[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
REGULATORY ASPECTS OF VOICE OVER
INTERNET PROTOCOL (VoIP)
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JULY 23, 2004
__________
Serial No. 102
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
U.S. GOVERNMENT PRINTING OFFICE
95-009 WASHINGTON : 2004
_________________________________________________________________
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
CHRIS CANNON, Utah SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona ANTHONY D. WEINER, New York
MIKE PENCE, Indiana ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
CHRIS CANNON, Utah Chairman
HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina
JEFF FLAKE, Arizona JERROLD NADLER, New York
JOHN R. CARTER, Texas TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio ANTHONY D. WEINER, New York
TOM FEENEY, Florida
Raymond V. Smietanka, Chief Counsel
Susan A. Jensen, Counsel
Diane K. Taylor, Counsel
James Daley, Full Committee Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
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JULY 23, 2004
OPENING STATEMENT
Page
The Honorable Chris Cannon, a Representative in Congress From the
State of Utah, and Chairman, Subcommittee on Commercial and
Administrative Law............................................. 1
WITNESSES
Mr. Robert Pepper, Ph.D., Chief, Policy Development, Office of
Strategic Planning and Policy Analysis, Federal Communications
Commission
Oral Testimony................................................. 63
Prepared Statement............................................. 64
Mr. John Langhauser, Esq., Vice President, Law, and Chief
Counsel, Consumer Services Group, AT&T Corporation
Oral Testimony................................................. 72
Prepared Statement............................................. 74
Mr. Stephen M. Cordi, Esq., CPA, Deputy Comptroller for the
Maryland Comptroller of the Treasury, State of Maryland
Oral Testimony................................................. 78
Prepared Statement............................................. 80
Mr. James Kirkland, Esq., General Counsel and Senior Vice
President, Covad Communications Group, Inc.
Oral Testimony................................................. 84
Prepared Statement............................................. 85
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Policy Paper of the National Cable and Telecommunications
Association, ``Balancing Responsibilities and Rights: A
Regulatory Model for Facilities Based VoIP Competition''....... 3
Letter from William E. Moschella, Assistant Attorney General,
U.S. Department of Justice, Office of Legislative Affairs to
the Honorable Chris Cannon..................................... 51
Letter from the National Governors' Association, the Council of
State Governments, the National League of Cities, the U.S.
Conference of Mayors and the National Association of Counties
to the Honorable F. James Sensenbrenner, Jr., and the Honorable
John Conyers, Jr............................................... 95
APPENDIX
Material Submitted for the Hearing Record
Memorandum of Understanding between the National Emergency Number
Association (NENA) and the Voice on the Net Coalition.......... 110
White Paper of the Voice on the Net Coalition, ``Unleashing the
Full Promise and Potential of Internet Voice Communication,
Vast Benefits: lower prices, better jobs, and improved ways to
communicate.................................................... 111
REGULATORY ASPECTS OF VOICE OVER INTERNET PROTOCOL (VoIP)
----------
FRIDAY, JULY 23, 2004
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:07 a.m., in
Room 2137, Rayburn House Office Building, Hon. Chris Cannon
(Chair of the Subcommittee) presiding.
Mr. Cannon. The Subcommittee will please come to order.
I want to thank Mr. Chabot for being here with us this
morning and helping us get this started. We are out of session,
and this is an extraordinarily kind thing for him to do. We
consider today the regulatory aspects of a technology that is
fundamentally changing the communications industry. That is
voice over Internet protocol or VoIP telephony.
As most of us know, VoIP allows the user to make telephone
calls using a broadband Internet connection rather than a
regular or analog hard-switched telephone line. While VoIP has
been available in various forms since about 1995, the creation
of new IP services and the increasing penetration of broadband
into the residential markets has spurred significant growth in
the industry. New and established telephony providers alike now
offer various kinds of VoIP, and the service is no longer
limited.
According to one estimate, the number of VoIP lines will be
4.2 million by 2007, and I suspect, personally, that that is a
dramatic underestimation. At issue is whether VoIP telephony
should be regulated and, if so, to what extent. VoIP represents
a unique concept to regulators because it does not conform to
the current regulatory paradigm which reflects the legacy
system of public switched telephone network or PSTN. VoIP
differs from this end-to-end telephony, because it converges
services that have historically been unregulated information
services and regulated telecommunications services.
The FCC's task in this regard is no minor feat. Indeed, FCC
Chairman Michael Powell has stated that VoIP promises the
``most important shift in the entire history of modern
communications since the invention of the telephone.'' While
the FCC first addressed the regulatory treatment of VoIP with
respect to universal service in 1998, it has yet to do so in a
comprehensive manner. We look forward to discussing the FCC's
progress toward the establishment of a definitive framework for
VoIP.
At the same time, understanding the enormous benefits of
VoIP to businesses and consumers alike, prompt action is
necessary that will promote rather than undermine the
development of this technology. Indeed, time is of the essence
for Federal guidance. Several States have launched legal or
regulatory proceedings addressing VoIP, calling into question
whether VoIP should be subject to State taxation or whether
Federal preemption is more appropriate.
We have the opportunity today to consider those issues
relevant to the development of a thoughtful yet timely approach
to the regulation of VoIP from those who know the subject
matter extremely well. The Subcommittee maintains jurisdiction
over the Administrative Procedure Act and has a long history of
providing effective oversight of the Federal administrative
process by conducting hearings into regulatory practices at
Federal agencies. For example, the Subcommittee has examined in
hearings the FCC's regulations concerning license transfers,
rules noticed by the Federal Reserve Board and Treasury
Department concerning the authority to monitor banking
activities and the role of Congress in monitoring
administrative rulemaking. Furthermore, the Subcommittee has
legislative and oversight responsibility for issues of State
taxation affecting interstate commerce, which is a central
issue in this debate.
I now turn to my distinguished colleague, Mr. Chabot, for
any opening statement he may wish to make.
Mr. Chabot. No.
Mr. Cannon. Thank you. The gentleman's entire statement
will be placed in the record.
I ask unanimous consent that Members have five legislative
days to submit written statements for inclusion in today's
hearing record.
Hearing none, so ordered.
Mr. Cannon. I ask unanimous consent for the inclusion of
two matters into the record. I have for inclusion in the
hearing record a policy paper from the National Cable and
Telecommunications Association concerning facilities-based VoIP
competition and also a letter from the Department of Justice
concerning the Communications Assistance for Law Enforcement
Act, CALEA. This letter submits that CALEA must be considered
when VoIP regulation is discussed. Without objection, these
documents will be included into the record.
[The information referred to follows:]
----------
Mr. Cannon. Before I begin with the witnesses'
introductions, interested parties will likewise have 5 days to
submit written statements.
I am now pleased to introduce today's hearing witnesses.
Our first witness is Robert Pepper, chief of policy development
at the Federal Communications Commission. In this capacity, Mr.
Pepper has served as the direct advisor to FCC Chairman Michael
Powell on long-term policy planning. He is also the co-chair of
the FCC's Internet Policy Working Group and has primary
responsibility for developing the Commission's overall
relationship with the financial community. Prior to his
fulfilling his current appointment, since March 2003, Mr.
Pepper was chief of the FCC's Office of Plans and Policy
beginning in 1989. Mr. Pepper has published and lectured widely
on telecommunications policy issues. He is a graduate of the
University of Wisconsin-Madison, where he received his doctoral
degree.
Our next witness is John Langhauser, vice-president, law,
and chief counsel to the Consumer Services Group of AT&T
Corporation. Mr. Langhauser joined AT&T in 1982 and has held
legal positions in the State government affairs, antitrust
litigation, international business services, Federal regulatory
and public policy groups. Prior to joining AT&T, he was a
litigator with the firm of Dewey Ballantine in New York. Mr.
Langhauser graduated cum laude from Harvard Law School and
summa cum laude from the State University of New York at
Plattsburgh.
Our next witness is Mr. Stephen Cordi, deputy comptroller
for the Maryland Comptroller of the Treasury. Mr. Cordi has
served in this capacity since 1994 and has primary
responsibility for tax administration. He is also the immediate
past president of the Federation of Tax Administrators. Mr.
Cordi was the first director of the Compliance Division of the
Maryland Comptroller following its creation in 1993. For 13
years prior to this appointment, he was the director of the
Maryland Sales and Use Tax Division. Mr. Cordi first entered
State service in 1974 as special assistant to the Attorney
General for the comptroller. An attorney and certified public
account, he is a graduate of Haverford College and Georgetown
University Law Center.
Our final witness is Mr. James Kirkland, general counsel
and senior vice-president of Covad Communications. Mr. Kirkland
is responsible for overseeing all of Covad's legal issues
relating to regulatory and legal affairs, corporate governance
and employment and finance. Prior to joining Covad, Mr.
Kirkland served as general counsel and senior vice-president of
Spectrum Development for the privately-held Clearwire
Technologies, Inc., a broadband Internet service provider based
in Dallas, Texas. Before joining Clearwire, Mr. Kirkland spent
17 years with Mintz, Levin, Cohen, Ferris, Glosky and Papeo,
P.C., located here in Washington, D.C., where he specialized in
communications law. Mr. Kirkland holds a bachelor's degree from
Georgetown University and a law degree with honors from Harvard
Law School.
I extend to each of you my warm regards and appreciation
for your willingness to participate in today's hearing. In
light of the fact that your written statements will be included
in the record, I request that you limit your oral remarks to 5
minutes. Accordingly, please feel free to summarize or
highlight the salient points of your testimony. I can assure
you that you will have more time to explain particular points
thereafter.
You will note that we have a lighting system that starts
with a green light. After 4 minutes, it turns to a yellow
light, and then, at 5 minutes, it turns to a red light. It is
my habit to tap the gavel at 5 minutes. We would appreciate it
if you would finish up your thoughts within that time. We don't
expect you to just cut off. We are actually anxious to
understand what you think is important for us to understand,
but that is a time frame that will actually help us move
through the hearing.
After all the witnesses have presented their remarks, the
Subcommittee Members in the order that they arrive, and I
suspect that is just one other Member, will be permitted to ask
questions of the witnesses subject to the 5-minute time limit.
Pursuant to the directive of the Chairman of the Judiciary
Committee, I ask the witnesses to please stand and raise your
right hand to take the oath.
[Witnesses sworn.]
Mr. Cannon. The record should reflect that each of the
witnesses answered in the affirmative.
You may be seated, and Mr. Pepper, would you now proceed
with your testimony?
TESTIMONY OF ROBERT PEPPER, PH.D., CHIEF, POLICY DEVELOPMENT,
OFFICE OF STRATEGIC PLANNING AND POLICY ANALYSIS, FEDERAL
COMMUNICATIONS COMMISSION
Mr. Pepper. Good morning, Mr. Chairman and distinguished
Members of the Subcommittee.
It is my pleasure to come before you this morning to talk
about voice over Internet protocol or V-o-I-P or VoIP. VoIP
services and applications are dramatically expanding beyond the
limited functionality of traditional telephone voice service
and at the same time challenging the traditional economic and
regulatory structures that have governed the traditional
telephone industry for more than a century.
Saying that VoIP is just another way to make a phone call
is much like saying that Ebay is just another way to have a
garage sale. This ignores the fact, obviously, that ecommerce
and the Internet have fundamentally changed the way we compare
products and prices, transact business and the way service
providers compete for and relate to consumers. VoIP is best
understood as bringing this dynamic to the market for voice
communications. The traditional network delivered voice over
brilliantly-designed, dedicated and centrally-managed network.
Whoever owned the pipe into your home owned the customer.
On the Internet, however, the voice application and, in
fact, all applications are separated from the physical
transmission network. They ride over that network but are
agnostic as to who provides it. Thus, anyone who can attach a
server to the Internet can allow two, three, four, 100 people
to talk to one another. Voice is becoming little more than one
application of many over a multiuse, digital broadband network,
less like standalone phone service and more like a free or
almost free add-on to something else you can buy from multiple
sources.
Indeed, the majority of voice-over-IP applications,
including voice instant messaging and talking to players of
live interactive games like X-box, look nothing at all like
traditional telephone service. These are fundamental changes in
an industry that has been regulated for almost a century on the
assumption that all providers are monopolies, protected by an
elaborate regulatory regime in which they use dedicated
narrowband networks. It would be irrational for regulators to
ignore these changes and automatically apply legacy regulation
without first seriously examining whether it is relevant.
History provides two excellent examples of a better way:
cell phones and the Internet. These technologies were largely
freed of common carrier regulation, notwithstanding long, hard-
fought battles to impose it. Today, the American consumer and
the American economy are far better off for having steered a
deregulatory course. These two industries grew from reaching
just a handful of customers to bringing substantial benefits to
tens of millions in the absence of any significant common
carrier regulation.
The Commission has begun examining VoIP issues in this
light in a notice of proposed rulemaking regarding IP-enabled
services as well as in specific petitions. The Commission began
its reexamination of VoIP because development of this promising
technology might very well be hampered by unjustified,
conflicting and burdensome regulatory requirements that could
result as different State commissions and courts begin to
address the area.
In this environment, the Commission cannot simply assume
that inaction will create an environment that encourages
innovation, investment and competition. In response to the
NPRM, the Commission received over 150 comments and 86 reply
comments from a very wide variety of parties. The Commission
already has issued two orders resolving petitions for
declaratory ruling, one filed by Pulver.com and the other by
AT&T. In addition, the Commission is considering VoIP-related
petitions from Vonage, Level 3, SBC and Inflection.
The Commission is also considering questions related to
voice over IP and its universal service contribution,
intercarrier compensation and our upcoming CALEA proceeding.
The Commission's decisions in this area will have the farthest-
reaching consequences of anything the Commission currently is
considering. What is at stake is nothing less than the future
of electronic communications for future generations.
The Commission, however, is constrained by the Act, which
divides the world into regulated telecom services and
unregulated information services. When dealing with
revolutionary new technologies, we need to start from the
perspective of how to best create the world we all want to live
in rather than applying tired regulations soon to be rendered
obsolete. While the Commission has some ability to fine-tune
treatment of new technologies, given its discretion and
flexibility granted to it by Congress, the Commission's
latitude is limited by the Act.
If you believe that VoIP and other new technologies are
transforming the telecom market in ways that cry out for new
regulatory approaches, you need to consider whether the tools
the Commission has today are adequate for that task. In the
meantime, the Commission is moving forward with its work, and
guidance and leadership from Congress is crucial to the success
of our process.
Mr. Chairman, on behalf of the FCC, I want to thank you for
calling this hearing, and we look forward to working with you
and other Members on these issues.
[The prepared statement of Mr. Pepper follows:]
Prepared Statement of Robert Pepper
Good morning, Mr. Chairman and distinguished members of the
Subcommittee. It is my pleasure to come before you today to discuss
services and applications that use voice over Internet Protocol
(``VoIP''), and the status of our examination of VoIP at the Federal
Communications Commission (the ``FCC'' or the ``Commission'').
i. the importance of voip
Voice over Internet Protocol services and applications are
dramatically expanding beyond the limited functionality of traditional
voice telephone service and, at the same time, challenging the
traditional economic and regulatory structures that have governed the
traditional telephone industry for more than a century.
The FCC has pending before it a number of proceedings initiated by
petitioners about VoIP, and has initiated a broad examination of issues
related to VoIP, as well as other Internet Protocol (IP) based
services. As an introduction to the status of these proceedings, it is
helpful to discuss why the emergence of VoIP raises important issues,
why the Commission, as indicated in the IP-Enabled Services Notice of
Proposed Rulemaking (``IP-Enabled Services Proceeding''), is examining
the best way to establish a minimally regulated environment for VoIP,
and why prompt action to clarify the regulatory regime applicable to
VoIP is crucial to the future of electronic communications and
America's place as the leading innovator in the field.
A. VoIP is Changing the Nature and Business of Voice Communication
VoIP is seen by some as simply a new technology for transmitting a
traditional voice telephone call. This purely functional view,
sometimes referred to as the ``if it quacks like a duck, it's a duck''
argument, is short-sighted for two reasons.
VoIP Technology is Radically Different From Traditional Voice
Telephony. First, the functional view ignores the fact that VoIP
technology is merely an application that rides over the public
Internet, or over dedicated data networks, just like any other
application. On these public or private data networks the bitstream
created by a VoIP application is no different than any other bitstream
on that data network--it can be incorporated into other bitstreams,
modified or enhanced by simply changing server or client software.
Thus, voice can now be easily combined with data and video in ways that
cannot be done over the traditional network. Adding enhancements to
voice, or incorporating voice to other applications, is merely a
question of adding a new feature in the next software release. With
VoIP, consumers can easily change their service selections or add
function and enhanced features simply by logging on to their VoIP
application provider's website, or by choosing a new provider with more
attractive features. And, by the way, the majority of voice over IP
applications look nothing like traditional plain old telephone service.
Some of these include voice instant messaging or the ability to talk to
opponents while playing a game across the Internet on XBox Live.
VoIP is a Radically Different Way of Doing Business. The second
reason why a purely functional approach is short-sighted is that it is
a new way of doing business. As my colleague, Jeffrey Carlisle has
noted, saying VoIP is just another way to make a phone call is like
saying that Amazon.com is simply a new way to sell books, without any
broader consequences for markets or consumer behavior. E-commerce is
much more than that. It changed the market for books, and everything
else, by opening a truly worldwide market to any retailer who could
attach a server to the Internet, or any individual who could open an E-
Bay account.
Similarly, VoIP changes the business of telecommunications by
allowing data networks to carry voice communications at comparable
levels of quality to the traditional circuit-switched network, but to
do so more flexibly and efficiently. VoIP changes the dynamics of the
market for telecommunications services in three ways.
First, VoIP transforms voice from the primary service provided by a
common carrier into just another application on the network. On
traditional telephone networks, voice was delivered over a dedicated
network that required a well-capitalized infrastructure and service
provider that traditionally was a protected monopoly. In the future,
the voice application--in fact, all applications--will be separated
from the physical transmission network. Anyone can attach a server to
the Internet, anywhere in the world, to allow two people--or three,
four, five or a hundred--to talk to one another, just as anyone can
connect a server to the Internet to provide email, file sharing, or
other applications. The implications for how voice services are
marketed and purchased are dramatic. No longer is the monopoly provider
the gatekeeper for innovation. Rather, innovation in telecommunications
can come from any entrepreneur, small company or enterprise that can
connect to the network. This is the consequence of moving voice
communications to the Internet, where intelligence is on the edge of
the network instead of a tightly controlled core.
With these kinds of developments, saying that a VoIP application is
merely another way of making a phone call is like saying that the
automobile is just another way of going someplace in your horse and
buggy. VoIP means that voice may no longer be a dedicated service for
which consumers pay a separate monthly bill. VoIP may be part of your
wireless phone service, as it already is with many push-to-talk
services; it may be bundled together with video and data service that
you buy from your cable, telephone, satellite or power company; or you
may buy it from dozens of providers over the Internet; or you may
simply have it as part of a software package that you buy for some
other purpose. Most likely, you will acquire it in all of these
different ways. When VoIP separates the voice application from the
physical network, the question will no longer be whether consumers will
benefit from competition in the voice market. Clearly, they will.
Rather, competition in voice will no longer be an issue, because voice
will become an almost free add-on to something else you buy from
multiple sources.
In this respect it is useful to compare the evolving voice market
to email. Email appears to be ``free,'' but email application providers
thrive in a market where intense competition drives innovation.
Advances in email provided by Google, Yahoo! and Hotmail become
headline news. Consumers can acquire email applications from their ISP,
select web-based mail from third parties supported by advertising,
outsource mail services, or operate email servers on their own
networks. In the same way, consumers will benefit from a market for
voice applications thriving with competition, innovation and choices
suited to their needs at significantly reduced costs--but with
significant rewards for agile and smart companies capable of delivering
the best service.
The second way VoIP is changing telecommunications markets is that
it accelerates the migration to all digital, multiuse broadband
infrastructures. Whatever the benefits of separating the voice
application from a dedicated infrastructure, there still need to be
companies capable of building and maintaining the digital
infrastructure over which applications ride. For most, if not all,
markets in the United States, infrastructure will no longer be the
monopoly domain of the traditional telephone network. Instead, an
entire range of broadband technologies, including DSL, cable modem,
licensed and unlicensed wireless broadband, Ultra Wide Band, satellites
and broadband over power line will provide connectivity. When networks
provide transmission, and are not tied to a single application like
voice or video, networks become highly substitutable and competition
increases dramatically, resulting in significant benefits for
consumers. Additionally, the offering of demand-creating applications
such as VoIP promotes deployment and adoption of broadband facilities,
which in turn promotes further development of VoIP and other Internet
applications. Thus, applications and broadband create a virtuous cycle
that will result in significant benefits for American consumers and the
American economy as a whole.
The third way VoIP changes telecommunications markets is that it
internationalizes voice communications. Just like many other
applications provided over the Internet, it doesn't matter where the
provider is located--a server providing a VoIP application could be
down the street, or in the next state, or it could be in Ukraine, the
UK, India, or, as is currently the case with Skype, in Estonia. A voice
application provided on a server located in a foreign country, with the
customer in the U.S. using nothing more than software downloaded from
the Internet and purchasing a broadband connection from a third party,
looks very different from the service provided by traditional phone
companies. This fundamental shift in how the voice application is
provided has obvious implications for what regulations, if any, are
imposed on VoIP providers and who decided and/or enforces any
regulation. Federal or state regulators need to recognize that it may
be very difficult to enforce requirements and unwarranted burdensome
regulation will place VoIP providers in this country at a competitive
disadvantage to VoIP providers located in relatively less regulated
countries, and that, if providers are driven abroad, we will lose
desirable jobs in the high technology sector.
Much of what I have described is a look into the reasonably
foreseeable future. But VoIP is already changing the market's dynamics,
even though it has not yet become ubiquitous. In 1998, VoIP generated
less than 0.2% of the world's international voice traffic. In 2002,
VoIP generated 10.4%, and, in 2003, is estimated to have generated
12.8%. Recently, Cablevision announced that it would provide a bundled
package of digital cable TV, high speed Internet, and unlimited local
and long distance calling for $90. If you consider what consumers pay
for digital cable and broadband in the marketplace today, at this
price, the voice service is essentially free. This is exactly what one
would expect when voice, which uses relatively little bandwidth, is
provided over a high bandwidth connection.
There are other indications that VoIP, while only gradually making
its way into the public consciousness, is nevertheless growing at an
increasing pace. A report released last month by the Pew Internet &
American Life Project and the New Millennium Research Project estimates
that approximately 14 million Americans have already made some sort of
voice communication over the Internet. Skype, an Internet-based VoIP
service that allows its members to speak to one another with crystal
clarity for free over a peer-to-peer network connection, has been
downloaded over 15 million times by users around the world.
B. Why Take Action Now?
The FCC has long relied on a policy of limiting regulatory
intrusion on the Internet and applications provided over it. The
Commission could have waited and raised the question of how VoIP is
regulated at some point in the future, after it matured. At the end of
2003, incumbent local exchange carriers (``ILECs'') and competitive
local exchange carriers (``CLECs'') served over 181 million access
lines in the United States, and even at astronomical growth rates it
will be some time before VoIP services and applications constitute a
significant portion of the U.S. voice market. But there are two factors
pressuring for Commission attention and, by implication, legislative
action.
First, industry players are deploying these applications today, and
are bringing their questions to the Commission. VoIP only started to
become more widely used in the domestic market within the last several
years. Thus, beginning in September 2002, a variety of companies from
across the telecommunications industry--VoIP applications providers,
ILECs, data companies and interexchange carriers (``IXCs'')--filed
petitions with the Commission seeking clarification regarding
regulatory treatment of VoIP.1 The petitions filed over the last two
years demonstrate the need for clarification and a measure of certainty
on important regulatory questions, especially since it is uncertain how
the FCC is going to rule in this very new environment.
Second, because of the important traditional role state public
utility commissions play in regulating intrastate telecommunications,
states have now begun to look at these questions, raising the
possibility of differences among state regulatory regimes, and between
various state and federal regulatory regimes. Some state commissions
have decided to wait until this service further develops or until the
FCC acts. But others have moved forward to examine VoIP, and some, such
as Minnesota and New York, have already taken steps to classify VoIP
applications as regulated telecommunications services. Federal courts
in both states have stayed the effectiveness of these rulings.
Nevertheless, companies offering VoIP are dealing today with multiple
attempts to apply potentially inconsistent regulatory regimes, with the
imminent prospect of more to come. This uncertainty and potentially
conflicting regulatory regimes is an impossible position for companies
wanting to provide VoIP service on a national basis.
It is not surprising, therefore, that while there is investment
capital that would fuel even further innovation in this high tech area,
there is hesitance to bring this capital to market while the regulatory
regime remains unclear. While this might be said of any number of areas
of telecommunications law, it is particularly true of VoIP, given that
much of the innovation in the area is coming from small companies and
entrepreneurs who are most vulnerable to shortages of investment
capital. Therefore, the FCC has begun to examine this area not because
it is looking for something to do, or because it is interested in any
way in regulating the Internet. Rather, the FCC has begun to examine
this area because of the demonstrated need for clarity because of the
very real possibility that deployment of this new technology will be
hampered by burdensome and conflicting regulatory requirements.
ii. the ip-enabled services proceeding
On March 10, 2004, the Commission released its Notice of Proposed
Rulemaking (``NPRM'') on IP-Enabled Services, docket number 04-36 in
order to address the need for the Commission to provide clarity to
consumers, industry and the investment community. This NPRM asked
commenters to tell the Commission how it could best craft a regime for
VoIP and other IP enabled services that would encourage innovation and
ensure that the benefits of this technology could reach consumers.
The NPRM discusses how VoIP will change how voice service is
delivered to business and residential customers, and then asks whether
the Commission can best serve the public interest by continuing its
policy of minimal regulation of the Internet and applications provided
over it. It asks for comment on how the Commission could determine
whether a service using VoIP is a regulated telecommunications service
or an unregulated information service under the 1996 Act: Should the
Commission establish the line at the point where VoIP technology
interfaces with the public switched telephone network? Should the
Commission use a purely functional approach that makes the distinction
based on whether the given service is a replacement for traditional
telephony? Should the Commission use a test that examines whether the
service substitutes for traditional telephony as determined by a
traditional market analysis? Should the Commission instead adopt a
layered approach, view VoIP purely as an application riding over a
network, and thus regulate applications very lightly while applying a
more stringent regime to facilities? And what impact should it have on
the Commission's analysis that VoIP can be provided via peer-to-peer
services that simply connect two users, as opposed to the centrally
managed networks used by traditional service providers? In the case of
traditional service providers, there is an entity to regulate that,
presumably, has some control over and information about the calls
routed over its network. In the peer-to-peer case, consumers
communicate directly with one another, and aside from assisting in
linking the participants, the provider of the peer-to-peer application
may have little or no control over the call.
Related to the question of classification, the NPRM asks how the
Commission might best achieve a minimally regulated environment. If
classified as an information service, the service is nevertheless
subject to the Commission's general jurisdiction to regulate all
interstate and international communications by wire and radio.
Alternatively, even if a service is classified as a telecommunications
service, Congress has directed the Commission to forbear from enforcing
its own regulations or the requirements of the statute if enforcement
is not necessary to protect consumers, ensure against unjust,
unreasonable or unreasonably discriminatory practices, or protect the
public interest.
The NPRM goes on to solicit comment as to jurisdiction. It notes
the Commission's recent order in response to a petition for declaratory
ruling filed by Pulver.com regarding Free World Dialup--as described in
the petition, a free peer-to-peer application facilitating voice
communication between members of a closed group, which does not
interconnect with the public switched telephone network. The
Commission's Order, released on February 19, 2004, held that Free World
Dialup was an information service subject to federal jurisdiction. The
Pulver.com order further held that state regulation treating Free World
Dialup like a regulated telecommunication service would most likely be
preempted given the Commission's finding and an explicit Congressional
policy against burdening the Internet with unnecessary federal and
state regulation. The NPRM acknowledges that the Pulver.com Order only
addressed one type of VoIP, and asked about the extent to which the
reasoning in the case can be applied to other types, such as VoIP
applications that interface with the public switched telephone network.
Having solicited comment on how the Commission should classify
VoIP, and who should have jurisdiction as to whether to regulate VoIP,
the NPRM then asks what regulations, if any, should apply, and develops
an important distinction. The NPRM asks whether economic regulations
such as entry, exit, tariff and accounting rules designed to protect
against the power of a monopoly provider of services, with control over
the bottleneck facility of the wire into the consumer's home, have any
application in an environment where consumers can choose any number of
applications providers, and use those applications over multiple
networks. If technology has redressed the imbalance in power between
customers and providers by lowering barriers to entry and allowing the
consumer to choose his or her service provider, and change that choice
easily, does this type of legacy economic common carrier regulation
continue to have any relevance, at least as regards VoIP providers?
Certainly, precedent indicates that where competitive choice is
possible, lower regulatory burdens are justified. This has been the
case with cellular providers, which are not subject to many of the
common carrier requirements that might otherwise apply to them. It has
also been the case with nondominant wireline providers. The NPRM
solicits comment on these issues.
Traditional economic common carrier regulation is distinguished
from requirements that can be characterized as social obligation
regulation. These are requirements that, as a society, we have decided
should apply broadly to any provider of voice services, as opposed to
only those providers that have a dominant market position. Thus, even
if a provider of voice is not dominant, we still believe that it is
important that its customers have access to emergency services. Even if
the market for voice services is changing in fundamental ways, it is
still a basic goal of the Communications Act to ensure that all
Americans have access to service at affordable prices. One might say
that free voice service would achieve that goal. But if it is necessary
to first purchase some form of broadband service, then it may be
necessary to examine how we understand universal service and support
for it may need to change over time. The social obligations raised in
the NPRM and related proceedings include emergency service via the 911/
E911 system, access to telecommunications by people with disabilities,
universal service, and authorized law enforcement access to electronic
communications--important societal goals that should not be compromised
as the market changes. But the NPRM recognizes that the ways to achieve
these goals are likely to change as the result of widespread VoIP
adoption. Thus, while it makes clear these goals continue to be
important, the NPRM also asks how the Commission can best achieve them
in the new environment, acknowledging both the difficulties and
opportunities presented by new technology.
iii. comments on the ip-enabled services proceeding
The response by the public to the NPRM has provided the Commission
with a rich record, and features original and thought-provoking
analyses of the issues. By May 28, 2004, the date for filing of initial
comments, the Commission had received over 150 sets of comments. And,
by last count, the Commission has received 86 reply comments by the
July 14 filing date. These comments and replies have come to the
Commission from a wide range of sources, indicating the broad interest
this proceeding engenders not only among industry actors, but across
American society as a whole. These sources include:
multiple public utility commissions, and two
organizations representing state commissioners, the Federation
for Economically Rational Utility Policy and the National
Association of Regulatory Utility Commissioners;
county 911 administrators;
the Department of Homeland Security and the
Department of Justice;
groups involved in studying and advocating public
policy as it relates to high tech issues, such as the
Electronic Frontier Foundation;
public interest groups representing specific groups
of consumers, such as AARP, the American Foundation for the
Blind, Communication Service for the Deaf, the National
Consumer League and the Ad Hoc Telecommunications Users
Committee;
trade groups representing the interests of
telecommunications and high tech industries, including the
Telecommunications Industry Association, CTIA, NCTA, the
Information Technology Association of America, and the High
Tech Broadband Coalition;
cable TV providers, including Cablevision, Time
Warner, and Comcast;
wireless providers, including Nextel, Cingular,
Ericsson, and T-Mobile; and
Internet Service Providers;
many well-known high technology companies such as
Microsoft and Cisco;
local exchange carriers, both incumbent and
competitive, as well as their trade associations;
rural telephone companies, as well as their trade
associations; and
numerous VoIP application providers, such as 8X8,
Net2Phone, Skype, Pulver.com, Callipso, Dialpad, Vonage, and
the Voice on the Net Coalition.
The commenting parties have, by and large, acknowledged the
significant changes that VoIP technology will bring. They differ,
however, as to the specific regulatory implications of that change.
A number of commenters, largely state commissions and rural
incumbent local exchange carriers (``rural ILECs''), argue that if VoIP
provides the functional equivalent of a voice call, then it should be
regulated in the same way as traditional voice telephony. Others argue
for a multi-factor test to determine whether a service should be
regulated or not. For example, the National Cable Television
Association argues that a VoIP application should be subject to the
same regulation as telecommunications service providers if the
following applies: (1) it makes use of 10 digit numbers under the North
American Numbering Plan; (2) it is capable of receiving calls from the
public switched telephone network at one or both ends of the call; and
(3) it represents a possible replacement for traditional telephone
service. However, NCTA also argues that if a service meeting all of
these criteria also uses IP protocol between the service provider and
the consumer, including use of an IP terminal adapter and/or IP-based
telephone set, it should be subject to minimal regulation. Still
others, such as AT&T, SBC, many of the high technology companies and
software providers, and all VoIP application providers, argue that
functional approaches or factor approaches are doomed to obsolescence
as technology develops, and that the Commission should instead broadly
classify services using IP technology, or at least those reaching or
leaving the customer in IP format, as information services.
Another strain of comments advocates a layered approach to
regulation. These commenters argue that the primary benefit of using IP
to transmit voice is that it allows industry to move from using
networks that are optimized for and dedicated to a single function,
voice, to a network capable of delivering multiple functions.
Therefore, regulation should reflect the fact that services and
applications are no longer tied to the physical infrastructure. If
dozens or hundreds of competing services and voice applications are
provided over the infrastructure layer, there is little or no
justification for continued common carrier regulation at those levels.
Rather, they argue that the focus of common carrier regulation, if any,
should be on underlying facilities, where issues of market power might
still exist.
Interestingly, differences on classification among commenters did
not necessarily translate to differences over jurisdiction. Some rural
ILECs, their trade organizations, many of the commenting state
commissions and NARUC argue that VoIP applications, if they are
classified as telecommunications services, can and should be regulated
at the state level. Other rural ILECs, the Federation for Economically
Rational Utility Policy, and virtually all companies interested in
offering VoIP applications, whether ILEC, IXC, CLEC, VoIP provider or
other high tech company, have argued that VoIP applications are
inherently interstate--that it is impossible to determine geographic
end points for calls when customers can use VoIP applications from
anywhere in the world, that IP networks ignore domestic and
international boundaries when transporting bits, thus rendering the
intrastate/interstate distinction meaningless, and that the Internet
and services provided over it have always been considered to be subject
to federal jurisdiction only.
With regard to whether economic common carrier regulation should
apply, high tech companies and VoIP application providers
overwhelmingly also agreed that there is no need for it. Many
commenters that argued some VoIP applications should be classified as
telecommunication services, nevertheless, also argued that they should
be subject to federal jurisdiction only and that the Commission should
forbear from applying economic common carrier regulation. The Illinois
Commission, while arguing that state and federal regulation should
coexist, with preemption only applying to state requirements that are
inconsistent with federal requirements, nevertheless thought that
extension of traditional utility regulation to emerging IP-enabled
services was unwarranted. Some state commissions and many commenting
rural ILECs concluded that VoIP applications should be subject to the
same level of regulation as traditional voice providers, although
America's Rural Consortium pointed out that this parity could be
achieved through federal preemption of state regulation of voice
service and removal of regulations from both VoIP and traditional
providers.
There was general agreement among the commenters that universal
service, 911 and other social obligations of this type will continue to
be important in the new environment. There was, however, disagreement
as to how best to achieve these goals. VoIP application providers and
many of the technology-oriented trade groups tended to argue that
obligations like access to 911 should only be made mandatory over time
in response to a market failure, and that there has already been
significant progress through voluntary industry action. They also
argued that universal service and access charges should not apply until
broader reforms to these systems are completed, as otherwise the
Commission would impose unsustainable systems on a new technology.
Others argue for mandatory application of these requirements, with most
commenters focusing on specific areas: groups involved with advocating
for disabilities access argue that mandatory disabilities access
requirements should apply; some incumbent and rural ILECs that receive
support from the Universal Service Fund and access charges argue that
these obligations should apply pending changes in the system.
The Commission has received a wealth of comments that truly
represent views across the spectrum.
iv. recent actions
In addition to our work on the IP-Enabled Services Proceeding, the
Commission also is working on several petitions regarding VoIP in
addition to recently resolved petitions.
The Commission recently resolved the following petitions:
Pulver.com. As previously mentioned, on February 19,
2004, the Commission released an order resolving a petition for
declaratory ruling filed by Pulver.com. In that order, the
Commission found that Pulver.com's Free World Dialup Service
was neither telecommunications nor a telecommunications
service, but was instead an information service subject to
federal jurisdiction, and that state regulation conflicting
with this classification would most likely be preempted. This
order was significant in terms of clearly establishing that
Internet-only voice applications would be treated very much
like any other applications traveling over the Internet: as
being unfettered by federal or state regulation.
AT&T. On April 21, 2004, the Commission released an
order resolving a petition for declaratory ruling filed by
AT&T. In this order, the Commission denied AT&T's request to
exempt from access charges its use of VoIP in providing voice
service where AT&T only used the technology to transport calls
that originated and terminated on the public switched telephone
network, and did not provide any enhanced functionality, cost
savings, or net protocol conversion for the end user. This
transport was carried out as part of AT&T's conventional
service offerings and was transparent to the consumer. The
Commission, by issuing this decision, did not prejudge the
application of access charges to other types of VoIP service,
which are still subject to consideration in both the IP-Enabled
Services Proceeding and the Intercarrier Compensation docket.
Thus, this decision was explicitly limited to the factual
circumstances described by AT&T.
Petitions pending before the Commission are as follows:
Vonage. On September 22, 2003, after the Minnesota
Public Service Commission ruled that Vonage's service was a
regulated telephone service under state law, Vonage filed a
petition for preemption of this decision. Subsequently, Vonage
obtained a reversal of this decision from a federal district
court. An appeal of that court decision to the United States
Court of Appeals for the Eighth Circuit is pending, while
Vonage's preemption petition is still pending before the
Commission.
Level 3. On December 23, 2003, Level 3 filed a
petition for forbearance, requesting that the Commission
forbear from applying access charges to calls that originate or
terminate as Internet protocol calls on one end, with the other
end originating or terminating over the public switched
telephone network. Level 3 excluded from its petition those
areas served by rural ILECs as defined in section 251(f)(1) of
the Communications Act. The twelve month deadline for
Commission action in this proceeding is December 23, 2004, with
a possible extension of three months beyond that date.
SBC. On February 5, 2004, SBC filed a petition for
forbearance asking the Commission to find that services and
applications provided over Internet protocol platforms are
information services subject only to federal jurisdiction, and
as such to forbear entirely from applying Title II common
carrier regulation to such services. The twelve month deadline
for Commission action in this proceeding is February 5, 2005,
with a possible extension of three months beyond that date.
Inflexion. On February 27, 2004, Inflexion filed a
petition for declaratory ruling, asking the Commission to find
that calls made to or from Inflexion's VoIP service in areas
that it characterizes as underserved are exempt from access
charges. Inflexion's definition of underserved areas
incorporates areas served by rural ILECs that Level 3
explicitly declined to cover in its petition.
In addition to the IP Enabled NPRM, these petitions also present
opportunities to resolve specific questions related to VoIP. In
addition, many of the issues that relate to universal service and
intercarrier compensation are being considered by the Commission in
other proceedings. Moreover, the Commission expects to release in the
near term a Notice of Proposed Rulemaking addressing issues regarding
VoIP and the Communications Assistance for Law Enforcement Act
(``CALEA'') raised by the Department of Justice, the Federal Bureau of
Investigation, and the Drug Enforcement Agency in their recently filed
petition for rulemaking. Consideration of VoIP issues will not delay
broader resolution of those dockets, and the Commission hopes to move
expeditiously on all fronts.
v. conclusion
The Commission is very aware that VoIP is leading to significant
developments in telecommunications markets challenging traditional
industry economics as well as traditional regulatory institutions and
processes. Perhaps most importantly, from the perspective of a
regulator, VoIP is changing the nature of the relationship between
consumers and providers. It would be irresponsible, as well as
counterproductive, for any regulator to impose obsolete regulations
reflexively, simply in order to protect a legacy regime. The examples
of mobile wireless service and the Internet are perhaps most
instructive in this respect. In both cases, the technologies have
developed free of many of the regulatory requirements and regimes
applicable to traditional monopoly common carriers, notwithstanding
long and hard fought battles to impose such requirements. Indeed, it
took an Act of Congress before the FCC could preempt counterproductive
state regulation of cellular service. Today, the American consumer and
economy are far better off because of the deregulatory course that
helped these two industries develop, innovate, expand and now touch
millions of lives, brining considerable benefits to consumers, and
generating substantial economic growth. All without traditional common
carrier utility regulation.
The Commission's decisions regarding VoIP will have the farthest-
reaching consequences of anything the Commission will consider in the
near future. The Commission is considering nothing less than the future
of electronic communications for today's and future generations.
Consumers, the many industries that rely on information technology and
advanced communications in their business, the telecommunications,
computer and software industries, and the investment community are all
counting on the Commission to get it right. It also is not an
overstatement to say that the world, also, is watching how the U.S.
decides to treat these services. Telecommunications regulators and
policy makers in other countries want to know whether the United States
will create an environment that is conducive to growth and investment
in innovation, or an environment where the United States becomes mired
in reflexive, legacy regulation and regulatory processes that stifle
progress.
Clearly, I believe we should look forward rather than backwards.
When dealing with revolutionary new technologies we need to start from
the perspective of how to best create the world we all want to live in,
rather than applying tired regulations quickly being rendered obsolete.
The Commission, however, is constrained by the Act, which divides the
world into regulated telecommunications services and unregulated
information services. While the Commission certainly has some ability
to fine tune treatment of new technologies given its discretion and the
flexibility granted to it by Congress, the Commission is still
constrained by this structure. If you believe that VoIP and other new
technologies are transforming the telecommunications market in ways
that cry out for new regulatory approaches, you may need to consider
whether the tools the Commission has today are appropriate for the
task.
In the meantime, the Commission will continue forward, and the
guidance and leadership of Congress is crucial to the success of its
process. On behalf of the FCC, I want to thank you, Mr. Chairman, for
calling this hearing, and we look forward to working with you and other
members on these issues.
1 The Commission did receive a petition regarding VoIP services as
early as 1996, and received another following the release of its 1998
report to Congress regarding universal service, often called the
``Stevens Report.'' There was not, however, any consequential activity
following these petitions.
Mr. Cannon. Thank you, Mr. Pepper.
Mr. Langhauser.
TESTIMONY OF JOHN LANGHAUSER, ESQ., VICE PRESIDENT, LAW, AND
CHIEF COUNSEL, CONSUMER SERVICES GROUP, AT&T CORPORATION
Mr. Langhauser. Mr. Chairman, Congressman Chabot, thank you
very much for giving me the opportunity today to discuss voice-
over-Internet protocol.
AT&T intends to provide IP-based services to all of our key
markets. In March of this year, we launched our residential
VoIP service, known as AT&T CallVantage. Today, it is offered
in 32 States and Washington, D.C. That is 100 major markets in
4 months. Voice-over-IP is a foundation for our future. Indeed,
because of recent Federal policy changes concerning unbundled
network elements, VoIP will soon become AT&T's only viable
alternative for offering new competitive local service, but
unfortunately, only for those customers who can obtain and
afford broadband.
Much of Silicon Valley will benefit from an IP explosion.
Small businesses will profit from a portable VoIP services. The
resulting productivity gains can, in turn, drive broader
economic growth. These benefits will only emerge if
policymakers bring certainty and stability to the regulatory
rules surrounding VoIP. It should be regulated with a light
hand at the Federal level. In particular, it should not be
saddled with the current, flawed intercarrier compensation
markets.
VoIP cannot be allowed to develop into yet another Bell-
controlled technology. AT&T's ability to compete for customers
and invest in VoIP will be hampered if the Bells are allowed to
continue such anticompetitive practices as refusing to sell
broadband to customers purchasing voice services from a
competitor.
Let me provide more details: VoIP holds the promise of
choices and capabilities far beyond today's circuit-switched
offerings. In the IP environment, voice services and futures
can be provided and enhanced much more efficiently. VoIP could
well become the killer application that drives broadband
adoption.
AT&T fully intends to lead the VoIP revolution. We have
invested heavily to upgrade our total network, including some
$3 billion last year alone. Our consumer offer includes
advanced features such as the ability to check voice mail from
your computer and dynamically control your feature settings
yourself.
AT&T has long been committed to providing a choice for
local telephone service. Today, we provide local service to
about 4.7 million residential customers and 4.5 million
business lines. Virtually all the residential customers are
served using Uni-P. But VoIP, which requires broadband, is not
an option for the majority of our current local customers.
Legislative and regulatory certainty, which fosters VoIP as
an emerging technology, will encourage AT&T to invest in VoIP
and remain in the domestic residential voice market.
Congressman Pickering's bill provides for Federal regulation
and access and universal service reform. Chairman Sensenbrenner
and Congressman Conyers have offered legislation ensuring that
the Telecommunications Act is not construed to supersede the
antitrust laws.
We commend these efforts to restore the potential for a
competitive communications marketplace. We agree with those who
have said that VoIP must provide access for the disabled, 911
and must cooperate with requests from law enforcement. In
contrast, the universal service and intercarrier compensation
schemes of today are badly broken and require substantial
revisions before they can or should be applied to VoIP.
The FCC's delay in reforming these regimes benefits the
incumbents. Nothing about VoIP threatens universal service. The
real threat is the shrinking base of interstate revenues that
support the system today. AT&T has proposed moving to a flat
rate charge for each telephone number, which would include
VoIP, be competitively neutral and provide a solid foundation
for the fund. The FCC has full authority to implement such
reforms, but AT&T's petition has been pending for over 15
months.
Current access charge regulations are especially
unworkable, but the FCC's long-promised overhaul of
intercarrier compensation has yet to occur. VoIP collectively
serves several hundred thousand customers nationwide, while the
Bells serve nearly 100 million. It makes no sense to require
nascent VoIP providers to subsidize the monopoly local
carriers. Nobody demanded that the auto industry subsidize the
buggy manufacturers or the computer industry the typewriter
providers.
If VoIP is to deliver on its promising potential, then, it
cannot be regulated like plain old telephone service. Today, we
are asking for your support to keep that from happening so that
all Americans can realize the competitive and innovation
benefits of VoIP technology.
Thank you again for inviting me here today, and I look
forward to your questions.
[The prepared statement of Mr. Langhauser follows:]
Prepared Statement of John J. Langhauser
Mr. Chairman and Members of the Committee, thank you very much for
giving me the opportunity today to discuss Voice Over Internet
Protocol. AT&T intends to provide IP-based services to all of the key
market segments--large enterprises, call centers, small offices,
teleworkers, and residential users. We've been delivering Business IP
services since 1997, and in March 2004, AT&T launched its residential
VoIP service, known as AT&T CallVantagesm Service. Today it
is offered in 32 states and Washington D.C.--that's 100 major markets
in less than four months.
VoIP is the convergence of voice and data, with the potential to
bring choice and innovation to the telecommunications marketplace. If
allowed to grow unimpeded by legacy regulation, it will offer consumers
an increasing array of advanced features not available today to enhance
ways of communicating and simplify busy lives.
VoIP will also contribute significantly to the business world.
Teleworkers using VoIP will be far more productive and successful at
their work. VoIP will bring the kind of advanced voice and data service
now available only to Fortune 500 companies within the reach of small
and medium-sized businesses. Much of Silicon Valley is now in the IP
value chain and will benefit from an IP explosion in this market. The
resulting productivity gains can, in turn, drive broader economic
growth and raise standards of living for all Americans.
These benefits will only emerge, however, if policymakers act
promptly to limit regulation to a light-handed regime that allows VoIP
to develop free of burdensome regulation at the federal, state or local
level. Imposing today's inflated access charges on nascent VoIP
providers would severely impede the growth of VoIP. VoIP providers are
already paying substantial compensation to local exchange carriers for
the right to terminate traffic on their networks. They should not have
to subsidize their established competitors as well. With respect to
intercarrier compensation, the priority should be on reform rather than
burdening innovative new services and technologies with an outmoded
regulatory model heavy with subsidies.
VoIP seeks only the favorable regulatory treatment that other
emerging voice technologies have received. Relieving wireless carriers
of much incumbent economic regulation led to amazing increases in
investment, innovation, and consumer adoption. While the FCC authorized
commercial cellular services in 1981, in 1992 there were only nine
million subscribers. It was only when Congress empowered the FCC in
1993 to forbear from imposing legacy regulation on cellular providers
and made significant additional spectrum available for their use, and
the FCC exempted them from tariffing and entry and exit regulation,
that wireless use exploded. By the end of 2002, there were 141.8
million subscribers nationwide.
Many questions regarding whether to foster VoIP's emergence as a
competing technology or saddle it with legacy wireline regulation and
stifle its development are currently before the FCC. Unless and until
Congress acts, we believe it is incumbent on the FCC--indeed,
consistent with its congressional mandate--to take steps to establish
an appropriate regulatory framework that encourages investment and
innovation. The FCC's unreasonable delays to date in resolving even the
most preliminary regulatory issues surrounding VoIP do not meet the
basic requirements of sound administrative procedure.
Firm resolve in enforcing the pro-competitive policies of the 1996
Act is a necessary first step on the path to VoIP. Business cases based
on a ``build it and they will come'' approach to deploying mass-market
local facilities have been almost uniform failures. Congress recognized
this when it passed the 1996 Telecommunications Act and provided for
resale and the unbundled network elements platform (UNE-P) to enable
carriers to develop local subscriber bases which would support a
migration to building their own local facilities. In both the business
and residential markets, however, facilities-based service requires a
significant concentration of demand to be economic. To the extent
multiple networks can ever economically compete, a significant customer
base is needed to justify network deployment and reduce the risk of
such deployment. Today, AT&T provides local service to more than 4.3
million residential lines and 4.5 million business lines, including 1
million small business lines. We have done so through a combination of
facilities-based entry--we have invested billions of dollars in our own
local facilities since 1996--and the lease of Bell network elements.
In the wake of the regulatory certainty generated by the U.S.
Supreme Court TELRIC decision and the highly contested FCC Triennial
Review announcement in February 2003, AT&T entered local service in
thirty-seven additional states for a total of forty-six states.
However, in view of the regulatory uncertainty generated by this same
Administration and FCC's decision not to appeal the D.C. Circuit
reversal of the February 2003 order, AT&T has had to re-assess the
business case for local and long distance residential markets. The re-
introduction of regulatory uncertainty has strangled mass-market local
competition in its very infancy.
AT&T strongly believed that the D.C. Circuit decision is both wrong
and flatly contradicts Supreme Court precedent, but the Administration
refused to appeal it. The Bell companies' refusal to negotiate
reasonable interconnection and leasing agreements in the wake of that
decision has left AT&T no choice but to stop incurring the costs to
solicit new local phone customers in its residential markets. With the
Bell companies poised to raise wholesale rates for UNE-P as early as
November, we will simply not be able to provide a bundle of local and
long distance services economically and build the customer base that so
greatly facilitates our VoIP deployment.
Without appropriate legislative and regulatory treatment, VoIP
could develop into yet another technology controlled by the Bells.
Without competition, the Bells may digitize voice but have no incentive
to develop the myriad software applications for advanced and converging
features that truly promise to change the way we communicate. Remember
that these are the same companies that held back the deployment of DSL
services to residential customers for some ten years so customers would
have to take their other, higher priced services. Only when forced by
competition, in that case the deployment of broadband Internet
connections by cable operators and competitive carriers Covad and
Rhythms, did the Bells finally introduce mass-market, high-speed
Internet access service. Similarly, without the threat of losing
customers to a VoIP rival, the Bells will have no incentive to invest
in and deploy this new technology or the rich array of features it is
capable of providing.
The prospects for competition will be thwarted, if the Bells are
allowed to continue such anticompetitive practices as refusing to sell
their broadband service to customers that purchase voice service from a
competitor, or requiring their broadband customer to purchase a local
exchange line as well. The Bells' ability to restrict broadband
customers from subscribing to anyone else's voice services has
attracted widespread attention and many states have sought to prohibit
these anticompetitive practices--but they continue. Unless we and other
competitors are allowed--quickly--to fairly compete for voice
customers, we will not be able to invest in VoIP, and VoIP will become
just another Bell-controlled technology.
Legislation proposed by Chairman Sensenbrenner and Congressmen
Conyers would greatly further the goal of competition and protect
against the incumbents' anticompetitive practices by reaffirming the
application of the antitrust laws to the telecommunications sector. It
would prevent the Bells from attempting to perpetuate their monopolies
by unlawful tying or refusing to share network facilities with
competitors at reasonable prices. AT&T strongly endorses this
legislation.
Let me provide more detail on each of these points.
voip holds the promise of new choices and more capabilities
VoIP holds the promise of choices and capabilities far beyond
today's circuit-switched offerings. It enables consumers to enhance and
tailor their communications services to their needs and lifestyles at
competitive prices. It very well could be the ``killer app'' to drive
widespread broadband adoption for which we have all waited. It could
also be an important economic driver for our nation.
AT&T fully intends to lead the VoIP revolution for businesses and
consumers. We have invested heavily to upgrade our total network,
including some $3 billion in 2003 alone, and we have already met our
goal of providing VoIP service in the top 100 markets in the country
this year.
With VoIP, voice service is just another ``hosted application''
like e-mail, letting customers take their phone numbers wherever they
go and access connections over any device, such as a standard home
telephone, wireless phone, or computer. AT&T's consumer offer, AT&T
CallVantagesm Service, for example, already includes a host
of new advanced features and the ability for consumers to dynamically
tailor and control their feature settings via website or telephone any
time day or night as often as they want. Advanced features include
advanced call forwarding features and ``do not disturb'' options that
enable consumers to program the service so that the phone answers to
their needs instead of the other way around. AT&T
CallVantagesm Service provides subscribers a ``Personal Call
Manager Web Site,'' which gives subscribers complete, dynamic control
over their answering, voice mail and other capabilities. Subscribers
can check their voicemail from their computer and forward information
as a ``talking'' e-mail. Innovations, and the resulting benefits to
consumers, will only increase as device manufacturers, network
operators, service providers and application developers take full
advantage of the ability to integrate voice, data and advanced computer
capabilities.
In the IP environment, voice services can also be provided much
more efficiently. IP technology allows for more efficient routing of
calls than traditional circuit-switching. These efficiencies enable
more innovative service packages. Current VoIP offerings allow
customers that have a broadband connection to place unlimited calls
anywhere in the country for a single, low monthly price. The Alexis de
Tocqueville Institution concluded earlier this year that government at
all levels could save $3-10 billion annually--up to 60% of their
current phone bills--by replacing circuit-switched service with VoIP.
You should not, however, think of VoIP as ``cheap phone service.'' It
promises to be lower-cost, yes, but with a host of new communications
management features and options that go well beyond today's ``plain old
telephone service'' (``POTS'').
a ``hands-off'' approach is the appropriate regulatory approach for
voip
Allowing VoIP to develop in the marketplace is a critical step to
bringing this Nation into the digital age. AT&T welcomes the fact that
many Members of Congress support a ``hands off'' approach to VoIP and
have introduced legislation that would bring the benefits of
competition and innovation to the telecommunications marketplace.
Congressman Pickering, for example, has proposed a deregulatory
approach to VoIP that acknowledges the need to reform the current
subsidy system and allow this nascent service to flourish.
Fundamentally, VoIP legislation must recognize that because the
Internet is global in nature and these services will be deployed
nationwide, a federal framework makes the most sense. Forcing U.S. VoIP
providers to develop 50 different varieties of VoIP services to comply
with a patchwork of potentially inconsistent state regulatory burdens
could hinder their development. Continuing regulatory uncertainty as to
federal versus state regulation of VoIP, or worse yet, the regulatory
uncertainty that would accompany implementation of 50 different regimes
to regulate VoIP, would inevitably impede investment, in direct
opposition to the federal policy of creating a regulatory framework
that promotes the growth and development of broadband services. Indeed,
recognizing the critical importance of a uniform, nationwide
deregulatory environment, the Pickering bill prohibits even the FCC
from regulating VoIP applications except as specifically authorized.
Such an approach will be critical to VoIP's ability to lead the
United States' broadband revolution: the United States' broadband
penetration lags behind that of a number of other countries. Many of
those who have higher rates of broadband penetration have recognized
that allowing VoIP to flourish will contribute to a positive economy
and allow them a competitive edge in the global marketplace. The United
States, too, must protect its economic interests by abandoning outdated
policies favoring and protecting incumbent revenue streams.
Allowing emerging VoIP services to develop free of unwarranted,
legacy regulation allows carriers to design the service to respond to
customer needs and interests, and to remain flexible in their business
plans as customer preferences emerge, rather than be bound by a
government-dictated vision of what the service should include and what
is a benefit to consumers. As FCC Chairman Powell stated on February 8,
2004:
the case for government imposed regulations regarding the use
or provision of broadband content, applications and devices is
unconvincing and speculative. Government regulation of the
terms and conditions of private contracts is the most
fundamental intrusion on free markets and potentially
destructive, particularly where innovation and experimentation
are hallmarks of an emerging market.
The wisdom of this approach was confirmed recently--in reverse--
when a new local VoIP provider concluded it could not stay in business
in any of the states in which it had been operating when faced with an
order from Washington state regulators to register as a telephone
company and comply with the same laws as other long distance companies
(including the payment of access charges). Regulators must be able to
approach VoIP service flexibly if they expect VoIP to bring its
promised benefits to consumers and competition.
We agree with those who've said that providers of VoIP services
must meet important social policies. Providing access for the disabled,
enabling public safety (911) response, and cooperating with lawful
requests for information from law enforcement are issues that the
industry can and is working to resolve, and AT&T is taking a lead in
these efforts. While government has a legitimate role in ensuring that
these things get done, it should refrain from regulating this new
service in these or other areas in the absence of a demonstrated
failure on the part of industry to act appropriately. We may also need
some flexibility and reasonable transition periods to achieve these
policy goals, in recognition of the fact that IP-enabled services
present different technical and operational issues than those
considered when the legacy common carrier regulations were originally
developed. Nonetheless, we believe that the enormous flexibility and
power of VoIP promises to address these issues in ways superior to
current circuit-switched technology.
Other legacy regulations, however, will require substantial
revisions before they can or should be applied to VoIP. The universal
service and intercarrier compensation schemes are irremediably broken
and indeed, no longer make sense even in the context of the
traditional, circuit-switched wireline telephone services for which
they were developed. Prompt attention to these fundamental flaws in
existing regulation is urgently needed so that IP-enabled services are
not burdened with costly and outdated, broken regulatory schemes that
would prevent VoIP services from reaching their potential.
Let me emphasize that nothing about VoIP threatens universal
service. The problem with the universal service fund (USF) is that it
is still supported by a shrinking base of interstate revenues for
traditional telecommunications services. A growing fund with a
shrinking base cannot be sustained. It's long past time for the
universal service systems in this country to be reformed, and we
support VoIP being part of the broader reform of the USF system. We
think VoIP providers should contribute to a reformed universal service
system--in a sustainable, fair, and nondiscriminatory manner.
AT&T has proposed a contribution system to the FCC that would
replace the current revenues-based system with a numbers/capacity-based
system that is fairer and more sustainable. Under our proposal,
providers would pay a flat-rated charge for each assigned telephone
number that maps to a unique end-user's service. Services known as
``special access services'' would also be assessed a flat-rated charge
based on the capacity of the service. Such a system would be
competitively neutral, and would provide a solid foundation for the
fund because the use of numbers is increasing. Moreover, VoIP providers
would be fully included, since their service nearly always uses
traditional phone numbers--as would future technologies, which are
likely to retain the use of numbering. The Commission has full
authority to implement such reforms--but it has yet to do so. In fact,
it has delayed action on every major VoIP issue it has confronted thus
far. It took the FCC 18 months to decide the merits of a petition AT&T
filed--and nearly as long to rule on a similar one filed by
pulver.com--regarding the regulatory consequences of offering VoIP
services. Such delay fails to meet basic notions of fairness in
administrative procedure--and harms competition. Carriers need clarity
and predictability in the marketplace if they are to make the risky
investment needed to make VoIP widely available.
Especially unworkable and in need of attention are the Commission's
vastly outdated access charge regulations. The access charge scheme was
developed decades ago to ensure that whenever a long distance company
used the local network, it would subsidize local service by paying
grossly inflated rates to the local carrier. While there was much in
this framework to which one could object, it remained workable as long
as local carriers and long distance carriers operated in separate
markets. Its infirmities became apparent and unsustainable when those
carriers entered each others' markets, and even more so when wireless
companies and ISPs became the largest users of access minutes. For that
reason, eight years ago, Congress ordered that implicit subsidies,
including those in access charges, must be eliminated. Unfortunately,
they still remain in place eight years later, and the FCC's long-
promised overhaul of its intercarrier compensation regime has yet to
occur. While Chairman Powell commendably opened a proceeding examining
needed revisions as one of his first acts as Chairman, that docket
remains unresolved more than three years later.
Now, the emergence of VoIP services dramatically underscores the
urgent need for the Commission to meet its responsibilities under the
APA and complete intercarrier compensation reform. Whatever the
historical wisdom of requiring interexchange carriers to subsidize
through inflated access charges local exchange carriers operating in a
different market, it makes no sense to require nascent VoIP providers
to subsidize the monopoly local exchange carriers against whom they
will be directly competing. VoIP providers collectively serve only
several hundred thousand customers, while the Bells serve nearly one
hundred million. Having VoIP providers subsidize the incumbents cannot
be the right answer. No one demanded that the auto industry subsidize
the buggy manufacturers, or the computer industry the typewriter
providers, or email the post office.
The far better course is comprehensive reform of the intercarrier
compensation regime to eliminate market distortions and opportunities
for regulatory arbitrage. Nearly every segment of industry agrees that
there is a need to move to a rational system in which all traffic is
exchanged under the same compensation rules. Even OPASTCO--the
Organization for the Promotion and Advancement of Small
Telecommunications Companies--acknowledges the need for intercarrier
compensation reform, although its members directly benefit from current
law. In a hearing before the Senate Commerce Committee on June 16,
2004, Arturo Macias, current Chairman of OPASTCO, testified that
although it was important for rural carriers to be able to recover
their costs of providing access to their networks, current intercarrier
compensation rates are not cost-based, and OPASTCO would not oppose
their reform.
Until that reform occurs, however, these legacy access charges
should not apply to IP-enabled services, even on an interim basis. Even
Qwest agrees with us that providers using IP at either the origination
or termination points of telephone traffic should not pay access
charges, even if the traffic at some point traverses the public
switched telephone network. The imposition of above-cost access charges
on IP telephony would radically alter the economics of providing VoIP
services and would severely impede the development of those services.
Contrary to the Bells' claims, VoIP providers do not get a ``free
ride'' when they don't pay access charges. To the contrary, VoIP
providers typically purchase what are known as Primary Rate Interfaces
(``PRIs'')--a type of high-speed line--or other local business lines to
connect to the public switched telephone network, and they pay for
termination as an enhanced service.
AT&T agrees that affordable service needs to be maintained in high-
cost areas of the country. Applying the legacy access charge regime to
VoIP, however, is not the way to achieve this result and would prove
counterproductive and market-distorting. It simply slows the deployment
of new and desirable technologies while driving users away.
______
Today we are at a crossroads where we must call upon your
leadership. If VoIP is to deliver on its promising potential--and offer
something truly different in the marketplace--then it cannot be treated
and regulated like plain old telephone service. We are asking for your
support to keep that from happening, so that Americans can finally
realize the long-promised benefits of widespread competition and the
innovations promised by VoIP.
Thank you again for inviting me here today, and I look forward to
your questions.
Mr. Cannon. Thank you, Mr. Langhauser.
Mr. Cordi.
TESTIMONY OF STEPHEN M. CORDI, ESQ., CPA, DEPUTY COMPTROLLER
FOR THE MARYLAND COMPTROLLER OF THE TREASURY, STATE OF MARYLAND
Mr. Cordi. Thank you, Mr. Chairman, Congressman Chabot.
Good morning and thank you for the opportunity to testify on
the regulatory aspects of voice-over-Internet protocol.
I am here on behalf of the Federation of Tax
Administrators. The FTA is an association of tax agencies of
all 50 States, New York City and the District of Columbia. My
comments today will be limited to the State and local aspects
and preemptions found in H.R. 4129, a bill that has been
referred to this Committee, and I will leave the regulatory
matters to those with expertise in those areas.
We have four major objections to the preemption of State
tax authority found in H.R. 4129: it discriminates against
other providers of voice communications services; It represents
a considerable fiscal cost to the State governments; it runs
completely counter to the country's established system of
federalism; and no case has been made for preempting State and
local tax authority.
Our reasoning for this is as follows: first, voice-over-IP
is an exciting new technology, and it is always tempting to
want to nurture a new product. But in doing so, we must not
forget existing and competing products. One of the primary
goals of tax policy is to treat similar taxpayers and similar
goods and services in a similar fashion. Government should not
choose the winners and losers in the marketplace through tax
policy.
One thing is clear: preempting State taxation of voice-
over-IP services will put land phone services and wireless
phone services at a competitive disadvantage. The technologies
are different, but they are functional equivalents. All three
industries provide voice communications services. All three,
and those that will emerge in the future, should be taxed in a
similar manner. Preempting State taxing authority with respect
to voice-over-IP goes 180 degrees in the wrong direction.
Secondly, State and local governments currently collect
about $10 billion annually on sales of telecommunications
services. The Congressional Budget Office has estimated that
preempting the taxation of voice-over-IP could reduce State
revenues by at least $3 billion a year within 5 years, and that
may be, as the Chairman said in his opening remarks, an
underestimation of the growth of voice-over-IP. And we
anticipate that preemption would also accelerate the growth of
voice-over-IP and quickly lead to the loss of much of the
remainder of the $10 billion.
Beyond that, it is possible that H.R. 4129, as written,
would also prohibit the States from collecting some substantial
part of the $7 billion we now collect in property, income and
sales taxes from existing telecommunications providers as
assets are shifted to voice-over-IP. In short, preempting the
taxation of voice-over-IP services will have a major and
adverse impact on State and local fiscal systems and constitute
a de facto repeal by the Congress of a source of taxation
available to State and local governments for over a century.
Third, broad preemption of State tax authority to tax
voice-over-IP services will represent a radical departure from
historical practice for Congress. Both the States and Federal
Government are sovereign entities with the right to tax.
Congress has heretofore generally limited preemption of State
and local taxation to narrow situations where there has been an
excessive reporting burden or a compelling need for uniformity.
Finally, not only is this a uniquely broad preemption, but
no evidence suggests that there is a compelling national
interest in eliminating the State taxation of this technology.
It has certainly not been showing of a need for preemption on
the basis of complexity or lack of uniformity. There may indeed
be bona fide issues that need to be resolved on how State and
local taxes should be applied to voice-over-IP services. Any
new type of business creates the need for new regulations and
policy adjustments. But it certainly seems excessive to preempt
the better part of an entire tax on the theory that there may
be issues that need to be resolved.
Any issues can best be dealt with through an honest and
constructive dialogue involving all affected parties. And in
conclusion, voice-over-IP services hold significant potential
to improve our society. Congress can promote competition,
preserve State tax authority and protect the public interest by
refraining from any policy that unnecessarily preempts State
and local taxing authority, discriminates against traditional
voice communication providers and disrupts State and local
fiscal systems.
Thank you.
[The prepared statement of Mr. Cordi follows:]
Prepared Statement of Stephen M. Cordi
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to appear before you today on the
important question of the appropriate federal policy regarding the
regulation and taxation of Voice over Internet Protocol (VoIP)
technology. My name is Stephen M. Cordi. I am the Deputy Comptroller
for the State of Maryland, and I appear before you today on behalf of
the Federation of Tax Administrators, an association of the principal
state tax administration officials from the 50 states, D.C. and New
York City.\1\ I am the Immediate Past President of the Federation.
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\1\ The Federation of Tax Administrators is an association of the
state tax agencies in the 50 states, District of Columbia and New York
City with principal programs in information exchange, training and
intergovernmental coordination. FTA policy regarding federal preemption
of state taxing authority was adopted by the membership at its 2004
Annual Meeting. That policy statement is attached.
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My comments today will be limited primarily to the issue of
potential federal legislation that would eliminate, limit or otherwise
preempt the ability of state and local governments to impose taxes on
VoIP services. There are important issues involving potential federal
preemption of state authority to regulate VoIP services, but I leave
those to others with expertise in the area. Further, I will direct my
comments principally to the state and local taxation provisions in H.R.
4129, The VoIP Regulatory Reform Act of 2004, that was introduced by
Rep. Pickering and others since that is the clearest expression of
potential federal policy in existence today.\2\
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\2\ H.R. 4129 would, among other things, prevent any state or
political subdivision from imposing any tax, fee or other charge on the
offering or provision of VoIP services. It would also preempt any state
regulation of VoIP services and would limit the extent to which the
Federal Communications Commission could regulate VoIP services.
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The thrust of my comments today can be summarized as follows:
Congress should not take action at this time that would preempt the
ability of state and local governments to impose taxes on VoIP
communications services. Such an action would discriminate against
other providers of voice communications services using technologies
that are subject to tax and would deprive states and localities of
significant amounts of revenue in the very near future. In addition,
such an action would run counter to our system of federalism and to the
traditional Congressional posture of not intervening in state taxing
matters. Finally, we believe that no case has been made that would
warrant federal intervention at this point, and that federal action of
the sort envisioned in H.R. 4129 would obviate any possibility of a
cooperative state-industry dialogue to identify and resolve any issues
that may be present in state and local taxation of VoIP services.
federal preemption would create discriminatory system
There is no doubt that VoIP is an exciting new technology that
holds significant potential to provide enhanced, more convenient
communications services to some consumers and businesses at costs that
are sometimes lower than they face today. Each week seems to bring the
announcement of another VoIP offering, not only from start-up
companies, but also from established telecommunications companies of
all types.\3\ At its core, however, we must remember that VoIP is one
of several competing technologies that can be used for providing voice
communications services.
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\3\ There are several types of VoIP services and a variety of
consumer features available from various VoIP providers. Some VoIP
services do not use the publicly switched telephone network (PSTN), but
estimates are that currently 90 percent of all VoIP calls either
originate or terminate on the PSTN.
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One of the primary goals of tax policy is to treat similar
taxpayers and similar goods or services in a similar fashion when it
comes to taxation. Only by taxing similar or functionally equivalent
services in the same fashion, can we ensure that consumer choices are
based on price and quality of service and not distorted by tax policy.
Preempting state and local taxation of VoIP services as proposed in
H.R. 4129 would create an unprecedented tax preference for one form of
voice communications services (VoIP), and it would place other
traditional land-line and wireless voice providers at a substantial
competitive disadvantage because they would still be obligated for
existing state and local taxes. Such a policy creates an unlevel
playing field that works against those providers not employing VoIP and
will cause a misallocation of resources in the economy. Enacting such a
discriminatory arrangement will undoubtedly create additional calls for
federal intervention in an effort ``to level the playing field.''
In considering the appropriate tax policy for VoIP, Congress must
consider function over form. That is, the function of VoIP is to
provide voice communications services, and it is the functional
equivalent of other forms of voice communications services. It should
be taxed in a manner similar to other voice communications services to
avoid distorting consumer choices and to avoid placing Congress in the
position of choosing winners and losers from among competing
telecommunications providers. H.R. 4129 runs directly counter to that
proposition.
If Congress chooses to base its tax policy decisions on the
technology employed in VoIP services, rather than the function of VoIP,
it is likely to find itself continually one step behind the technology
curve and facing a continuing set of requests for intervention. A prime
example of this result is the passage of the Internet Tax Freedom Act
in 1998 that was written when dial-up access was the predominant, if
not exclusive, method of providing Internet access. Within a relatively
short period of time, however, other technologies developed and not all
were treated in the same manner under the federal law as juxtaposed
against state tax systems. This led to demands for further
interventions and preemptions by the Congress as it considered
extending the Act this year.
In short, preempting state and local taxation of VoIP services,
while leaving the taxation of other forms of voice communication
intact, constitutes an unsound tax policy that discriminates against
traditional voice communication providers. This is not to suggest that
there are not likely bona fide issues of the manner in which state and
local taxes should be applied to VoIP services. Such issues can only be
identified and resolved through an honest and constructive dialogue
among the affected parties. Adoption of policies such as those
contained in H.R. 4129 would prevent such a dialogue from occurring and
create a discriminatory tax environment.
federal preemption would have a substantial revenue impact on
states and localities
According to the Congressional Budget Office, state and local
governments collect about $10 billion annually in general purpose
transaction taxes (including sales taxes and telecommunications excise
taxes) on sales of telecommunications services at the present time.\4\
Further, CBO estimates that under current projections, it is expected
that up to one-third of traditional voice traffic would migrate to VoIP
within five years, thus implying a revenue loss to states and
localities of upwards of $3 billion annually by that time. Enacting a
tax exemption for VoIP services would undoubtedly accelerate that
revenue loss and lead to the loss of a substantial portion of the $10
billion in a relatively short period of time.
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\4\ Letter to Senator Lamar Alexander from CBO Director Douglas
Holz-Eakin regarding S. 150, the ``Internet Tax Nondiscrimination
Act,'' dated February 13, 2004. This does not include about $3-4
billion in 911 and Universal Service Fund fees that would be preempted
under the bill as well.
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In addition, depending on interpretations of the breadth of the tax
preemption in H.R. 4129 as well as the interpretation of the state
prohibition on regulating VoIP services in the bill,\5\ a substantial
portion of the $7 billion that CBO estimates states and localities
collect from business taxes (property taxes, business profits taxes,
and taxes on purchases) on telecommunications providers could be
preempted as well.\6\ That is, as assets of traditional
telecommunications providers are shifted to VoIP services or are taken
out of service due to the migration of traffic to VoIP providers,
revenue from these business taxes will also be lost to state and local
governments.
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\5\ In the bill ``regulate'' is defined to mean ``any governmental
action that restricts, prohibits, limits or burdens, or imposes any
obstacle, obligation or duty, or interferes with, [a VoIP] application
\6\ For further discussion, see Michael Mazerov, ``Proposed `Voice
over Internet Protocol Regulatory Freedom Act' Threatens to Strip
States and Localities of billions of Dollars In Annual Tax Revenues,
Center on Budget and Policy Priorities, Washington, D.C., July 20,
2004.
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In short, a broad preemption of state and local taxation of VoIP
services would have a substantial detrimental revenue impact on states
and political subdivisions. It would, in fact, constitute a de facto
repeal by the Congress of an entire category of taxes on which states
and localities have long relied--taxes on telecommunications services
and providers. States and localities would have two alternatives to
deal with the preemption: reduce expenditures or raise the revenues
from other taxpayers. Given that approximately 55 percent of all state
and local expenditures are for education, social services and public
safety, the impact of expenditure reductions will likely be felt in
services considered critical by the citizens.\7\
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\7\ U.S. Bureau of Census, Preliminary Estimate, State and Local
Government Finance, 2002 Census of Governments, found at http://
www.census.gov/govs/www/estimate02.html.
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federal preemption would run counter to our system of federalism
Our system of federalism is founded on the concept that both the
states and the federal government are sovereign entities and that both
possess the sovereign ability to tax. The shared sovereignty with
regard to taxation is a core element of political sovereignty.
Moreover, our system is based on a precept that state and local elected
officials, respecting the safeguards afforded all citizens by the U.S.
Constitution, are in the best position to determine the appropriate tax
policy for their citizens and for economic activity occurring within
their borders.
Despite its plenary authority to regulate interstate commerce,
Congress historically has been respectful of state tax sovereignty and
has substantially limited the instances in which it has preempted state
taxing authority.\8\ Congressional preemptions (beyond those assuring
respect for the Supremacy Clause) have generally been limited to
relatively narrow areas where there has been a substantial showing of
excessive burden or need for uniformity. Examples include the
individual income tax treatment of workers in interstate commerce,
treatment of nonresident pension income and property taxation of
certain interstate transportation industries. In addition, Congress has
in some instances fostered state tax sovereignty. Examples include the
federal Tax Injunction Act that prohibits the federal courts from
restraining the collection of a state tax where an adequate remedy
exists in the state courts and the Mobile Telecommunications Sourcing
Act that endorsed a resolution to the need for a single rule in
sourcing wireless telecommunications services that was developed by the
industry and the states.
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\8\ For a more complete discussion (as well as an evaluation of
certain current federal preemption proposals), see Charles E. McLure,
Jr. and Walter Hellerstein, ``Congressional Intervention to State
Taxation: A Normative Analysis of Three Proposals,'' State Tax Notes,
March 1, 2004.
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Enactment of H.R. 4129 or similar policies preempting states from
taxing a particular technology would represent a substantial departure
from traditional Congressional positions and our federal system.
Congress would be substituting its judgment for the judgment of state
and local elected officials and effectively determining that states and
localities should no longer tax voice communications services.\9\ This
stands in sharp contrast to the rich tradition of federalism on which
our government was founded and which has served our country well. As
our national and state economies have evolved, states have developed
their tax policies with an eye toward accommodating new technologies as
members of a stable marketplace. This system has worked well, and no
evidence has been presented to suggest that state tax policies have
impeded the growth of new technologies or state or national economies.
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\9\ Most observers expect a rapid migration to VoIP even without a
tax preference. Michael K. Powell, the chairman of the Federal
Communications Commission, was quoted as saying, ``We think pretty
quickly there's no reason why virtually any communication service
[won't be Internet-based].'' Yuki Noguchi, ``Identity Crisis,'' The
Washington Post, Oct. 23, 2003. Preempting taxation of VoIP would
constitute a de facto repeal of all taxes on voice telecommunications
because all or nearly all forms of voice telecommunications would move
to VoIP.
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case for federal policy of tax preemption has not been made
We believe that enacting the broad regulatory and tax preemptions
contained in H.R. 4129 is unwarranted in that there has been no showing
of a need for federal intervention.\10\ Moreover, a policy of
preemption would likely impede or preclude the development of sound
long-term policy for VoIP that treats all voice telecommunications
providers in an equitable fashion and that is respectful of the tax
sovereignty of the states.
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\10\ The U.S. Senate has twice taken action to clarify that its
actions are not intended to preempt state and local taxation of VoIP
services. The Internet Tax Nondiscrimination Act (S. 150) as passed by
the Senate in April 2004, contains a provision contained in a Manager's
Amendment stating, ``Nothing in the Act shall be construed to affect
the imposition of taxon a charge for voice . . . service utilizing
Internet protocol. . . .'' On July 22, 2004, in a mark-up of its
version of the ``VoIP Regulatory Reform Act'' (S. 2281), the Senate
Commerce Committee approved an amended version of the bill that does
not contain a preemption of state and local taxing authority and a
dialogue with the sponsor of the bill established that the bill was not
intended to preempt taxing authority.
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The types of VoIP services that will be offered are still evolving
as is the understanding of the issues involved in the taxation and
regulation of VoIP. On the tax front, there has not, to my knowledge,
been any attempt to demonstrate a need for federal preemption on the
basis of complexity or lack of uniformity. A review of recent tax
literature reveals only one article examining state tax issues
associated with VoIP,\11\ and the bulk of the issues identified in that
piece involve whether VoIP would qualify as a telecommunications
service under state tax statutes, not issues of complexity or
uncertainty that would make a tax on VoIP services difficult to
administer or comply with. While there may well be issues that should
be addressed, we do not believe it is appropriate to preempt all state
and local taxation on the theory that there may be issues to deal with.
Through efforts such as the Mobile Telecommunications Sourcing Act and
the Streamlined Sales Tax Project, states have shown their willingness
and ability to work with stakeholders to address bona fide issues of
complexity and uniformity. A broad federal preemption would preclude
any such discussions.
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\11\ Walter Nagel and Ari M. Lev, ``VoIP: The Second Battle of the
Internet Tax Wars,'' State Tax Notes, June 3, 2004.
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conclusion
VoIP services hold significant potential to provide consumers with
more choices for voice communications at lower costs. As the technology
evolves, the legal framework governing VoIP will also evolve. There
will likely be a number of issues that will need to be addressed, but
they are best addressed through meaningful dialogue among affected
stakeholders that have a view and an incentive to create ``win-win''
solutions that benefit all parties. It seems that the prudent thing for
Congress to do at this point is to foster that dialogue by taking a
holistic approach to examining VoIP technology with an emphasis on
promoting competition, preserving state authority, and protecting the
public interest, rather than moving forward with a policy that preempts
state taxing authority, discriminates against traditional voice
communications providers, and disrupts state and local fiscal systems.
______
Resolution Seventeen
Preemption of State Authority to Tax
WHEREAS, the power to define the state tax system is a core element
of state sovereignty, and
WHEREAS, the United States Constitution establishes appropriate
bounds to the sovereignty of the states in the tax arena, and
WHEREAS, the system of federalism that is defined by the United
States Constitution further cedes to state and local governments the
responsibility for supplying the majority of the daily services due to
its citizens and residents, and
WHEREAS, a vibrant state and local tax system is essential to
meeting those needs, and
WHEREAS, the U.S. government has traditionally shown substantial
deference to the tax sovereignty of the states, and
WHEREAS, there is an increasing number of groups seeking to preempt
state taxation authority in particular areas, and
WHEREAS, federal preemption of state tax authority has the effect
of establishing a preferred class of taxpayer and shifting the tax
burden to other non-preferred taxpayers, and
WHEREAS, federal preemptions often have unintended consequences,
and
WHEREAS, our system of federalism can result in substantial
administrative compliance burdens for persons with tax responsibilities
in multiple states, and
WHEREAS, many of the legitimate goals that might be pursued in
preemptive legislation can be effectively achieved through cooperative
state efforts and improved uniformity among the states, now, therefore,
be it
Resolved, that the Federation of Tax Administrators respectfully
urges the Congress and the U.S. federal agencies to refrain from
enacting measures, taking actions or making decisions which would
abrogate, disrupt or otherwise restrict states from imposing taxes that
are otherwise lawful under the U.S. Constitution or from effectively
administering those taxes, and be it further
Resolved, that Congress should undertake an active program of
consultation with states as it considers measures that would preempt
state tax authority, and be it further
Resolved, that states should actively pursue such uniformity and
simplification measures as are necessary and effective in addressing
concerns of administrative burden in complying with the tax laws of
multiple states.
This resolution shall automatically terminate three years after the
Annual Business Meeting at which it is adopted, unless reaffirmed in
the normal policy process.
Adopted at the FTA Annual Meeting, June 9, 2004
Mr. Cannon. Thank you, Mr. Cordi. We are on a remarkable
roll here, where three out of three witnesses have done under 5
minutes.
Mr. Kirkland. I think the rule means that I get that much
time to myself now. Is that----
Mr. Cannon. Well, it depends on what you say. [Laughter.]
You keep us interested, you probably have a long time.
Thanks.
Mr. Kirkland, please go ahead.
TESTIMONY OF JAMES KIRKLAND, ESQ., GENERAL COUNSEL AND SENIOR
VICE PRESIDENT, COVAD COMMUNICATIONS GROUP, INC.
Mr. Kirkland. Good morning, Chairman Cannon and Congressman
Chabot. Thank you for offering me the opportunity to provide
Covad's perspective on voice-over-IP and how best to ensure
that this exciting new technology is rolled out as rapidly as
possible.
The Judiciary Committee's oversight in this area is as
important today as it has ever been, in light of recent
activity in the D.C. Circuit, and frankly, companies like Covad
who have invested around the 1996 act in competitive
businesses, investing hundreds of millions of dollars in
facilities at some point start to feel like there has been kind
of a bait and switch. In January, I read the Trinko decision,
where the Supreme Court discussed how the role of regulation
perhaps reduced the importance of antitrust scrutiny, and 2
months later, we have a major court decision that essentially
removes fundamental elements of the regulatory scheme, and we
are wondering, you know, where does the buck stop?
We need antitrust enforcement. We need rigorous antitrust
oversight. We also need market-opening regulation to facilitate
the introduction of new competitive technologies. I think in
the voice-over-IP area, this is a very exciting technology, but
it is easy to get lost in terms of what it means in the
marketplace and competition. And the new services that are in
the marketplace, companies like Vonage and AT&T's CallVantage
services, are essentially what we call applications or
software. They operate on a computer, but they do not directly
interrelate with the underlying broadband network.
These applications or software programs can be delivered
over any kind of broadband network, and the providers who
provide these services by definition do not control the
underlying transmission facilities that these services ride
over. They are like a Web browser or any other application that
rides over the Internet. They are simply software, and the
underlying transmission facilities are provided by either the
phone companies like DSL, by companies like Covad over DSL, by
cable companies over broadband facilities.
This is a critical point, because every time you hear about
a new technology, new forms of competition, there is a big
emphasis on, well, revisting the need for underlying regulation
of bottleneck facilities. The local phone network remains the
one ubiquitous set of loops that connects all homes and all
businesses in this country. While you hear a lot about new
technology, for example, the cable companies, they
predominantly serve residential areas. They do not serve the
small businesses of this country. All of the new technologies
you hear, broadband over power line and broadband wireless, are
many years away.
So for the foreseeable future, to the extent that you want
innovation and competition, companies like Covad will still
need to access that ubiquitous network of loops in order to
provide our services. In addition, you know, the history of
innovation is driven not just by the software or by the
application but also by the network. The software has an area
in which it can operate and function, but if you can combine
innovation in software with innovation in the network, you will
have a much better, more accelerated introduction of advanced
features, more of a productive spiral of innovation.
And so, for example, Covad is able in the voice-over-IP
arena not just to provide an excellent software package that
provides all the exciting features that we have been talking
about: an ability to dial phone calls off of your computer; a
single inbox that has all of your voice mail, email and faxes
in a single inbox; an ability to control those features, to
forward calls to different numbers on the fly, so if you are
going somewhere different for a weekend. And in order to do
that, however, we are also able to protect the voice quality of
the service that goes over that line because we control our
network.
I think I would just point out, you know, voice-over-IP is
here. Covad is launching the service in 100 cities. We recently
had our launch party in Washington, D.C., and we expect to be
nationwide by the end of this year. We raised $125 million in
new capital to fund this rollout, and we are very excited about
this technology, but procompetitive market regulation still has
a very critical role to play.
I think one other final point is I think the history of
innovation of this country shows that while large companies
have been a source of innovation, small companies have been a
very important source of innovation as well. So it is critical
that this Committee, via its oversight as well as the
legislative process preserve that competitive, those
competitive alternatives, and we appreciate your attention to
these issues and look forward to your questions.
[The prepared statement of Mr. Kirkland follows:]
Prepared Statement of James Kirkland
Good morning Chairman Cannon, Ranking Member Watt, and Members of
the Subcommittee. My name is James Kirkland, and I am the General
Counsel of Covad Communications. I would like to thank Chairman Cannon
for convening this important hearing on VoIP services, and for allowing
me the opportunity to offer Covad's perspective on ensuring the rapid
rollout of VoIP. At the outset, let me also commend Chairman
Sensenbrenner and Ranking Member Conyers for their foresight and
leadership in promoting the rapid deployment of VoIP services through
H.R. 4412.
The Judiciary Committee's oversight of the enforcement of the
antitrust laws is of particular importance today in light of recent
actions by a Federal court and the FCC. The D.C. Circuit's decision to
vacate the primary competition-enabling rules governing access to the
last mile of the telecommunications network created a vacuum which
places the large monopoly phone companies in the enviable position of
having a monopoly over a critical portion of the local phone network
with few regulations requiring they open those lines to competitors.
The FCC's efforts to fill this vacuum are critical, but unfinished.
These developments, coupled with the Supreme Court's decision in Law
Offices of Curtis Trinko v. Verizon limiting the applicability of the
antitrust laws with regard to activities governed by the
Telecommunications Act, force us to consider whether the large local
phone companies now have market power to limit what would otherwise be
a very vibrant VoIP marketplace. That is why it is so important for
this Committee to have this hearing today, and that is why we are
supportive of the Chairman and the Ranking Member's efforts to ensure
that the antitrust laws and procompetitive loop access requirements
continue to remain an appropriate tool to open local monopoly markets.
I would first like to discuss what Covad is doing with VoIP, then
give you an overview of and some key statistics concerning the VoIP
market, and finally touch on the key policy issues that are important
to this Committee.
Covad and VoIP
Covad will be at the forefront of the deployment of VOIP
technology. We were the first company to deploy mass market broadband
DSL services in the nation, and have invested hundreds of million of
dollars in building the leading nationwide facilities-based broadband
network, reaching nearly 50 million homes and businesses in 35 states.
Covad's broadband facilities reside in over 2000 neighborhood central
offices across the nation. Today, we continue to invest in facilities-
based competition. This year, Covad acquired a leading VOIP service
provider, Gobeam, and in March we raised $125 million in new capital to
help fund a nationwide VoIP rollout. By the end of 2004, Covad plans to
roll out its business-class VoIP services nationwide to 100 major
markets. In 2005, Covad will develop consumer VoIP services across its
nationwide broadband facilities. As its name suggests, Voice over
Internet Protocol based services bring the flexibility and capacity for
rapid innovation found in other IP enabled services to public voice
services. These services have traditionally relied upon the hard wired,
and relatively inflexible, capabilities of the public telephone
network. Covad's VOIP services illustrate the power of this combination
of voice and IP. Covad's services provide businesses with all of the
capabilities of expensive PBX systems, with little investment in
hardware. Each user receives a unique phone number to consolidate their
multiple phone numbers. Find me and follow me capabilities allow calls
to find you no matter what phone you are using, and are all
configurable in real time using a ``Dashboard'' web-interface to manage
incoming and outgoing phone calls through a computer. The service
includes a personal virtual fax number to handle all incoming faxes; a
unified visual mailbox to manage voicemail and faxes like e-mail; and
robust call logs and integration with Microsoft Outlook, allowing users
to make and return calls from their PC. Covad's VoIP services also
include easy to use web collaboration and voice conferencing tools.
These features dramatically enhance the speed and ease with which end
users can access the enhanced functionalities of VoIP telephony,
combining the familiarity of a traditional telephone handset with the
flexibility and power of a computer-based interface.
It is not an understatement to say that facilities-based VoIP
services truly hold the potential to revolutionize the
telecommunications industry, all within a few short years. Indeed, the
VoIP revolution is not just around the corner--it is already underway.
The U.S. VoIP market has been forecasted to grow to more than five
million subscribers by 2007, a five-fold increase over 2002 levels.
Furthermore, the Internet Protocol-PBX market, which has just under
100,000 lines today, is expected to grow to more than 1.7 million lines
by 2007. Covad adds a unique and critical ingredient to this
revolution--namely, its own nationwide, facilities-based broadband
network. Covad's management of last-mile broadband transmission
facilities enables it to offer VoIP services that rival the legacy
public switched telephone network in their reliability, quality of
service, and public safety features, such as access to 911.
The Importance of Facilities-Based VoIP Competition
Covad is able to provide innovative new services like VoIP because
Congress had the vision and the foresight in 1996 to create a flexible
regulatory framework to manage the transition from local telephone
monopolies to robust local competition. This transition is still at a
very early stage. The local telephone network remains the sole,
ubiquitous public infrastructure connecting virtually every home and
business in this country. By requiring that the local telephone
companies allow competitors to utilize and integrate these ubiquitous
loops into innovative, facilities based service platforms, competitors
can develop new and innovative services like VoIP.
Vigorous innovation in the provision of telecommunications services
requires that a service provider control both the ``application''
portion of the service it provides as well as the underlying
transmission capabilities used to carry a service. By controlling its
own broadband facilities, which utilize telephone company lines from a
customers' premise to central offices where Covad maintains its own
broadband points of presence, Covad is able to control the quality of
service it provides to its customers, and introduce innovative features
that are both software and network based. On the other hand, if the
lines which connect homes and businesses become the exclusive province
of a monopoly phone company in any area, the deployment of new
technologies like VoIP will be determined by the decisions and business
objectives of one, or at most two large incumbents that control
facilities in any market. Covad respectfully submits that the history
of innovation in this country has been driven as much, if not more, by
small entrepreneurial companies as large, well funded incumbents. If
VoIP is to truly flourish, there must be room for both small and large
competitors. With the competitive spur of smaller, often nimbler and
more focused competitors, the large incumbents are far more likely to
deliver on their promises of future investment in advanced facilities.
Without robust facilities-based competition from multiple players,
Covad believes that the revolutionary potential of VoIP may not be
fully realized, or may be realized much more slowly. At this initial
stage in the development of VoIP services, VoIP service providers that
do not operate their own broadband transmission facilities have had
some initial success in developing the marketplace for VoIP services.
For example, in a few short years, Vonage has grown its subscriber line
count to more than 100,000 consumers and small businesses across the
nation.\1\ AT&T recently announced its own entry into the third party
VoIP marketplace, with the rollout of its CallVantage Service. AT&T
plans to enter 100 major markets by year's end, and expects to sign up
1 million consumers and businesses for CallVantage services by year-end
2005.\2\
---------------------------------------------------------------------------
\1\ See ``Vonage Becomes First Broadband Telephony Provider To
Activate 100,000 Lines,'' Press Release, Vonage, Feb. 2, 2004
(available at http://www.vonage.com/corporate/press--
index.php?PR=2004--02--02--0).
\2\ See ``AT&T Ushers In New Era in Communication With Launch of
AT&T CallVantage Service--New Jersey,'' Press Release, AT&T, March 29,
2004 (available at http://www.att.com/news/item/0,1847,12989,00.html).
---------------------------------------------------------------------------
These services offer innovative features, but are limited by their
providers lack of control over the facilities used to carry them.
Indeed, as Banc of America Securities recently wrote,
Because they have no legacy voice business, the virtual
carriers, like Vonage, have every reason to press ahead
aggressively . . . But they have significant risks long term.
The current regulatory arbitrage from which they benefit
(namely the ability to circumvent access charges and the USF),
may go away eventually; they have little brand awareness or
reputation; they can't bundle multiple services; and they are
at the mercy of the infrastructure provider to maintain the
plant sufficiently; and, at least today, they can't offer a
quality of service (QoS) guarantee.\3\
---------------------------------------------------------------------------
\3\ See ``Straight Talk on VoIP,'' David W. Barden, et al., Banc of
America Securities Equity Research, April 15, 2004, at 4.
Control over and operation of underlying broadband transmission
facilities will confer significant advantages to service providers
---------------------------------------------------------------------------
offering integrated transmission and VoIP services, such as:
[the abilities] to control the quality of service, leverage
existing customer relationships and take advantage of their on-
the-ground field service networks to assist with customer
installation.\4\
---------------------------------------------------------------------------
\4\ See ``Everything Over IP,'' Glenn Campbell, et al., Merrill
Lynch Research Report, March 12, 2004, at 19 (available at http://
www.vonage.com/media/pdf/res--03--12--04.pdf).
For example, Covad's control over its network based facilities allows
it to use packet prioritization techniques to ensure that voice quality
is maintained even as a user downloads large files or watches streaming
media.
Competition in the underlying transmission facilities layer will
become increasingly more important over time in ensuring the
competitiveness of services and applications like VoIP. In other words,
to preserve and extend the competition being created by third party
providers of IP enabled services, it will become increasingly more
important to preserve and extend competition in the underlying
provision of broadband transmission services. Robust competition in the
broadband transmission facilities layer for competitors like Covad who
are unencumbered by legacy businesses will help ensure that the
exciting innovation being witnessed today in the provision of third
party IP enabled services like VoIP will continue unabated.
The Market Structure
Robust facilities-based competition in the provision of the
broadband services that VoIP requires does not yet exist. Amidst all
the hype over the broadband future and new technologies, the underlying
reality is stark. According to recent FCC data, the incumbent telephone
companies and cable providers control more than 93% of the nation's
broadband access lines.\5\ Moreover, many end users lack a choice even
amongst this limited set of two providers--for example, cable providers
have historically focused their network deployment in residential
areas, leaving most businesses with the incumbent telephone company as
their only broadband option. In fact, recent figures show that cable
penetration in the small business segment has actually dropped: ``We
projected cable modem would surpass DSL in this [the small business]
segment by year-end 2003. However, cable modem penetration dropped
precipitously in the small business market, or businesses with between
20 and 99 people. Cable operators also achieved limited success in the
remote office market, reaching only 4.2 percent of the market in
2003.'' \6\ As the Yankee Group now recognizes, ``DSL operators
dominate the U.S. [small business] broadband and enterprise remote-
office broadband market.'' \7\ Even more fundamentally, as both the
Department of Justice and the FCC have long recognized, duopoly
conditions are insufficient to produce competitive outcomes. Duopoly
competition is problematic not simply because the firm with the larger
market share may exercise market power, but also because both
participants are likely to have the incentive and ability to maintain
prices above competitive levels rather than attempting to ruthlessly
compete with each other, as they would need to do in a market with
multiple firms.\8\ Accordingly, as the FCC has concluded, ``both
economic theory and empirical studies'' indicate that ``five or more
relatively equally sized firms'' are necessary to achieve a ``level of
market performance comparable to a fragmented, structurally competitive
market.'' \9\ Most importantly, large incumbents with substantial
investments in existing facilities are less likely, left to their own
devices, to be aggressive innovators in disruptive technologies like
VOIP.
---------------------------------------------------------------------------
\5\ See High-Speed Services for Internet Access: Status as of June
30, 2003, Industry Analysis and Technology Division of the Wireline
Competition Bureau, Federal Communications Commission, at Table 5
(December 2003). Specifically, out of a total of 23,459,671 high-speed
lines (over 200kbps in at least one direction), RBOCs served 7,266,765
lines, other ILECs served 948,828 lines, and cable providers served
13,684,225 lines.
\6\ Yankee Group, Cable and DSL Battle for Broadband Dominance
(February 2004), at 4-5 (emphasis added).
\7\ Id. at 4 (emphasis added).
\8\ See United States Department of Justice/Federal Trade
Commission, Horizontal Merger Guidelines, Section 2 (rev. Apr. 8,
1997).
\9\ Report and Order, 2002 Biennial Regulatory Review--Review of
the Commission's Broadcast Ownership Rules and Other Rules Adopted
Pursuant to Section 202 of the Telecommunications Act of 1996, 18 FCC
Rcd. 13620, 289 (2003).
---------------------------------------------------------------------------
The incumbent telephone companies, with substantial legacy
businesses, face conflicting incentives in deploying VoIP, which
threatens their core circuit-switched voice businesses with VoIP
services:
SIP threatens to strand the Bells' core network . . . VoIP
customers bypass, obsolete and strand the Public Switched
Telecom Network (PSTN).\10\
---------------------------------------------------------------------------
\10\ See ``SIP Happens: How VoIP Technology `Re-unbundles'
Telecom,'' Scott Cleland, et al., Precursor Telecom and Media Research,
Apr. 12, 2004.
Given nearly $150 billion invested in circuit-switched telephone
plant,\11\ it is easy to see why incumbent telephone companies have
severely conflicting incentives in rolling out VoIP: ``the Bells will
be reluctant to cannibalize themselves . . .'' \12\ The Bells' history
in deploying DSL technology is instructive. As is now widely
acknowledged, the incumbent phone monopolies were slow to deploy ADSL
precisely because it threatened to cannibalize lucrative, legacy
monopoly services such as ISDN, T1, and second line telephone service.
---------------------------------------------------------------------------
\11\ See id.
\12\ See ``Straight Talk on VoIP,'' supra n. 3, at 4.
---------------------------------------------------------------------------
The cable industry also has conflicting incentives. Cable providers
have much stronger incentives to aggressively roll-out bundles of VoIP
and broadband transmission. After all, ``[r]elative to the Bells,
[cable's] major advantage is obviously that it doesn't have a legacy
voice business it needs to protect.'' \13\ Viewed in the broader
context of their own legacy monopoly, however, the picture gets
murkier. Under duopoly conditions, the ILECs and cable providers have
every incentive not to aggressively compete in each others' core
businesses:
---------------------------------------------------------------------------
\13\ See ``Straight Talk on VoIP,'' supra n. 3, at 5.
[W]e think cable operators are wary of being too successful . .
. the chief risk is that being too successful in VoIP could
induce the Bells to be more aggressive in the data and video
businesses (such as ratcheting up marketing activity and price
pressure). To put it another way, we think cable operators want
to be successful with VoIP only up to the Bells' threshold of
pain; maximizing the value of VoIP may not maximize the value
of the cable business if it invokes a predatory response . .
.\14\
---------------------------------------------------------------------------
\14\ See id.
[W]e think cable regards the potential Bell threat as much
larger [than virtual carriers like Vonage] and we think it is
highly unlikely to risk baiting the Bells with an aggressive
push into VoIP just to preempt what it regards as a smaller
threat.\15\
---------------------------------------------------------------------------
\15\ See id. at 6.
Indeed, alongside the flurry of press announcements announcing cable
---------------------------------------------------------------------------
operators' ambitious future VoIP rollout plans is a note of caution:
Most are wary of using big, new capital expenditures to take on
entrenched local phone giants, such as Verizon, while they are
also spending heavily on fancy, new set-top boxes and cable
modems. ``To dislodge a competitor that large takes a lot of
money, and cable operators are still loaded with debt,'' says
Richard Nespola, CEO of telecom consultant TMNG. ``Investors
would not jump for joy.'' \16\
---------------------------------------------------------------------------
\16\ See ``Cable Poised to Offer Phone Service--Just Not So Fast,''
USA Today, May 27, 2004.
This economic reality highlights another limitation of duopoly
competition in the IP transmission layer. To the extent that the cable
industry does pursue VOIP services, this is no guarantee that the
industry will make further investments to optimize their transmission
networks for VOIP. They may merely elect to provide VOIP services on a
``best efforts'' basis utilizing their existing internet access
capabilities. In this scenario, cable companies would not drive any
significant transmission layer innovation, but would simply be
``virtual'' voice carriers, like Vonage, over their own networks.
Unlike the established telephone and cable companies, Covad and
other competitors have no legacy business to protect. Thus, we believe
that including Covad's facilities-based VoIP offerings in the overall
marketplace will significantly speed the rate at which broadband
services like VoIP are adopted, and the development of innovations in
these services.
Lessons from Abroad
The experiences of countries like South Korea and Japan are
instructive. Both nations enjoy significant leads over the U.S. in
broadband penetration, and both nations have experienced explosive
growth in broadband deployment after adopting and enforcing unbundling
regimes. South Korea's market-opening measures included the formation
of a new company (Hanero) to compete with incumbent Korea Telecom,\17\
and opening Korea Telecom's network with requirements for local loop
unbundling, including sharing of the local loop.\18\ The result has
been thriving competition in the broadband market, with three main
suppliers,\19\ and rock-bottom prices (as low as $25 a month \20\) for
consumers. As a result, ``[a]t the end of June 2003, South Korea ranked
third in the world by the total number of DSL lines and first in the
world in terms of DSL penetration, with 14.27 DSL lines per 100
population.'' \21\
---------------------------------------------------------------------------
\17\ Id.
\18\ See ``Developments in Local Loop Unbundling,'' Organisation
for Economic Cooperation and Development, Working Party on
Telecommunications and Information Services Policies, Sept. 10, 2003,
at 49 (available at http://www.oecd.org/dataoecd/25/24/6869228.pdf).
\19\ Korea Broadband, PDS Consulting Short Paper, Version 12 June
2003.
\20\ Seoul's Strong Hand Sets Pace on Web, International Herald
Tribune Online, November 26, 2001.
\21\ South Korea, Korea Broadband Overview, Point Topic, October
20, 2003.
---------------------------------------------------------------------------
Japan's market-opening measure included being one of the first
countries to introduce line sharing, reducing line sharing charges to
the lowest rates in the world, reducing collocation costs, shortening
provisioning intervals, and unbundling backhaul facilities.\22\ As a
result of such actions, at the end of 2003, Japan led the U.S. in
broadband penetration, and a competitor named Softbank--not the
incumbent--was the top DSL carrier in Japan.\23\ The experiences of
South Korea and Japan show that maintaining competitive access to local
loop and transport facilities spurs the deployment and adoption of
innovative new services like broadband. Similarly, preserving
competition among multiple facilities-based providers of VoIP will
dramatically speed the pace at which VoIP services are developed,
deployed and adopted here in the U.S.
---------------------------------------------------------------------------
\22\ On a roll: Japan's success with DSL, Ovum Research, DSL:
Business Models for Exploiting the Local Loop, July 2002.
\23\ How the ``Japanese Miracle'' of Broadband Came About, Glocom
Platform, Japanese Institute of Global Communication, Colloquim #43,
December 24, 2003.
---------------------------------------------------------------------------
VoIP Policy Issues
Aside from minimal regulation ensuring access to the last mile of
the phone network, we believe that policy makers should adopt a
generally deregulatory stance towards VoIP. We believe there is
promising evidence that traditional social policy objectives can be met
without enacting new regulatory requirements for VoIP services. Of
particular importance to this Committee is law enforcement access to
communications conducted over IP enabled services. First and foremost,
I can tell you that Covad is committed to working with all law
enforcement agencies to ensure that those officials have access to all
the information from a VoIP call that they currently have access to for
a regular phone call. In fact, we have complied with such requests in
the past. In addition, last December, the National Emergency Number
Association (NENA) and the Voice on the NET (VON) Coalition, of which
Covad is a member, announced a voluntary agreement on approaches to
provide VoIP subscribers with basic 911 service, and to work together
to develop solutions for enhanced 911 functionality.
Furthermore, we believe that many critical social policy objectives
can be met by focusing on enforcing and rationalizing existing
telecommunications service regulations, rather than by extending them
to information services like VoIP. For example, we generally believe
that regulators should refrain from imposing legacy access charge
regulations on VoIP services, and instead should focus their efforts on
reforming existing regulations to develop a comprehensive intercarrier
compensation mechanism. Similarly, rather than imposing new universal
service obligations on information services like VoIP, we believe that
regulators can help safeguard universal service by rationalizing the
existing contribution mechanism, so that all providers of broadband
transmission services contribute equitably. In sum, we believe that the
enforcement of existing regulations on broadband telecommunications
service providers like Covad, combined with voluntary industry
collaborative efforts and standards setting, can meet critical social
policy objectives like public safety and universal service--without
imposing intrusive new forms of regulation on information services like
VoIP.
Conclusion
Mr. Chairman, Members of the Subcommittee, we are in the midst of a
revolution in the telecommunications industry. We are moving away from
the limitations of traditional phone service towards all of the
enhancements, efficiency gains and innovation that VoIP makes possible.
We are moving away from competition through legacy circuit switches to
facilities-based competition over packet-switched broadband networks.
Because of all that, now more than ever this Committee's oversight and
stewardship of the antitrust laws is crucial. I hope that we can work
with you in the future on these very important issues.
Thank you again for this opportunity and I welcome questions from
the panel.
Mr. Cannon. Thank you, Mr. Kirkland.
The Chair recognizes the gentleman from Ohio, Mr. Chabot,
for 5 minutes.
Mr. Chabot. Thank you, Mr. Chairman.
Unfortunately, I have a flight in less than an hour, and
security being what it is these days, one never knows how long
it is going to take to get through security. So I will yield my
time to the Chairman to grill the witnesses here this morning,
and I want to thank them for their very interesting and
informative testimony, and my staffer is here as well, so we
will be following very closely and look forward to working with
all of you in the future on this important technology.
Thank you. I yield to the Chair.
Mr. Cannon. Thank you. I thank the gentleman and appreciate
your being here today to help us getting started.
I want to apologize to the minority, which is not here.
Both Mr. Watt and Mr. Delahunt asked that we defer the hearing.
Both recognized the commitments by the members of the panel,
and since Mr. Kirkland had already embarked from California to
arrive, we suggested that we would go forward with the hearing.
And we will try and keep the interests of all parties in mind
as we ask some questions. Actually, the ``we'' is not royal.
The ``we'' is actually me, I think, here today. So I appreciate
your attendance, and I know that is at some sacrifice coming
from across the country. I appreciate that, Mr. Kirkland, and
thank you for your testimony.
You know, Mr. Kirkland, you just mentioned the issue of
small companies and how they relate here, and I think that is
actually one of the most interesting issues before us. My
district has a huge amount of information technology, and
having the rules clear on VoIP is important. So you have a few
genius type guys who with some few thousand lines of code can
come up with an entirely new product or concept that transforms
the world.
If you have VoIP available, it seems to me that is
important. I would actually like your thoughts on that Mr.
Kirkland and also Mr. Cordi, but in addition, if I could just
point out that we had a company--I think it was in Washington,
yes, the Washington State regulators found that VoIP provided
by a local company called Local Dial was a telecommunications
service. This was a very tiny company and then ordered Local
Dial to register and comply as such, which included the
remission of access charges.
About a week later, Local Dial shut down, because it
concluded it could not comply with the order and stay in
business. Is this not a clear demonstration of the destructive
power of taxation and that in an environment where we want to
create a fertile field for innovation, taxation in this new
area may actually be deathly?
And Mr. Kirkland, do you want to comment and then Mr.
Cordi?
Mr. Kirkland. Yes, this is why we support the approach
taken in the Pickering legislation. We do believe that a very
light regulatory touch on voice-over-IP is critical. This
technology is very exciting, but it is very much in a nascent
stage, and the kinds of entrepreneurs that you described as
well as even larger companies would struggle with a 50-State
regulatory regime over voice-over-IP. So we are very supportive
of that approach. We are also supportive of a very light touch
with the caveat that I discussed in my testimony, and that is
structural regulation of the telecommunications market remains
critical, and in fact, it will enhance the rollout of these
technologies.
So we are very sympathetic, and even with larger companies,
there are substantial costs involved in complying with the
whole myriad of State regimes, and so we do think the Federal
level is the appropriate level for policy here.
Mr. Cordi. Mr. Chairman, on the tax question, we certainly
do not deny that compliance with State tax requirements and
local tax requirements presents some burden. There is no
question about that. But we do not think that the first
reaction of the Congress should be because of that burden to
preempt State taxation in its entirety. It is clear to us that
to create this preemption creates an unlevel playing field
which threatens the remainder of a very large source of State
and local revenue.
The States and taxpayers have proven that they can work
together to address burden problems, and I think we feel
strongly that we should be given a chance to do so.
Mr. Cannon. Can I just follow up with that, Mr. Cordi, for
a moment, and ask you to help balance for me the burdens. Let
me say it this way: you have this new technology. Mr. Pepper
referred to it as comparing VoIP and traditional telephony with
a garage sale and an Ebay sale, and I think that, literally,
the magnitude of difference is that much. Maybe the same thing
is that you have stuff in your garage you want to sell; one is
more efficient.
There is another element here of differentiation, which is
that we cannot even imagine the kind of tools, the kinds of
products that may become available as people look at this. So
those products, in my experience, and I have--we have had some
large IT companies, and one of the funniest things I have ever
watched in my lifetime is we had a fellow named Ray Norda who
ran one of our great companies, and he had the view that he
should fire 10 percent of his people every year. And so, every
year, he would have a 10 percent layoff, and these guys would
all go out, and they would say, well, I have got three offers
from big IT companies, and I have five buddies who each have a
new IT idea that they are working on, and before the bubble, of
course, that was a lot more attractive.
I will say that most of those guys are back to work now,
which is very nice. But I have lived with, and I actually did
venture capital with some of these companies. So the
amazingness of some of the ideas is what I think we ought to be
aware of in the future. But, you know, there are all kinds of
problems with a start-up. In the first place, if it is really a
good idea, and it is really going to threaten the
establishment, it gets absorbed pretty quickly, and the world
changes. And, of course, the major companies in America have
proved that they can be adaptive, led, by the way, by AT&T,
which did an audacious thing 5 years ago or 6 years ago to
enter this space.
So what I would like you to do, Mr. Cordi, is to sort of
respond. I understand that this is a source of cash, and in
fact, if I might just go a little bit further, I heard an
estimate the other day that the cost of switching, the cost of
providing a phone call over the Internet, a VoIP phone call, is
less than one-fifteenth of a switched call, and I think it is
probably significantly less than that, and the scaling makes it
even less.
But in a context where you have a shrinking cost base, if
your taxation stays at a relatively constant percentage, your
revenues are going to shrink anyway. As those revenues shrink,
as we are in a market where new ideas emerge that make the
world a better place and which drive the whole economy, because
but for the last couple of years when we have had a little bit
of a slowdown, the information technologies have driven State
revenues at a remarkable pace.
Is there not a reason for the States to back off and say we
probably ought to let this grow?
Mr. Cordi. Well, I guess first of all, the number we are
talking about here is not a small number, because we perceive
this as threatening the whole source of revenue.
Mr. Cannon. Now, when you say the whole source of revenue,
you mean the telecommunications taxation.
Mr. Cordi. In general; certainly, the money we take in from
landline phone services and from this. And it gets worse to the
extent that this preemption would facilitate----
Mr. Cannon. Right.
Mr. Cordi.--the move of business in that direction.
Mr. Cannon. That was a long question, so let me break it
down in pieces. As you look at a reduced cost of services, you
either have to expand the rate of taxation, or your revenues
are going to fall. Is that not a concern?
Mr. Cordi. Well, our taxes are based on the charges in
general, not on the costs. And so----
Mr. Cannon. Well, if it is a percentage of the charges by
the phone company, except for some of the fixed costs; there
are some fixed taxes, and there are some percentage taxes. If
the cost declines, that is, if the cost of providing the
service declines, and you are in a highly competitive
environment, which we are, you are going to see a decline in
the cost or in the charges that the phone companies make and
therefore a decline in revenues.
Mr. Cordi. Revenues will go down, Congressman. You are
quite right. And that will present a problem for local policy
makers. And to the extent that they need that revenue, they are
either going to have to increase rates for their services or
find other sources of revenue or cut expenditures. I do not
think there is any other alternative. I am sorry; you were
about to say something.
Mr. Cannon. Let me just go a little bit, a step further. I
met with AT&T recently to see their VoIP product in
anticipation of this hearing, and the woman who made the
presentation said this is a $34.95 price, but for the first 6
months, it is $19. So, I said, well, does the $19 fee require
some long-term contract, or if prices decline in the future,
you know, and I sign up, am I going to have a reduced price?
And there was some confusion, and finally, one of the guys
said look: we are in a market where prices are declining. You
will be lucky to maintain that $19 price. So the introductory
hook price is likely to be the high end of the long-term price,
and you are talking about a service that retails for $34 but is
selling for $19 and is going to fall to $8 or whatever I would
like. You set your prices, not me.
So in that environment, you are looking, and now, of
course, the QWest has a naked DSL, meaning you can do just DSL
without a line. That means--I use QWest at home. My bill
recently went from $150 to $75 with virtually all of the same
services. I cannot get DSL where I am right now, although I
think that is coming in the near future. When I get DSL, I will
be able to have a line charge--they have got two, now,
standards. One is 512K, I think the other is 1.7 meg.
So for the same price as one line today, which is not
taxed, by the way, because currently, at least, Utah is not
taxing, I will get DSL service, and then, for $19 or some other
amount of dollars. So for less than two-thirds of what I am
paying right now, I am going to have all of the telephony that
I can use, because I think that includes long distance if I use
AT&T's product; I am not sure what the QWest product is. I know
that my bill is going to go down in the future, and even my
underlying DSL service is going to go down as other competitive
services come on board.
So I am looking at a reduction in my phone bill today of a
third and probably a reduction to about half or less over the
next year or two or three. That means your revenue base is
declining like crazy, and your constituents are not going to
let you keep that cost up, do you think?
Mr. Cordi. Well, I think you are completely correct. The
likelihood is that revenues may come down here, and that will
present a revenue problem for State governments. But I would
argue we do not want to aggravate that. That is going to happen
regardless of what you do here. We do not want to aggravate
that by creating a preemption that sort of takes all of it out
of the picture and over a short period of time.
Getting back to the underlying problem, which is dealing
with the burden question, I mean, what we see here is the big
players, AT&T already, you know, pay taxes around the country.
They have existing systems to do that. The burden here will be
incremental. The new players, for the most part, will not be
subject to our reach because of nexus questions, that we will
not have the authority to reach a player that is out in
California in Maryland unless he has got some presence there.
And so, I see for the startup people a period of time
during which they are not going to have this tax obligation
until they become more present or unless Congress passes
something like the streamlined sales tax which would provide a
tax payment requirement without regard to nexus.
Mr. Cannon. This is a real complicated issue, and I really
actually want to hear from our other panel members. But I am
not letting you off the hot seat, because this is the dialogue
that we need, that is really important. And I apologize for
giving such long questions, but the context, I think, is
important.
And now, you have touched on several different things. If I
might just deal with SSTP for a moment, the streamlined sales
tax program, it seems to me that we just got a letter from,
which we will make part of the record without objection----
[The information referred to follows:]
Mr. Cannon.--the National Governors Association and the
National Council of State Governments, the National League of
Cities, the U.S. Conference of Mayors and the National
Association of Counties which pretty much lays out in brief
your main points.
What we have, I believe here, if I can just make a
statement, is an attempt by people who live in the status quo
to strangle the emerging future, which is better for us all. I
liken it to the golden goose. It is laying eggs of great value
to society and to the States and to State revenues in
particular. And I might say that it has implications for the
rest of the world.
To the degree that we scale up, it makes it easier for
people in other parts of the world to get these services. We
are now talking, a group of us are trying to work with Haiti to
get a WiFi system on the cheap there that would allow people
there to change their lives dramatically by having medical
resources they do not currently have by having agronomists help
them with their crops by having a market like Ebay's market to
sell their products.
You know, the biggest employer in Afghanistan today is a
Utah company called Overstock.com. They employ the largest
number of people and the largest number of women. So we have a
bunch of women who have made carpets for their whole lives now
make their carpets and sell them directly on Ebay.
Overstock.com creates a context where they assure quality and
delivery, and you have made the world a dramatically better
place in Afghanistan.
So the issue here is not what happens in Maryland or in
Utah so much as it is what happens throughout the whole world.
And I cannot overemphasize the fact that the tools that we can
make available very cheaply like Overstock.com has done are
much more important in the long run than the soldiers who risk
their lives day-to-day there in the parts of the world that are
unstable.
So the transformation that we are dealing with here, the
discussion that we are having about VoIP is not a discussion
about the tax health of any particular State or one industry
over another or one technology over another but the health of
the world in a very real sense. That said, by way of admonition
and maybe by counsel for you, it seems to me that if I were in
the State's position, I would be saying we have the telephone
revenues and the Internet tax moratorium. We have got the SSTP
and what that provides for us, and then, we have got the
business activity tax. And those three things combined
represent the future of taxation by the States.
And to resist mightily on the Internet tax moratorium seems
to me to be counterproductive for the other two. And I think
that Mr. Delahunt, who serves on this panel as well and who is
the leading minority pusher of the SSTP agrees entirely with me
on the subject.
First of all, am I right about the relationship between
those three different taxes and the future, and secondly, is
there a way that we can get the various groups together so that
we can come up with a rational decision instead of strangling
the baby as it is born?
Mr. Cordi. We need to all be talking, you know. The State
governments disagree vociferously that the business activity
tax should be related to anything else, and we do not see that
as a reasonable price for either the streamlined sales tax
legislation or, for that matter, an acceptable Internet tax
freedom act. We see that as simply unrelated. You know, for the
most--for many States, the cost of that exceeds any conceivable
benefit from the streamlined sales tax. So State governments, I
believe, resist the linking that you have suggested.
Mr. Cannon. Perhaps we can come back to that, but stepping
back, am I correct about the importance of these new
technologies? And should there be a relationship between the
Internet tax moratorium and the SSTP? In other words, could the
States give up the potential revenues that are going to decline
anyway in the context of improved revenues through the SSTP?
Mr. Cordi. Well, we are talking on these telecommunications
taxes upwards of $10 billion. I do not have off the top of my
head what the conceivable numbers are on the streamlined sales
tax, but I am not sure they are in that range. Forgive me,
Congressman, for not knowing that off the top of my head.
Mr. Cannon. You know, I have seen lots of different
numbers. Business Week had a number about a month ago of $35
billion lost to the States through sales over the Internet.
That seemed a little high to me, but that is one of the numbers
that is out there.
Mr. Cordi. It seems very high to me, and as you know, the
streamlined sales tax legislation has thresholds in it that
really take out a lot of the potential revenues. And so, I do
not think the number is anywhere like that, Congressman, but I
do not have the numbers in front of me.
Mr. Cannon. That is right, but, you know, the MTC number
which we are talking about, the $10 billion, I think, came
mostly from the MTC, the Multistate Tax Commission, represents
a number that we have already agreed here, I think, is going to
decline significantly just because the charges that are made to
the customer are going to decline. So it is not $10 billion
versus some portion of $35 billion; it is a shrinking $10
billion against a growing other source. And so what I am asking
is, is the question I am asking relevant to the States?
Mr. Cordi. I think the question deals with the Internet tax
freedom act and the streamlined sales tax. The answer is--yes,
although there is not a whole lot of overlap between the two
proposals.
Mr. Cannon. That is right.
Mr. Cordi. There is some, but, you know, you can discuss
the two of those separately.
Mr. Cannon. That is true, but, of course, the States have
held up our version of the Internet tax in the Senate, and I
think they did that without a lot of thought. What I am
wondering is is there a possibility of getting the folks
together that are actually thinking about this and changing the
paradigm among the States?
Mr. Cordi. I think that probably, the Federation of Tax
Administrators is not the key player here.
Mr. Cannon. Right.
Mr. Cordi. I think you need to be dealing with the National
Governors Association and the NCSL and the other senior----
Mr. Cannon. There are other players. You guys are sort of
the----
Mr. Cordi. Humble tax collectors.
Mr. Cannon.--smart guys, though, with all due respect, and
I am hoping that you will take up the burden.
Mr. Cordi. Yes, sir.
Mr. Cannon. Let me just point out: there is a difference
between the BAT. The reason I raise them in the same context is
because to the degree that the States need revenues, they need
clarity of rules, so that, in other words, I am not using the
BAT to bat the States over the head but rather to say we need
to have clarity about how revenues are generated so that
business can operate in an environment that is predictable, and
that seems to me to be the major connection there.
Let me shift here. Thanks, Mr. Cordi. I appreciate this.
You know, this is a real difficult topic, and it is difficult
in large part because of the fundamental transformative nature
of what we are dealing with here.
And so, Mr. Kirkland, if I could just ask a couple of
questions of you, how many companies do you know of that are
doing VoIP, and can you give me a sense of the size? You have
the monsters, but you also have the small companies and the
real startups.
Mr. Kirkland. A lot of companies have talked about doing
voice-over-IP. AT&T, obviously, showed some leadership in the
space. Vonage is another company that has a lot of voice-over-
IP customers. We acquired a company called Go Beam that focuses
on the small and medium-sized business, and they were venture-
backed and running, you know, basically trying to raise their
next round, and we are now taking their product and launching
it nationwide.
When we bought it, they had about 13,000 line equivalents.
There are--it runs the gamut. I do not know if you read--there
was an article, I think, in the Wall Street Journal this
morning about a company called Skype that basically just allows
downloadable software so you can make free calls over the
Internet so long as the person on the other side has the same
software on their computer.
So there is a whole range of companies providing these
services. I think in the aggregate, it is still probably less
than 0.3, 0.1 percent of the total number of communications
lines out there, so it really is a nascent technology. But that
is what is great about it. There are probably companies that
none of us have heard of here that are providing the service
and a lot of diversity out there.
Mr. Cannon. Let me ask a question, Mr. Kirkland, of you,
and Mr. Langhauser and others may want to comment on this as
well. I think, Mr. Langhauser, that you announced yesterday
that you are leaving the local market. So you are facing some
pretty significant transition in your business. You mentioned,
probably when we were talking beforehand that probably about
only 20 percent of the homes in America have broadband. But you
pass more than 80 percent of the houses in America, as I
understand it; is that not correct, with your broadband
services?
Mr. Langhauser. Actually, we offer broadband connectivity
only in partnership with other companies, including Covad.
Mr. Cannon. Yes; thank you.
But Covad, Mr. Kirkland, Covad passes, with your
partnerships, with QWest, with AT&T, how many homes do you pass
in America?
Mr. Kirkland. Our network, as we said, we are a facilities-
based company. We actually have our own facilities in 2,000
central offices throughout the country. All we use are those
local loops to connect to our own DSL equipment. We pass about
50 million homes and businesses in the United States, so that
is approximately half the country; generally the top 100
markets.
Mr. Cannon. My sense is that about between cable and DSL,
85 or 90 percent of the homes have access to if they do not use
broadband; is that right, Mr. Pepper?
Mr. Pepper. That is right. We estimate--it is hard to know
precisely, but we estimate between 80 and 90 percent, 85 and 90
percent of households have broadband available to them through
either their cable company or through DSL, trough the incumbent
carriers and providers or competitors like Covad.
Based upon the latest numbers that we have seen in terms of
industry reports, about 25 percent of American households now
subscribe to some form of always-on, high-speed Internet
service. And we also believe that some of the more exciting new
technologies to provide broadband, especially in rural areas,
are with wireless networks. We estimate that there is between
1,500 and 2,000 small wireless Internet service providers, many
of them using unlicensed bands and unlicensed devices to
provide broadband in rural communities that do not have DSL or
cable modem service available.
Mr. Cannon. And those wireless services are broad enough
bandwidth to support VoIP?
Mr. Pepper. Yes.
Mr. Cannon. Mr. Langhauser, you talked about VoIP being the
killer app. What does that mean in the market? I mean, if you
have all of these people who have access who have chosen not to
take broadband because of the cost, because they do not get the
benefit, what does it mean? And may I ask also, we have had a
lot of confusion in pricing. QWest's price for very narrow
broadband was up to $70, $69.95 for a significant period of
time. That was not the kind of thing that anybody except the
real geeks wanted.
As the uncertainty settles out, as prices fall, will prices
fall, and will the cost of VoIP services fall, and what will
that do to the market, in your estimation?
Mr. Langhauser. What I mean by VoIP possibly becoming the
killer app is, as you point out, houses are passed by
broadband, but for a number of reasons, consumers have not
subscribed in overwhelming numbers. It is about 25 percent. And
they need a reason to pay the $30, $40 a month for broadband.
Some people are reluctant to use it for narrow band email, and
it may not be useful for narrow band email.
This may be the application, especially as we add to it and
enhance it that gives consumers a reason to have that broadband
connection into their house. What is exciting about this
service are some of the applications that you can put on top of
the voice traffic. Mr. Kirkland mentioned some of the features.
There are going to be more. And these are going to provide a
real opportunity for entrepreneurial companies to help us
develop features that we could put on our service.
The VoIP pricing so far has been extraordinarily
competitive, almost frighteningly competitive for a service
that is just being rolled out, and I expect it will continue
that way, and competition tends to lower prices.
Mr. Cannon. I think of thrilling as opposed to frightening,
but I am on the other side of the equation.
You spoke earlier, Mr. Langhauser, about taxing by phone
number. Now, at this point, I am pretty anxious not to see any
taxes go any way, and so, you can you a little bit of
opposition there, but does that not have some inherent
problems? For instance, my understanding is that most VoIP
services, I can get an area code where I want it. You know, if
my mother lives in Utah, and I am out here, I can use a Utah
area code so she can call me directly, or if I want the status
of a Manhattan area code, I can do that as well.
And by the way, I live in two places, and many people have
different places that they locate. Does that create a problem
in your mind?
Mr. Langhauser. I think the fact that voice over the
Internet does not comply with any of the traditional
jurisdictional notions certainly causes a problem on State
taxation. And you are absolutely right. You could take your
Washington VoIP number to Utah, and you would have a real issue
of which jurisdiction taxes that.
What I was referring to, though, was our proposal to reform
the Federal universal service fund. Right now, that fund is
funded only through interstate telecommunications revenues. It
is a very narrow base. It is a shrinking base. It is a fund
that is headed for severe problems. And what we are suggesting
rather than tack on additional services like VoIP to this
broken fund that the FCC should fundamentally reform it.
They should probably base the charge on telephone numbers
or other connections to the Internet; subject all telephone
numbers to a monthly charge. It would include VoIP; it would
include wireless; it would be nondiscriminatory, and it would
also sustain the life of the fund.
Mr. Cannon. So you are only thinking about the universal
service fund when you think about that.
Mr. Langhauser. That is right.
Mr. Cannon. But I think the States are going to have
something to say about that.
Mr. Cordi, do you want to respond to the difficulty that
represents or the opportunity?
Mr. Cordi. Well, I am not certain that I have anything to
add to that.
Mr. Cannon. I am just concerned here about if people, if we
tax, if we create or if we use the phone number as the basis of
taxation, how do States participate in that process? How do
they get a revenue stream?
Mr. Cordi. Well, phone bills generally are controlled by
the billing address of the customer and not by the area code he
happens to be in. You know, there is good precedent for
collecting tax on telephone services, not only the Mobile
Telecommunications Sourcing Act but elsewhere for taxing phone
services at the principal place of use. And typically, if you
cannot identify it to any other place, it is the billing
address.
Now, that is something that even an Internet provider,
anyone who takes a credit card over the Internet asks for an
address. And so, even if you are billing to a credit card and
not, maybe, like AT&T, sending a bill to someone's home, I
think this is a manageable problem.
Mr. Cannon. I worry at some point that if we have a regime
that is based on addresses or billing addresses that people
will be driven to the jurisdiction with the lowest taxes, which
is part of the reason that I think we need a rational solution
for all States as opposed to competing interests.
Let me come back to USF, and this is a question, Mr.
Pepper; you may want to talk about this; Mr. Langhauser, you
may want to as well or Mr. Cordi, Mr. Kirkland. The fact is the
costs of using the VoIP are much lower than the costs of
switched telephony. Does that lower cost not have significant
implications for the need for the USF fund? You said you have
serious problems coming, but if you can use a lower-cost
system, is that not actually helpful for the USF?
Mr. Pepper. Well, I think that this is why we have some
optimism. Number one, affordable phone service is a goal shared
by, you know, the FCC, State commissions, Congress, State
legislatures, everybody. So the goal of affordable phone
service does not change. What will need to change, as you have
been pointing out, is the way in which we achieve it in this
new world.
In a world in which the costs are actually lower, right, it
makes it easier to achieve the affordability goal. So if the
costs are lower, prices can be lower, and it will be easier to
provide affordable phone service to everybody. So I think you
are absolutely correct that there are some significant
advantages using not just voice-over-IP but other new
technologies to provide the physical transmission connection as
well as the applications like voice-over-IP. And again, I think
back and look at some of the wireless broadband providers that
are providing services to, broadband services to communities
that do not have any other broadband choice. And 2 years ago,
we were told those communities would never have broadband.
Today, they have broadband service, and it is being provided by
people with no subsidies.
Mr. Cannon. Exactly; thank you very much for that comment.
Let me go back to just one point you made and flesh that
out a little bit. You talked about affordability, and this is
for the whole panel, not just for you, Mr. Pepper, but
affordability. Is not a tax on a fundamental service the most
regressive tax you can have? In other words, as you think about
that for just a moment, John Conyers and I, the Ranking Member
of the full Committee, have had a long association in this
particular battle, because the digital divide leaves people
that he believes he is representing on the wrong side.
And so, we have worked strongly together to try to help
bridge that digital divide. To the degree that we are taxing
these kinds of services, is that not extraordinarily
regressive, and Mr. Pepper, I would like you to respond first.
You seem to be interested, Mr. Langhauser, as well, but we will
let you do the cleanup, Mr. Cordi, and give the other argument.
Mr. Pepper. I am not a tax expert, but you are absolutely
right that, you know, people at the bottom end of the economic
scale can least afford to pay more for services, and one of the
ironies that we have seen is that many of the universal service
or other fee or tax obligations tend to fall very heavily on
low-income people, especially low-income people who make a lot
of long-distance calls. And that really also applies to
immigrants.
So we have a lot of, you know, people who come to the
United States. You know, it is still the country of everybody's
dreams because of economic opportunity. They do not make a lot
of money. They call family members back home. They are paying
very high fees that actually increase their costs, and so, in
some ways, it does not really help close that gap.
Mr. Langhauser. I think one thing I would add to that is
for some reason, and it is probably history, telecommunications
in general has been singled out for a myriad of different State
and local taxes. In some respects, it is treated as if it were
tobacco or alcohol, with almost a punitive tax burden. I think
this is something that is very important to address, and we are
not arguing that we should not be taxed at all. We are arguing
that we should be taxed like regular businesses and not singled
out for excessive tax burdens.
Mr. Kirkland. To build on what John said, I think you also
see in the various taxes and fees, as you often see in
communications issues, real inequities in what kinds of
services, even services that appear like like services, some
contribute; some do not. You know, USF is a good example, where
cable modem service does not contribute into USF; other forms,
like DSL, do in certain circumstances.
And so, there is a whole legacy set of different fees,
taxes, other sorts of things that the current system needs some
rationalization. And before you then take some exciting new
technology which certainly has great potential but extend, you
know, systems that are in need of sort of a fundamental re-look
or fundamental reform, another example being access charges,
you know, we would suggest that you do not just take the old
legacy system and try to figure out where to pigeonhole voice-
over-IP but really look at the fundamental premises of these.
And that is not to say that voice-over-IP should not bear
its fair share, but there is some fundamental restructuring and
equity that needs to be brought to the process. And I would
argue that while this technology is nascent, while it is
evolving, while it is still developing, and we will see where
it ultimately ends up and what it really looks like on the
ground, because really, there are all sorts of varieties out
there, perhaps there is a case to be made to take a wait and
see approach on this.
Mr. Cannon. Thank you.
Mr. Cordi?
Mr. Cordi. Yes, let me start out by agreeing with your
general observation. Obviously, flat taxation on basic services
or goods that the whole population buys tend to be regressive.
You are right. What we are looking at here, though,
interestingly would have--this preemption would have the
opposite effect, because, of course, who would avoid taxation
as a result of this is necessarily people who are computer-
literate, able to afford DSL connections, more sophisticated
people; basically, the better off would be who would get the
tax benefit, indirectly, frankly of this preemption, the
immediate benefit of it.
And who is left holding the bag are all the people who will
be locked into landline services for all the reasons that they
cannot get this. So I would argue this preemption makes
existing telephone taxes, as regressive as they may be, worse.
Mr. Cannon. Well, let me just follow up a little bit,
because my sense is that people who have landlines in cities
will tend to be close to DSLams or switches so they can get DSL
relatively cheaply. It is the rural folks that have a long
distance and are going to have a hard time getting DSL services
that are left in a sort of a box. But I think as Mr. Pepper
just said, those people in many cases are already getting
broadband services.
So people who are living closely together and have
landlines now are the people that are most likely to benefit
from the plummeting costs of DSL, broadband or VoIP. It seems
to me that--are we seeing the same issue, or am I missing
something here?
Mr. Cordi. Well, that is correct as far as you are going. I
guess my concern, though, is for those people who cannot take
advantage of that, which is a very large chunk of the
population that cannot throw up the money for a computer, get
the cost of DSL, and those are the people who will be left
using landlines, and frankly, my sense is preemption leaves
this more regressive and not less regressive. That is an
opinion.
Mr. Cannon. I do not mean to be tenacious about this, but
you are going to have VoIP with just a phone. In other words,
you will not even need a computer to do it. So you are not at
the $1,000 or $500, I mean, today with Linux, you are probably
at less than that for a computer that would work; in fact, we
were pricing for Haiti refurbished computers at $100 a piece.
So the cost of a computer, I do not think is going to be a
hurdle, and yet, the poorest tend to be the most closely-
packed. They tend to have telephones already, and those are the
folks who are going to lose a third to half of their phone bill
by doing a VoIP, and a big chunk of that is tax, I grant you,
but some of that is going to be purely economic, and over time,
more of it will be purely economic. Are those not the very
people that you want to bring into the--you want to not put on
the wrong side of the digital divide?
Mr. Cordi. I will agree with that.
Mr. Cannon. Thank you, because here, we are not just
talking about the taxation as being regressive. We are talking
about the context being regressive. And I appreciate that
information.
Let me ask all the witnesses about what happened in the
Senate Commerce Committee yesterday. We passed, or they passed,
Senator Sununu's VoIP bill that would preempt certain State
taxes and regulations for 3 years but only 3 years. What
potential problems do you see from a lack of certainty that is
inherent in just a 3-year moratorium, or is the 3 years too
much, whatever your view on that may be?
And Mr. Pepper, could we start with you and then just move
through the panel?
Mr. Pepper. We actually have not--I have not seen the
latest language, but my understanding is that the 3-year
moratorium language was a start in order to build a consensus
to provide time for a more lasting approach.
Mr. Cannon. And so, you think 3 years is appropriate?
Mr. Pepper. You know, I think we need clarity, you know.
The question is, you know, will a 3-year approach at least
provide clarity for 3 years while Congress considers what to do
beyond that? I mean, that is my understanding from reading the
trade press this morning. And clarity is the thing that
investors need if they are going to roll out new services and
make investments.
Mr. Cannon. Does 3 years provide enough certainty for
investment, or is that too short a period of time?
Mr. Pepper. I would ask the companies that question.
Mr. Cannon. That is a good point.
Mr. Langhauser. We believe it should be permanent. We
believe it should include VoIP. Certainty is just vital in this
industry, and it is particularly acute to my company after what
we have been through based on a flip-flop in Federal policy.
Mr. Cannon. Do you have, at the top of your mind, by any
chance, the amount of money, the amount of capitalization that
was lost from the top of the bubble to the bottom for telecom
companies? My sense is something like $500 billion or $600
billion.
Mr. Langhauser. I do not have that number in my head, but
that sounds like a reasonable estimate.
Mr. Cannon. There have been a huge number which argues for
clarity now and certainty now.
Mr. Langhauser. Absolutely.
Mr. Cannon. Mr. Cordi?
Mr. Cordi. My understanding, and I am getting this only
from press reports of what the Senate did, was they took out
the State tax preemption language. The 3-year moratorium
pertains only to regulation, and the tax language has gone
away, but that is only from press reports, Congressman.
Mr. Cannon. Thank you.
Mr. Kirkland. We would support certainty again. We would
echo the constant changes in the environment make it very hard
to make investment decisions. And so, to the extent there can
be a resolution that is at least permanent, obviously, nothing
is permanent at the end of the day, but if--we prefer greater
definition.
Mr. Cannon. Thank you.
Mr. Pepper, how long did it take the FCC to rule on the
Pulver order, and how long did it take to rule on the AT&T
order?
Mr. Pepper. I would have to go back and check specifically.
But I think it was Pulver was probably a little over a year,
and I think the AT&T also--you may have the exact dates. About
18 months, probably about 18 months for each.
Mr. Cannon. Is there something that you can commit to for
the FCC today about making these time frames shorter?
Mr. Pepper. I wish I could make commitments on behalf of my
bosses, but that is tough. We are working very quickly. I mean,
literally, even here in July on a Friday, I talked to them this
morning. We have staff working through the reply comments that
came in on the notice of proposed rulemaking, so we actually
are working on it, and we expect to have some pieces of this
staff recommendations to the Commissioners by the end of the
year.
Mr. Cannon. Six months there, 18 months there; the shelf
life of these technological products is relatively short. We
would encourage you that.
Mr. Pepper, in 2004, the FCC issued its order declaring
AT&T's--yes, this is actually different, AT&T's IP telephone
service was not exempt from paying the access charges
applicable to circuit-switched interexchange calls. At a
hearing a few weeks ago before the Energy and Commerce
Committee, FCC Senior Deputy Chief Jeffrey Carlisle stated that
the order applies only to AT&T until the broader VoIP questions
are addressed in the IP-enabled services NPRM.
However, we have received information that despite the
narrow read of the FCC order, incumbent carriers have applied
this decision to other VoIP providers that are distinguishable
from AT&T such as Calypso.com. We understand the incumbents
continue to impose or threaten to impose access charges on
these companies by misapplying the FCC order, what appears to
be a misapplication of the FCC order.
In essence, the incumbents are freezing out the VoIP
providers either directly or through threats to competitive
carriers. What should be done about companies such as
Calypso.com whose viability is threatened by a distorted
interpretation of the AT&T order?
Mr. Pepper. We became--first of all, the AT&T decision
applies only to the specific facts of the AT&T case, and so
that is absolutely correct. And we have learned over the last
week or so of these kinds of actions on the part of incumbent
carriers wanting to impose access charges on other forms of
voice-over-IP on which the Commission has not yet made a
determination.
So my recommendation to Calypso is to come in and talk to
the people at the Commission. We also have other petitions
pending as well as the notice of proposed rulemaking that is
addressing situations that go beyond the AT&T set of facts.
Mr. Cannon. Thank you. Could you tell us a little bit about
the FCC's efforts to address the social issues associated with
VoIP, including universal service and 911 service?
Mr. Pepper. Yes; we believe that it is very important that
we separate economic regulation from what we call the social or
consumer policies. Those include things like affordable phone
service, access for law enforcement for first responders,
access for people with disabilities, access for lawful
intercept. And the Commission began a series of what we call
solution summits, bringing the parties together to work through
these issues. And for example, we had a solution summit with
the law enforcement community and service providers to focus on
911 issues for first responders.
And frankly, there has been a lot of progress. There was
wide agreement, for example, in that particular meeting that,
number one, the voice-over-IP providers who were there said,
you know, they actually believe it is important as a
competitiveness necessity to provide 911 service going forward.
There are some technical difficulties on figuring out location-
based for certain forms of voice-over-IP, and they are working
with the National Emergency Numbering Authority, NENA, which is
the body which does the work for the law enforcement community
and first responders, hospitals, fires and so on, firefighters,
to work through those issues.
And in fact, on December 1, the two communities entered
into a memorandum of understanding for short-term agreements
while they work through long-term solutions. And I have a copy
of that here if you would like to have that in the record.
Mr. Cannon. I would appreciate that for the record.
I mentioned earlier that I had been to the AT&T
presentation. They have a registration process which allows you
to put an address in, and from what I understand from what
you're saying is there is now a context for that address to be
useful, and I suspect in most cases, it would be useful to a
local emergency responder.
Mr. Pepper. Well, this is what they're working through. One
of the questions for the first responders and the public safety
access points is whether or not those what we call PSAPs
actually have the equipment that could do something with that
information. And so, part of the answer is funding for and
upgrading the local first responder facilities, not just doing
something with the voice-over-IP technology on the service
provider side.
This, by the way, is very analogous to the issues with
having location-based e-911 for mobile wireless, cell phone
service, right, where the industry is, you know, stepping
forward and providing it on their networks, but there are many
of the local authorities that have not yet upgraded their
facilities, because they just do not have the funds to do that.
Mr. Cannon. Thank you.
What efforts has the FCC made to address the issue raised
by Mr. Langhauser concerning intercarrier compensation with
regard to VoIP, and what is the position of the FCC on this
point?
Mr. Pepper. Well, the Commission and individual
Commissioners have said that resolving the intercarrier
compensation questions are among our highest priorities. And
the reason is very simple: the intercarrier compensation
arrangements that have grown up over the last 40, 50, 60 years
were based upon monopolies and a single form of communications.
And essentially, what has happened is that we now have many
competitive providers, and we have different prices for the
same thing. What I mean by that is that we talk about
intercarrier compensation; essentially what we are talking
about is what one provider of service pays another to terminate
a call. Those prices, and by the way, if you are the local
carrier, the cost of terminating a call from your central
office to your home or office is the same no matter where that
call originates from.
Today, we have a regime in which if the call originates
across the country, you pay one price; if it originates within
the State but not your community, you pay another price; if it
is from across town, you pay--a carrier pays a third price. If
it's a cell phone company, you pay a different price. There are
multiple prices for the same thing, and as a result, there is
significant incentive for arbitrage.
And to give you an idea of the range of prices for this
termination, if you are AT&T, and you are providing a long-
distance call, and you want to terminate it, and it comes
across the country, and you are going to a major, a big Bell
company, you will pay about a half a cent per minute to
terminate that. On the other hand, if you are taking that call
to a small telephone company, the rural telephone companies,
and the call originates within the State, for instance,
Wisconsin, there is a small rural phone company in Wisconsin
that has an intrastate access charge, in other words,
intrastate termination charge of 12 cents per minute.
That is not sustainable going forward, because everybody
eventually is going to have services like their wireless phone,
where your local calling area, in terms of your pricing, is the
United States. So we think this is extremely important. We have
an open proceeding. There are industry negotiations, and this
is one of the things that we are going to be working toward as
soon as we can.
Mr. Cannon. Is this an issue that the FCC expects to
resolve in its notice of proposed rulemaking on IP-enabled
services?
Mr. Pepper. No, there is a separate proceeding on
intercarrier compensation.
Mr. Cannon. Thank you very much.
This has been an extraordinarily informative hearing. I
appreciate the depth of understanding and clarity of
statements. Are there any things that any of you would like to
add at this point to the record?
It has also been, given the contentious nature, the
difficult nature of it, it has been remarkably agreeable. I
think that we understand--and, in fact, if I can just comment
on the course of this, 3 months ago, I had people telling me
that the 911, it was never going to work, and that was a
terrific difficulty. We have made dramatic progress in recent
times, and I think if I can characterize this hearing, there is
dramatic consensus on the nature of the transition but concern
about how we deal with that transition, especially from the
point of view of the States and State revenues, because this is
a larger threat, I think you have indicated, than the SSTP may
represent, and so, we have to--let me just say that it is going
to be extraordinarily important that we grapple with this.
It is just not acceptable to have the Senate stop stuff
because one Senator can put a hold over there, because stopping
is not going to change the course. And stopping may just end up
leaving the States in much worse condition than if we are
thoughtful and work out a process for resolving it. So, Mr.
Cordi, I really appreciate your insights, the clarity of your
thinking. I understand the urgency of it. And I am committed to
helping, at least from this Committee's perspective, helping
VoIP move forward, because I think it solves a host of
problems, including for the poorest among us, recognizing that
if that happens, something else has to happen to create a
balance.
And so, I appreciate your input, especially, Mr. Cordi. I
think it has been very thoughtful, very helpful and very
agreeable, and I appreciate the technical and other kinds of
input that we have gotten from the other panelists, which have
been most enlightening.
Thank you, and this hearing is adjourned.
[Whereupon, at 11:30 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
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