------------------------------------
    \19\ 47 U.S.C.  552(a). See Comments of Alliance of Local 
Organizations Against Preemption at 67-68, In re Appropriate Regulatory 
Treatment for Broadband Access to the Internet Over Cable Facilities, 
Notice of Proposed Rulemaking, CS Docket No. 02-52, 17 FCC Rcd 4798 
(2002), available at http://gullfoss2.fcc.gov/prod/ecfs/
retrieve.cgi?nativeXorXpdf=pdf&idXdocument=
6513198533
---------------------------------------------------------------------------
    CONGRESS SHOULD RESPECT LOCAL GOVERNMENTS' AUTHORITY TO COLLECT 
             COMPENSATION FROM ANY RIGHT-OF-WAY OCCUPANTS.

A. The Fact That A Service Is A Broadband /Information Service Does Not 
        Affect Local Authority To Manage Public Rights-of-Way or To 
        Require Franchises.
    There are enormous public policy and constitutional issues that 
would be raised if the Cable or Telecommunications Act were read to 
preempt local authority to charge fees for use and occupancy of the 
public rights-of-way just because a service provider offered a 
broadband or information service.
    Supreme Court precedent makes it clear that the Cable Act must be 
read to permit localities to charge fees unless there is no possible 
reading of the statute under which such charges could be permitted. 
Thus, for example, Gregory v. Ashcroft, 501 U.S. 452, 464 (1991), held 
that intrusions on traditional state authority will only be given 
effect when a statute's language makes the Court ``absolutely certain 
that Congress intended'' such a result. The rule, described by 
Professors William Eskridge and Philip Frickey as ``superstrong,'' 
20 ``increases Congress's political accountability by 
forcing it to state explicitly a decision to erode state authority and 
reduce the benefits of federalism--such as ``decentralized government 
that [is] more sensitive to the diverse needs of a heterogeneous 
society [and that] increases opportunity for citizen involvement in 
democratic processes' that accrue to the polity.'' 21 
Particularly given the impact on basic infrastructure and on the public 
of the upgrades associated with providing cable modem service it is 
fair to expect that had Congress meant to intrude so extraordinarily 
into state sovereignty it would have done so directly--and taken the 
responsibility for the results.22 It did not do so, and 
therefore the Constitution requires that the Act be construed to 
preserve local authority to charge a fee for use and occupancy of the 
public rights-of-way to provide information services if at all 
possible:
---------------------------------------------------------------------------
    \20\ William N. Eskridge, Jr. & Philip P. Frickey, 
QuasiConstitutional Law: Clear Statement Rules as Constitutional 
Lawmaking, 45 Vand. L. Rev. 593, 623(1992)
    \21\ Jack W. Campbell, Regulatory Preemption in the Garcia/Chevron 
Era, 59 U. Pitt. L. Rev. 805, 816 (1998).
    \22\ The Commission's decision to announce that cable operators 
need not pay fees, at the same time that it tells consumers to look to 
local governments for protection against cable modem abuses, is an 
unfortunate example of a federal agency passing the buck in two 
senses--telling consumers to look to local governments for protection, 
while taking the bucks from local government required to provide that 
protection.
---------------------------------------------------------------------------
        Where an administrative interpretation of a statute invokes the 
        outer limits of Congress' power, we expect a clear indication 
        that Congress intended that result. See Edward J. DeBartolo 
        Corp. v. Florida Gulf Coast Bldg & Constr. Trades Council, 485 
        U.S. 568, 575 (1988). This requirement stems from our 
        prudential desire not to needlessly reach constitutional issues 
        and our assumption that Congress does not casually authorize 
        administrative agencies to interpret a statute to push the 
        limit of congressional authority. See ibid. Thus, ``where an 
        otherwise acceptable construction of a statute would raise 
        serious constitutional problems, the Court will construe the 
        statute to avoid such problems unless such construction is 
        plainly contrary to the intent of Congress.'' DeBartolo at 575.
Solid Waste Agency of Northern Cook County v. U.S. Army Corps of 
Engineers, 531 U.S. 159, 173 (2001). See also, I.N.S. v. St. Cyr, 533 
U.S. 289, 299-300 (2001) (``[I]f an otherwise acceptable construction 
of a statute would raise serious constitutional problems, and where an 
alternative interpretation of the statute is `fairly possible,' see 
Crowell v. Benson, 285 U.S. 22, 62 (1932), we are obligated to construe 
the statute to avoid such problems. See Ashwander v. TVA, 297 U.S. 288, 
341, 345-48 (1936) (Brandeis, J., concurring); United States ex rel. 
Attorney General v. Delaware & Hudson Co., 213 U.S. 366, 408 (1909).'')

B. Collecting Payment for Use of Public Property by Commercial 
        Enterprises is Sound Public Policy Encouraged by the Congress.
    In addition to the arguments that the Congress cannot prohibit 
localities from charging fees for the use and occupancy of public 
rights-of-way to provide broadband services, it is good public policy 
to charge private companies fair value for property used.
    Congress has long recognized that requiring communications 
companies to pay fair market value for the inputs used in their 
business encourages competition and economic deployment of resources. 
Spectrum auction, for example, generated huge revenues for the 
Treasury, but the effect was to encourage competition and deployment, 
rather than discourage it. In its report to the Congress on these 
auctions the FCC concluded:
        ``the competitive bidding process provides incentives for 
        licensees of spectrum to compete vigorously with existing 
        services, develop innovative technologies, and provide improved 
        products to realize expected earnings. In this way, awarding 
        spectrum using competitive bidding aligns the licensees'' 
        interests with the public interest in efficient utilization of 
        the spectrum. As one commenter observes, ``[s]uccessful bidders 
        are those that not only place a high value on the property 
        relative to other auction participants, but also have the 
        financial capability to support their bids.'' 23
---------------------------------------------------------------------------
    \23\ FCC Report to Congress on Spectrum Auctions, WT Docket No. 97-
150, Report, FCC 97-353, at  IV(B)(1997).
---------------------------------------------------------------------------
    The same is true with respect to charging for use of public rights-
of-way: allowing localities to charge fair value will not discourage 
use of the public rights-of-way if an enterprise is sound; but it will 
discourage uneconomic uses.
    Indeed, the recent problems in the broadband industry generally 
have been exacerbated by over-investment. The last thing the industry 
needs is an incentive to misallocate resources.24 Charging 
fair market value for the use of rights-of-way will help companies make 
more rational investment decisions. As the Third Report notes at  62:
---------------------------------------------------------------------------
    \24\ See Brian Leaf, Battling Waves of Woe: Once high-flying 
industry getting swamped,'' Crain's Chicago Business, Feb. 25, 2002 
(``As companies rushed to install fiber optic cables--the autobahn of 
the new economy--they went overboard. Now, the capacity glut has cost 
telecom companies billions of dollars, with no foreseeable return on 
their investment.''); Jeff Smith, Fiber-Optic Fallout; Billions Were 
Wasted in Frenzy to Build Networks, 90% of which lie Dormant, Rocky 
Mountain News, May 6, 2002, at 1B; Jon Healey, Telecom's Fiber Pipe 
Dream, Los Angeles Times, April 1, 2002, at A1 (``The problem was that 
too many companies had the same dream, and they built too many digital 
toll roads to the same destination.'')
---------------------------------------------------------------------------
        ``there has been a recent slowdown in investment caused by the 
        economic downturn generally, and more particularly, over-
        building by carriers, over-manufacturing by vendors, over-
        capitalization by financial markets, coupled with unrealistic 
        market expectations by investors. [Analysts] conclude that, 
        although it will take some time for the industry to absorb 
        excess bandwidth capacity and increase utilization of existing 
        assets, the recent slowdown in investment has not been caused 
        by a slowdown in consumer demand.''
    Charging fees for use of the public rights-of-way prevents what 
would otherwise be substantial subsidies running from the public to 
broadband operators. The industry consistently underestimates costs 
associated with use of the public rights-of-way. The costs involve far 
more than the direct costs of overseeing public right-of-way 
construction (costs associated with permitting and inspecting, for 
example), coordinating public right-of-way construction (police 
supervision and traffic control) and responding to construction-related 
complaints. Construction reduces the life of the roadway, 25 
reduces the space available in the roadway to others, makes 
coordination of public projects more difficult (and expensive) and 
often damages vital utility infrastructure in ways that may not be 
detected until much later. As importantly, construction imposes 
significant, uncompensated costs on the public. In some cases, those 
costs are as simple (and as significant) as delays in traffic and 
damage to vehicles, 26 but in other cases, critical access 
routes to local businesses are cut off.27 In some cases, the 
impact can be fairly described as disastrous.28 The 
University of Minnesota has concluded that installation of utility 
infrastructure imposes substantial costs on the public.29
---------------------------------------------------------------------------
    \25\ Ghassan Tarakji, San Francisco State University, The Effect of 
Utility Cuts on the Service Life of Pavements in San Francisco: Study 
Procedure and Findings (1995); IMS, Infrastructure Management Services, 
Inc., Estimated Pavement Cut Surcharge Fees for the City of Anaheim, 
California Arterial Highway and Local Streets (1994).
    \26\ Lyndsey Lawton, Hidden Cost of Road Tear-ups: D.C. Taxpayers 
Struck With Bill for Trench-Weakened Streets, The Washington Post, 
March 15, 2000, at A1.
    \27\ Lyndsey Lawton, Despite Promises, Road Work Still Chaotic, 
Only 1 Cut Coordinated Out of 507 Permitted, The Washington Post, 
August 13, 2000, at C1; Lyndsey Lawton, Mayor Vows to Bring Order to 
Street Work; Longer Moratorium on Trenches Is Possible, The Washington 
Post, March 28, 2000, at B1.
    \28\ Joanna Glasner, High Bandwidth Bureaucracy, Wired News, March 
25, 1999; Rachel Horton, City Urges Conservation After Water Line 
Slashed, Irving News, July 11-14, 1999, at 1A.; Rani Cher Monson and 
Melissa Borden, 3,600 Lose Emergency Phone Service, Arlington Morning 
News, July 16, 1999, at 1A; Stephen C. Fehr, Road Kill on the 
Information Highway, The Washington Post, March 21, 1999, at A1; Jim 
Hannah and Cindy Schroeder, Fiber-optic cut disrupts business computers 
snarled in Kenton Co., The Cincinnati Enquirer, February 28, 2001; 
Blake Morrison and Amy Mayron, Buried Stone May Have Caused Break 
Submerged Block Diverted Auger to the Side, Piercing Gas Line, St. Paul 
Pioneer Press, December 13, 1998, at 1A.
    \29\ Raymond L. Sterling, University of Minnesota, Indirect Costs 
of Utility Placement and Repair Beneath Streets (1994).
---------------------------------------------------------------------------
 IV. NON BROADBAND CHALLENGES FACING LOCAL GOVERNMENT IN OVERSIGHT OF 
                            CABLE OPERATIONS

A. Local Government Rate Regulation Authority Is Limited.
    Real competition creates downward pressure on rates.30 
Local rate regulation has been used as a substitute rate restraint 
where there is no real competition to protect consumers from 
unreasonable rates. Unfortunately, as explained below, local government 
actions to ensure reasonable rates for subscribers have been stymied by 
illogical FCC rules, interpretations, and unreasonable rate-setting 
formulas.31
---------------------------------------------------------------------------
    \30\ Brigitte Greenberg, ``Cable Prices Rise More Than Other Goods 
and Services,'' Communications Daily, Jan. 15, 2002, at 6.
    \31\ For a fuller discussion of local government recommendations 
for rate regulation reform, see Comments and Reply Comments of National 
Association of Telecommunications Officers and Advisors, National 
League of Cities, Miami Valley Cable Council, Montgomery County, 
Maryland, and City of St. Louis Missouri, In re Revisions to Cable 
Television Rate Regulations, Notice of Proposed Rulemaking and Order, 
MB Docket No. 02-144, 17 FCC Rcd 16,803 (2002), available at 
www.fcc.gov/searchtools.html, ``Search For Filed Comments--ECFS,'' 
Proceeding ``02-144,'' Filed on Behalf of ``NATOA'' and ``National 
Association of Telecommunications Officers and Advisors.''
---------------------------------------------------------------------------
    In addition, the effectiveness of basic rate regulation is hampered 
by the lack of regulation of other service tiers. For example, if a 
local government determines that an operator's basic rate is more than 
what would be charged if a competitive market existed, the operator can 
simply charge more for the unregulated tiers, thereby ensuring that 
subscribers will continue to pay the unreasonable rate selected by the 
operator. As one operator bluntly stated:
        If, during the appeal process and prior to a final decision by 
        the FCC, Time Warner Cable is required to implement the Rate 
        Order, it is our intention to provide the ordered customer 
        refund during 1 billing period. It is also our intention to 
        adjust our CPST Service tier price by a like amount during that 
        1 billing period . . . If the Rate Order is implemented, the 
        only customers who will realize a net refund and/or reduction 
        in total service price are those 2,930 customers subscribing 
        only to basic service.32
---------------------------------------------------------------------------
    \32\ ``Time Warner Settlement Letter,'' Letter from Gerald 
DeGrazia, Time Warner Cable, to Kent Bristol, Executive Director, Miami 
Valley Cable Council (Nov. 5, 2002), attached as Exhibit B, Attachment 
14 to Errata to Opposition to Appeal of Local Rate Order, Time Warner 
v. Miami Valley Cable Council, (filed Dec. 6, 2002), available upon 
request.
---------------------------------------------------------------------------
B. Cable Industry Deregulation has led to Less competition, not Lower 
        Rates.
    Cable rates continue to rise unreasonably because cable incumbents 
lack viable wireline competitors, not, contrary to the claims of the 
cable industry, because programming costs continue to rise. In the 
past, cable operators used their control over a la carte tier pricing 
as a means to charge more, not less, per channel. Today, consolidated 
cable behemoths are using ownership control of sports and news 
programming, predatory pricing tactics, and geographic rate 
discrimination as means to drive out wireline competition. Cable 
operators should be held accountable for their attempts to evade 
current rate regulations, not rewarded with further deregulation.

C. Expanding Cable Operator Control of Programming Is Unlikely to 
        Reduce Cable Rates.

1. Cable Operators Historically Used A La Carte Pricing to Evade Rate 
        Regulation.
    In 1994, the initial cable rate regulation rules exempted single-
channel ``a la carte'' offerings. Operators began offering a la carte 
channels on a single and a la carte tier package basis. The single 
channel price, however, was so high that it only made sense to purchase 
a la carte channels as a tier package. However, because each channel in 
the a la carte tier was technically available as a single a la carte 
channel, cable operators claimed that the a la carte tier package was 
not subject to rate regulation (as other programming tiers were). On an 
ad hoc basis, the FCC permitted this a la carte tier arrangement so 
long as six or fewer channels were packaged together.33 
Ultimately, the FCC found no sufficient justification for the tier 
restructuring ``other than to avoid rate regulation.'' 34 
Despite this finding, however, the FCC neither prohibited this evasion, 
nor sanctioned the operators for trying to avoid compliance with rate 
regulation rules.
---------------------------------------------------------------------------
    \33\ See, e.g., In the Matter of: Adelphia Cable Partners, L.P., 
South Dade County, Florida, Letter of Inquiry, Memorandum Opinion and 
Order, 9 FCC Rcd. 7781 (1994) (rejected justification where 32 channels 
were placed on an ``a la carte'' tier, although operator was not 
sanctioned for the attempted evasion).
    \34\ In re Comcast Cablevision of Tallahassee, Florida, Letter of 
Inquiry, Memorandum Opinion and Order, 9 FCC Rcd 7773,  15 (1994); 
aff'd by full Commission, In re Comcast Cablevision of Tallahassee, 
Florida, Application for Review, Memorandum Opinion and Order, 11 FCC 
Rcd 1246 (1995).
---------------------------------------------------------------------------
    The unfortunate consequence of the FCC response is that it creates 
an implicit incentive for cable operators to aggressively interpret the 
rate rules to their benefit. For example, an operator with 10 million 
subscribers manipulates a rule interpretation to add an additional ten 
cents per month to every subscriber bill. In one year, the rate 
manipulation has generated $12 million. Even if the ten-cent addition 
is denied by a local government in a large jurisdiction with 200,000 
subscribers, and the FCC rules on appeal that the ten-cent charge was 
unlawful, at worst, the operator would have to refund $240,000 to the 
200,000 subscribers. But it will likely keep the other $11 million it 
unlawfully collected from other subscribers because the FCC is not 
going to assess a separate fine or make the FCC Order apply beyond the 
jurisdiction that issued the challenged Rate Order.

2. A La Carte Pricing Could Result in Channel Substitution, Not Lower 
        Rates.
    Cable operators cannot offer every channel on an a la carte basis. 
Operator-owned programming interests may affect decisions as to which 
channels will be offered as part of a package or as an a la carte 
channel. Congress should be concerned about channel substitution. For 
example, assume in New York City that Cablevision agrees to carry YES 
Network, drop ESPN from its expanded-tier programming, and make ESPN 
available as a separate a la carte channel. If there are no substantial 
savings in programming costs between YES and ESPN, or if programming 
cost savings are not passed onto subscribers, then the subscriber who 
did not want sports programming would see no price reduction, and the 
subscriber who wanted ESPN will have to pay the same price to receive 
ESPN-less programming or a larger price to receive the same programming 
with ESPN.

D. Cable Operators Have Not Presented Verifiable Programming Cost Data.
    Verifiable programming cost and revenue data is needed to evaluate 
the impact of programming costs on cable rates. Notwithstanding the 
fact that a Justice Department investigation and an informal SEC 
inquiry related to the accuracy of operator-reported data are currently 
pending, 35 Congress should require the cable industry to 
provide specific information about all channel programming costs, 
programming launch fee revenue, and corporate allocation of volume 
discounts.
---------------------------------------------------------------------------
    \35\ Riva D. Atlas and Geraldine Fabrikant, ``Large Cable Operator 
to Restate its Results for 2000 and 2001'', New York Times, Nov. 20, 
2002, at C1.
---------------------------------------------------------------------------
     Actual Programming Costs. Cable operators submit only their basic 
tier channel programming costs to local governments as part of the rate 
regulation process and do not routinely submit any programming costs to 
the FCC. Thus, cable operators do not disclose to any regulatory body 
what they are paying for most of their programming.
     Accounting Treatment of Launch Fee Revenue. Cable operators 
receive substantial ``launch fees'' from programmers--i.e., fees for 
adding new channels to cable systems, for advertising new channels on 
existing channels, in program guides, on or with subscriber bills, and 
for other channel launch-related services--but do not uniformly treat 
them as programming revenues which offset total programming costs.
     Allocation of Volume Discounts. Cable operators often delay or 
refuse to comply with local government requests to disclose terms of 
their programming contracts, thus making it difficult to determine how 
volume discounts are allocated. In at least one instance, franchise-
level reported programming costs were greater than the operator's 
actual costs because the operator negotiated volume discounts for 
programming, but charged its local franchises as if no discount had 
been obtained, booking the difference as profit for the corporate 
parent. According to the 2001 Annual Report Comcast filed with the SEC:
        ``[O]n behalf of the company, Comcast secured long-term 
        programming contracts . . . Comcast charged each of the 
        Company's subsidiaries for programming on a basis which 
        generally approximated the amount each subsidiary would be 
        charged if it purchased such programming from the supplier . . 
        . and did not benefit from the purchasing power of Comcast's 
        consolidated operations.'' 36
---------------------------------------------------------------------------
    \36\ See Comcast Cable Communications, Inc., Form 10-K Annual 
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act 
of 1934 For the Fiscal Year Ended December 31, 2001, at 42 (filed March 
29, 2002) available at http://www.sec.gov/Achives/edgar/data/1040573/
000095015902000190/cable10k.txt.
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E. The Effect of Programming Cross-Ownership Remains Unknown.
    Without actual programming cost data, it is also difficult to 
evaluate what effect cable operator cross-ownership of programming 
networks has had on increases in programming costs and cable rates. 
Cable operators could be recovering programming fees from subscribers, 
while also benefiting from fee increases through their programming 
network ownership agreements. The FCC reported: 37
---------------------------------------------------------------------------
    \37\ Ninth Annual Report at  135.

 Combined, four of the top six cable operators hold ownership 
        interests in 72 of 92 satellite-delivered programming networks.
 AOL Time Warner has an ownership interest in 39 networks, i.e., 13% 
        of all national programming networks.
 Cox has an ownership interest in 25 networks, i.e., 8% of all 
        national programming networks.
 Comcast has an ownership interest in 9 networks, i.e., 3% of all 
        national programming networks.
 Cablevision has an ownership interest in 5 networks, i.e., 2% of all 
        national programming networks.
 Liberty Media has an ownership interest in 41 networks, or 13% of all 
        national programming networks.
 Comcast has an ownership interest in several regional sports 
        programming channels, and sports programming has been cited as 
        major source of programming fee increases.
    Local governments urge the Subcommittee to take steps to protect 
subscribers from potential abuses of a la carte pricing, to ensure 
transparent and equitable accounting treatment of programming costs and 
revenues, and to investigate how cable operator cross-ownership of 
programming affects subscriber rates.

F. Without Wireline Competition, Cable Rates Will Continue to Rise.
    At the July 21st hearing, there was reference made to competition 
for cable. In response to a question from Chairman Tauzin, Mr. Sachs 
indicated that less than five percent of cable operators face head-to-
head competition with wireline competitors.
    In separate studies, both the GAO and the FCC found that cable 
rates are lower in areas where competing cable service is available 
from a second wireline provider than in areas where there is no 
wireline competition. The GAO study found cable rates to be 17% lower, 
and the FCC found rates were 8% lower, where a second wireline 
competitor exists.38 However, according to the FCC, only 2% 
of the 33,246 cable community units have competition from more than one 
wireline provider.39 The seven largest cable operators, 
which account for 83.8% of all cable subscribers, 40 are 
incumbents that do not compete against each other. The largest of these 
is Comcast with over 21 million subscribers, and the seventh largest is 
Mediacom with 1.5 million subscribers.41 In contrast, the 
three largest competitive cable providers, 42 which compete 
in the same markets against the largest cable operators, are RCN with 
426,700 subscribers, WideOpenWest with 310,000, and Knology with 
124,700.43
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    \38\ United States General Accounting Office, Telecommunications 
Issues in Providing Cable and Satellite Television Service, Report to 
the Subcommittee on Antitrust, Competition, and Business and Consumer 
Rights, Committee on the Judiciary, U.S. Senate, at 9, GAO-03-130 
(2002)(``GAO 2002 Study''), available at http://www.gao.gov/cgi-bin/
getrpt?GAO-03-130; In re Statistical Report on Average Rates for Basic 
Service, Cable Programming Service, and Equipment, Report On Cable 
Industry Prices, MM Docket No. 92-266, 17 FCC Rcd 6301, Table 6 (2002) 
(``2002 Cost Report''). This table has been attached as an Appendix to 
this testimony.
    \39\ Ninth Annual Report at  115.
    \40\ Ninth Annual Report at App. B, Tables B-1, B-3. Comcast and 
AT&T are counted as single operator. The combined percentage of AT&T, 
Time Warner, Comcast, Charter, Cox, Adelphia, Cablevision, and 
Mediacom's share (64.16%) of all MVPD subscribers (89,890,641) equals 
57,673,835, which is 83.8% of 68.8 million cable subscribers.
    \41\ Ninth Annual Report at App. B, Table B-3. Comcast's share of 
89,890,641 MVPD subscribers is the sum of AT&T's 14.75% plus Comcast's 
9.46% as reported in June 2002. Mediacom reported 1.76%.
    \42\ These cable providers or overbuilders prefer to be called 
``broadband providers'' as they provide competitive video programming, 
Internet access, data and telephone services.
    \43\ Ninth Annual Report at  117 and n.354. RCN reported 506,700 
basic subscribers as of June 2002, but the FCC noted the current number 
of subscribers is 80,000 less due to a sale for cash in August 2002 of 
certain RCN systems in New Jersey. RCN Corp., ``RCN to Receive $245 
Million for Non-Strategic New Jersey Cable Systems'' (press release), 
Aug. 27, 2002.
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1. DBS Service Does Not Constrain Cable Rates.
    Both the GAO and FCC have determined that the provision of DBS 
service does not have any effect on cable rates.44 The 
National Cable Television Association (``NCTA'') submitted statements 
to the FCC stating that market power is restrained to the extent that 
there are competitive alternatives available to which customers could 
turn if a cable operator attempted to raise its prices.45 
Local governments offer the following factors as possible explanations 
as to why DBS does not present a true ``competitive alternative'' for 
the customer and thus does not restrain cable prices:
---------------------------------------------------------------------------
    \44\ GAO 2002 Study at 9; 2002 Cost Report at Table 6. GAO found 
that cable operators respond to DBS competition by adding more 
channels. GAO 2002 Study at 10.
    \45\ Ninth Annual Report at n.432.

 Non-Interchangeable Equipment. Wireline competition may be more price 
        competitive than DBS against incumbent cable service because it 
        is easier for customers to switch between wireline competitors 
        using cable modem and set-top boxes than it is for customers to 
        switch between dish systems and cable boxes.
 Provision of local channels. In the GAO study, 47% of respondents 
        cited the ability to receive local broadcast and cable channels 
        from the same provider as a major reason for selecting cable, 
        and DBS providers confirm that provision of local broadcast 
        channels increases subscription rates.46 Yet local 
        broadcast channels are offered by DirecTV or Echostar in only 
        62 of 210 television markets and local channels are offered by 
        both providers in only 41 markets. In addition, DBS does not 
        carry local PEG programming.
---------------------------------------------------------------------------
    \46\ Ninth Annual Report  62. Echostar claims provision of local 
channels makes DBS service competitive with cable service. Sixty 
percent of DirecTV subscribers purchase the local channel package.
---------------------------------------------------------------------------
G. Consolidated Cable Incumbents Are Using Aggressive Marketing to 
        Eliminate Wireline Competitors.
    Competitive broadband providers, including nascent cable system 
overbuilders, have complained of incumbent cable operators using 
aggressive marketing tactics--including deeply discounted introductory 
rates, e.g., $24.95 per month for 200 channels compared to $77.90 per 
month in the neighboring community without wireline competition; cash 
bonuses, e.g., $200 to switch to the incumbent's cable service and 
another $200 to switch to the incumbent's Internet service; and 
forgiveness of old debt owed by subscribers to the incumbent--to drive 
these small competitors out of the market entirely.47 It is 
also unclear whether the neighboring community's rates are being 
increased to offset the discounted price offered in the competitive 
neighborhood.
---------------------------------------------------------------------------
    \47\ See Comments of Scottsboro (Alabama) Electric Power Board 
(``SEPB'') in the Notice of Inquiry in CS Docket No. 01129, at 5, 
Appendix B (Aug. 3, 2001) (``SEPB Comments''). In a surrounding 
community with no competition, the incumbent offered 150 channels for 
$77.90. See also, In re Annual Assessment of the Status of Competition 
in the Market for Delivery of Video Programming, CS Docket No. 01-129, 
Comments of Knology, Inc. to the Notice of Inquiry, 4-5 (filed late, 
Nov. 20, 2001); In re Applications for Consent to the Transfer of 
Control of Licenses Comcast Corporation and AT&T Corporation, 
Transferors to AT&T Comcast Corporation, Transferee, MB Docket No. 02-
70, RCN Telecom Services, Inc., Written Ex Parte Comments in Response 
to Comcast (filed Aug. 27, 2002); In re Applications for Consent to the 
Transfer of Control of Licenses Comcast Corporation and AT&T 
Corporation, Transferors to AT&T Comcast Corporation, Transferee, MB 
Docket No. 02-70, RCN Telecom Services, Inc., Written Ex Parte and 
Accompanying Declaration (filed Aug. 14, 2002).
---------------------------------------------------------------------------
    Although the reasons may not be clear, the results are: cable 
prices go down when there is wireline competition; cable prices do not 
go down when there is no wireline competition or when there is 
competition only from non-wireline providers. Any legislative attempt 
to reduce cable rates should focus on encouraging wireline competition. 
Any legislative reform of programming requirements should examine how 
cable operators may be using control of programming to discourage 
competition before considering how to give cable operators more control 
over programming.

H. FCC Policy Implementation Has Led to Unreasonable Rates and is 
        Impeding Competition.
    The FCC has not adopted regulations that ensure reasonable rates. 
The FCC has ignored absurd consequences and been generally unresponsive 
on consumer issues. And the FCC is permitting cable operators to abuse 
their monopoly power in a manner that harms competition for cable and 
broadband services. Additional Congressional oversight of the FCC is 
necessary to promote the wireline competition necessary to produce 
lower cable rates.

I. FCC Rate Regulation Rules Do Not Ensure Reasonable Rates.
    An entire hearing could be, and should be, devoted to the numerous 
ways in which the FCC has failed to establish or interpret rate 
regulation rules in a manner that ensures reasonable rates for 
subscribers. Here are but a few examples:

 Advertising Revenues Do Not Offset Costs. Regulated rates are 
        calculated to permit the operator to earn a reasonable profit 
        from operation of the cable system. The FCC rate formula 
        permits the operator to recover system operation costs from 
        subscribers, but prohibits offsetting costs with any revenues 
        earned from selling advertising on the system. For example, in 
        2002, subscribers paid over $10 billion in regulated rates for 
        basic service. Cable operators collected an additional $2.8 
        billion in ad sales--i.e., 25% to 26% of what they recovered in 
        basic rates--but none of the $2.8 billion was used to reduce 
        the regulated basic rate.48
---------------------------------------------------------------------------
    \48\ Ninth Annual Report at Table 4. Table 4 has been attached as 
an Appendix to this testimony; 2002 Cost Report at Table 1. Table 1 has 
been attached as an Appendix to this testimony. Basic Service is 38.0% 
of combined $28.492 million in 2002 Basic Service Tier and Cable 
Programming Service Charges, based on 2001 Average Monthly Rates of 
$12.84 for Basic Service Tier and $20.91 for Cable Programming Service. 
``Advertising sales'' as used herein refers to all non-cable revenues, 
which includes $2.503 billion in advertising revenues and $284 million 
in home shopping network commissions for 2002. See Texas Coalition of 
Cities For Utility Issues v. FCC, 324 F.3d 802 (5th Cir. 2003).
---------------------------------------------------------------------------
 Operators Are Permitted to Collect 11.25% Interest. An operator 
        estimates its costs for the year and calculates a projected 
        rate. At the end of the year, if the operator charged less than 
        its actual costs, the operator can recover the difference plus 
        an FCC-mandated 11.25% interest rate from subscribers. However, 
        if subscribers are owed refunds, under the FCC rules, the 
        operator pays the I.R.S.-mandated rate, which is currently 
        6%.49
---------------------------------------------------------------------------
    \49\ FCC Form 1240, available at http://www.fcc.gov/mb/mbform.html; 
47 C.F.R.  76.942(e).
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 Operators Are Permitted to Inflate Aggregated Equipment Rates. 
        Congress permitted operators flexibility to calculate equipment 
        rates at any level, 50 e.g., by franchise, region, 
        state, company-wide, etc., but the FCC implementing rules do 
        not require any consistency within these calculations. Thus, 
        for example, an operator determined that equipment costs were 
        higher to serve a specific cluster of Ohio communities than the 
        aggregate equipment costs for the entire state. The operator 
        then calculated the equipment rates for those Ohio communities 
        using only the higher costs and excluded the remaining lower 
        cost areas. But when the operator calculated the rates for the 
        rest of the state, it included the higher cost clustered 
        communities in its calculations, thus increasing the aggregate 
        rates for the rest of the state as well.51
---------------------------------------------------------------------------
    \50\ 47 U.S.C.  543(a)(7)(A).
    \51\ Declaration of Garth Ashpaugh at  17-22, attached as Exhibit 
C to Errata to Opposition to Appeal of Local Rate Order, Time Warner v. 
Miami Valley Cable Council, (filed Dec. 6, 2002), available upon 
request.
---------------------------------------------------------------------------
J. FCC Inaction Impedes Local Government Efforts to Ensure Reasonable 
        Rates.
    FCC inaction and delays make rate regulation less effective, 
encourage operators to use the FCC appeals process as a means for 
running out the clock, and ultimately deny subscribers the protection 
from unreasonable rates that Congress intended. For example:

 The FCC does not require the cable operator to refund overcharges if 
        the FCC considers the overcharge to be de minimis.52
---------------------------------------------------------------------------
    \52\ See, e.g., In re King Video Cable Company Valley Springs, 
California, Benchmark Filing to Support Cable Programming Service 
Price, Memorandum Opinion and Order, 10 FCC Rcd. 1707,  8 (1995); In 
re King Video Cable Company Jackson, California, Memorandum Opinion and 
Order, 10 FCC Rcd. 1706,  8 (1995).
---------------------------------------------------------------------------
 After 1996, the FCC arbitrarily decided to dismiss any pre-1996 
        complaints regarding non-basic tier rates on grounds that the 
        1996 Act would deregulate non-basic tier rates beginning in 
        1999.53 The final irony is, the reason there were 
        any pre-1996 complaints still unresolved after deregulation of 
        the non-basic tier, was because the FCC had not ruled on these 
        appeals in a timely fashion. For example:
---------------------------------------------------------------------------
    \53\ See, e.g., In re Prestige Cable TV, Order Dismissing Rate 
Complaints, Order, 12 FCC Rcd. 21,103,  4 (1997).
---------------------------------------------------------------------------
     In a survey of FCC rate orders issues in 2000, the average time 
            between the filing of rate order appeal and the release of 
            an FCC order was 63.7 months--more than five years! 
            54
---------------------------------------------------------------------------
    \54\ Based on an audit of all Cable Service Bureau decisions 
related to enforcement of, 47 U.S.C. 623(c) Regulation of Unreasonable 
Rates, as reported in the Federal Communications Commission Record 
between January 1, 2000, and December 31, 2000. Of 36 reported 
decisions, 7 did not specifically mention the date of the initial 
complaint or date of order granting review of Local Franchising 
Authority decision.
---------------------------------------------------------------------------
     On April 16, 2003, the FCC finally remanded for further evidence 
            two rate orders originally appealed on September 21, 
            1995.55
---------------------------------------------------------------------------
    \55\ In re TCI of Pennsylvania, Inc., Appeals of Local Rate Orders 
of the City of Pittsburgh, Pennsylvania, CSB-A-0181 & CSB-A-0304, 
Memorandum Opinion and Order, DA 03-1151 (rel. Apr. 16, 2003) available 
at http://hraunfoss.fcc.gov/edocsXpublic/attachmatch/DA-03-1151A1.doc.
---------------------------------------------------------------------------
 In 2002, the Enforcement Bureau sua sponte overturned a 1999 Cable 
        Bureau Order rejecting an operator's refund plan. Instead, the 
        Enforcement Bureau accepted the refund the operator thought it 
        owed and dismissed the case on grounds that it was not 
        worthwhile to issue a new refund order (since, post-
        deregulation of non-basic tiers, the cable operator would be 
        able to raise non-basic service rates to recover the amount of 
        any basic service refund ordered).56 In effect, the 
        FCC let the cable operator run out the clock and subscribers 
        ended up footing the bill.
---------------------------------------------------------------------------
    \56\ In re Marcus Associates Application for Review, Order, File 
No. EB-02-TC-087 (2002), available at http://hraunfoss.fcc.gov/
edocsXpublic/attachmatch/DA-02-3546A1.doc.
---------------------------------------------------------------------------
K. The FCC Creates Unreasonable Rates By Refusing to Revise Rate 
        Regulation Rules to Prevent Absurd Results.
    In some instances, an original FCC interpretation of federal law 
may create absurd results because of changed market circumstances, or 
unscrupulous application by operators. In almost no instance has the 
FCC reviewed its policy to determine whether the FCC policy continues 
to further the goal of Congress to ensure reasonable rates. For 
example:
    Boston Effective Competition & the LEC Test. In 1996, Congress 
permitted effective competition to be declared when a local exchange 
carrier (``LEC''), i.e., local telephone service provider, began 
providing video programming service. This LEC test did not require any 
specific system build-out or subscriber penetration benchmarks to be 
met. In 1998, against a backdrop of seemingly limitless 
telecommunications capital financing, the FCC decided to accept 
franchise agreements with build-out requirements as showing that 
competition was present everywhere in a community, in lieu of requiring 
the entire LEC system to be built-out. In 2001, the Cable Bureau 
declared effective competition to exist in Boston based on a franchise 
granted to RCN. The City asked the FCC to reconsider, providing 
evidence that RCN was available in only a few of the City's 
neighborhoods, its financing had dried up, and that RCN would not be 
able to meet the franchise benchmarks. The City suggested that in the 
changed telecommunications climate, franchise agreements could not be 
substitutes for actual build-outs. In 2002, the FCC affirmed the 
effective competition decision, reasoning that RCN's financial troubles 
would simply mean that it might take an extra year to build-out its 
system. One month after the FCC decision, RCN asked the City to convert 
its franchise agreement into an OVS license without a build-out 
requirement. The City residents no longer have the benefit of rate 
regulation, and RCN does not serve many more neighborhoods than it did 
in 2001.57
---------------------------------------------------------------------------
    \57\ In re Cablevision of Boston, Inc., Petition for Determination 
of Effective Competition, Application for Review of Determination of 
Effective Competition in re Cablevision of Boston, Inc. (filed Aug. 20, 
2001); In re Cablevision of Boston, Inc., Petition for Determination of 
Effective Competition, Application for Review, Memorandum Opinion and 
Order, 17 FCC Rcd. 4772 (2002); Open Video System Certification 
Application of RCN BecoCom, LLC (filed April 18, 2002), available at 
http://www.fcc.gov/mb/ovs/rcnbos.doc.
---------------------------------------------------------------------------
L. Local Government v. FCC Level of Service to Subscribers.
    Local governments are concerned that the FCC is unnecessarily 
collecting fees from subscribers to cover the cost of regulation no 
longer performed by the FCC, while simultaneously cutting the revenue 
streams of the local governments which now have greater franchise 
administration costs and needs for revenue streams.
    In 1994, Congress required regulatory agencies to recover the cost 
of regulation from the regulated industries. At the height of rate 
regulation, the FCC calculated its costs as $0.49 per 
subscriber.58 The FCC no longer regulates the CPST, no 
longer has a Cable Bureau, and there are 9.1 million more subscribers 
than there were in 1994; in effect, the FCC added $33.7 million to 
subscribers' bills in 2002 in return for little to no cable rate 
regulation.59
---------------------------------------------------------------------------
    \58\ 47 U.S.C.  159(a); 47 C.F.R.  1.1155; In re Implementation 
of Section of the Cable Television Consumer Protection and Competition 
Act of 1992: Rate Regulation, Fourth Order on Reconsideration, 9 FCC 
Rcd. 5795,  9, 12, nn.28, 35 (1994) (``Fourth Reconsideration 
Order'').
    \59\ Third Report at App. B Table 1; Ninth Annual Report at App. B 
Table B-1.
---------------------------------------------------------------------------
    In contrast, local governments now regulate more companies in the 
public rights-of-way, and assist consumers with more complaints about 
more services. Yet through its Cable Modem Order, for 2002, the FCC 
permitted cable operators to use the public rights-of-way to generate 
an additional $5.6 billion in cable modem revenues, while 
simultaneously reducing the rent paid by cable modem providers to local 
governments by $280 million.
    Consider the experience of Montgomery County, MD, with just under 
206,000 cable subscribers, as an example of the misallocation of 
resources and revenues: 60
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    \60\ These comparisons are based on 2002 Quarterly Report data 
released by the FCC's Consumer and Governmental Affairs Bureau, 
available at http://www.fcc.gov/cgb, and from complaint report 
information available upon request from the Montgomery County Office of 
Cable and Communications Services.

 The FCC collected just over $100,000 in regulatory fees from 
        Montgomery County cable subscribers; Montgomery County 
        collected $600,000 less from cable operators in lost cable 
        modem franchise fees.
 Among 68.8 million cable subscribers nationwide, the FCC handled 2143 
        complaints and inquiries about cable rates and billing, i.e., 
        about 3 billing and rate complaints or inquiries per 100,000 
        subscribers. Montgomery County's cable office handled 1107 
        cable rate and billing complaints and inquiries, i.e., about 
        500 per 100,000 subscribers.
 Among the 6.6 to 7.4 million cable modem subscribers, the FCC handled 
        26 complaints and inquiries about cable modem service for the 
        entire year, or 4 complaints and inquiries per million cable 
        modem subscribers. Among 35,000 cable modem subscribers, 
        Montgomery County handled 396 complaints and inquiries about 
        cable modem service, or 1 per 100 cable modem subscribers.

M. The FCC Should Prevent, Not Promote, Cross-Subsidization.
    The FCC's rate regulation rules are harming not only subscribers, 
but broadband competition as well. First, the FCC's rate regulation 
rules force cable subscribers to subsidize broadband deployment by 
cable operators. Under the FCC's rate regulation and equipment rules, 
cable operators have been permitted to recover the cost of upgrading 
their systems by raising the regulated rates of all basic 
subscribers.61 These upgrades have enabled cable operators 
to provide Internet access and telephone service, and the FCC rate 
regulation rules permit cable operators to raise the rates of basic 
subscribers to pay for these upgrades, regardless of whether the 
customer subscribes to anything other than basic cable.
---------------------------------------------------------------------------
    \61\ See, e.g., In re Social Contract for Time Warner, Memorandum 
Opinion and Order, 11 FCC Rcd. 2788 (1995).
---------------------------------------------------------------------------
    Second, the FCC's rate regulation rules are not just resulting in 
higher cable rates for basic subscribers; the FCC's rules are also 
providing a built-in rate subsidy to cable system operators, thus 
providing the cable industry with an artificial cost advantage over DSL 
and other competitive broadband providers. In contrast to cable rate 
regulation, in the mid-90s the FCC did not permit the telephone 
companies to increase the federally-controlled rates of basic telephone 
subscribers to recover the cost of providing video service over phones 
lines (i.e., ``video dial tone'' service).62 Today, cable 
modem has twice the number of subscribers and almost three times the 
number of access lines as ADSL.63 By permitting one 
industry, but not another, to cross-subsidize from its captive rate 
payers, the FCC is manipulating competition between different forms of 
broadband service in a manner that Congress did not authorize.
---------------------------------------------------------------------------
    \62\ See e.g., In re Telephone Company-Cable Television Cross-
Ownership Rules, CC Docket No. 87-266 and RM-8221, 10 FCC Rcd 244, 247 
(1994), available at http://www.fcc.gov/searchtools.html, ``Search For 
Filed CommentsXECFS,'' DA/FCC Number ``94-269.''
    \63\ June 2002 High Speed Report at Tables 3 and 4.
---------------------------------------------------------------------------
    Finally, because the FCC rules permit cable operators to charge 
more than they could in a competitive market--and the FCC has done 
nothing to encourage wireline competition to cable systems--there will 
always be room for the cable operator to offer a discount on basic 
cable rates (something that should not be possible if the FCC regulated 
rate was producing the rate that would be offered in a competitive 
market). Thus, cable operators are offering discounts on video 
programming cable service as a promotional benefit to encourage 
purchase and installation of cable modem service. These higher cable 
system build-out fees and cable-cable modem cross-market promotions may 
provide additional explanations as to why cable service rates continue 
to increase.
    Local governments urge Congress to increase its administrative 
oversight of the FCC to eliminate practices that hinder efforts to 
achieve reasonable subscriber rates and practices that hinder 
competition.

                               CONCLUSION

    Local governments act as: trustees, owners, and managers of 
valuable public property, mediators among competing uses of the public 
right-of-way, economic development agencies in promoting deployment of 
broadband facilities, users of extensive communications resources, 
developers and promoters of broadband applications, and protectors of 
consumer services and privacy.
    Congress should act to protect these many vital roles of local 
government and in so doing Congress will also protect consumers. 
Specifically, Congress should:

 Clarify the cable modem service is a cable service subject to Title 
        VI thereby ensuring cable modem consumers privacy and consumer 
        protection
 Congress should also:
     Require operators to disclose actual programming costs.
     Review whether the 1994 a la carte tier pricing rules lead to 
            lower rates before implementing a la carte pricing in 2003.
     Instruct the FCC to implement rate regulation rules in a manner 
            that prohibits unreasonable rates, eliminates absurd 
            results, and reflects today's competitive markets.

                                                Table 4: Cable Industry Revenue and Cash Flow: 1998-2002
    From In re Annual Assessment of the Status of Competition in the Market For the Delivery of Video Programming, MB Docket No. 02-145, Ninth Annual
                                            Report, 17 FCC Rcd 26,901, (2002)(``Ninth Annual Report'') at 15.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                  2001-
                                                                  1998      1999     98-99 %    2000     99-00 %    2001     00-01 %    2002     2002 %
                                                                  Total     Total    Change     Total    Change     Total    Change     Total    Change
--------------------------------------------------------------------------------------------------------------------------------------------------------
Basic Subscribers (mil.)......................................      66.1      67.3      1.8%      68.5      1.8%      68.6      0.1%        69      0.6%
Revenue Requests (mil.).......................................        --        --        --        --        --        --        --        --        --
Basic Service and CPST Tiers..................................   $21,831   $23,135      6.0%   $24,729      6.9%   $27,031      9.3%   $28,492      5.4%
Premium (Pay) Tiers...........................................    $4,758    $4,696     -1.3%    $5,115      8.9%    $5,617      9.8%    $5,533     -1.5%
Pay-Per-View..................................................      $514      $721     40.3%      $751      4.2%      $993     32.2%    $1,143     15.1%
Local Advertising.............................................    $1,675    $2,000     19.4%    $2,430      21.%    $2,430      0.0%    $2,503      3.0%
Home Shopping.................................................      $175      $205     17.1%      $239     16.6%      $260      8.8%      $284      9.2%
Advanced Analog and Digital Tier..............................      $445      $919    106.5%    $1,088     18.4%    $2,365    117.4%    $3,379     42.9%
High-Speed Internet Access, Cable Teleph. & interactive svcs..      $133      $542    307.5%    $1,164    114.8%    $2,835    143.6%    $5,602     97.6%
Equipment and Install.........................................    $2,631    $2,424     -7.9%    $2,451      1.1%    $2,463      0.5%    $2,491      1.1%
Total Revenue (mil.)..........................................   $32,162   $34,642      7.7%   $37,967      9.6%   $43,994     15.9%   $49,427     12.3%
Revenue Per Subscriber........................................   $486.57   $514.74      5.8%   $554.26      7.7%   $641.31     15.7%   $716.33     11.7%
Operating Cash Flow (mil.)....................................   $14,900   $15,597      4.7%   $15,674      1.1%   $16,683      5.8%   $18,806     12.7%
Cash Flow Per Subscriber......................................   $225.42   $231.75      2.8%   $230.13     -0.7%   $243.19      5.7%   $272.55     12.1%
Cash Flow/Total Revenue.......................................     46.3%     45.0%     -2.8%     41.5%     -7.8%     37.9%     -8.7%     38.0%      0.3%
--------------------------------------------------------------------------------------------------------------------------------------------------------

                           Appendix B, Table B-1: Assessment of Competing Technologies
 From In re Annual Assessment of the Status of Competition in the Market For the Delivery of Video Programming,
      MB Docket No. 02-145, Ninth Annual Report, 17 FCC Rcd 26,901, (2002)(``Ninth Annual Report'') at 75.
----------------------------------------------------------------------------------------------------------------
                Technology Used                    June-98      June-99      June-00      June-01      June-02
----------------------------------------------------------------------------------------------------------------
(1) TV Households..............................   98,000,000   99,400,000  100,801,720  102,184,810  105,444,330
Percent Change.................................        1.03%        1.43%        1.41%        1.37%        3.19%
(2) MVPD Households............................   76,634,200   80,882,411   84,423,717   87,830,074   89,890,641
Percent Change.................................        4.06%        5.54%        4.38%        4.60%        1.79%
Percent of TV Households.......................       78.20%       81.37%       83.75%       86.42%       85.25%
(3) Cable Subscribers..........................   65,400,000   66,690,000   67,700,000   68,500,000   68,800,000
Percent Change.................................        1.95%        1.97%        1.51%        1.18%        0.00%
Percent of MVPD Total..........................       85.34%       82.45%       80.19%       77.99%       76.54%
(4) MMDS Subscribers...........................    1,000,000      821,000      700,000      700,000      490,000
Percent Change.................................       -9.09%      -17.90%      -14.74%        0.00%      -30.00%
Percent of MVPD Total..........................        1.30%        1.02%        0.83%        0.80%        0.55%
(5) SMATV Subscribers..........................      940,000    1,450,000    1,500,000    1,500,000    1,600,000
Percent Change.................................      -19.14%       54.26%        3.45%        0.00%        6.67%
Percent of MVPD Total..........................        1.23%        1.79%        1.78%        1.71%        1.78%
(6) HSD Subscribers............................    2,018,200    1,783,411    1,476,717    1,000,074      700,641
Percent Change.................................       -7.15%      -12.07%      -17.20%      -32.28%      -29.94%
Percent of MVPD Total..........................        2.65%        2.20%        1.75%        1.14%        0.78%
(7) DBS Subscribers............................    7,200,000   10,078,000   12,987,000   16,070,000   18,240,000
Percent Change.................................       42.66%       39.97%       28.86%       23.74%       13.66%
Percent of MVPD Total..........................        9.40%       12.46%       15.38%       18.30%       20.29%
(8) OVS Subscribers............................       66,000       60,000       60,000       60,000       60,000
Percent Change.................................     2100.00%       -9.09%        0.00%        0.00%        0.00%
Percent of MVPD Total..........................        0.09%        0.07%        0.07%        0.07%        0.07%
----------------------------------------------------------------------------------------------------------------
Notes:
(i) Some numbers have been rounded.
(ii) The total number of MVPD households is likely to be somewhat less than the given figure since some
  households subscribe to the services of more than one MVPD. See 1994 Report, 9 ICC Rcd at 7480. However, the
  number of households subscribing to more than one MVCP is expected to be low. Hence the given total can be
  seen as a reasonable estimate of the number of MVPD households.
(iii) The decline in OVS subscribers since 1998 reflects the conversion of some OV4 systems to franchised cable
  systems over the last three years.

   Appendix C, Table C-1: MSO Ownership in National Video Programming
                                Services
 From In re Annual Assessment of the Status of Competition in the Market
   For the Delivery of Video Programming, MB Docket No. 02-145, Ninth
Annual Report, 17 FCC Rcd 26,901, (2002)(``Ninth Annual Report'') at 80-
                                   82.
------------------------------------------------------------------------
        Programming Service          Launch Date     MSO Ownership (%)
------------------------------------------------------------------------
Action Max.........................       Jun-98  AOL Time Warner (100)
American Movie Classics............       Oct-84  Cablevision (60)
Animal Planet......................       Oct-96  Liberty Media (39.2),
                                                   Cox (19.7)
(a) Max............................       May-01  AOL Time Warner (100)
Black STARZ!.......................       Feb-97  Liberty Media (100)
Canales (6 digital channels) *.....       Oct-98  Liberty Media (90)
Cartoon Network....................       Oct-92  AOL Time Warner (100)
Cinemax............................       Aug-80  AOL Time Warner (100)
CNN................................       Jun-80  AOL Time Warner (100)
CNN en Espanol.....................       Mar-97  AOL Time Warner (100)
CNN Headline News..................       Jan-82  AOL Time Warner (100)
CNN International..................       Jan-95  AOL Time Warner (100)
CNNfn..............................       Dec-95  AOL Time Warner (100)
Comedy Central.....................       Apr-91  AOL Time Warner (50)
Court TV...........................       Jul-91  Liberty Media (50),
                                                   AOL Time Warner (50)
Discovery Channel..................       Jun-85  Liberty Media (50),
                                                   Cox (24.6)
Discovery Civilization.............       Oct-96  Liberty Media (25),
                                                   Cox (12.3)
Discovery en Espanol...............       Aug-98  Liberty Media (50),
                                                   Cox (24.6)
Discovery Health...................       Jul-98  Liberty Media (50),
                                                   Cox (24.6), Comcast
                                                   (20)
Discovery HD Theatre...............       Jun-03  Liberty Media (50),
                                                   Cox (24.6), Comcast
                                                   (20)
Discovery Home & Leisure...........       Oct-96  Liberty Media (50),
                                                   Cox (24.6)
Discovery Kids.....................       Oct-96  Liberty Media (50),
                                                   Cox (24.6)
Discovery Science Channel..........       Oct-96  Liberty Media (50),
                                                   Cox (24.6)
Discovery Wings: The Aviation and         Jul-98  Liberty Media (50),
 Adventure Channel.                                Cox (24.6)
E! Entertainment...................       Jun-90  Comcast (50)
Encore.............................       Apr-91  Liberty Media (100)
Encore Action......................       Sep-94  Liberty Media (100)
Encore Love Stories................       Jul-94  Liberty Media (100)
Encore Mystery.....................       Jul-94  Liberty Media (100)
Encore True Stories................       Sep-94  Liberty Media (100)
Encore WAM! America's Youth Network       Sep-94  Liberty Media (100)
Encore Westerns....................       Jul-94  Liberty Media (100)
5Star Max..........................       May-01  AOL Time Warner (100)
FoxSports (2) channels.............      Various  Cablevision (50)
FoxSports Latin America............       Nov-96  Liberty Media (50)
G4 Video Gaming Network............       Jun-02  Comcast (94)
GEMS International Television......       Apr-93  Liberty Media (100)
Golf Channel.......................       Jan-95  Comcast (91)
Hallmark Channel (formerly Odyessy)       Oct-93  Liberty Media (32.5)
HBO................................       Nov-72  AOL Time Warner (100)
HBO Latino.........................       Nov-00  AOL Time Warner (100)
HBO 2..............................       Oct-98  AOL Time Warner (100)
HBO Signature......................       Oct-93  AOL Time Warner (100)
HBO Comedy.........................       May-99  AOL Time Warner (100)
HBO Family.........................       Dec-96  AOL Time Warner (100)
HBO Zone...........................       May-99  AOL Time Warner (100)
Home Shopping Network..............       Jul-85  Liberty Media (20)
In Demand..........................       Nov-85  Comcast (55), AOL Time
                                                   Warner (33), Cox (11)
Independent Film Channel...........       Sep-94  Cablevision (60)
International Channel..............       Jul-90  Liberty Media (90)
More MAX...........................       Aug-91  AOL Time Warner (100)
Movie Plex.........................       Oct-94  Liberty Media (100)
Much Music USA.....................       Jul-94  Cablevision (75)
Outdoor Life Network...............       Jul-95  Comcast (100)
OuterMax...........................       May-01  AOL Time Warner (100)
Ovation: The Arts Network..........       Apr-96  AOL Time Warner (4.2)
PIN (Product Information Network)..       Apr-94  Cox (45)
Prevue Channel.....................       Jan-88  Liberty Media (51)
QVC................................       Nov-86  Comcast (57), Liberty
                                                   Media (43)
Sci-Fi Channel.....................       Sep-92  Liberty Media (20)
Sneak Prevue (TV Guide)............       May-91  Liberty Media (12)
Starz!.............................       Feb-94  Liberty Media (100)
Starz! Cinema......................       May-99  Liberty Media (100)
Starz! Family......................       May-99  Liberty Media (100)
Starz! Theater.....................       Mar-96  Liberty Media (100)
Style..............................       May-99  Comcast (50)
TBS................................       Dec-76  AOL Time Warner (100)
TLC (The Learning Channel).........       Nov-80  Liberty Media (50),
                                                   Cox (24.6)
Thriller Max.......................       Jun-98  AOL Time Warner (100)
Turner Classic Movies..............       Apr-94  AOL Time Warner (100)
USA Network........................       Apr-80  Liberty Media (20)
Viewers Choice 1-10 and Hot Choice        Nov-85  Cox (20), AOL Time
 (11 multiplexed channels).                        Warner (17)
WE.................................       Jan-97  Cablevision (60)
WMAX...............................       May-01  AOL Time Warner (100)
------------------------------------------------------------------------
Sources: NCTA, Directory of Program Services, Cable Developments 2002 at
  29-141.
Liberty Media Corp. at http://www.libertymedia.com/ourXaffiliates/
  videoXprogramming.htm

    Table 1: Average Monthly Rate, by Component (Competitive and Non-
                      Competitive Groups Combined)
 From In re Statistical Report on Average Rates for Basic Service, Cable
 Programming Service, and Equipment, Report On Cable Industry Prices, MM
     Docket No. 92-266, 17 FCC Rcd 6301, Table 6 (2002) (``2002 Cost
                             Report'') at 8.
------------------------------------------------------------------------
                                   July 1,   July 1,  12-Month   Percent
                                    2002      2001     Change    Change
------------------------------------------------------------------------
Basic service tier (BST)........    $12.57    $12.84     $0.27      2.1%
Cable programming service tier      $18.88    $20.91     $2.03     10.8%
 (CPST).........................
Total programming services (BST     $31.45    $33.75     $2.30      7.3%
 and CPST)......................
Equipment (set-top box and           $2.97     $3.24     $0.27      9.1%
 remote control)................
Programming and equipment           $34.42    $36.99     $2.57      7.5%
 combined.......................
Number of local channels........      14.1      14.5       0.4      2.8%
Number of satellite channels....      42.2      44.9       2.7      6.4%
Total channels on BST and CPST..      56.3      59.4       3.1      5.5%
Programming rate per satellite      $0.797    $0.801     $0.00     40.5%
 channel........................
Programming rate per channel        $0.591    $0.600    $0.009      1.5%
 overall........................
------------------------------------------------------------------------

                   Table 6: Comparison between Competitive Strata and the Noncompetitive Group
                                        From ``2002 Cost Report'' at 11.
----------------------------------------------------------------------------------------------------------------
                                              Wireline     DBS                   Low                     Non-
                    Date                     Overbuild  Overbuild     LEC    Penetration  Municipal  Competitive
----------------------------------------------------------------------------------------------------------------
                                              Average Monthly Rate
July 1, 2001...............................     $34.03     $37.13    $35.03      $34.30      $24.35      $37.13
July 1, 2000...............................     $31.45     $34.25    $32.55      $32.57      $23.40      $34.54
                                               Number of Channels
July 1, 2001...............................         56       53.3      65.3        52.9        51.4        59.3
July 1, 2000...............................       52.7       46.5      62.4        49.5        50.8        56.2
                                   Average Rate per Channel (Programming Only)
July 1, 2001...............................     $0.587     $0.727    $0.489      $0.663      $0.447      $0.603
July 1, 2000...............................     $0.578     $0.761    $0.483      $0.674      $0.437      $0.594
----------------------------------------------------------------------------------------------------------------

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