[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








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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

                              ----------                              

                             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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
      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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \11\ Walter Nagel and Ari M. Lev, ``VoIP: The Second Battle of the 
Internet Tax Wars,'' State Tax Notes, June 3, 2004.
---------------------------------------------------------------------------
                               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.]

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