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



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

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

                                HEARING

                               before the

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              JULY 7, 2004

                               __________

                           Serial No. 108-104

                               __________

       Printed for the use of the Committee on Energy and Commerce


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


                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
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____________________________________________________________________________
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                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

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

                      Bud Albright, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

          Subcommittee on Telecommunications and the Internet

                     FRED UPTON, Michigan, Chairman

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

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Carlisle, Jeffrey J., Senior Deputy Bureau Chief, Wireline 
      Competition Bureau, Federal Communications Commission......    40
    Citron, Jeffrey, Co-founder, Chairman and Chief Executive 
      Officer, Vonage Holdings Corp..............................    50
    Greene, Margaret H., President, Regulatory and External 
      Affairs, BellSouth Corporation.............................    59
    Jensen, S. Michael, CEO, Great Plains Communications.........    65
    Kirkland, James, General Counsel and Senior Vice President, 
      Covad Communications.......................................    69
    Martine, Cathy, Senior Vice President, AT&T Corporation......    73
    Nelson, Hon. Robert B., Michigan Public Service Commission, 
      Chairman, Committee on Telecommunications, National 
      Association of Regulatory Utility Commissioners............    83
    Rutledge, Thomas M., Chief Operating Officer, Cablevision....    88
    Vidal, Ronald, Group Vice President, Emerging Opportunities 
      from Level 3...............................................    91
Material submitted for the record by:
    Dingell, Hon. John D., a Representative in Congress from the 
      State of Michigan:
        Letter dated July 19, 2004, to Jeffrey Carlisle, Senior 
          Deputy Bureau Chief, Wireline Competition Bureau, 
          Federal Communications Commission, enclosing additional 
          questions for the record, and responses to same........   123
        Letter dated July 19, 2004, to Jeffrey Citron, Co-
          founder, Chairman and Chief Executive Officer, Vonage 
          Holdings Corp., enclosing additional questions for the 
          record, and responses to same..........................   127
        Letter dated July 19, 2004, to Margaret H. Greene, 
          President, Regulatory and External Affairs, BellSouth 
          Corporation, enclosing additional questions for the 
          record, and responses to same..........................   132
        Letter dated July 19, 2004, to S. Michael Jensen, CEO, 
          Great Plains Communications, enclosing additional 
          questions for the record, and responses to same........   135
        Letter dated July 19, 2004, to James Kirkland, General 
          Counsel and Senior Vice President, Covad 
          Communications, enclosing additional questions for the 
          record, and responses to same..........................   137
        Letter dated July 19, 2004, to Cathy Martine, Senior Vice 
          President, AT&T Corporation, enclosing additional 
          questions for the record, and responses to same........   142
        Letter dated July 19, 2004, to Robert B. Nelson, Michigan 
          Public Service Commission, Chairman, Committee on 
          Telecommunications, National Association of Regulatory 
          Utility Commissioners, enclosing additional questions 
          for the record, and responses to same..................   148
        Letter dated July 19, 2004, to Thomas M. Rutledge, Chief 
          Operating Officer, Cablevision, enclosing additional 
          questions for the record, and responses to same........   155
        Letter dated July 19, 2004, to Ronald J. Vidal, Group 
          Vice President, Emerging Opportunities from Level 3, 
          enclosing additional questions for the record, and 
          responses to same......................................   159

                                 (iii)

  

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

                              ----------                              


                        WEDNESDAY, JULY 7, 2004

              House of Representatives,    
              Committee on Energy and Commerce,    
                     Subcommittee on Telecommunications    
                                          and the Internet,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2123, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Stearns, Gillmor, 
Cox, Deal, Whitfield, Shimkus, Wilson, Pickering, Fossella, 
Buyer, Bass, Walden, Terry, Barton (ex officio), Markey, Wynn, 
McCarthy, Doyle, Davis, Gonzalez, Boucher, Towns, Gordon, Rush, 
Eshoo, Stupak, Engel, and Dingell (ex officio).
    Staff present: Will Nordwind, majority counsel and policy 
coordinator; Howard Waltzman, majority counsel; Will Carty, 
legislative clerk; Peter Filon, minority counsel; and Gregg 
Rothschild, minority counsel.
    Mr. Upton. Good morning, everyone.
    Today's hearing is entitled ``Voice Over Internet Protocol 
Services: Will the Technology Disrupt the Industry or Will 
Regulations Disrupt the Technology?''
    Voice over Internet protocol or VOIP is a tremendous 
technological advancement in the telecommunications 
marketplace. Quite simply, VOIP takes voice signals, turns them 
into data packets of ones and zeros and sends them over the 
Internet. This is much more efficient than sending the voice 
signal over the public switch telephone network. This 
efficiency is bringing lower prices to the consumer and VOIP 
represents yet another competitor in the telecommunications 
marketplace.
    And we are in an exciting place in the development of VOIP. 
The companies represented at today's witness table offering 
varying flavors of VOIP. On the one hand, it is being deployed 
to consumers at an impressive pace for nascent technology. On 
the other hand, it is still just that, a nascent technology but 
one with tremendous potential, to be sure.
    But we will never realize VOIP's tremendous potential if we 
saddle it with unwarranted government regulation. For instance, 
given VOIP's reliance on the Internet which respects no State 
or local boundaries, VOIP is truly interstate in nature. As 
such, we must have a single Federal regulatory regime, not a 
patchwork of 51 different State regulations. But that single 
Federal regulatory regime must tread as lightly as possible. 
While we need to make sure that the law enforcement officials 
when authorized have adequate tools to track criminals and 
terrorists who might use VOIP services and that consumers have 
access to E911 services, VOIP providers should not be regulated 
like common carriers.
    Today's hearing title poses two questions. The first 
question is will the technology disrupt the industry? My answer 
to that is that it likely will, but the benefits to the 
consumer will be tremendous.
    The second question is: Will regulation disrupt the 
technology? My answer to that question is not unless we let it, 
and we should not.
    I want to thank all of today's witnesses for being with us 
today. Look forward to your testimony. Appreciate it being sent 
up in advance.
    I want to particularly thank Jack Carlisle who was born on 
Saturday for letting us borrowing his dad for today's hearing. 
Congratulations, Jeff, and your wife Rebecca.
    With that, I yield for an opening from my friend and 
ranking member of the subcommittee, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much. And I want 
to comment you for calling this hearing today on Voice over 
Internet Protocol.
    Internet protocol based telecommunications and services 
continue to make inroads into markets traditionally served 
through older technologies. IP technology can put any content; 
voice, video, data or a combination into packets of zeros and 
ones. These digital packets can be delivered over any 
telecommunications infrastructure. This is the kind of 
destructive technology that Joseph Shumpeter spoke about in his 
book published 60 years ago entitled ``Capitalism, Socialism 
and Democracy.''
    In that book he spoke of a process of industrial mutation 
that incessantly revolutionizes the economic structure from 
within incessantly destroying the old one, incessantly creating 
the new one. This process of creative destruction is the 
essential fact about capitalism, he said.
    Now Internet based technologies are buffeting many of the 
incumbent marketplace participants across many industries. In 
the telephone market consumers stand to benefit from advances 
in technologies such as VOIP which possess the ability to bring 
additional features and services to what we once called plain 
old telephone service.
    In addition to challenging industry participants, it also 
challenges regulators to not be timid about embracing change, 
ensuring that innovative creatively destructive technologies 
and service providers are not thwarted from reaching consumers 
by established incumbents, and that was a key goal of the 
Telecommunications Act of 1996.
    The FCC has struggled with adopting many of the future 
oriented regulatory definitions in the Telecom Act of 1996 in 
the last several years. Indeed, the Commission has been 
reversed in key court decisions that supported a more 
competitive interpretation of the blueprint that Congress 
established in the Telecommunications Act for the digital free-
for-all that we hope to unleash across all markets. We had 
hearing after hearing after hearing in this committee room in 
1994, in 1995, in 1996 about this digital free-for-all about 
the fact that any company would be able to provide any service 
within time as long as a vigorous paranoia-inducing competition 
was unleased in the telecommunications marketplace.
    So all of this is now coming to pass, although belatedly in 
some areas because of the Federal Communications Commission. 
But nonetheless, we have been making great progress.
    Consumers deserve access to new Internet-base services. 
Consumers also deserve to receive those services from multiple 
providers so that they benefit not only from access to new 
technology, but also from improved service quality and lower 
prices.
    Consumers must also retain the important consumer 
protections developed over the years for these services. Just 
because the technology used to deliver a service utilizes a new 
technology doesn't mean that the service itself changes from a 
consumer standpoint. The need for ensuring consumers of 
affordable service, consumer privacy rules, billing 
protections, fraud protection, emergency service and law 
enforcement access do not disappear simply because a voice call 
travels in packets rather than dedicated circuits.
    Today's hearing will provide us with an excellent 
opportunity to hear how both the industry and regulators are 
confronting the rise of Internet telephony and allow us over 
the coming months to gage whether any changes are necessary to 
existing telecommunications statutes or whether any adjustments 
need to be made to regulatory interpretations of those laws.
    Again, Mr. Chairman, this is an incredibly important 
hearing and I think you for conducting it.
    Mr. Upton. Thank you.
    Mr. Cox?
    Mr. Cox. Thank you, Mr. Chairman.
    And I just want to pay homage to my colleague from 
Massachusetts for his tribute to Schumpeter's creative 
destruction. I mean there is very little more that can amaze me 
now when Massachusetts liberals are honoring Schumpeter. And 
it's fair then, I think, to say we are all capitalists now.
    Mr. Markey. I wish the Federal Communications Commission 
believed it, but that is the problem.
    Mr. Cox. It is actually a sign of the times that we find 
ourselves making common cause in this way, as in fact we've 
done on many other issues.
    I want to thank you, Mr. Chairman, for holding this 
important hearing for that very reason.
    And I, too, would like to offer a special thanks to Mr. 
Carlisle of the FCC. And I hope that you'll share my thanks and 
congratulations with the entire Commission for your outstanding 
decision to approve the Pulver petition. This wise decision 
will ensure that consumers of voice software applications on 
the Internet which never use the public switched telephone 
network won't suffer the burden of old line telecom regulation.
    Consumers now have the freedom to talk to friends, family, 
customers and colleagues all over the world without ever 
needing the services of a regulator, which makes one wonder not 
only whether traditional regulation has anything to offer VOIP 
customers, but also whether it has anything to offer customers 
period.
    While VOIP service remains a small segment of the telephone 
market, still far less than 1 percent, it is clear that every 
week thousands of Americans are moving to this new technology. 
It is important to listen to these consumers. They are sending 
us a very clear message: They do not want to stay in the 
heavily regulated, heavily taxed traditional telephone market. 
So it is important for those who are considering regulation of 
this market to recognize that applying the old regs to VOIP is 
by definition anti-consumer, at least for those consumers who 
have freely chosen to reject the traditional network.
    We must also recognize that just as the technology has 
destroyed the ability of companies to exercise monopoly power 
over voice communications, it also undermines the ability of 
governments to exercise monopoly power over the design and cost 
of these services. The government, of course, can still make 
demands on U.S.-based providers of voice applications, but if 
an American broadband customer can simply access a website 
overseas to use a foreign provider of such services, then we 
have only succeeded in outsourcing jobs and capital to more 
Internet-friendly jurisdictions. And as the inventor of the 
Internet, the United States should be the natural home for this 
exciting technology.
    We can also chase this business offshore with heavy 
taxation. Yesterday Declan McCullagh of news.com reported that 
the IRS is considering applying the Spanish-American War tax on 
telephone services to new applications such as VOIP. I urge the 
IRS to abandon this effort even though this hearing is not 
about them.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you.
    I would recognize Mr. Dingell for an opening statement.
    Mr. Dingell. Mr. Chairman, thank you. This is a very 
important hearing and I commend you for calling it.
    We are looking at some very significant changes, great 
advantages, great opportunities and great potential for 
unfortunate consequences if we do not handle these matters 
well.
    Voice-Over-Internet-Protocol telephone services holds 
tremendous promise for bringing greater competition, lower 
prices, and exciting new applications to the telecommunications 
marketplace. We do not yet know who the winners and losers will 
be in that marketplace, but we know that America's consumers 
stand to benefit tremendously from this wonderful technology. 
For this reason it is incumbent upon the Congress, the Federal 
Communications Commission and the States to move cautiously in 
regulating. We do not want to over overregulate at the risk of 
stifling or unduly slowing down the emergence of VOIP 
offerings. We also do not wish to pick the winners and losers. 
Those choices are much better left to consumers.
    The FCC is presently embarked on several proceedings to 
determine how VOIP, which over the next several years is likely 
to become the dominant method of voice communications, will be 
regulated. I've reviewed some of the chairman's pronouncements 
in this field. Some I agree with, including the notion that it 
is not necessary to subject VOIP to all the common carrier 
regulations which currently exist in the Telecommunications 
Act. Other pronouncements, however, particularly the notion 
that VOIP may be deemed an unregulated information service, I 
find troubling.
    I would like to take this opportunity to remind the FCC 
that it is a creature of Congress and that Congress never 
intended that voice services should be deregulated at the whim 
of the FCC. There is nothing in either the 1996 Act nor its 
legislative history which suggests that Congress ever intended 
the dominant voice service to be classified as an ``information 
service'' and, thus, essentially deregulated under Title I. 
Rather, it is to be regulated as a ``telecommunications 
service'' under Title II, subject to section 10 forbearance 
where less regulation is appropriate. And I note, section 10 
affords broad discretion for the FCC to act in the broad public 
interest.
    Of course I agree with those who argue that it would be 
foolish to impose title II regulation, in its entirety, on VOIP 
service offerings. Congress anticipated that advances in 
technology might render existing regulations either unnecessary 
or even harmful. The law provides the FCC, therefore, with 
section 10 forbearance authority so that it can refrain from 
wholesale regulation in such instances.
    While VOIP providers need not be subject to legacy economic 
regulations such as tariff requirements, other core regulations 
remain critical--including those which pertain to universal 
service, access, emergency services, law enforcement and 
individuals with disabilities. It is also critical that neither 
the Congress nor the FCC take any action which would disrupt 
the ability of the States to perform their responsibility in 
the area of core consumer protection functions which protect 
consumers from the rascally acts of certain less scrupulous 
companies, of which we seem to have a fine number in this 
business.
    I will be watching the FCC closely as it moves forward. I 
hope that it remains within the bounds of the statute and 
congressional intent. I would note that the FCC recently lost 
an important appellate decision largely because it ignored 
statutory directions from the Congress and clear congressional 
intent. Likewise, with respect to VOIP, an end-run around the 
Telecommunications Act in order to achieve quicker deregulation 
is not what Congress intended or what the public interest 
requires. It is less likely to be upheld in court and is a 
disservice to consumers as it will only slow VOIP roll-out by 
prolonging the uncertainty which presently exists in the 
marketplace.
    Finally, we in Congress must recognize that with the rapid 
emergence of VOIP, it is our responsibility to ensure that the 
law keeps pace and provides appropriate boundaries and 
guidance.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Whitfield?
    Mr. Whitfield. Mr. Chairman, I also would like to thank you 
for having this hearing on a very important subject matter. All 
of us are looking forward to the testimony of our nine experts 
in this field, and we look forward to trying to determine the 
real difference in information services and communications 
services, and the segments of this industry that are regulated 
versus the other segments that are not regulated. And we have 
many challenging issues facing us. I know that all of us look 
forward to the testimony, and for that reason I will waive back 
the balance of my time.
    Mr. Upton. Ms. McCarthy?
    Ms. McCarthy. I'll waive back.
    Mr. Upton. Mr. Gonzalez?
    Mr. Gonzalez. Thank you very much, Mr. Chairman. And I will 
be really brief.
    I thought you would commence the proceeding day with maybe 
the proclamation ``let the games begin,'' because I know this 
really is laying the foundation for what will be a very 
interesting debate, and we get all the information gathering 
done this year, of course.
    It is has often said that the future of any technology will 
be determined by regulation. And I think we can all agree 
regardless of ideology, party affiliation or even region. The 
question is to what degree and extent.
    For the bottom line for all of us is, of course, to 
encourage healthy competition which is really the cornerstone 
of our great democracy. And to that end I hope that this will 
be a real healthy, healthy debate.
    And when I say ``competition,'' it should be for all 
players, all actors, all entities old and new.
    And with that, I yield back. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Shimkus?
    Mr. Shimkus. Thank you, Mr. Chairman.
    First I would like to ask unanimous consent that a 
statement by the National Emergency Number Association be 
inserted into the record.
    Mr. Upton. Without objection.
    [The prepared statement of the National Emergency Number 
Association follows:]
    Prepared Statement of the National Emergency Number Association

    In the last 15 years modem communications services advancements 
have put a spotlight on the need for a more appropriate E9-1-1 system. 
Specifically, a 9-1-1 system that is able to adapt rapidly to new 
technology and the resulting new devices supporting communications.
    Today, over 50 million Americans are using some form of broadband 
services. A growing number of that subset is migrating to Voice over 
Internet Protocol (VoIP), for competitive voice telephony. Truly we are 
at the dawn of a new era, in which voice, data and computer integration 
are converging to offer consumers, commerce and others new 
communications choices in our digital age.
    Yet with all the excitement for VoIP comes concern. If the past is 
any indication, public safety services and access may be overlooked 
unless we pursue early technical review and service planning.
    Since its inception, the 9-1-1 system has been THE first responder 
in times of individual and mass emergencies. Every day, Americans call 
9-1-1 at the time of their greatest need. For the caller and the 
public, the successful completion of a 9-1-1 call can mean the 
difference between danger and security, injury and recovery, or life 
and death. Simply, the ability to call for help in times of an 
emergency is not ``voluntary''--it's mandatory.
    In regards to Voice over Internet Protocol, NENA respectfully 
offers the following recommendations to improve the public policy 
leadership for 9-1-1 and Voice over Internet Protocol planning with our 
nation's emergency communications.
    Guiding NENA leadership is our adopted technical, operational and 
policy ``Future Path Plan'' by which new services, technologies and 
devices capable of dialing or signaling 9-1-1 can and should be able to 
provide their users with access to emergency assistance.
    For well over two years, we have used the ``Future Path Plan'' to 
convene stakeholders discuss solutions and form interim/transitional 
and long-term solutions to define full requirements for our nation's 9-
1-1 system.
    As the United States Congress, grapples with Voice over Internet 
Public Policy issues, NENA offers the following observations and 
actions for consideration and review of nation's communications system.

                NATIONAL PLAN FOR 9-1-1 AND VOIP POLICY

    We need a national 9-1-1 VoIP policy. We recognize that to be 
effective and meaningful the 9-1-1 system must work with a wide range 
of VoIP and IP-enabled products and services. VoIP technologies, and 
those well into the future, will need 9-1-1 orientation and long-term 
solutions to accommodate all the variances. It's about building 
solutions.

                         CONSUMER EXPECTATIONS

    9-1-1 is national, consumers are increasingly global. We must 
retain consumer service quality expectations. Technical development of 
9-1-1 must be convergent with its policy direction. 9-1-1 needs to be 
treated as an integrated public safety service, part of a larger whole 
for our safety and national security. In over 35 years of 9-1-1 
service, we've learned some important and valuable lessons in 
implementing new technologies: 9-1-1 must be treated as an inter-
dependent overall system; coordination is very important; federal 
leadership is necessary for national implementation and resolution of 
issues.

                    OPEN SYSTEMS AND OPEN STANDARDS

    We as a nation must develop policies for 9-1-1 compatible with the 
commercial environment for IP communications. We cannot support the 
further fragmentation of 9-1-1. We recognize that consumer expectations 
for 9-1-1 are national and therefore require jurisdictional leadership 
and resources from the Federal Government. We have called for a 
national coordinating office as offered by recent legislation in the 
House of Representatives H.R. 2898 and United States Senate (S. 1250).

                   REGULATORY LEADERSHIP AND SUPPORT

    Finally, we support the need for targeted federal regulation for 9-
1-1 and VoIP, believing further that this is most appropriately handled 
by the FCC, through our present collaborative approach. With our 
support, we look to the Commission to maintain a directive influence in 
the needed processes for industry and public safety collaboration.
    We seek a ``light touch'' regulatory approach for 9-1-1 that 
enables full 9-1-1 capabilities for the consumer while minimally 
affecting, and actually improving the advancement of overall consumer 
services. In our experience, voluntary consensus provides better, more 
accurate results. Improved 9-1-1 project management is better than 
legal debate. Real 9-1-1 solutions are better than arbitrary 
requirements.
    In August, 2003 we began aggressive IP development efforts. The 
NENA-VON Coalition agreement is a result of those efforts, and is an 
important first step toward consensus development; to both guide the 
initial efforts of Voice over Internet providers in handling 9-1-1 
calls, and to gain agreement in an active role in the development of 
migratory and longer term IP and VoIP solutions for 9-1-1. Our schedule 
for completion of technical and operational elements of this agreement 
is before the end of First Quarter 2005. And in our consensus, we 
strongly believe that customer disclaimers do little to support the 
public's safety.
    To this end the nation's 9-1-1 system needs reliable and dependable 
funding. In the VoIP environment, funding could prove evermore 
complicated, given the traditional policy framework reliance on state 
and local funding for 9-1-1 services and upgrades. Until a clear 
solution is identified for this immediate public safety funding 
problem, attention to the need for technological change and evolution 
of the E9-1-1 system itself is difficult to achieve.
    9-1-1 service should not be an ``afterthought'' for communications 
providers, but rather an active part of service design and development.
    As the consumer changes communications capabilities, the 9-1-1 
system should be dynamic in design and operation to adjust to and match 
new technologies and old expectations.
    We thank the Subcommittee for allowing us to share our concerns and 
leadership in improving our nation's 9-1-1 system.

    Mr. Shimkus. Thank you.
    And, Mr. Chairman, as you know, we deal with a whole bunch 
of very high tech issues. And I find important for me to try to 
specialized in some areas. I worked with my colleague Ann Eshoo 
on 911 issues since I have been a member. That is kind of where 
my focus will be. There are a lot of other issues that a lot of 
other members will bring up.
    We did pass the enhanced 911 bill through this committee, 
through the floor and we are awaiting Senate action. But now we 
have a completely a new technology of Voice over Internet 
Protocol. What happens if a person uses VOIP needs to call 911? 
Where does the call go?
    If a customer can plug into their VOIP phone anywhere where 
there is a broadband connection, how can a dispatcher determine 
their location? In most cases a 911 call is how our first 
responders are notified of an emergency. In fact, in this 
environment that's even important. And in our enhanced 911 bill 
we've also talked about the ability of emergency responders to 
forward call in areas of downwind issues in case of biological 
or terrorism to get a call to cell phones in the downwind 
areas.
    How an a dispatcher determine location under VOIP and 911 
call? In most cases the 911 call is how, as I said, our first 
responders are notified. If 20 percent of the market is 
projected to be VOIP by 2014, we just really need to start 
working on how to address this concern.
    Now some will say allow the industry to move, and I would 
like to believe that that is true. We all know that the 
government will be involved. Now, the question is do we move 
through legislations at the Federal level or do we allow the 
FCC to move or to not move; and that's the crux of the debate.
    There is a lot of other issues that VOIP has that are of 
concerns with local rural telephone companies and Universal 
Service Fund and how do you compensate. But I want to make sure 
that I am on record and that those of you who are the panelists 
and those who are joining us can help me work through this 
issue on emergency 911. And I think that will be helpful, and I 
think my colleague Anne will also be interested to see how we 
can address this concern.
    Thank you, Mr. Chairman. I yield back.
    Ms. Eshoo. Would the gentleman just yield for a moment?
    Mr. Shimkus. I will.
    Ms. Eshoo. Are you going to place into the record the 
statement of the National Emergency Number Association.
    Mr. Shimkus. I did.
    Ms. Eshoo. Good. Thank you.
    Mr. Upton. Mr. Gordon?
    Mr. Gordon. Thank you, Mr. Chairman.
    I concur this is an important and timely hearing. And since 
we have triple desk panel before us and the issues have already 
been outlined, I will limit my comments to just welcoming my 
friend Margaret Greene, who is back before us again. She 
testified last year on the universal services and has just 
completed her term as Chairman of the United States Telecom 
Association.
    So I welcome Ms. Greene and yield back my time.
    Mr. Upton. Ms. Wilson?
    Ms. Wilson. Mr. Chairman, I will waive my opening statement 
in order to ask questions.
    Mr. Upton. Mr. Walden?
    Mr. Walden. I will waive my opening statement, sir.
    Mr. Upton. Mr. Pickering?
    Mr. Pickering. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman. I normally do not do this but 
today I am going to use some props.
    We have the choice before us today of the phones of our 
youth versus a voice over the Internet phone, the phones of the 
future. If we act and if we act in a timely way I believe that 
we can achieve objectives that this committee has struggled 
with ever since I arrived, and that is to achieve three policy 
objectives simultaneously and without conflict.
    Our contradiction of the three objectives:
    1: Is to have a policy with that promote broadband 
investment, capital investment;
    2: To promote competition without putting those two in 
conflict, and;
    3: Protect consumers to give them more choices at lower 
prices.
    I think there's great common ground and consensus from the 
FCC to members on this panel that there should be a Federal 
policy, there should be a preemption of States that we do not 
have 50 States with a patchwork of regulatory contradictions 
and conflicts over this application. I think that if we act 
quickly it will spur investment, spur competition and promote 
the consumers' best interest.
    We do need to act I think very quickly. There are a number 
of States, New York, California and others that are beginning 
to look at regulating Voice Over Internet. For that reason we 
should act and considering acting this year. I know that our 
time is short, but the Senate Commerce Committee has announced 
that it will move to markup on Voice Over Internet legislation. 
I do not think that this committee should be a place where the 
Senate ever does something faster than the House.
    It is a place where we can find common ground between all 
of the industries, between the Bells, an AT&T and MCI and 
cable, wireless. From a broad range of high technology and 
telecommunication providers we do see Voice Over Internet being 
a fundamental and critical aspect of their future business 
plans. That is all the more reason why we need to act quickly 
and to give certainty.
    I realize that there are issues on social obligations, on 
universal service, on CALEA and law enforcement. But I think 
the targeted consensus of making this a Federal policy of 
preempting the States that we can move pretty quickly while 
leaving the other very important issues as something that we 
can address in a broader comprehensive reform that we plan for 
next year.
    Let me just in conclusion read from Chairman Michael 
Powell's letter in response to a letter I wrote him asking for 
his counsel on whether the Congress or whether we should act on 
Voice Over Internet regulations.
    His response in a letter that is available, and I would 
like to submit for the record, Mr. Chairman, states: ``The time 
has come for the Congress and this Commission to confront the 
legal and policy environment for IP-enabled services including 
Voice Over Internet services. If we do not, the policy 
environment for the Internet will develop in a piecemeal 
fashion or by dangerous accident and potential consumer 
benefits will go unrealized. Thus, it is important that we 
establish a rational and consistent policy environment for IP-
based services so that they will continue to evolve.
    I would like to thank you for taking a role in drafting 
legislation to establish a sound policy environment in this 
area, and I support congressional action to that end.'' And I 
would like to submit this for the record.
    And I look forward to hearing the testimony today and 
working with you, Mr. Chairman, as we find a consensus and try 
to move as quickly as possible to set a certain and rational 
framework or Voice Over Internet for the phones of the future.
    Mr. Upton. Ms. Eshoo?
    Ms. Eshoo. Thank you, Mr. Chairman, for holding this very 
important hearing.
    I am going to submit my full statement for the record, but 
I do want to welcome Jim Kirkland from Covad to this hearing. 
Covad, of course, has testified many times in this hearing room 
before, and we welcome you again.
    My colleagues will remember that Covad is an innovative 
Silicon Valley company that offers broadband services to 
millions of residential and business customers across the 
country. So welcome to you.
    I share Mr. Shimkus' views relative to E911. These are 
services that really need to be preserved and protected in 
whatever we do. And I look forward to hearing from the 
witnesses and engaging them in some questions.
    So thank you, Mr. Chairman, for having a hearing on this 
all important topic.
    [The prepared statement of Hon. Anna G. Eshoo follows:]

Prepared Statement of Hon. Anna G. Eshoo, a Representative in Congress 
                      from the State of California

    Thank you Mr. Chairman for holding this important hearing.
    I also want to welcome Mr. Jim Kirkland and his colleagues from 
Covad to the hearing. Covad is an innovative Silicon Valley company 
that offers broadband services to millions of residential and business 
customers across the country. Covad--one of the fastest growing 
companies in America--is an example of the competition that was 
unleashed by the 1996 Telecom Act.
    The Internet has obviously been the most significant development in 
telecommunications, and in our society generally, in a generation or 
more. It has made possible technologies, services, and innovations 
unimaginable just a decade ago.
    There's not really much debate that we are now moving toward a 
single packet-switched network that carries voice, wireless, data, and 
Internet services. It won't matter whether you buy your phone service 
from a phone company, a cable company, or an Internet company--all of 
the traffic from these services will be carried over the Internet, 
along with a variety of other advanced services and content.
    Along with the seemingly infinite possibilities created by the 
Internet, there are also challenges. One of the most difficult 
challenges we face as policymakers is how do we incorporate Internet-
based services into the existing regulatory scheme for telephony, cable 
television, and satellite? None of the existing regulatory frameworks 
is really appropriate to deal with IP services, and we should be wary 
of subjecting these emerging technologies to overly burdensome 
regulations.
    However, it's clear that regardless of how a telecommunications 
service is delivered, certain well-established obligations should be 
maintained. We must ensure that we preserve universal service, access 
to emergency services including 911, and other important public 
policies as our telecommunications system evolves to take advantage of 
advances in technology. We must also make certain that competition in 
the telecommunications marketplace is vibrant and that a wide variety 
of providers are available to consumers and businesses.
    Let's be clear--a single cable provider competing against a single 
phone company for Internet access services is not effective 
competition, and innovations in technology have done nothing to change 
that dynamic.
    The 1996 Telecommunications Act was intended to provide competitive 
access to local customers and real consumer choice for 
telecommunications services. Because of the reforms enacted in the 1996 
Act, competitive forces have been unleashed that have led to a race to 
deploy broadband communications services. As a result, the latest FCC 
statistics show that in my home state of California broadband is now 
available in 97 percent of the zip codes, and nearly two million 
digital subscriber lines (DSL) have been put into service.
    This is real progress, and I think we can attribute much of this 
growth to the pro-competition rules advanced by the FCC and the 1996 
Act.
    Obviously, the time has come to re-evaluate the entire regulatory 
scheme as it applies to services delivered over the Internet, including 
services that have traditionally been heavily regulated. But in the 
meantime, we cannot afford to abandon the competitive forces that have 
emerged in key sectors.
    I look forward to working with my colleagues to address these 
challenges, and I look forward to the witnesses' testimony.

    Mr. Upton. Mr. Stearns?
    Mr. Stearns. Thank you, Mr. Chairman.
    This technology is a transformational technology. And I 
think we all agree that it could create a whole new set of jobs 
and industry.
    Mr. Carlisle noted in his statement that VOIP represents a 
fundamental change in voice communication that is radically 
different from traditional telephony.
    Now here we are 8 years after the Telecom Act and we are 
facing a technology that does not really fit into a package 
here under the framework. So regulators are at odds on how to 
address VOIP. They perhaps think of it like it quacks like a 
duck so it must be a duck and apply the same regulatory codes 
to it. And, of course, I think if they did that they would 
actually kill it. Because that is what Title II of the legacy 
regulation will do, in my opinion. It will definitely hurt this 
Nation's technology.
    Mr. Chairman, even more important the government considers 
now how to address VOIP, I feel they are missing a valuable 
component in the whole equation.
    My colleagues, VOIP is just one of a single application. 
There are many new technologies we are seeing in today's market 
such as VOIP, but they all have one thing in common, and that 
is they deal with an Internet protocol address. These new 
technologies using an Internet protocol addressing have the 
ability to saturate the market with numerous offerings of high 
tech services, not only just voice but video, high speed data. 
And who knows what in the future we're going to have that still 
uses the Internet protocol addressing. The provider could be 
your phone, your cable, the wireless or even the electric 
company that provides electricity to your home; we could have a 
new technology over that.
    What we are actually seeing with these different offerings 
in a new type of service. And I would call this an advanced 
Internet communication service. Toward that end, Mr. Chairman, 
I introduced a bill yesterday, 4757 The Advanced Internet 
communication Service Act which addresses the issues before us 
today in a manner that allows for future advanced Internet 
communication services like VOIP to develop without being 
stifled at every step of the process. As we move forward in 
debating changes to the Telecom Act we should be mindful that 
we examine the provisions of services, not each individual 
application. Our bill establishes advanced Internet 
communication services as a unique form of services that 
removes the debate that now exists in the State and in the 
industry as to whether to classify AICS or the Advanced 
Internet Communication Service as an information service or a 
telecommunications service.
    Further, by establishing the AICS or interstate services we 
eliminate the regulatory uncertainty of a myriad of different 
State regulatory approaches that would impede investment in 
these new services.
    So, I believe, Mr. Chairman, this is the approach to do, to 
set up and then we have established for future generations what 
we can do.
    I'd also as a unanimous consent, Mr. Chairman, enter into 
the Federation for Economically Rational Utility comments that 
were filed by the FCC on VOIP NPRM. I believe that these 
comments offer unique perspective from a number of individuals, 
State commissioners on how a light regulatory hand should be 
applied to this type of technology by unanimous consent.
    Mr. Upton. Without objection.
    [The information referred to follows:]

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    Mr. Stearns. And I thank you, Mr. Chairman.
    Mr. Upton. Both Mr. Stupak and Mr. Buyer waive. Get an 
additional 3 minutes.
    Mr. Wynn?
    Mr. Doyle?
    Mr. Towns?
    Mr. Towns. Thank you very much, Mr. Chairman. Let me begin 
by first thinking you for holding this hearing.
    The landscape of the telecommunications industry is 
constantly changing and the ramifications due to the 
development of Voice over Internet Protocol would be enormous. 
While still in it's beginning stage, adoption of this new 
technology is rapidly growing and widespread adoption is 
expected within the next few years.
    As we look upon the horizon and try to predict the 
development of this new technology, I believe we should strive 
for a regulatory framework that protects the consumers, 
encourage investment and innovation and fosters competition; 
all of this should occur at the same time.
    In my district where many constituents still do not have a 
dial up Internet connection, let alone broadband service, VOIP 
is not an option for the foreseeable future. So I am concerned 
about what happens to regular local phone service for these 
consumers if the high paying profitable customer migrate to 
VOIP. The migration of consumers to this new service and the 
regulatory treatment of VOIP will have serious consequences for 
universal service and the maintenance of the existing public 
switch telephone network.
    I am pleased that most companies considering VOIP recognize 
that we must balance the need to promote the technology with 
the need to protect certain consumers. The question is where is 
that balance?
    I hope hopeful today's witnesses might help bring some 
clarity to this issue. To encourage investment companies must 
be able to operate under a predictable national framework of 
services, pricing and intercarrier compensation. The fact that 
the service, like all Internet traffic operates without borders 
makes VOIP more appropriate actually for the Federal Government 
for the FCC to look into.
    Finally, as we work toward the framework that levels the 
playing field among all telecommunications competitors, I am 
not convinced at this point that we can foster the most 
competitive environment by just tackling VOIP or whether a 
broader approach toward all Internet services is needed. I look 
forward to hearing from all of the witnesses about these issues 
and would like especially to welcome, of course, Cablevision 
because they are from a New York company so you know I want to 
welcome them especially.
    And of course, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Upton. Mr. Fossella?
    Mr. Fossella. Thank you, Mr. Chairman.
    By acknowledging the success of Voice Over IP it is clear 
that competition can thrive if allowed and consumers would 
benefit. And I speak primarily to welcome Mr. Tom Rutledge of 
Cablevision for taking time to join us today.
    Cablevision has been a leader in providing the New York 
area including portions of Brooklyn with Voice Over IP. In 
addition to being the first company to roll out their services 
system wide, Cablevision has successfully worked with law 
enforcement to include E911 and to meet all law enforcement 
access and surveillance requests. This exemplifies the will 
private industry has to do the right thing without government's 
heavy regulatory hand.
    While Voice Over IP remains a new interstate and 
international service to consumers, it's clear that private 
industry through their determination to provide competitive 
services and to remain unregulated has been able to build a 
competitive telecommunications venue that can address public 
safety and full access concerns without government 
intervention.
    I believe the individuals within the industry should be 
applauded for their accomplishments to invest capital to offer 
consumers more choice and new innovative products and services. 
And if anything comes out of this hearing today, Mr. Chairman, 
I would hope we can bring the Pickering household up to speed. 
As a New Yorker, we believe we are on cutting edge and I do not 
get to Mississippi often, but I had no idea. Perhaps if 
anything, we could take a little collection for Mr. Pickering.
    I yield back.
    Mr. Buyer. He might be able to give you some free minutes.
    Mr. Davis?
    Mr. Boucher?
    Mr. Boucher. Well thank you very much, Mr. Chairman. I want 
to compliment you this morning for focusing the committee's 
attention on a matter of far reaching consequence for the 
telecommunications marketplace.
    The arrival of advanced communications offered over the 
Internet, notably Voice over Internet Protocol service promises 
a broad telecommunications transformation. VOIP with its packet 
switched architecture offers a far more convenient and less 
costly means of making telephone calls than currently used 
circuit switched technology. Internet-based telephone calling 
will bring digital clarity, greater flexibility and a wider 
array of service offerings and substantial consumer savings 
over the analog circuit switched technology that is now widely 
in use.
    New businesses will be formed to offer VOIP and existing 
telephony providers will develop new business models around the 
technology as well. As video based IP services are broadly 
introduced in the future, even greater market transformations 
will occur.
    As the private sector both welcomes and accommodates these 
dramatic changes, a new regulatory framework is required. 
Yesterday our committee colleague, Mr. Stearns and I, 
introduced a measure that is designed to provide that new 
regulatory framework. Our goal is to treat all advanced IP 
applications, including VOIP, with a lite regulatory touch. 
Since every Internet user who is equipped for advanced services 
will have a broad choice of service providers, the services 
will be highly competitive. Accordingly, the regulations which 
have governed monopoly telephone networks should not apply to 
the new competitive Internet-based technologies. It's time for 
an entirely new regulatory framework for Internet based 
communications.
    In introducing the Advanced Internet Communications 
Services Act of 2004, Mr. Stearns and I are seeking to help 
frame the debate on advanced Internet communications regulation 
in anticipation of a broader telecommunications overhaul in the 
Congress, which we believe will begin in 2005. By suggesting 
basic ground rules today, we're hoping to make a substantial 
contribution to the rewriting of the 1996 Telecommunications 
Act. That law was an analog statute. It related to traditional 
telephone service only. The Internet is only mentioned 
collaterally in that section dealing with the Communications 
Decency Act, which by the way was unceremoniously declared 
unconstitutional by a nine to nothing vote of the Supreme 
Court.
    It is now time to have a bill that focuses on the Internet 
solely, and the measure that we have put forth is one such 
measure. Our bill would declare that all advanced Internet 
communication services including VOIP, video and data 
applications are interstate services subject to the exclusive 
jurisdiction of the Federal Communications Commission. The 
services in our bill will be specifically excluded from the 
categories of either information service or telecommunication 
service, the categories into which services are now placed.
    As advanced Internet communication services, IP services 
will have their own set of regulatory principles as embodied 
within the text of the bill. Neither the FCC nor any State 
would be permitted to regulate the rates, charges, terms or 
conditions or entry into or exit from IP-based businesses.
    Regarding VOIP specifically we would direct the FCC to 
regulate lightly in order to assure a protection of the public 
safety interest by having E911 capability, by assuring an 
appropriate contribution to the Universal Service Fund, by 
assuring access for persons with disabilities and providing 
just and reasonable intercarrier compensation when a call that 
originates as a VOIP called terminates on the public switched 
network as a regular telephone call.
    The bill requires parity and regulatory treatment among all 
providers of advances services and would break from traditional 
regulation by ceasing the regulation of specific industries in 
different ways. So in the future all services would be 
regulated in a similar manner by a common set of rules, whether 
the platform be operated by a cable company, by a telephone 
company or some other provider of broadband services.
    Mr. Stearns and his staff have done an excellent job in 
working with us as this measure was structured. And I want to 
commend them for their outstanding effort.
    It is my hope that today's witnesses will comment on some 
of the principles that we have embodied in our bill as they 
survey the landscape for VOIP regulation today and recommend to 
us what it should look like in the future.
    I want to welcome our witnesses. And thank you very much, 
Mr. Chairman, for assembling this timely discussion.
    I yield back.
    Mr. Upton. Mr. Barton?
    Chairman Barton. Thank you, Mr. Chairman. I have a formal 
statement for the record. I assume that it's been allowed to be 
entered into the record.
    Mr. Upton. It will be without objection.
    Chairman Barton. And I will just simply summarize, and I 
welcome the panel. I think this is a very important hearing. I 
think VOIP is going to be huge. It makes cell phone expansion, 
you know, look like wagon trains when it gets going.
    And I think we do need a Federal bill. I think we need to 
do the absolute minimum in terms of regulation, and I applaud 
the hearing that Mr. Upton is holding today.
    [The prepared statement of Hon. Joe Barton follows:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    Mr. Chairman, thank you for calling this hearing today. The 
Internet has dramatically changed the way we communicate, shop, learn, 
and entertain ourselves. And now Internet Protocol (IP) technology is 
changing the market for voice communications.
    Voice Over Internet Protocol (VOIP) services use IP technology to 
packetize voice signals and send such signals in packets over the 
Internet. This is a much more efficient means of sending voice signals 
than traditional circuit-switched technology. The increase in 
efficiency enables VOIP providers to offer services at lower costs and 
using less bandwidth. This should translate into lower prices for 
consumers and innovate applications that can be provided in the 
bandwidth previously reserved for circuit-switched phone calls.
    VOIP services have great potential. And many companies, such as the 
ones before us this morning, are turning that potential into reality 
today. I applaud the efforts of companies using multiple technology 
platforms to offer consumers IP-based services.
    Congress and the FCC need to ensure that these companies are able 
to operate free from stifling regulations. In particular, VOIP 
providers should not have to battle with 51 different sets of rules 
across the country. There should be only one, federal set of rules that 
apply to VOIP.
    And those rules should be absolutely minimal. VOIP should not 
become the communications medium of choice for terrorists. And 
consumers who subscribe to VOIP services should have access to E911 
capabilities. But VOIP services should not be treated like plain old 
telephone service and VOIP providers should not be treated like common 
carriers.
    VOIP services are likely to be a very disruptive force in the 
communications industry, one that will benefit consumers substantially. 
Let's make sure that government does not limit VOIP's growth.
    Mr. Chairman, thank you for holding this hearing. I look forward to 
the testimony of our witnesses.

    Mr. Upton. Thank you.
    Mr. Bass? A waive.
    Mr. Terry?
    Mr. Terry. Partially waive.
    I just want to welcome my friend Mick Jensen. He is not a 
constituent because he lives just a couple of miles outside of 
my district. Nonetheless he has been a good family friend for 
as long as I can remember and, frankly, one of the first people 
I met with to discuss telecommunications policy before I was 
even on this committee. I consider a Mick a mentor of mine in 
this area, and welcome him today.
    Mr. Upton. That concludes our opening statements.
    [Additional statements submitted for the record follow:]

    Prepared Statement of Hon. Paul E. Gillmor, a Representative in 
                    Congress from the State of Ohio

    Thank you Mr. Chairman for this opportunity, not only to gauge the 
state of competition in the communications sector, but to lay the 
groundwork for addressing the insurgence of new technologies under 
current telecommunications law.
    With the enactment of the Telecommunications Act of 1996, we were 
certainly not as dependent on email or our cell phones when conducting 
business, and of course there wasn't a blackberry in sight. With the 
recent explosion in email, wireless, broadband, and soon, voice over 
Internet Protocol (VOIP) services, yesterday's advanced services such 
as Internet dial-up and land-lines are losing steam.
    I should also point out, that while telecommunications industry 
investment remains weak, consumers have an array of new services to 
choose from, reaching farther out to serve rural areas like my Ohio 
district. Furthermore, as we have seen according to the recent trends, 
as more people subscribe to broadband Internet access, more consumers 
become aware of and are more likely to take advantage of innovative 
VOIP services; and with it comes lower costs, spurring traditional 
companies within the industry to provide these enhanced features, 
creating more competition and most importantly, the ability to meet 
customers' demands. In terms of regulation, we must continue to provide 
a communications environment conducive to new investment, 
manufacturing, competition, and lower prices for our constituents.
    I welcome the well-balanced panel of witnesses and look forward to 
learning more about the latest breakthroughs in VOIP technology and its 
potential impact on the current telecommunications sector marketplace. 
Again, I thank the Chairman and yield back the remainder of my time.
                                 ______
                                 
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming

    Thank you, Mr. Chairman.
    I look forward to our hearing today on what may be the phone 
service of tomorrow, Voice Over Internet Protocol (VOIP). The concept 
of telephone competition when we were crafting the Telecommunications 
Act of 1996 was based on the principle of shared facilities. Now we are 
nearing a world where consumers will benefit from competition, but 
instead of it being just one platform shared by competitors, it will be 
intermodal in nature. Consumers can choose what connection or ``pipe'' 
that provides broadband into their homes--be it copper, cable, wireless 
or satellite--and expect a reasonably similar suite of services on each 
platform.
    This is a truly exciting time, and one where innovation is 
rewarded. It does, however, require that we in Congress review the 
overall assumptions upon which the Telecom Act is based. The lines 
between voice and data communications has been blurred. The principles 
behind the Universal Service Fund need to be addressed, and what 
obligations one has under emergency services needs clarification. We 
also need to ensure that those of us in rural America are not left 
using 19th Century technology in a 21st Century world.
    Who would have imagined just eight short years ago that one could 
use their cable provider for voice services, or their phone company for 
video? Well, now we are entering that world. That's why this is an 
important hearing to tackle these matters in anticipation of a 
redrafting of the Telecom Act for this next Century of communications.
    I look forward to hearing from our distinguished panel on these 
matters Today and want to continue our dialog as we tackle legislation 
addressing these matters.
    I yield back the balance of my time.
                                 ______
                                 
 Prepared Statement of Hon. Eliot Engel, a Representative in Congress 
                       from the State of New York

    Mr. Chairman--thank you for recognizing me and calling this 
hearing.
    Once again, we--the members of this subcommittee and indeed all of 
Congress--are presented with advances in technology that have passed 
our nation's laws and regulations.
    Voice over Internet Protocol is an exciting technology that turns 
the home computer into a telephone.
    So the question being asked today is a simple one--is this a phone 
or computer program?
    If only the answer were as easy. In fact, there seems to be an 
inverse correlation to the ease of the question to the difficulty of 
the answer.
    Questions of intercarrier compensation, 911, CALEA, the USF program 
and disabled accessibility are all on the table.
    From my point of vantage point the easiest parts of the answer are 
ALL VOIP systems must be completely integrated with the emergency 911 
system and accessibility for the disabled. ANYTHING LESS IS 
UNACCEPTABLE.
    The systems must all be able to be accessible to law enforcement 
when they have a proper court order.
    Intercarrier compensation is a hearing unto itself--so I will skip 
that for now!
    That leaves USF--the program that provides subsidies for rural 
telephone services and the E-Rate program that funds Internet access 
for our schools and libraries.
    As my colleagues know, USF and E-Rate are funded by a fee on long 
distance usage. However, VOIP doesn't use long distance as a measure--
and as it becomes more popular one can only assume that revenues for 
USF will decline.
    Thus, due to this point I must withhold taking a position on how 
best to classify VOIP until a much better proposal of how to fund the 
USF and E-Rate emerges.
    I am aware that Chairman Barton has concerns about the management 
of the E-Rate program--and I join him with those concerns. There have 
been terrible abuses and outright fraud in by vendors of the E-Rate 
program. Let me be clear--that is stealing from kids. It is wrong. It 
WILL end.
    I look forward to working the Chairman and my colleagues on 
improving the management of the E-Rate program.
    As to VOIP, I know a number of my colleagues have introduced 
legislation to deal specifically with its regulatory framework, however 
I think that it would be best to address this in context of a larger 
re-write of the 1996 Telecommunications Act. We should not try and keep 
plugging holes in a law that was written for the analog age with 
digital age band-aids.

    Mr. Upton. At this point we are ready to hear the 
statements from the witnesses. We are joined by a very good 
panel led by Mr. Jeffrey Carlisle, Senior Deputy Bureau Chief 
of the Wireline Competition Bureau from the FCC. Mr. Jeffrey 
Citron, Co-Founder and Chairman and Chief Executive Officer of 
Vonage Holdings Corp. in New Jersey. Ms. Margaret Greene, 
President and regulatory External Affairs from BellSouth. Mr. 
Michael Jensen, CEO of Great Plains Communications from 
Nebraska. Mr. Jim Kirkland, General Counsel and Senior VP for 
Covad Communications. Ms. Kathy Martine, senior VP from AT&T. 
Mr. Robert Nelson, Michigan Public Service Commission, Chairman 
of the Committee on Telecommunications, obviously from Lansing 
and from the National Association of Regulatory Utility 
Commissioners. Mr. Thomas Rutledge, Chief Operating Officer of 
Cablevision Systems in New York and Mr. Ronald Vidal, Group VP, 
Emerging Opportunities from Level 3 from Colorado.
    Your statements are made a part of the record in their 
entirety. We would like to limit your remarks to 5 minutes, 
which the subcommittee will be able to ask questions.
    Mr. Carlisle, we'll begin with you.

  STATEMENTS JEFFREY J. CARLISLE, SENIOR DEPUTY BUREAU CHIEF, 
    THE WIRELINE COMPETITION BUREAU, FEDERAL COMMUNICATIONS 
  COMMISSION; JEFFREY CITRON, CO-FOUNDER, CHAIRMAN AND CHIEF 
 EXECUTIVE OFFICER, VONAGE HOLDINGS CORP.; MARGARET H. GREENE, 
     PRESIDENT, REGULATORY AND EXTERNAL AFFAIRS, BELLSOUTH 
       CORPORATION; S. MICHAEL JENSEN, CEO, GREAT PLAINS 
COMMUNICATIONS; JAMES KIRKLAND, GENERAL COUNSEL AND SENIOR VICE 
  PRESIDENT, COVAD COMMUNICATIONS; CATHY MARTINE, SENIOR VICE 
 PRESIDENT, AT&T CORPORATION; HON. ROBERT B. NELSON, MICHIGAN 
       PUBLIC SERVICE COMMISSION, CHAIRMAN, COMMITTEE ON 
  TELECOMMUNICATIONS, THE NATIONAL ASSOCIATION OF REGULATORY 
  UTILITY COMMISSIONERS; THOMAS M. RUTLEDGE, CHIEF OPERATING 
 OFFICER, CABLEVISION; AND RONALD VIDAL, GROUP VICE PRESIDENT, 
              EMERGING OPPORTUNITIES FROM LEVEL 3

    Mr. Carlisle. Good morning, Mr. Chairman, and distinguished 
members of the subcommittee. It is my pleasure to come before 
you today to discuss Voice over Internet Protocol also known as 
VOIP.
    On March 10, 2004 the Commission initiated its study of 
VOIP by releasing its notice of proposed rulemaking in the IP-
enabled services proceeding. Before describing the status of 
this proceeding, it is useful to first discuss how VOIP should 
be viewed by regulators in light of the changes this technology 
is bringing to the market for telecommunication services.
    Saying that VOIP is just another way to make a phone call 
is like saying Amazon.com was nothing more than another way to 
sell books. This ignores the fact that ecommerce, whether it 
was Amazon.com, eBay or any number of retail providers over the 
Internet, changed the way we buy books and everything else.
    The Internet changed fundamentally the way service 
providers compete for and relate to their consumers. VOIP is 
better understood as bringing this dynamic to voice 
communications. How so?
    The traditional voice network delivered its service over a 
dedicated centrally managed network. Whoever the owned the pipe 
into your home owns you as a customer. On the Internet the 
voice application, in fact all applications, are separated from 
the physical transmission network. They ride over it but are 
agnostic as to who provides the network as long as the network 
is capable of carrying Internet protocol. Thus, anyone who can 
attach a server to the Internet can allow 2 people, or 3, or 4, 
or 100 to talk to one another. Voice inevitably is becoming an 
application just like any other; less like a stand alone 
service that you pay a separate monthly bill for and more of a 
free or almost free add on to something else you buy.
    VOIP changes the market in two other ways. It accelerates 
the adoption of broadband, and thus accelerates the migration 
of various services from dedicated network to multi-use 
broadband platforms. If you can get more with a broadband 
connection, whether that connection is provided by DSL, cable 
modem or any other technology, you're more likely to buy it as 
a consumer; a dynamic that promotes competition and brings 
significant consumer benefit.
    VOIP also changes the market by internationalizing voice 
communications. You can download VOIP software from a provider 
in the U.S. or anywhere in the world.
    These are fundamental changes to an industry that has been 
regulated for 70 years on the assumption that all provides are 
monopolies protected by an elaborate regulatory regime and all 
providers use dedicated narrow band networks. I believe it 
would irrational for regulators to ignore these changes and 
apply legacy regulations reflexively without seriously 
examining whether they are relevant.
    History provides two very useful examples; cellular and the 
Internet. These technologies were left free to develop outside 
of common carrier regulation, notwithstanding long hard fought 
battles to impose that regulation. Today the American consumer 
and the American economy enjoy significant benefits because we 
steered that course. These two industries grew from reaching a 
handful of consumers to touching millions of lives everyday, 
all in the absence of significant common carrier regulation.
    The Commission's NPRM should be viewed in this light. The 
FCC has begun to examine VOIP because development of this 
promising technology might very well be hampered by 
unjustified, conflicting regulatory requirements that will 
result as different courts and State commissions begin to 
address this area. In this environment the Commission cannot 
simply assume that inaction will be sufficient to engender an 
environment of innovation and competition.
    The NPRM first asks whether the Commission can best serve 
the public interest by continuing its policy of minimal 
regulation of the Internet and applications provided over it. 
It asks how the Commission should classify different types of 
VOIP applications and what the nature of Federal State 
jurisdiction is over these applications.
    The NPRM asks how the Commission can best implement 
regulations designed to advance specific societal goals such as 
access to emergency services, access for people with 
disabilities and universal service. And asks whether economic 
common carrier regulation which protects against abuses by 
monopoly providers continues to have relevance in the IP 
environment.
    In response to the NPRM the Commission has received over 
150 initial comments from a wide variety of sources: VOIP 
applications providers and existing wireline companies, 
individual, State public utility commissions, public interest 
advocacy groups, 911 administrators and high technology 
companies such as Microsoft and Cisco. While these comments 
provide a rich source of material, the Commission will receive 
any more. Reply comments on due on July 14.
    In conclusion, treatment of VOIP will very likely have some 
of the farthest reaching consequences of anything the 
Commission considers in the near future. Consumers, including 
industries that rely on advanced communications, are counting 
on policymakers to get it right.
    The Commission will do its best. But while the Commission 
has some discretion to fine tune treatment of new technologies, 
it must act within the scope of its current congressional 
directives, which divide the world into regulated 
telecommunication services and unregulated information 
services. If VOIP and other new technologies are changing the 
telecommunications market such that new regulatory approaches 
are necessary, it may be time to consider whether the tools the 
Commission has today are sophisticated enough for the task. In 
the meantime, we will move forward with our job. The guidance 
and leadership of Congress is important to the success of our 
process. Accordingly, we at the FCC would like to thank you, 
Mr. Chairman, for calling this hearing and we look forward to 
working with you and other members of the subcommittee on these 
issues.
    Thank you very much.
    [The prepared statement of Jeffrey J. Carlisle follows:]

    Prepared Statement of Jeffrey J. Carlisle, Senior Deputy Chief, 
     Wireline Competition Bureau, Federal Communications Commission

    Good morning, Mr. Chairman and distinguished members of the 
Subcommittee. It is my pleasure to come before you today to discuss 
services and applications that use voice over Internet Protocol 
(``VOIP''), and the status of our examination of them at the Federal 
Communications Commission (the ``FCC'' or the ``Commission'').

                       I. THE IMPORTANCE OF VOIP

    The Commission has pending before it a number of proceedings 
initiated by petitioners about VOIP, and has initiated a broad 
examination of issues related to it. As an introduction to the status 
of these proceedings, it is helpful to discuss why the emergence of 
VOIP raises important issues, why the Commission, as indicated in the 
IP-Enabled Services Notice of Proposed Rulemaking (``IP-Enabled 
Services Proceeding''), is examining the best way to establish a 
minimally regulated environment for VOIP, and why prompt action to 
clarify the regulatory regime applicable to VOIP is crucial to the 
future of electronic communications and America's place as the leading 
innovator in the field.
A. VOIP is Changing the Nature and Business of Voice Communication
    VOIP is seen by some as simply an alternative technology for 
transmitting a traditional voice telephone call. This purely functional 
view, sometimes referred to as the ``if it quacks like a duck, it's a 
duck'' argument, is short-sighted for two reasons.
    VOIP Technology is Radically Different From Traditional Voice 
Telephony. The functional view ignores the fact that VOIP technology is 
merely an application that rides over the public Internet, or over 
dedicated data networks, just like any other application. And on public 
or private data networks the bitstream created by a VOIP application is 
no different than any other bitstream on that data network--it can be 
incorporated into other bitstreams, modified or enhanced by simply 
changing server or client software. Thus, voice can now be easily 
paired with data and video in ways that for all practical purposes 
cannot be achieved over the traditional network. Adding enhancements to 
voice, or voice to other applications, is no longer a question of a 
common carrier spending millions of dollars to purchase and implement 
modifications to highly complex circuit switches--it's a question of 
adding a new feature in the next software release. Moreover, consumers 
no longer need to pay rates well above cost for a la carte offerings of 
voicemail, caller ID, and other enhanced features--these features may 
be included in their VOIP package for free. Consumers can change their 
service selections simply by logging on to their VOIP application 
provider's website, or by choosing a new provider with more attractive 
features.
    VOIP is a Radically Different Way of Doing Business. The above 
description of what VOIP is and can do still focuses on the function 
the consumer is receiving, and one could say that, however amazing and 
easy these functions are to provide, VOIP is still a way of making a 
``phone call.'' But this raises the second reason why a purely 
functional approach is short-sighted--VOIP is much more than an 
alternative way of making a ``phone call''--it is an alternative way of 
doing business. Saying VOIP is just another way to make a phone call is 
very much like saying that Amazon.com is simply an alternative 
technology for selling books, without any broader consequences for 
markets or consumer behavior. As it turns out, e-commerce is much more 
than that--it changed the way we shop for things. It changed the market 
for books, and everything else, by opening a truly worldwide market to 
any retailer who could attach a server to the Internet, or any 
individual who could open an E-Bay account.
    So how does VOIP change the business of telecommunications? By 
allowing data networks to carry voice communications at comparable 
levels of quality to the traditional circuit-switched network, and to 
do so more flexibly and efficiently, VOIP changes the dynamics of the 
market for telecommunications services in three ways.
    The first way VOIP changes telecommunications markets is that it 
changes voice from the primary service provided by common carriers into 
nothing more than just another application on the network. Yesterday, 
voice applications were delivered over a dedicated network that 
required an enormous and well-capitalized service provider in order to 
maintain basic infrastructure. And the provider demanded a protected 
monopoly in return for doing so. Tomorrow, the voice application--in 
fact, all applications--will be separated from the physical 
transmission network. Anyone can attach a server to the Internet to 
allow two people--or three, four, five or a hundred--to talk to one 
another, just as anyone can connect a server to the Internet to provide 
email, file sharing, or any other service. The implications for how 
voice services are marketed and purchased are staggering. No longer is 
innovation the sole province of the monopoly provider, who may face 
little pressure to innovate. Rather, innovation in telecommunications 
can come from any entrepreneur, small company or enterprise that can 
connect to the network. This is the consequence of moving voice 
communications to the Internet, where intelligence is on the edge of 
the network instead of a tightly controlled core.
    With these kinds of developments, saying that a VOIP application is 
another way of making a phone call is like saying that an automobile is 
just another way of going someplace in your horse and buggy. VOIP means 
that voice will no longer be a dedicated service for which consumers 
pay a separate monthly bill. VOIP may be part of your wireless phone 
service, as it already is with many push-to-talk services; it may be 
bundled together with video and data service that you buy from your 
cable, telephone, satellite or power company; or you may buy it from 
dozens of providers over the Internet; or you may simply have it as 
part of a software package that you buy for some other purpose. Most 
likely, you will buy it in all of these different ways. Accordingly, 
when VOIP separates the voice application from the physical network, 
the question is no longer whether consumers will benefit from 
competition in the voice market. Clearly, they will. The question is, 
how long it will be until voice competition is no longer an issue, 
because voice has become an almost free add-on to something else you 
buy from multiple sources.
    In this respect it is useful to compare the evolution of the voice 
market to that of the market for email. There, too, a different and 
dynamic business model changed how we communicate, with significant 
consumer benefit. Email appears to be ``free.'' But email application 
providers thrive in a market where intense competition drives 
innovation. Advances in email provided by Hotmail, Google and Yahoo 
become headline news. Consumers can acquire email applications from 
their ISP, select web-based mail from third parties supported by 
advertisements, outsource mail services, or operate email servers on 
their own networks. In the same way, consumers will benefit from a 
market for voice applications thriving with competition, innovation and 
choices suited to their needs at significantly reduced costs--but with 
significant rewards for agile and smart companies capable of delivering 
the best service.
    The second way VOIP changes telecommunications markets is that it 
accelerates the migration to all digital, multiuse infrastructures. 
Whatever the benefits of removing the voice application from a 
dedicated infrastructure, obviously we will still need companies 
capable of maintaining the digital infrastructure that carries it. This 
business, too, is changing. For many markets in the United States, 
infrastructure will no longer be the monopoly environment of the 
traditional network. Rather, an entire range of broadband technologies, 
such as DSL, cable modem, broadband wireless, WIFI, Ultra Wide Band, 
satellites and broadband over power lines will provide connectivity. 
When networks simply provide transmission, and are not tied to a single 
application like voice or cable television, networks become highly 
substitutable for one another and competition increases dramatically, 
again rendering significant benefits to the consumer. Furthermore, the 
offering of demand-creating applications such as VOIP promotes 
deployment of broadband facilities, and increases in deployment in turn 
promote further development of VOIP and other Internet applications. 
Thus, applications and broadband create a virtuous circle that promises 
to confer significant benefits to American consumers and the American 
economy as a whole.
    The third way VOIP changes telecommunications markets is that it 
internationalizes voice communications. Just like many other 
applications provided over the Internet, it doesn't matter where the 
provider is located--a server providing a VOIP application could be 
down the street, or in the next state, or it could be in Britain, 
Ukraine, India, or, as is currently the case with Skype, in Estonia. A 
voice application provided through servers located in foreign 
countries, with the customer in the U.S. using nothing more than 
software downloaded from the Internet and purchasing a broadband 
connection from a third party, looks very different from the service 
provided by traditional phone companies. While I will discuss 
regulatory issues in greater detail later in my testimony, allow me to 
note here that this fundamental shift in how the voice application is 
provided has obvious implications for regulation. Federal or state 
regulators can apply any number of possible regulatory requirements to 
VOIP technology, but if regulators decide to do so we must acknowledge 
that it may be very difficult for us to enforce these requirements, 
that we will place voice providers in this country at a competitive 
disadvantage to voice providers located in relatively less regulated 
countries, and that, as providers relocate abroad, we will cause the 
loss of desirable jobs in the high technology sector.
    Much of what I have described is a look into the reasonably 
foreseeable future. But VOIP is already changing the market's dynamics, 
even though it has not yet become ubiquitous. In 1998, VOIP carried 
less than 0.2% of the world's international voice traffic. In 2002, 
VOIP carried 10.4%, and, in 2003, is estimated to have carried 12.8%. 
Recently, Cablevision announced that it would provide a bundled package 
of digital cable, high speed Internet, and unlimited local and long 
distance calling for $90. If you consider what consumers pay for 
digital cable and broadband in the marketplace today, at this price, 
the voice service is essentially free. This is exactly what one would 
expect when voice, which uses relatively little bandwidth, is provided 
over a high bandwidth connection.
    There are other indications that VOIP, while only gradually making 
its way into the public consciousness, is nevertheless growing at an 
increasing pace. A report released June 27 by the Pew Internet & 
American Life Project and the New Millennium Research Project estimates 
that approximately 14 million Americans have already made some sort of 
voice communication over the Internet. Skype, an 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?
    To be sure, the Commission has long relied on a policy of limiting 
regulatory intrusion on the Internet and applications provided over it. 
The Commission could have waited and raised the question of how VOIP is 
regulated at some point in the future, after it matured. At the end of 
2003, incumbent local exchange carriers (``ILECs'') and competitive 
local exchange carriers (``CLECs'') served over 181 million access 
lines in the United States, and even at astronomical growth rates it 
will be some time before VOIP services and applications constitute a 
significant portion of the U.S. voice market. But there are two factors 
pressuring for Commission attention and, by implication, legislative 
action.
    First, industry actors are deploying these applications today, and 
are bringing their questions to the Commission. VOIP only started to 
become used more broadly in the domestic market within last two to 
three years. Thus, the Commission has seen companies occupying niches 
across the telecommunications industry--VOIP applications providers, 
ILECs, data companies and interexchange carriers (``IXCs'')--file 
petitions seeking clarification from the Commission regarding 
regulatory treatment of VOIP beginning in September of 
2002.1 The petitions filed over the last two years 
demonstrate the need for a measure of certainty on important regulatory 
questions, and, while the petitions are pending, create their own 
measure of uncertainty as to how the FCC is going to apply its current 
regulations in this very new environment.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    Second, because of the historic and important role of state public 
utility commissions in regulating intrastate telecommunications, states 
have now begun to look at these questions, raising the possibility of 
differences among state regulatory regimes, and between various state 
and federal regulatory regimes. Some state commissions have decided to 
wait until this service further develops or until the FCC acts. But 
others have moved forward to examine VOIP, and some, such as Minnesota 
and New York, have already taken steps to classify VOIP applications as 
regulated telecommunications services. Federal courts in both states 
have stayed the effectiveness of these rulings. Nevertheless, companies 
offering VOIP are dealing today with multiple attempts to apply 
potentially inconsistent regulatory regimes, with the imminent prospect 
of more to come.
    It is not surprising, then, that while there is investment capital 
that would fuel even further innovation, there is hesitance to bring 
this capital to market while the regulatory regime remains unclear. 
While this might be said of any number of areas of telecommunications 
law, it is particularly true of VOIP, given that much of the innovation 
in the area is coming from small companies and entrepreneurs who are 
most vulnerable to shortages of investment capital. Accordingly, the 
FCC has begun to examine this area not because it is looking for 
something to do, or because it is interested in any way in regulating 
the Internet. The FCC has begun to examine this area because there is a 
demonstrated need for clarity in the face of growing deployment of VOIP 
and the very real possibility that this deployment will be hampered by 
burdensome and conflicting regulatory requirements.

                 II. THE IP-ENABLED SERVICES PROCEEDING

    Because of the need for the Commission to provide clarity to 
consumers, industry and the investment community, on March 10, 2004, 
the Commission released its Notice of Proposed Rulemaking (``NPRM'') on 
IP-Enabled Services, docket number 04-36. This NPRM asked commenters to 
tell the Commission how it could best craft a regime for VOIP that 
would encourage innovation and ensure that the benefits of this 
technology could reach consumers.
    The NPRM discusses how VOIP will change how voice service is 
delivered to business and residential customers, and then starts from 
the question of whether the Commission can best serve the public 
interest by continuing its policy of minimal regulation of the Internet 
and applications provided over it. It asks for comment as to how the 
Commission could determine whether a service using VOIP is a regulated 
telecommunications service or an unregulated information service under 
the 1996 Act. Should the Commission establish the line at the point 
where VOIP technology interfaces with the public switched telephone 
network? Should the Commission use a purely functional approach that 
makes the distinction based on whether the given service is a 
replacement for traditional telephony? Should the Commission use a test 
that examines whether the service substitutes for traditional telephony 
as determined by a traditional market analysis? Should the Commission 
instead adopt a layered approach, view VOIP purely as an application 
riding over a network, and thus regulate applications very lightly 
while applying a more stringent regime to facilities? And what impact 
should it have on the Commission's analysis that VOIP can be provided 
via peer-to-peer services that simply connect two users, as opposed to 
the centrally managed networks used by traditional service providers? 
In the case of traditional service providers, there is an entity to 
regulate that, presumably, has some control over and information about 
the calls routed over its network. In the peer-to-peer case, consumers 
communicate directly with one another, and aside from establishing the 
link, the provider of the peer-to-peer application may have little or 
no control over the call.
    Related to the question of classification, the NPRM asks how the 
Commission might best achieve a minimally regulated environment. If 
classified as an information service, the service is nevertheless 
subject to the Commission's general jurisdiction to regulate all 
interstate and international communications by wire and radio. 
Alternatively, even if a service is classified as a telecommunications 
service, Congress has directed the Commission to forbear from enforcing 
its own regulations or the requirements of the statute if enforcement 
is not necessary to protect consumers, ensure against unjust, 
unreasonable or unreasonably discriminatory practices, or protect the 
public interest.
    The NPRM goes on to solicit comment as to jurisdiction. It notes 
the Commission's recent order in response to a petition for declaratory 
ruling filed by Pulver.com regarding Free World Dialup--as described in 
the petition, a free peer-to-peer application facilitating voice 
communication between members of a closed group, which does not break 
out to the public switched telephone network. The Commission's order 
was released on February 19, 2004, and held that Free World Dialup was 
an information service subject to federal jurisdiction. The Pulver.com 
order further held that state regulation treating Free World Dialup 
like a regulated telecommunication service would most likely be 
preempted given the Commission's finding and an explicit Congressional 
policy against burdening the Internet with unnecessary federal and 
state regulation. The NPRM acknowledges that the Pulver.com Order only 
addressed one type of VOIP, and asked about the extent to which the 
reasoning in the case can be applied to other types, such as VOIP 
applications that interface with the public switched telephone network.
    Having solicited comment on how the Commission should classify 
VOIP, and who should have jurisdiction as to whether to regulate VOIP, 
the NPRM then asks what regulations, if any, should apply, and develops 
an important distinction. The NPRM asks whether regulations that were 
designed to protect against the power of a monopoly provider of 
services, with control over the bottleneck facility of the wire into 
the consumer's home, have any application in an environment where 
consumers can choose any number of applications providers, and use 
those applications over multiple networks. That is, why does it make 
sense to require VOIP application providers to obtain prior permission 
from the government to enter or leave the market, or to conduct 
acquisitions, mergers or initial public offerings? Why should VOIP 
application providers file tariffs or comply with regulatory accounting 
requirements? These measures were designed to place the government in a 
position to control the power of potentially abusive monopoly 
providers. If technology has redressed the imbalance in power between 
consumers and providers by lowering barriers to entry and allowing the 
consumer to choose his or her service provider, and change that choice 
easily, does this type of economic common carrier regulation continue 
to have any relevance, at least as regards providers using VOIP? 
Certainly, precedent indicates that where competitive choice is 
possible, lower regulatory burdens are justified. This has been the 
case with cellular providers, which are not subject to many of the 
common carrier requirements that might otherwise apply to them. It has 
also been the case with nondominant wireline providers. The NPRM 
solicits comment on these issues.
    This class of economic common carrier regulation is distinguished 
from requirements that might be generally thought of as social 
obligation regulation. These are the kinds of requirements that, as a 
society, we have decided should apply to any provider of voice 
services, as opposed to only those providers that have a dominant 
market position. Thus, even if a provider of voice is not dominant, it 
may nevertheless be a good idea to ensure that its customers can have 
access to emergency services through that provider. Even if the market 
for voice services is changing in fundamental ways, it is still a basic 
goal of the Communications Act to ensure that all Americans have access 
to reasonably comparable services at affordable prices. Certainly, one 
might say that free voice service essentially achieves that goal. But 
if it is necessary to purchase some form of broadband facility in order 
to reach it (not to mention equipment and software), then it may be 
necessary to examine how we understand universal service and support 
for it may need to change over time. The social obligations raised in 
the NPRM and related proceedings include emergency service via the 911/
E911 system, access to telecommunications by people with disabilities, 
universal service, and authorized law enforcement access to electronic 
communications--important societal goals that should not be compromised 
as the market changes. But the NPRM recognizes that the method of 
reaching those goals may very well change, and that the versatility of 
VOIP might, for example, actually result in better 911 service and 
superior access for individuals with disabilities. Accordingly, while 
it makes clear these goals continue to be important, the NPRM also asks 
how the Commission can best achieve them in the new environment, 
acknowledging both the problems and opportunities presented by new 
technology.

          III. COMMENTS ON THE IP-ENABLED SERVICES PROCEEDING

    I am pleased to report to you that the response by the public to 
the NPRM has provided the Commission with a rich record, and features 
original and thought-provoking analyses of the issues. By May 28, 2004, 
the date for filing of initial comments, the Commission had received 
over 150 sets of comments. These comments have come to the Commission 
from a wide range of sources, indicating the broad interest this 
proceeding engenders not only among industry actors, but across 
American society as a whole. These sources include:

 15 state public utility commissions, and two organizations 
        representing state commissioners, the Federation for 
        Economically Rational Utility Policy and the National 
        Association of Regulatory Utility Commissioners;
 county 911 administrators;
 the Department of Homeland Security and the Department of Justice;
 groups involved in studying and advocating public policy as it 
        relates to high tech issues, such as the Electronic Frontier 
        Foundation;
 public interest groups that represent specific groups of consumers, 
        such as AARP, the American Foundation for the Blind, 
        Communication Service for the Deaf, the National Consumer 
        League and the Ad Hoc Telecommunications Users Committee;
 trade groups that represent the interests of industries, as well as 
        some industries related to but outside the world of traditional 
        wireline telephony providers, including the Telecommunications 
        Industry Association, CTIA, NCTA, the Information Technology 
        Association of America, and the High Tech Broadband Coalition;
 Internet Service Providers;
 many well-known high technology companies such as Microsoft and 
        Cisco;
 local exchange carriers, both incumbent and competitive, as well as 
        the Association for Local Telecommunications Services, CompTel/
        Ascent, and the United States Telecommunications Association;
 rural telephone companies, as well as organizations relating to our 
        representing them, such as NECA, NTCA and OPASTCO; and
 numerous VOIP application providers, such as 8X8, Pulver.com, 
        Callipso, Dialpad, Vonage, and the Voice on the Net Coalition.
    In any proceeding, a record of this size and scope would provide a 
significant resource for the Commission to draw upon, and it certainly 
does so here. However, this is only half of the story--reply comments 
are due on or before July 14, 2004, and the Commission reasonably 
expects to receive significantly more material.
    At the present time, the record can best be characterized as 
follows. The parties have, by and large, acknowledged the significant 
changes that VOIP technology will bring. They differ, however, as to 
the specific regulatory implications of that change.
    A number of commenters, largely state commissions and rural 
incumbent local exchange carriers (``rural ILECs''), argue that if VOIP 
provides the functional equivalent of a voice call, then it should be 
regulated in the same way as traditional voice telephony. Others argue 
for a multi-factor test to determine whether a service should be 
regulated or not. For example, NCTA argues that a VOIP application 
should be subject to the same regulation as telecommunications service 
providers if the following applies: (1) it makes use of 10 digit 
numbers under the North American Numbering Plan; (2) it is capable of 
receiving calls from the public switched telephone network at one or 
both ends of the call; and (3) it represents a possible replacement for 
traditional telephone service. However, NCTA also argues that if a 
service meeting all of these criteria also uses IP protocol between the 
service provider and the consumer, including use of an IP terminal 
adapter and/or IP-based telephone set, it should be subject to minimal 
regulation. Still others, such as AT&T, SBC, many of the high 
technology companies and software providers, and all VOIP application 
providers, argue that functional approaches or factor approaches are 
doomed to obsolescence as technology develops, and that the Commission 
should instead broadly classify services using IP technology, or at 
least those reaching or leaving the customer in IP format, as 
information services.
    Another strain of comments advocates a layered approach to 
regulation. Commenters such as MCI and others argue that the primary 
benefit of using IP to transmit voice is that it allows industry to 
move from using networks that are optimized for and dedicated to a 
single function, voice, to a network capable of delivering multiple 
functions. Accordingly, regulation should reflect the fact that 
services and applications are no longer tied to the physical 
infrastructure. If dozens or hundreds of competing services and voice 
applications are provided over the infrastructure layer, there is 
little or no justification for continued common carrier regulation at 
those levels. Rather, the focus of common carrier regulation should be 
on underlying facilities, where issues of market power might still 
exist.
    Interestingly, differences on classification among commenters did 
not necessarily translate to differences over jurisdiction. Some rural 
ILECs, their trade organizations, many of the commenting state 
commissions and NARUC argue that VOIP applications, if they are 
classified as telecommunications services, can and should be regulated 
at the state level. Some state commissions, such as the Maine Public 
Utilities Commissioner, advocate for less for a strict delineation of 
federal and state jurisdiction, as opposed to a partnership between 
federal and state regulators, with the Commission responsible for 
ensuring an effective overall regulatory scheme. Other rural ILECs, the 
Federation for Economically Rational Utility Policy, and virtually all 
companies interested in offering VOIP applications, whether ILEC, IXC, 
CLEC, VOIP provider or other high tech company, have argued that VOIP 
applications are inherently interstate--that it is impossible to 
determine geographic end points for calls when customers can use VOIP 
applications from anywhere in the world, that IP networks ignore 
domestic and international boundaries when transporting bits, thus 
rendering the intrastate/interstate distinction meaningless, and that 
the Internet and services provided over it have always been considered 
to be subject to federal jurisdiction only.
    With regard to whether economic common carrier regulation should 
apply, high tech companies and VOIP application providers 
overwhelmingly also agreed that there is no need for it. Many 
commenters that argued some VOIP applications should be classified as 
telecommunication services, nevertheless, also argued that they should 
be subject to federal jurisdiction only and that the Commission should 
forbear from applying economic common carrier regulation. The Illinois 
Commission, while arguing that state and federal regulation should 
coexist, with preemption only applying to state requirements that are 
inconsistent with federal requirements, nevertheless thought that 
extension of traditional utility regulation to emerging IP-enabled 
services was unwarranted. Some state commissions and many commenting 
rural ILECs concluded that VOIP applications should be subject to the 
same level of regulation as traditional voice providers, although 
America's Rural Consortium pointed out that this parity could be 
achieved through federal preemption of state regulation of voice 
service and removal of regulations from both VOIP and traditional 
providers.
    As for social obligation regulation, there was general agreement 
among the commenters that universal service, 911 and other issues of 
this type will continue to be important in the new environment. There 
was, however, disagreement as to how best to achieve these goals. VOIP 
application providers and many of the 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. Many others have argued for mandatory application of these 
requirements, with most commenters focusing on specific areas: groups 
involved with advocating for disabilities access argued that mandatory 
disabilities access requirements should apply; some incumbent and rural 
ILECs that receive support from the Universal Service Fund and access 
charges argue that these obligations should apply pending changes in 
the system.
    The Commission has received a wealth of comments that truly 
represent views across the spectrum. While I have made some initial 
generalizations here, the Commission is waiting for the remainder of 
the record to come in and looks forward to seeing these issues explored 
in even further detail.

                           IV. RECENT ACTIONS

    In addition to our work on the IP-Enabled Services Proceeding, the 
Commission is also working on several petitions regarding VOIP. I'll 
first describe two recent orders the Commission issued in this area, 
and then summarize the remaining petitions.
    The Commission recently resolved the following petitions:

 Pulver.com. As I previously mentioned, on February 19, 2004, the 
        Commission released an order resolving a petition for 
        declaratory ruling filed by Pulver.com. In that order, the 
        Commission found that Pulver.com's Free World Dialup Service 
        was neither telecommunications nor a telecommunications 
        service, but was instead an information service subject to 
        federal jurisdiction, and that state regulation conflicting 
        with this classification would most likely be preempted. This 
        order was significant in terms of clearly establishing that 
        Internet-only voice applications would be treated very much 
        like any other applications traveling over the Internet: as 
        being unfettered by federal or state regulation.
 AT&T. On April 21, 2004, the Commission released an order resolving a 
        petition for declaratory ruling filed by AT&T. In this order, 
        the Commission denied AT&T's request to exempt its use of VOIP 
        from access charges, when AT&T only used the technology to 
        transport calls that originated and terminated on the public 
        switched telephone network, and did not provide any enhanced 
        functionality, cost savings, or net protocol conversion for the 
        end user. This transport was carried out as part of AT&T's 
        conventional service offerings and was transparent to the 
        consumer. The Commission issued this decision to bring to an 
        end self-help AT&T was engaging in to avoid access charges that 
        would normally apply to its routing of long distance calls. The 
        Commission, by issuing this decision, did not prejudge the 
        application of access charges to other types of VOIP service, 
        which are still subject to consideration in both the IP-Enabled 
        Services Proceeding and the Intercarrier Compensation docket. 
        Thus, this decision was explicitly limited to the factual 
        circumstances described by AT&T.
    Petitions pending before the Commission are as follows:

 Vonage. On September 22, 2003, after the Minnesota Public Service 
        Commission ruled that Vonage's service was a regulated 
        telephone service under state law, Vonage filed a petition for 
        preemption of this decision. Subsequently, Vonage obtained a 
        reversal of this decision from a federal district court. An 
        appeal of that court decision to the United States Court of 
        Appeals for the Eighth Circuit is pending, while Vonage's 
        preemption petition is still pending before the Commission.
 Level 3. On December 23, 2003, Level 3 filed a petition for 
        forbearance, requesting that the Commission forbear from 
        applying access charges to calls that 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.
    Although the Commission hopes to focus its efforts on resolving the 
questions posed by the NPRM, these petitions also provide possible 
areas of resolution for specific questions related to VOIP. Please also 
note that many of the issues that relate to universal service and 
intercarrier compensation are being considered in other dockets by the 
Commission. Moreover, the Commission expects to release in the near 
term a Notice of Proposed Rulemaking addressing issues regarding VOIP 
and the Communications Assistance for Law Enforcement Act (``CALEA'') 
raised by the Department of Justice, the Federal Bureau of 
Investigation, and the Drug Enforcement Agency in their recently filed 
petition for rulemaking. Consideration of VOIP issues will not delay 
broader resolution of those dockets, and the Commission hopes to move 
expeditiously on all fronts.

                             V. CONCLUSION

    The Commission has indicated in the IP-Enabled Services Proceeding 
and in its resolution of various petitions that it is cognizant that 
VOIP is leading to significant developments in telecommunications 
markets. Perhaps most importantly, from the perspective of a regulator, 
VOIP is changing the nature of the relationship between consumers and 
providers. Thus, it would be wholly irresponsible for any regulator to 
impose obsolete regulations reflexively, simply in order to protect a 
legacy regime. The examples of cellular technology and the Internet are 
perhaps most instructive in this respect. In both cases, the 
technologies were left to develop free of many of the regulatory 
requirements and regimes applicable to common carriers, notwithstanding 
long and hard fought battles to impose such requirements. Today, the 
American consumer and economy are far better off because of the 
deregulatory course that has been steered--these two industries now 
touch millions of lives, bring considerable benefits to consumers, and 
generate substantial economic growth. All in the absence of common 
carrier regulation.
    Thus, while the Commission deals with many significant issues, it 
is very likely that treatment of VOIP will have the farthest-reaching 
consequences of anything the Commission will consider in the near 
future. The Commission is not simply considering minor adjustments to 
specific regulations--the Commission is considering the future of 
electronic and optic communication for many years to come. Consumers, 
the many industries that rely on information technology and advanced 
communications in their business, the telecommunications, computer and 
software industries, and the investment community are all counting on 
the Commission to get it right. It is no overstatement to say that the 
world, also, is watching how the U.S. decides to treat these services. 
Telecommunications regulators and policy makers in other countries want 
to know whether the United States will create an environment that is 
conducive to growth and investment in innovation, or an environment 
where the United States figures as little more than an also-ran because 
other countries, with clear national policies, have been able to 
surpass it.
    I will conclude by noting that I believe it is important when 
dealing with the public policy implications of revolutionary new 
technologies to start from the perspective of how to best create the 
world we all want to live in, rather than applying regulatory 
structures that may have been rendered obsolete. The relevant question 
is how we as a society deal with the fundamental change in electronic 
communication we are witnessing, rather than falling into rather 
abstract fights over definitions. This being said, the Commission can 
only act as it may be allowed under the Act, which divides the world 
into regulated telecommunications services and 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 
working changes in the telecommunications market such that new 
regulatory approaches are necessary, you may need to consider whether 
the tools the Commission has today are sophisticated enough for the 
task.
    In the meantime, the Commission will move forward with its work, 
and the guidance and leadership of Congress is important to the success 
of its process. Accordingly, we at the FCC would like to thank you, Mr. 
Chairman, for calling this hearing, and we look forward to working with 
you and other members of the Committee on these issues.

    Mr. Upton. Thank you very much.
    Mr. Citron?

                   STATEMENT OF JEFFREY CITRON

    Mr. Citron. Good morning Chairman Upton, Ranking Member 
Markey and members of the committee. That you for the 
opportunity to be here today.
    I'm Jeff Citron. I'm CEO of Vonage Holdings Corp. We are 
the leading providing of consumer and small business VOIP 
services in the United States with over 200,000 subscriber line 
equivalents.
    Vonage is at the forefront of this new emerging market, 
which approximately 400,000 users and as such, we are 
confronting public policy issues that have never been seen 
before. Policy makers are asking us what is voice IP? Is it 
like a phone or is more like email? Will it replace the 
traditional switch networks or just be another option for 
consumers? How can public safety needs be met and improved 
upon?
    Indeed, VOIP is turning the traditional notions of 
telephony on their heads as it blends voice and data into 
existing new offerings never seen before.
    In the face of such uncertainty and change there is a 
tendency by some to try and wedge this new technology into a 
common carrier regime, a mild design for monopoly wire line 
owners. I hope this committee will not act out of fear as 
others have, and instead exercise its leadership and 
understanding by creating a new national framework that keeps 
this innovative technology free from inappropriate regulation 
therefore enabling it to evolve and grow where the 
possibilities are endless.
    For the first time in history consumers are experiencing 
widespread residential local and national competition. 
Competition in turn lowers prices and improves offerings. 
Vonage offers customers the ability to replace their existing 
telephone service with voice over IP for as little as $14.99 a 
minute. This also includes 500 minutes of national calling with 
the most popular features like caller ID with name, call 
waiting and voice mail and host of more all included for free.
    At the same time, Vonage is meeting its public policy goals 
by supporting universal service, CALEA, 911 and local number 
portability. And the good news doesn't stop here. Everyday 
people upgrading their dialup Internet connections to get 
access to this new killer application, it offers better value 
and many new innovative features.
    Now, as consumers increasingly demand these new services, 
the capital markets have finally taken notice. This has spurred 
investment capital to flow into new and existing companies such 
as ours which in term has lead to the creation of new jobs, 
increased capital spending on telecom equipment. But this 
resurgence is already in jeopardy under attack by disparate 
interests which for fear of change and lack of understanding 
suggest that voice over IP must be subject to a full suite of 
common carrier regulation. These disparate groups ignore the 
difference between VOIP offerings and traditional wireline 
networks with complete disregard for the underlying interstate 
nature of the service. Should you allow improper regulation to 
take hold, consumers and the telecom industry will suffer 
greatly.
    And Congress has already shown its leadership by enacting 
critical social policy goals. It then became incumbent on all 
of this operators to work together with the FCC to achieve 
these goals. Vonage has demonstrated our commitment in this 
area of becoming the first portable or mobile VOIP provider to 
adopt a basic 911 solution.
    Vonage continues in its commitment to universal service by 
paying indirectly into the Universal Service Fund. And 
furthermore, new technologies such as voice over IP can help 
meet the USF's primary goal of providing affordable 
communication services to everyone everywhere without the need 
for costly subsidies.
    As for intercarrier compensation, virtually every 
participant in the system has acknowledged that there is a need 
for reform of the settlement system. And there needs to be put 
in place a system, a national carrier intercompensation system 
ensuring fairness for all parties including new entrants. While 
this work is underway, it'll be reckless to subject VOIP 
providers to a broken system.
    Now Vonage is fully committed to meeting the needs of law 
enforcement personnel and has already responded to numerous 
requests, subpoenas from government agencies. If policymakers 
are concerned that the CELEA statute may not apply to VOIP 
providers, then they should address the deficiencies of the 
CELEA statute.
    As Congress consider VOIP issues, we remind that the 
Internet applications are interstate in nature, whether they be 
voice IP applications, sending bits of sound from one 
destination to another or a web browsing program sending bits 
of an image and text back and forth. Each bit of data deserves 
the same treatment regardless of what content it is carrying.
    Congress exercises far reaching leadership by promoting 
Internet development, and now we need Congress to act again. We 
enthusiastically support proposed legislation as a thoughtful 
and sensible compromise that would ensure our voice over IP 
providers can continue to innovate, create jobs and allow 
America to recapture its lead over this technology.
    I look forward to answering any questions you may. Thank 
you very much for this opportunity.
    [The prepared statement of Jeffrey Citron follows:]

  Prepared Statement of Jeffrey Citron, Chairman and Chief Executive 
                  Officer, Vonage Holdings Corporation

                            I. INTRODUCTION.

    Good morning Chairman Upton, Ranking Member Markey, and Members of 
the Committee, and thank you for inviting me to appear before you 
today. I am Jeffrey Citron, Chairman and CEO of Vonage, the leading 
voice over Internet protocol (``VOIP'') provider in the United States.
    I am honored to be here today. This Committee has been at the 
center of the technological and telecommunications revolution that has 
swept the United States over the last decades. Now, we have reached a 
critical juncture with the emergence of new technologies, and it is 
imperative that Congress exercise its leadership to pave the way for 
these technologies before their progress is halted by impenetrable 
regulatory roadblocks. Going forward, the members of this Committee 
will play a key role in ensuring that the United States maintains its 
dominant position in the international technology community, and that 
every American is able to experience the communications advances that 
are being developed on what seems like a daily basis. As such, I 
sincerely value the opportunity to contribute to the debate about VOIP 
services.
    Headquartered in New Jersey, Vonage uses a VOIP software solution 
to bring voice communications service to consumers nationwide. Vonage 
customers use a third-party provided broadband connection to make 
Internet calls, either to another user on the Internet, a traditional 
telephone, a wireless customer, or a user of another Internet protocol 
(``IP'') network. Regardless of the type of call, a Vonage customer 
uses a computer and a broadband Internet connection. Through the use of 
special software and the Internet, Vonage provides its customers with a 
new communications tool that offers exciting new features and 
functionality at a significant cost savings to traditional telephone 
service. Further, because the Vonage service requires customers to use 
a broadband Internet connection, Vonage's VOIP service drives broadband 
adoption. For the first time, many of Vonage's customers now find they 
have a reason to subscribe to high speed Internet service. Indeed, 
Internet telephony is stimulating the telecommunications and Internet 
industries, and the economy as a whole.
    The consumer and investor response to our VOIP product has been 
remarkable. As recently as 2001, Vonage was in the research and 
development phase, and the company did not fully launch its service 
until 2003. Nevertheless, Vonage is already the clear Internet 
telephony industry leader, commanding about 50 percent of the market 
share with a national reach that accounts for more IP telephony lines 
than the entire North American cable industry combined. Just this week, 
Vonage will activate its 200,000th line.
    While the response to our product is overwhelming, VOIP is still in 
its infancy, with only .1 percent of all U.S. telephony subscribers, 
according to Merrill Lynch. As the market and the technology develop, 
we encourage policy makers to resist wedging this promising new 
technology into rigid regulatory boxes that were created for legacy 
monopoly communication systems and markets. Vonage's form of VOIP is an 
``information service'' like e-mail, and rides over the Internet, which 
is inherently interstate and incongruous with artificial boundaries.
    We understand that critical public policy needs must be met in the 
context of VOIP, and we commit to working with policy makers on issues 
such as 911 emergency calling, law enforcement interception, disability 
access, and the provision of universal service. Meeting these needs, 
however, does not require that VOIP be regulated under a system of 
rules created decades ago, intended to govern the conduct of wireline 
carriers who faced no competition.
    Failing to apply new thinking to this new technology carries 
serious consequences. VOIP providers would have to divert their 
energies to complying with a patchwork of 51 sets of regulations of 
questionable merit to this new technology. Compliance would not only be 
difficult, but in many cases impossible. The result of misguided state 
efforts to regulate new Internet applications is draining resources 
away from deployment and innovation. Already, Americans are missing out 
on the benefits of competition and advanced functionality that citizens 
of Japan and China readily enjoy. Americans are losing out on broadband 
adoption and the economic benefits it brings. On a broader level, the 
failure by the United States to capitalize on this opportunity is 
retarding further innovation, driving VOIP providers off-shore, and 
contributing to the export of technology, jobs, and the tax base. 
American technological competitiveness is suffering, and we are already 
lagging behind many countries in Asia and Europe in broadband 
deployment and VOIP offerings.
    Congress and this Committee have exercised visionary leadership 
with respect to the Internet by codifying in the Telecommunications Act 
of 1996 a policy of exempting ``information services'' and thereby the 
Internet from common carrier regulation. That critical step put this 
nation on a path toward great advances in Internet technology, and 
ultimately to the creation of VOIP. We now look to Congress to continue 
its bold leadership, for a step back would have catastrophic 
consequences. Time is of the essence, as states have already begun the 
process of applying antiquated rules to this promising new technology. 
On the federal level, the Federal Communications Commission (``FCC'') 
appears to be headed in the right direction, but will need your support 
and guidance as it struggles to ensure that these new technologies 
flourish while at the same time meeting important public policy goals. 
We are relying on Congress to reject ill-fitting regulatory models and 
focus on principles that value consumer benefits, innovation, and 
economic development.

            II. VOIP CREATES CONSUMER AND ECONOMIC BENEFITS.

    VOIP technology furthers a number of national policy goals. It 
provides consumer benefits such as lower prices, innovative features, 
and competition. Vonage's VOIP service, and similar VOIP services, 
drive broadband adoption, as high speed access is a prerequisite for 
using the services. Further, this new technology stimulates economic 
development and American competitiveness.
    VOIP Technology. Vonage's service is a software application, 
independent of the underlying transmission facilities that carry the 
calls to the Internet. Vonage's VOIP service converts analog voice 
transmissions into digitized data packets and transmits these packets 
over either the public Internet or managed IP networks. These data 
packets are routed using Internet protocol, which is the world's most 
common method for sending data from one computer to another.
    Vonage's Product. The Vonage service operates using a VOIP platform 
to transmit voice over the public Internet. Vonage customers place 
calls using computer equipment that is connected to the user's high-
speed wireline, cable, or fiber-to-the-home connections, Wi-Fi network, 
and eventually new networks that have not yet been built. The digital 
signal is sent over the public Internet, then in some cases, back 
through a traditional phone network to the receiving party's phone. In 
order to permit Vonage's end users to communicate with end users on the 
traditional public switched telephone network (``PSTN''), Vonage had to 
make our service reverse-compatible with today's technologies. However, 
our product is also forward compatible; if the receiving party also is 
a Vonage customer, the call is transmitted wholly across the Internet, 
never touching the traditional phone network. Forward-compatibility 
also enables us to terminate calls to wireless phones and other IP 
networks without ever touching the PSTN.
    In some cases, Vonage customers utilize a software program loaded 
on their computers to make a call. In other instances, the customer 
will use the special computer adapter. When using the special adapter, 
the broadband Internet connection is bridged to an ordinary phone 
essentially serving the same function as a microphone and headset when 
attached to a computer. In the near future, because Vonage provides a 
software application similar to instant messaging or e-mail, Vonage 
customers will be able to use a Wi-Fi cordless handset or even personal 
digital assistants (``PDAs'') or other Internet-enabled device loaded 
with special ``softphone'' software.
    Consumers Get More for Less. Through innovative software and 
hardware, Vonage provides its customers with increased functionality 
and significant cost savings. For example, the Vonage service package 
includes voicemail, caller ID, call waiting, call forwarding, call 
transfer, 3-way calling, repeat dialing, call return, caller ID block, 
and call hunt for no extra charge. Vonage customers experience such 
enhanced functionality as local number portability, area code 
selection, the ability to use multiple phone numbers, web based 
voicemail retrieval, national number mobility, and online features 
management. For this multitude of services, Vonage offers customers 
flat rate billing options that range from $14.99 per month for 500 
minutes anywhere in the United States and Canada to $29.99 for 
unlimited residential local and long distance calling in those areas.
    Competition. Congress has made it a national priority to encourage 
telecommunications competition. While great strides have been made by 
traditional telecommunications providers in the competitive business 
and long distance markets, there has been no meaningful competition in 
the local residential market. VOIP providers are accelerating 
competition in this area, realizing technological advancements and 
lowering consumer costs, all of which are goals Congress sought to 
achieve with the 1996 Telecommunications Act.
    Even within the VOIP market, companies have implemented a variety 
of consumer offerings that generally fall under the ``VOIP'' banner, 
two of which are consumer applications: computer-to-computer and 
computer-to-phone. Using computer-to-computer products, the call 
dialing and receiving party both must possess special premises 
equipment that differs from an ordinary analog telephone. Vonage 
customers can talk computer-to-computer, and Vonage's service is also 
capable of reverse-compatibility with the legacy phone system by 
performing the net protocol conversion necessary to allow customers on 
the Internet to communicate with customers on traditional switched 
networks and vice versa, largely known as computer-to-phone VOIP. 
Additionally, Vonage users are able to communicate with many other 
kinds of networks, such as wireless networks and IP networks. In short, 
Vonage both enables reverse-compatibility with existing services while 
readying consumers for the technologies and functionalities of the 
future, when all networks will be IP based.
    Broadband Deployment. While an estimated 85 percent of U.S. homes 
currently are capable of receiving broadband Internet access, only 
about 20 percent of all U.S. homes (23 million total broadband 
subscribers) have adopted the technology. These numbers pale in 
comparison to countries such as Korea and Canada. Those countries had 
broadband penetration levels at almost twice that of the United States. 
Also impressive is the development of broadband services in Japan. In 
2001, there were less than 10,000 digital subscriber line (``DSL'') 
broadband customers in the entire country. In just three years, the 
broadband market has swelled to over 10 million customers.
    Because VOIP services require a broadband connection to achieve the 
necessary speed and ``always on'' functionality, VOIP provides 
consumers with the incentive to upgrade to these broadband networks. In 
fact, many Vonage customers upgrade to broadband simply to use our 
service. Often these customers find that they can receive the 
additional benefits of Vonage's service and high speed broadband for 
less money than it typically costs to purchase a traditional telephone 
service and narrowband Internet access. VOIP penetration drives 
broadband adoption, which in turn promotes broadband deployment.
    American Competitiveness. Investment in the technology sector will 
drive innovation and help America reinforce its role as the world 
technology leader. This role is at stake given that broadband 
deployment has lagged in this country, and VOIP adoption in other 
countries has already surpassed the U.S. That growth has been 
attributed, in no small part, to the Internet telephony services that 
some Japanese broadband providers offer, like Yahoo! BB, which already 
has 3 million VOIP users. The only way America can maintain its 
position as the world's technology leader is to foster the growth of 
new technologies like VOIP.
    Economic Benefits. VOIP can spur a telecommunications industry 
rebound and contribute to the national economic recovery. The 
telecommunications industry, which once helped drive the technology 
boom of the mid-to-late nineties, has been hard hit by the nation's 
economic slump. Merrill Lynch estimates the S&P integrated telecom 
index fell about 64 percent from January 2000 to January 2004, while 
the broader market fell only about 24 percent. According to a 2004 
VentureOne report, investment levels in the communications sector are 
down to 1996 levels.
    Internet telephony can help revive the telecommunications, 
technology, and equipment sectors and the economy in general. 
Excitement surrounding VOIP services has already increased investment. 
A VentureOne report stated that IT investments increased to $2.3 
billion last quarter, up from $2.1 billion in the third quarter. That 
increase, which was the first time IT funding had demonstrated 
sequential growth since 2000, was due in part to several large 
investments in VOIP providers. Further, several VOIP equipment 
manufacturers, such as Sonus, Cisco, Lucent, and Motorola posted large 
stock price gains for 2003, partially due to increasing interest in 
VOIP equipment and services.

  III. CONGRESS SHOULD CONTINUE ITS POLICY OF ALLOWING ``INFORMATION 
              SERVICES'' TO GROW UNFETTERED BY REGULATION.

    In an effort to stimulate innovation and competition in the 
Internet sector, Congress and the FCC have long respected policies that 
differentiate ``information services'' from regulated 
telecommunications services. While Internet telephony may, in some 
respects, resemble traditional telephony from a consumer perspective, 
from a technical and regulatory perspective, Vonage provides an 
``information service.''
    Federal Precedent. Federal policy has long differentiated 
``telecommunications services'' and ``information services.'' The FCC 
distinguished between ``basic services'' and ``enhanced services'' as 
far back as 1980 in the FCC's Second Computer Inquiry, 77 FCC 2d 384 
(Computer II). Basic services are essentially telecommunications common 
carrier services that are regulated under Title II of the 
Communications Act of 1934. The FCC concluded that regulation of 
enhanced services is unwarranted because the market for those services 
is competitive and consumers benefit from that competition. Id. at 433. 
The FCC acknowledged that notwithstanding this decision, there is a 
communications component in some enhanced services. Id. at 435. The FCC 
reaffirmed the distinction between basic and enhanced services in its 
Computer III proceeding in 1986. Third Computer Inquiry, 104 FCC 2d 958 
(Computer III).
    Congress Codifies Distinction. The Telecommunications Act of 1996 
mirrors this distinction with its definitions of ``telecommunications 
service'' and ``information service.'' The 1996 Act defines 
``telecommunications service'' as ``the offering of telecommunications 
for a fee directly to the public or to such classes of users as to be 
effectively available directly to the public regardless of the 
facilities used.'' 47 USC 153(46). The Act defines 
``telecommunications'' as ``transmission, between or among points 
specified by the user, of information of the user's choosing, without 
change in the form or content of the information as sent and 
received.'' 47 USC 153(43). By contrast, the 1996 Act defines 
``information service'' as ``the offering of a capability for 
generating, acquiring, storing, transforming, processing, retrieving, 
utilizing, or making available information via telecommunications, and 
includes electronic publishing, but does not include any use of any 
such capability for the management, control, or operation of a 
telecommunications system or the management of a telecommunications 
service.'' 47 USC 153(20).
    By codifying these definitions, Congress set out a policy of 
separating regulated common carrier services from Internet services to 
encourage innovation and competition. Congress found that ``[t]he 
Internet and other interactive computer services have flourished, to 
the benefit of all Americans, with a minimum of government 
regulation.'' 47 USC 230(a)(4). In order ``to promote th[is] continued 
development,'' the 1996 Act reaffirmed the ``policy of the United 
States' of maintaining the Internet ``unfettered by Federal or State 
regulation.'' 47 USC 230(b).
    ``Information Services.'' By these definitions, VOIP is an 
information service, and not a telecommunications service. VOIP is a 
software application that rides on broadband Internet networks. VOIP 
service offers the ``capability for generating, acquiring, storing, 
transforming, processing, retrieving, utilizing, or making available 
information via telecommunications.'' 47 USC 153(20).
    Policy Has Worked. The government's policy of encouraging 
innovation through a regulatory safe harbor sparked unimagined 
innovation in Internet development, and led to the development of VOIP. 
For years, VOIP services were more theory than reality, and were 
largely ignored by policy makers. The neglect proved positive as 
entrepreneurs and inventors saw an open playing field and were provided 
incentive to create. VOIP is rapidly growing, and should be allowed to 
continue, without the trappings of common carrier regulation. Now, as 
VOIP is gaining consumer acceptance, policy makers have announced an 
intention to explore and even regulate the service, but this would be a 
mistake. As I have noted, VOIP still only accounts for .1 percent of 
U.S. telephony subscribers. The technology is in its infancy, and 
should be allowed to grow consistent with the policy that led to its 
inception.
    To that end, policy makers should clarify the existing statutory 
framework to ensure that it continues to reward innovation, foster 
consumer benefits, and facilitate broadband deployment and the growth 
of the Internet. In this respect, it is imperative to make clear that 
VOIP services such as Vonage's are not telecommunications services, but 
rather are interstate information services.

      IV. THERE ARE SERIOUS RISKS TO PREMATURELY REGULATING VOIP.

    Regulating VOIP prematurely could threaten the consumer and 
economic benefits that have already resulted from this nascent 
technology. While the technology is beginning to reach the mass market, 
it is still evolving, and it is too early to know what regulations, if 
any, are necessary. What is known, however, are the risks of 
regulation.
    Patchwork of State Regulation. Failure to establish a federal 
policy protecting the growth of VOIP could result in a patchwork of 
premature, burdensome state legislation and regulations, crippling the 
domestic VOIP industry. Overregulation, particularly differing 
regulations in all 50 states and the District of Columbia, will make it 
impossible for VOIP to grow. Newer companies like Vonage do not have 
the resources to participate in proceedings at every state utility 
commission, nor to comply with 51 sets of differing regulations that 
may each have the same goal, but may require us to comply in different 
ways. The Internet, by its very nature is an interstate service, 
incapable of being divided into artificial boundaries. Policy makers 
should recognize this inherent feature of the Internet when formulating 
policy and applying such policy to applications riding over the 
Internet.
    Vonage's Experience. Vonage experienced first hand the strain that 
burdensome state regulations can place on a nascent technology company. 
The Minnesota Public Utilities Commission (``PUC'') last year asked 
Vonage to obtain a certificate of authority to provide a telephone 
service. Vonage had less than 500 customers in Minnesota, yet was 
forced to vigorously oppose the Minnesota PUC to avoid the 
establishment of an improper state level precedent. As a result of the 
arguments asserted by Vonage, the United States Federal District Court 
for the District of Minnesota ruled in Vonage's favor on October 14, 
2003 and issued a permanent injunction.
    Notwithstanding the outcome in Minnesota, the New York Public 
Service Commission (``PSC'') in May of this year issued a similar order 
asserting its jurisdiction over the interstate information services 
that Vonage provides. Once again, Vonage was forced to seek relief in 
Federal court. Just last week Magistrate Judge Eaton in the Southern 
District of New York indicated his intention to issue a preliminary 
injunction precluding the PSC from imposing legacy telecommunications 
regulations upon the company.
    While Vonage is pleased with these decisions, successfully fighting 
these cases is a serious drain on Vonage's resources, and continues to 
be burdensome. The Minnesota PUC is currently appealing the case for a 
second time and a hearing on the issuance of a permanent injunction in 
New York is scheduled for early next year. This litigation is forcing 
Vonage to use valuable human and financial resources to fight court 
battles, directing these resources away from service enhancements and 
innovations, including technical solutions to meeting public policy 
goals. Vonage simply can not afford to continue to duplicate this 
effort in 48 other states and the District of Columbia. We would be 
driven out of business.
    We hope that federal policy makers will take action to make clear 
to states that VOIP is an interstate information service, thereby 
halting the march of the states to regulate it.
    National Policy Issues. With resources stretched thin for VOIP 
providers, overregulation by the states or the federal government would 
slow technological development. With the uncertainty that is created by 
this regulatory hodgepodge, capital will dry up. If the U.S. becomes a 
hostile environment for VOIP, domestic innovation will slow, risking 
this nation's role as a technology leader. Furthermore, since VOIP 
services are provided over the Internet, they can be launched from 
anywhere on the globe. Providers like Skype are already offering 
services from off-shore locations. Not only would it be a loss of this 
nation's technology base, once providers move off-shore, the U.S. would 
have no access to the services and thus face difficulties meeting 
public policy goals such as 911 service, universal service, or law 
enforcement intercepts for these off-shore services. The U.S. would 
also lose an important tax base, and would see a further exportation of 
service jobs.

            V. VOIP PROVIDERS CAN MEET PUBLIC POLICY GOALS.

    While policy makers are rightfully concerned about how VOIP fits in 
with public policy goals, VOIP can assist in meeting these aims, and in 
some cases it even holds more promise than legacy systems. VOIP will, 
of course, have to meet public policy goals in ways that are 
technically feasible for its technology, and government should help 
facilitate such growth through an understanding of the capabilities and 
limitations of the technology.The issues public policy makers most 
often identify as areas of concern are compliance with emergency 911 
capability, disability access, universal service, law enforcement 
access to call intercepts, and intercarrier compensation. However, 
public policy goals can be and are being met without classifying VOIP 
as a telecommunications common carrier service.
    911 Dialing. The ability to access emergency services through 
dialing 911 is an important feature for consumers of telephony, whether 
it is plain old telephone service, wireless service, or VOIP service. 
VOIP service offers the promise of truly exciting functionality in this 
area. While we are building solutions now, ultimately VOIP will offer 
consumers and emergency workers more functionality than the services of 
today. For example, VOIP customers in the future might be able to 
access 911 services through any Internet-equipped device, such as a 
Blackberry, PDA or instant messaging product. In addition to the 
customer's precise location, emergency workers may be able to instantly 
and seamlessly access that customer's medical history, while at the 
same time a separate message could notify the customer's primary 
physician or family members of the emergency situation.
    Vonage is the VOIP industry leader in providing a 911 solution to 
its customers. Similar to traditional telephone service, Vonage 
customers who dial ``9-1-1'' on their handsets have their calls 
forwarded to the Public Safety Answering Point (``PSAP'') for that 
customer's designated area. There are, however, several technology 
issues that currently cause the Vonage solution to differ in certain 
respects from traditional 911 service.
    First, similar to cellular providers, the mobility of the Vonage 
service prevents it from being able to identify the actual geographic 
location of customers that place a call using the Vonage software. 
Thus, Vonage requires customers to register their location before they 
are able to use the 911 service, and then routes any 911 calls to the 
PSAP serving that location. Because of the mobility of VOIP customers, 
Vonage is developing technology solutions to provide enhanced location 
information to PSAPs. We are currently in the midst of several trials 
of a new solution, in Rhode Island, Minnesota, Washington and Texas.
    Second, in order to route 911 calls to a PSAP's dedicated 911 
lines, Vonage must obtain interconnection to the incumbent LECs. While 
some incumbents are cooperating with Vonage and local PSAPs, others are 
refusing to work with Vonage and local PSAP administrators to foster 
interconnection arrangements or technical trials. The reaction has been 
mixed, to say the least. In this area, it would be helpful for Congress 
to encourage the LECs to provide such assistance as access to trunk 
interconnection so we can fulfill our commitment to offering wireline-
comparable 911 services.
    Vonage makes the limitations inherent in its 911 service clear to 
all Vonage customers and is continually working to remedy these issues. 
Vonage is working with the National Emergency Number Association 
(``NENA''), which recently adopted a joint resolution with the VOIP 
industry, to develop technical solutions for VOIP 911, and we are 
regular participants in the NENA working group. We participated in the 
FCC's March 18, 2004, Internet Policy Working Group ``Solutions 
Summit'' on 911/E911 issues associated with Internet-based 
communications services. Further, Vonage is working to upgrade its 911 
service and negotiating with competitive LECs to obtain indirect access 
to the E911 trunks.
    Vonage is confident that it will be able to offer a 911 solution to 
its customers in the near future that is comparable to that offered by 
traditional telecommunications providers. All of this is being done 
despite the fact that VOIP is not classified as a common carrier 
service nor required to provide these offerings.
    Disability Access. Individuals who have disabilities should have 
full access to the range of developing technologies. While VOIP 
technology and deployment are in the early stages, VOIP providers 
anticipate software solutions to disability-related obstacles to 
service. Given the flexibility of software solutions, we anticipate 
that VOIP providers will ultimately be able to offer greater 
functionality than the traditional legacy systems.
    Universal Service. Congress has expressed its commitment to 
ensuring that rural and underserved areas receive telecommunications 
services equivalent to those found in more high-density or well-funded 
locations through the Universal Service Fund (``USF''). In this 
context, Congress is contemplating USF reforms and may consider the 
role of VOIP services as part of that exercise. While it has been 
suggested that VOIP is a threat to the fund and therefore VOIP services 
must be regulated as telecommunications services, in fact the existing 
system is ``failing'' for a number of reasons and VOIP does not need to 
be regulated as a common carrier service in order to make direct 
contributions to USF.
    The FCC has opened a rulemaking in which it is examining ways to 
ensure that USF support remains sustainable. As part of that 
proceeding, it has recognized that numerous factors are contributing to 
the decline in monies paid into the USF, and the emergence of VOIP 
services is only one small piece of that puzzle. For example, the 
decline in long distance rates, the proliferation of flat-rated calling 
plans and bundled service packages, and the substitution of wireless, 
e-mail, instant messaging, and other services for traditional long 
distance calling have all reduced monies flowing into USF.
    VOIP providers can and do pay into the fund as end-users, and there 
is flexibility under current law to accommodate VOIP services in 
relation to USF. Even if policymakers determine that VOIP providers 
should contribute directly to USF, such a result could be achieved 
under existing law. The FCC has broad statutory authority to modify the 
current contribution metrics without engaging in any perversion of the 
dichotomy between information and telecommunications services. FCC 
Chairman Powell testified before this Committee on October 30, 2003, 
that the FCC has ``legal authority to assess Universal Service 
contributions against information service providers that use telecom.'' 
Under current law, VOIP providers offer information services, but they 
use some underlying telecommunications services. VOIP providers need 
not be regulated as carriers to be required to contribute to universal 
service.
    Unfortunately, the USF distributions currently are weighted heavily 
towards the support of legacy narrowband networks, which are not 
capable of supporting broadband Internet access services or the modern 
applications that run on these broadband networks. This continued 
support of legacy networks at the expense of the deployment of modern 
broadband networks and applications will only serve to further distance 
the United States from the rest of the world leaders in terms of 
broadband adoption and the development of modern applications, such as 
VOIP. Therefore, Vonage believes it is important that any USF reform 
efforts should consider policies that encourage construction of 
broadband-capable networks in high cost areas.
    Law Enforcement Intercepts. Without exception, Vonage has complied 
with all subpoena requests from law enforcement, including providing 
call logs, records, and other detailed account information. In the 
future, Vonage software will also allow law enforcement intercept 
capabilities. Vonage is committed to assisting law enforcement and will 
comply with VOIP requirements determined by policy makers. The FCC has 
announced its intention to open a proceeding to consider the 
interaction between CALEA and VOIP. Vonage looks forward to 
participating in that proceeding, and in working toward a technical 
solution wherein VOIP providers can continue to assist law enforcement 
in their surveillance efforts. It is not necessary, however, to 
classify VOIP as telecommunications services in order to meet law 
enforcement needs.
    Intercarrier compensation. Intercarrier compensation has been 
included in the panoply of issues that policy makers are considering as 
they evaluate the impact of VOIP services on the market and on public 
policy. Vonage does not connect directly to the phone network, but 
rather contracts with carriers to transport its calls to their 
destination on the public switched network. Vonage has not thus far 
participated in proceedings related to VOIP access charges (computer-
to-computer calls are subject to Internet industry voluntary peering 
arrangements for termination to other computer users). Nonetheless, 
Vonage recognizes, as many policy makers do, that the access charge 
system is broken and in need of repair. However, Vonage emphasizes that 
VOIP is not the source of the access system's ills; these problems have 
myriad causes and predated the emergence of VOIP by several years. VOIP 
consumer products, such as Vonage's service, will not have an impact on 
access charges for a long while to come, as we represent only .1 
percent of telephony subscribers.
    The existing system of intercarrier compensation is complex, 
imposing unique charges on each different type of carrier and each 
different type of service. The FCC has recognized that these 
disparities are unsustainable in a converging and increasingly 
competitive market and has been examining intercarrier compensation 
reform for almost three years. Vonage urges Congress to support the 
FCC's efforts to reform this broken system.
    In Section 254(e) of the Telecommunications Act of 1996, Congress 
required the FCC to make the implicit subsidies in the access charge 
regime explicit, and the monies to be collected in the Universal 
Service Fund. The FCC has begun the process of making interstate USF 
support explicit and reducing subsidies implicit in interstate access 
charges. We are hopeful that the FCC will finish these reforms as 
quickly as possible and that the states will also take up this 
important matter and remove implicit subsidies and rationalize their 
intercarrier compensation systems as well.
    Removing implicit subsidies from the system of access charges and 
imposing a single cost-based termination charge on all types of 
providers and traffic should end any alleged arbitrage opportunities 
and bring rationality to the system.

                          VI. RECOMMENDATIONS.

    As Congress contemplates the role of VOIP as a provider of consumer 
voice services, we offer our perspective on what policies would help 
VOIP to grow. First, Congress should make clear that VOIP is an 
interstate service, like the Internet itself. Doing so will bring 
regulatory clarity, which will stimulate investment and promote further 
consumer benefits. Second, Congress should reaffirm that VOIP services 
such as Vonage's are ``information services,'' and therefore VOIP 
providers such as Vonage are information service providers. Public 
policy needs can be met without regulating communications over the 
Internet as if they were being provided by a telecommunications 
carrier.
    We look forward to working with Congress during this exciting time. 
We hope that Congress will continue its support for Internet based 
technology, by allowing the sector to grow unfettered by ill-fitting 
regulations that were designed for legacy systems. Any less would 
imperil VOIP carriers like Vonage in the face of what will soon become 
overwhelming regulation. VOIP providers have something valuable to 
offer to consumers, but we can only move forward by focusing our 
limited resources on improving our service, growing, and meeting 
critical public policy mandates like those this Committee is 
considering.
    Accordingly, we are pleased to offer our unqualified support for 
Rep. Pickering's bill, which would help keep VOIP on an innovative, 
disruptive path by clarifying jurisdictional lines for VOIP services. 
This bill offers thoughtful direction on difficult issues such as 
intercarrier compensation, USF, 911 services and law enforcement access 
to VOIP technology. We urge this Committee to markup this bill as soon 
as possible.
    I look forward to answering any questions you might have. Thank 
you.

    Mr. Upton. Ms. Greene?

                 STATEMENT OF MARGARET H. GREENE

    Ms. Greene. Mr. Chairman, members of the subcommittee, 
thank you for inviting me here today and for recognizing that 
telecom policy really is about technology. Voice over IP, the 
technology bringing us together today is disruptive, but it is 
merely a technology not the disruptive industry shock. The real 
shock, the earthquake that has disrupted the global telecom 
landscape is the increasing mobility and convergence of 
networks and devices.
    The industry is moving in clear fundamental directions, 
from wireline to wireless, from narrow band to broadband. And 
all things broadband and wireless are moving to IP. The 
profound implications of that are becoming more evident 
everyday. Surely wireless and broadband networks have changed 
your communication experience, and yet their impact remains 
largely absent from our policy decisions.
    A few facts. Disruptive shock No. 1: Wireline to wireless. 
More and more customers go to wireless. In 2002 wireless 
customers surpassed wireline customers in number. Wireless 
minutes dramatically increased while wireline voice minutes, 
especially in long distance, declined. And yet wireline policy 
continues on much as it has for the last decade, if not for the 
last seven decades.
    Disruptive shock No. 2: Narrow band to broadband. In the 
digital broadband era once separate technologies have 
converged. Two-thirds of the traffic on BellSouth's network is 
not data, text, photo, video. No longer just plain old voice. 
The combined effects of broadband and IP are profoundly 
disruptive; broadband because of the rich applications that it 
can deliver to consumers and IP because it is quickly becoming 
the common denominator across all communications. Whether it is 
your cell phone, your laptop or your interactive pager; most 
any form of communication people are using today is either at 
or moving toward an IP platform.
    Where Internet applications like email and instant 
messaging replace over 40 percent of what used to be local 
phone calls. Broadband competitors have names like BellSouth 
and Comcast, but also Microsoft, Cisco, Vonage, Skype. Apple, 
IBM, Earthlink. VOIP, it is real, it is imminent, it is a new 
software application which creates a new market.
    VOIP technology allows voice to be turned into data and 
carried over the network in packets. It is not a new network, 
but it is a use of existing networks. Cable telecom companies 
and many others are rapidly moving forward deploying VOIP 
technology. Best Buy and Circuit City sell a Vonage starter kit 
for $29.99. Cablevision launched voice over IP across its 
entire footprint. Time Warner now offers voice over IP in 
Charlotte and Raleigh-Durham and shortly throughout the region. 
Cox has rolled out in Roanoke. Comcast plans to offer VOIP 
service to 40 million customers by the end of 2005. AT&T has 
launched CallVantage in 34 markets and plans to sign up a 
million customers by the end of 2005.
    At BellSouth we have explained our VOIP solutions for our 
business customers and we are exploring ways to bring increased 
functionality and technology to our residential customers.
    But why are these statistics important? Because they show 
that broadband, wireless, IP telephony, high speed 
unconstrained and always on communications are here today. 
These are the shocks that technology has unleased in our 
telecom ecosystem, and we have not even mentioned the impact of 
broadband over power lines.
    How policymakers respond to these shocks will be a major 
determinant of the course of the industry. The response must be 
timely, but it must also be comprehensive and balanced. It must 
recognize that the functionally equivalent technologies need to 
be lumped together and treated alike, not separately considered 
or singled out for preferential treatment. And we must 
recognize that government cannot keep pace with the technology 
cycle, and should not try to legislate on a technology specific 
basis.
    For this reason, we think voice over IP should not be the 
subject of stand alone legislation. But nor should it be the 
subject of 51 different approaches. Like most of telecom 
policy, it should be jurisdictionally interstate and subject to 
the exclusive jurisdiction of the FCC.
    Much of the value of VOIP comes from the value of being 
able to be carried on the ubiquitous public network. Today 
there are two broadband capable networks that exist; cable and 
wireline telecommunications with the promise of two more, fixed 
wireless and power lines. Yet only the wireline network has the 
burden of legacy social dues which include governmental 
intervention and control at both the retail and the wholesale 
level. Access charges were established to provide compensation 
for these social responsibilities. Nothing changes that 
equation when VOIP is involved. Those that use the public 
switch network should pay compensation for its use.
    Additionally, the underpinning and main prerequisite for 
providing VOIP service is a broadband connection which between 
85 and 90 percent of U.S. households can now obtain from a 
provider other than their incumbent local exchange telephone 
company. And that is why I would like to recognize the Boucher-
Stearns bill as a positive contribution to the regulatory 
debate. That bill recognizes the role that networks play in the 
development and growth of voice over IP by freeing the 
underlying IP broadband networks from legacy regulation.
    IP-enabled services should be free of economic regulation, 
of discriminatory regimes like computer inquiry rules that 
stifle innovation and raise the cost of broadband services. 
Instead we need to shift the focus to vital issues facing us 
such as universal service contributions across all 
technological platforms; 911, access for the disabled, privacy 
safeguards and cooperation on homeland security. With that 
focus we can ensure that this technology brings the greatest 
benefits to consumers as quickly as possible.
    Thank you.
    [The prepared statement of Margaret H. Greene follows:]

  Prepared Statement of Margaret H. Greene, President--Regulatory and 
                External Affairs, BellSouth Corporation

    Mr. Chairman, Congressman Markey, members of the Subcommittee, 
thank you for giving me the opportunity once again to testify before 
you to present BellSouth's views on Voice over Internet Protocol 
(VOIP). Your hearing today is timely and I am sure it will prove to be 
a valuable contribution to the consideration of the many issues that 
VOIP presents. Today, we have the Congress, State Legislatures, Federal 
Courts, the Federal Communications Commission (FCC) and State 
Regulatory Commissions all looking intensively at this issue.
    VOIP is a software application that allows voice to be turned into 
data and carried over the network in packets. VOIP is not a new 
network, but a use of the existing network to provide new voice 
alternatives. The underpinning and main prerequisite for providing VOIP 
service is a broadband connection, which between 85 and 90 percent of 
U.S. households can now obtain from a provider, other than their 
incumbent local exchange telephone company. Additionally, in the 9 
BellSouth states, DSL now passes more than 75% of all households. 
Riding on this competitive infrastructure, a wide range of providers 
are deploying and marketing VOIP services nationwide. All six major 
cable operators, which collectively reach 85 percent of U.S. 
households, have begun commercial deployment of VOIP, or have announced 
plans to do so imminently. VOIP services are now being offered in 
markets throughout the country by incumbent local exchange carriers 
such as BellSouth, AT&T and other inter-exchange carriers, CLECS and a 
new breed of VOIP-only competitors such as Vonage and Pulver.com. Here 
are a few examples demonstrating that VOIP is real. It is imminent and 
it will transform voice into another data application--

 Best Buy and Circuit City are now both making available a ``Vonage 
        Broadband Phone Service Starter Kit'' for $29.99 after a $50 
        rebate.
 Cablevision has already launched VOIP across its entire footprint.
 Time Warner now offers VOIP in Charlotte and Raleigh-Durham and will 
        shortly expand throughout the region.
 Cox has rolled out in Roanoke, Virginia.
 Comcast announced plans to offer VOIP service to 40 million customers 
        by the end of 2006.
 AT&T has launched its CallVantage service in 34 markets and plans to 
        sign up 1 million customers by the end of 2005.
    VOIP providers now market their service as a primary-line 
replacement, and the majority of consumers are purchasing the service 
as such. Significant numbers of consumers have already abandoned 
circuit-switched service in favor of VOIP, and their ranks are rising 
very rapidly. Added functionality and price points are the cornerstone 
of why consumers are moving to VOIP. Analysts predict that, within the 
next three years, local telephone companies will lose up to 10 percent 
of their line to cable-operator providers of VOIP services, and 
millions of additional lines to other VOIP competitors. On June 14, 
2004, the New York Times reported on a Mercer Management Consulting 
survey that indicated that as many as 30% of all U.S. homes will 
subscribe to VOIP in the next three years. This is astronomical growth 
given that the same article reported that the market research firm, 
IDC, is expecting only 600,000 such VOIP subscribers by the end of this 
year, with Vonage being the current dominant provider with 200,000.
    Why such a massive increase in three years? The answer is that 
there has been an earthquake in telecommunications. The industry is 
moving in clear fundamental technological directions--from wireline to 
wireless; from narrowband to broadband--and all things broadband and 
wireless are moving to IP.
    VOIP services match the functionality of conventional circuit-
switched voice in many respects, including voice quality, total home 
wiring, and number portability, and are typically priced 30-40 percent 
or more below comparable circuit-switched offerings. VOIP providers 
also offer many features that are unavailable on conventional circuit-
switched networks.
    Most importantly, VOIP is promoting adoption of broadband service 
itself. As FCC Chairman Powell and AT&T CEO David Dorman have both 
indicated, VOIP is now widely viewed as the ``killer app'' for 
broadband service. Because VOIP will give consumers an increased 
incentive to subscribe to broadband service, it will expand the base of 
broadband customers, and thereby lower the average cost of providing 
broadband service. Today, about 24 million customers--22 percent of 
U.S. households--currently subscribe to broadband; 30 percent will by 
the end of 2004 and almost 40 percent by the end of 2005. As the 
participation by Best Buy and Circuit City in marketing Vonage VOIP 
service attests, the incremental cost, for these broadband customers, 
of adding VOIP service is low. This is due to the fact that the 
principal incremental cost of adding VOIP, for a customer who already 
has a broadband connection, is for a relatively inexpensive adapter 
that encodes the analog signal into digital packets.
    Given that VOIP service costs considerably less, many customers 
would likely substitute VOIP for circuit-switched service, even if 
there was some difference in quality or functionality. But as industry 
analysts, competitive carriers, and equipment vendors now uniformly 
agree, VOIP provides comparable or superior quality and functionality 
to conventional circuit-switched service.
    Change is in the process of occurring as we speak here today, and 
there are a number of issues that need to be addressed concerning VOIP, 
broadband and economic regulation of these applications and services.

                     A. JURISDICTION--STATE OR FCC

    When you have VOIP phone service, your phone number no longer has a 
relationship to your physical location. The user can choose any area 
code offered by the VOIP provider, and it need not be an area code 
where you live. Two examples that I will cite for you will illustrate 
what this is all about.
    First, on June 14, 2004, Brian M. Carney, the Deputy Editorial Page 
Editor of the Wall Street Journal Europe wrote a column for the Op-Ed 
page of the Wall Street Journal (U.S. edition) entitled ``VOIPification 
(No, It's Not In the Dictionary . . . Yet). Mr. Carney tells us in this 
article that he lives and works in Brussels, Belgium, where he is a 
Vonage customer and that he has a phone in his apartment that is 
assigned a telephone number with a 917 (U.S.) area code. 917 is one of 
the area codes for New York City. As he points out in his article: 
``friends and relatives in New York can call for the cost of a local 
call and we can call them--or anyone else, anywhere in the U.S. or 
Canada--for a fixed monthly fee of around $30.''
    The second example involves the decision by the Minnesota Public 
Utilities Commission (MPUC) to require Vonage to comply with Minnesota 
laws that regulate telephone companies. This MPUC determination was 
appealed to Federal District Court and the court granted Vonage a 
permanent injunction against this MPUC action finding that Vonage's 
service was an information service not subject to state jurisdiction. 
The court pointed out in its recitation of the facts in this case that 
at that the time of the MPUC decision (September 2003) that Vonage had 
500 customers with billing addresses in Minnesota. It also had 38 
customers with Minnesota billing addresses who had requested telephone 
numbers not geographically situated within Minnesota and 88 customers 
with billing addresses outside of Minnesota.
    What these two examples illustrate is that VOIP is not an 
intrastate communication service within the meaning of Section 2(b) of 
the Communications Act of 1934. Yes, you can make a call on a VOIP 
phone say from here on the Hill to our offices on 21st Street, but you 
could also take that VOIP phone on vacation with you to Florida and 
call back to the office on 21st Street. The two calls would use the 
same phone number, and the actual location of the caller is unknown. IP 
enabled services, meaning services such as broadband internet access 
and applications such as VOIP that rely on the IP protocol, should be 
determined to be jurisdictionally interstate and subject to the 
exclusive jurisdiction of the FCC.
    At least two state legislatures (Florida and Pennsylvania) have 
passed laws pertinent to VOIP. A number of states regulatory bodies 
such in Alabama, California, Colorado, Illinois, New York, Ohio and 
Wisconsin are considering issues raised by VOIP, either on their own, 
or in response to petitions from interested parties. This 
jurisdictional confusion should be ended as it creates a climate of 
uncertainty that is not conducive to investment and innovation.
    We have followed the development, introduction and deliberations 
regarding the two major VOIP bills that have been introduced to date in 
the Congress ``H.R. 4129 introduced by Congressman Pickering and S.2281 
introduced by Senator Sununu. Both bills wisely provide that VOIP 
applications are to be subject to Federal government jurisdiction and 
delegation of that authority to the states is prohibited by the terms 
of the bills.

                        B. REGULATORY TREATMENT

    IP enabled services that include VOIP applications and broadband 
internet access services should be free of economic regulation, by 
which I mean the authority to regulate any IP enabled service with 
respect to its rates, charges, terms or conditions for any such service 
as well as authority to regulate entry into or exit from the IP-enabled 
services market. This withdrawal of economic regulation is warranted by 
the fact that as the FCC has recently noted: ``[a]s communications 
migrate from networks relaying on incumbent providers enjoying monopoly 
ownership of the underlying transmission facilities to an environment 
relating on numerous competing applications traversing platforms, power 
over the prices and terms of service necessarily shifts from the 
provider to the end user.''
    Today's disparate regulatory treatment assigned to providers of 
``telecommunications services'' and ``information services'' is 
inappropriate in the context of IP enabled services. The VOIP and 
broadband markets are widely competitive, making economic regulation of 
these services and applications inappropriate and unwarranted.
    In the current VOIP market, there are already multiple providers of 
VOIP offering services in non-traditional ways. Hosted voice providers, 
free of economic regulation such as Vonage currently dominate the VOIP 
market. Cable operators, also free of legacy economic regulations, 
continue to invest in their own VOIP infrastructure and are expected to 
dominate the consumer cable VOIP market by the end of this year. The 
result of all of this largely unregulated (with the significant 
exception of the BOC new entrants) investment activity is that VOIP is 
now competitive with those voice services available over traditional 
circuit switched networks. These competitive circumstances also make 
the elimination of economic regulation of these circuit switched 
services likewise warranted.
    The market for broadband internet access is equally as competitive 
as the VOIP market. Broadband over cable is now available to more than 
85% of all U.S. households and should be available to 90% by the end of 
this year. Small businesses are increasingly turning to cable for 
broadband access service and inter-exchange carriers, not ILECs, have 
captured most of the business broadband market. Moreover, inter-modal 
competition continues to grow by means of fixed wireless while the 
nation's largest electric utility companies have been conducting 
broadband over power line (BPL) trials. The Power Line Communications 
Association estimates that BPL will reach between 750,000 and 1 million 
customers by the end of this year and independent industry analysts 
estimate that BPL could reach 6 million power lines by 2006.
    Given these market conditions, IP enabled services should be free 
of economic regulation and Bell operating companies that are non-
dominant in the provision of broadband services should no longer be 
subject to legacy type regulation, such as the Computer Inquiry rules 
that stifle innovation in, and raise the cost of, the broadband 
services that are essential to VOIP. The legal, technological and 
market circumstances of the early 1980's when the Computer Inquiry 
rules were established are very different than those that exist in 
broadband today.
    Neither H.R. 4129 nor S.2281 totally accomplishes these regulatory 
reform goals. They do for VOIP applications, but not for broadband 
internet access services. We believe that legislation should not, as 
these bills both do, address only a single application such as VOIP as 
Congress will, if this approach is taken, surely wind up having to 
legislate on each flavor of new communications technology. Given the 
rapid pace of change in communications, this would surely be a futile 
effort. At a minimum, the issues revolving around the jurisdiction and 
regulation of all broadband services should be addressed.

                      C. SOCIAL POLICY OBJECTIVES

    All IP enabled services, even though free from economic regulation, 
should contribute to federal universal service support mechanisms, be 
subject to inter-carrier compensation obligations, provide access to 
the disabled, provide emergency 911 services and provide assistance to 
law enforcement. Simply put, the regulatory framework should be 
constructed so that all analogous IP enabled services are treated the 
same, regardless of transmission technology or legacy regulation.
1. Universal Service and Inter-carrier Compensation
    There should be a regulatory framework designed to provide 
incentives to invest in new services and facilities, which will 
eventually require a comprehensive and holistic overhaul of current 
universal service funding and PSTN access charge regimes that will 
eliminate opportunities for arbitrage. Steps must be taken to level the 
playing field in both these areas through the establishment of a 
competitively neutral mechanism for universal service funding and for a 
unified inter-carrier compensation regime that eliminates existing 
distortions and arbitrage opportunities. By doing so, there will be 
eliminated any incentive for carriers to characterize their IP-enabled 
service offerings exclusively to avoid legitimate contribution and 
compensation obligations.
    In the final analysis, the essential rule should be that those who 
use the PSTN should pay for its support, regardless of how their 
service or application is classified or categorized for regulatory or 
taxation purpose. If the PSTN is not equitably supported and available 
for VOIP customers to reach other customers, the value proposition of 
VOIP service would disappear. Local exchange carriers have a right to 
recover the legitimate costs imposed on their networks in the 
origination and termination of interstate communications. A PSTN 
interconnecting provider's use or substitution of IP technology does 
nothing to change the nature of the interconnecting provider's use of 
the network. A government policy or requirement that allows some 
providers to avoid access charges, because of the technology that they 
use would therefore deprive local exchange carriers of appropriate 
compensation for their property. Those that use the Public Switched 
Telephone Network to terminate their traffic should pay compensation 
for this use.
    The Federal Universal Service Support Programs are in serious need 
of comprehensive reform from both the contribution and distribution 
perspectives. As I indicated in my testimony before this Subcommittee 
last September regarding Universal Service :
          ``As communications migrate to broadband, the old world base 
        of universal service funds--local and long distance wireline is 
        shrinking. And increasingly, alternate technologies, like cable 
        modem and VOIP, offer directly competitive services while being 
        exempt from the social responsibilities attendant to universal 
        service. Like so many other aspects of our current regulatory 
        scheme for telecommunications, this puts the historic providers 
        of universal service, those living with the legacy of using 
        wireline revenue flows to subsidize social goals, at a 
        competitive disadvantage in a robustly competitive marketplace. 
        This situation cannot exist without serious detriment to the 
        regulated carriers and it must be fixed.
          Fixing this competitive/social policy mismatch means, for the 
        issue of universal service, ensuring neutrality on both sides 
        of the equation. Parity of obligation must exist between those 
        who offer functionally equivalent telecommunications services. 
        If broadband connections are to be assessed, as DSL is today, 
        then functional equivalents, like cable modem service, must 
        pay.''
    These observations are as timely today as they were when I shared 
them with you last year. Neither the House nor the Senate bill 
comprehensively reforms Federal Universal Service--the Congress needs 
to.
2. E 911 Requirements
    An IP-enabled information service that (1) includes a voice 
capability component and (2) is either (a) assigned a North American 
Numbering Plan (NANP) telephone number or (b) can call a line assigned 
to a NANP telephone number and (3) either (a) originates or terminates 
or both originates and terminates calls on the PSTN or (b) is a 
substitute for traditional voice communications, should comply with 
E911 requirements that are economically and technically reasonably 
achievable given the nature of the technology and the associated costs. 
IP-enabled service providers that meet the foregoing test should be 
required to fulfill 911 emergency call processing requirements in a 
manner that is not unnecessarily disruptive of the overall market 
development of IP-enabled services. The industry should be allowed to 
develop reasonable solutions for accomplishing E911 requirements 
through the adoption of open and voluntary industry standards prior to 
imposing any government mandated standards.
    The National Emergency Numbering Association (``NENA'') has been 
actively addressing, with industry support and participation, various 
proposals for ``migratory paths'' for IP-enabled services. BellSouth 
strongly encourages reliance on NENA for guidance on leading the 
industry toward operational and technical solutions and standards that 
would enable VOIP and IP-enabled services to move forward in manageable 
stages.
    Both H.R. 4129 and S.2281 require the FCC to appoint a 
representative industry organization to develop consensus guidelines, 
protocols or performance standards in this area. So long as, NENA and 
in turn the Emergency Services Interconnection Forum (``ESIF''), for 
the purpose of creating an American National Institute Standard 
(``ANSI''), are brought within this ambit , the industry will be able 
to develop the appropriate and desired standards.
3. CALEA
    BellSouth has a very long history of cooperating with law 
enforcement, which has existed long before the promulgation of CALEA. 
BellSouth has been an active participant in the development of 
technical standards and products necessary to comply with CALEA and has 
devoted substantial time and resources to upgrade its network to deploy 
CALEA-compliant solutions. BellSouth remains committed to working 
together with the FBI, Department of Justice and other members of the 
industry to develop standards for IP enabled services that fall within 
the scope of CALEA.

                             D. CONCLUSION

    VOIP is a new application which has created a new market, and the 
rules need to fit that new market--no economic regulation, no entry and 
exit requirements, no unbundling obligations, and limited regulations 
which apply equally to all providers to address public safety issues. 
But the networks which enable VOIP are not new. Today there are two 
networks that exist: cable and telecommunications, with the promise of 
two more: fixed wireless and power lines. Yet only the 
telecommunications network has the requirement to provide voice 
ubiquitously with a host of social responsibilities while having its 
profits diluted by the obligation to unbundle and sell pieces to its 
competitors at below cost.
    VOIP is just an application using this network to transport voice 
carried in packets. Our network was created to provide ubiquitous 
service to all customers. Access charges were established to provide 
compensation for that network, which is today still saddled with many 
social obligations not shared by other network providers. Nothing 
changes that equation when VOIP is involved. Those that use the Public 
Switched Telephone Network should pay compensation for its use.
    So the question is not whether VOIP will disrupt the industry. The 
disruption has begun. At this point how regulation or legislation 
responds will determine whether the technology is disrupted. A light 
handed regulatory approach which is limited to ensuring parity for all 
providers, public safety requirements, incentives for broadband 
investment, and compensation for the Public Switched Telephone Network 
will allow the technology to bring the greatest benefit to consumers as 
quickly as possible.

    Mr. Upton. Mr. Jensen?

                 STATEMENT OF S. MICHAEL JENSEN

    Mr. Jensen. Good morning Chairman Upton and members of this 
committee. I am Mich Jensen, CEO of Great Plains 
Communications.
    It is a privilege to have the opportunity to share some 
thoughts with you about the exciting evolution of Voice Over 
Internet from the perspective of a telecommunications service 
provider serving a high cost rural area of our nation.
    I also appreciate the concern you have for maintaining and 
advancing universal service in rural areas, and I want to note 
especially my appreciation of the efforts of your fellow 
committee member, by friend Congressman Lee Terry.
    Great Plains Communications is a family owned telephone 
company headquarters in Blair, Nebraska. We had a very humble 
beginning in 2009 when my wife's father began to build what is 
now Nebraska largest independent telecommunications company. We 
serve 32,000 access lines in 76 communities with absolutely the 
best telephone service possible.
    Great Plains had Nebraska first all buried cable 
distribution plant, first digital switchboard, first all 
digital network and we were the first to bury fiberoptic cable. 
However, there was a deeper more basic principle that guided 
our growth and development: Keep the customers as your highest 
priority. Serve them as you want to be served. Be a part of 
their community.
    Our family is now in its fourth generation of ownership of 
Great Plains Communications and those principles have not 
changed. We now provide much more than local telephone service. 
We have deployed broadband Internet services to every single 
community we serve, even those that have fewer than 100 people. 
Our cable television business has the latest digital TV 
technology and we also offer long distant services. None of 
that would have ever been possible without our customers in 
hometown Nebraska loyally paying their telephone bills every 
month. Intercarrier compensation and universal service also 
played a very key role in our network buildout and upgrades.
    Great Plains is representative of the Nation's small rural 
incumbent local exchange carriers and I am indeed honored to be 
appearing today on behalf of the hundreds of local exchange 
carriers that are represented by NTCA and OPASTCO, and more 
importantly on behalf of the several million subscribers that 
we serve together.
    VOIP technology certainly is intriguing. The ability to 
send voice, data and other information over the Internet or 
using Internet protocol is one that all companies both large 
and small must deploy. However, as promising as the technology 
may be, VOIP is a long way from replacing traditional 
telephony. It is merely an evolution, not a revolution of 
technology.
    In the haste to jump on the VOIP bandwagon, Congress must 
guard against legislation that has the potential to ravage the 
underlying networks that carry not only VOIP but every other 
form of telecommunication service. I comment Congressman 
Pickering on his work bringing this important issue to the 
forefront. However, VOIP is but one of the many technologies 
that has a potential to transform the telecommunication 
industry.
    Instead of looking at single technology such as VOIP, the 
committee must look at the telecommunications industry as a 
whole and seek to construct a broad framework that will allow 
the industry and the regulations that govern it to adopt the 
rapidly changing technologies now and in the future. Rather 
than prohibiting any form of regulatory oversight of VOIP, 
policymakers should be taking steps to ensure that the 
underlying telecommunication infrastructure is properly 
deployed and maintained. Without universal service and 
compensation by carriers that utilize real company's networks, 
the United States would not have the high quality network that 
exists today. Without this new network, new technologies like 
VOIP would simply not be possible.
    Exempting VOIP providers from universal service obligations 
and access would lead to disinvestment in network 
infrastructure and result in deterioration of the national 
network.
    I would like to lay out a balance and sustainable approach 
to VOIP. VOIP and other IP-enabled service providers should be 
required to pay access charges regardless of their regulatory 
classification as an information or telecommunication service.
    Next, the underlying network upon which all calls, 
including VOIP are carried must continued to be supported to 
enable the deployment of existing and new technologies and to 
uphold the doctrine of universal service. Also, the definition 
of universal service must evolve to include broadband services 
so that all Americans have access to them.
    Further, the universal service contribution base should be 
expanded to include cable, wireless and satellite broadband 
Internet access service providers and VOIP and other IP-enabled 
service providers since those providers benefit from that 
national network.
    Next, rather than Federal preemption across the board, the 
FCC should allow for the possibility that some IP-enabled 
services may fall under exclusive State jurisdiction or shared 
State and Federal jurisdiction. The FCC must also ensure that 
all consumers, particularly those in rural areas are protected 
from power that large carriers would possess were IP to be 
deregulated.
    VOIP providers should be required to comply with the same 
911, CALEA and disability access rules as incumbent providers.
    I strongly encourage the committee to take its time to 
ensure any legislation ultimately adopted is comprehensive and 
must avoid a piecemeal approach to telecom reform. Congress 
must continue to support the longstanding policy of providing 
all Americans with access to comparable affordable 
telecommunication services now and in the future.
    Mr. Chairman, thank you for this opportunity to speak on a 
topic on a topic so critical to the future success of rural 
telecommunication.
    [The prepared statement of S. Michael Jensen follows:]

Prepared Statement of S. Michael Jensen, Great Plains Communications on 
   Behalf of the National Telecommunications Cooperative Association

    Good Morning Chairman Upton and members of the committee. I am Mick 
Jensen, CEO of Great Plains Communications. Great Plains is a family-
owned telephone company in Blair, Nebraska. We had a very humble, and 
by today's standards, very primitive beginnings in 1909. Those were the 
days when telephone service was a challenge to provide and a luxury to 
have. It was in that environment that my wife's grandfather started 
down the path to building what is now Nebraska's largest independent 
telecommunications company, serving 34,000 access lines in 76 
communities in the state with the absolute best telephone service. 
Along the way, our founding family members established themselves and 
our company as true pioneers. We developed some of the first techniques 
anywhere for burying telephone lines; an innovation that helped make 
America's telecommunications networks the most reliable in the world. 
We were the first company in Nebraska to develop an all-digital 
switching network, and we were the first to install fiber optics in the 
state. But, beyond the technical innovations that identified us, there 
was a deeper, more basic principle that guided our growth and 
development--keep the customers as your highest priority. Serve them as 
you want to be served. Be part of their community. Take care of them, 
and they will do their part to take care of you.
    Our family is now into its fourth generation of ownership of Great 
Plains Communications and those principles have not changed. By 
building on that foundation, we now provide much more than local 
telephone service. We have deployed some form of broadband Internet 
services to every single community we serve, even those that have fewer 
than 100 people. We have built a cable television business that has the 
latest digital TV technology in 31 communities. We began offering long 
distance services a couple of years ago, and we have established 
ourselves as the experts in utility locating and damage prevention 
services.
    None of that would have ever been possible without our customers in 
hometown, Nebraska loyally paying their telephone bills every month. We 
owe it all to them and we must look out for their best interest 
whenever possible.
    Great Plains is representative of the nation's small, rural 
incumbent local exchange carriers. The good things we stand for and do, 
make our rural communities a better place in which to live and work. 
That is why I am honored to be appearing today on behalf of the 
hundreds of rural local exchange carriers that are represented by NTCA 
and OPASTCO, and more importantly, on behalf of their several thousand 
employees and several million subscribers.
    NTCA members and their fellow rural independents provide service to 
seven percent of this nation's access lines, but actually cover 40 
percent of the landmass of this country. We have a mission of service 
that supersedes profit making. That is why we appreciate the 
opportunity to provide feedback on all of the regulatory and 
legislative activity surrounding Voice over Internet protocol or VOIP.
    Today the vast majority of Americans use their landline and 
wireless telephones to place and receive voice calls. Over the next 
several years there will be some migration of voice communications from 
landline and wireless telephone service to Voice over Internet protocol 
(VOIP) service. During this migration there will be a significant 
number of VOIP originated calls terminating on the public switched 
telephone network (PSTN). Until the day when all American households 
and businesses completely migrate from the PSTN to an IP-network to 
place and receive calls, which may take decades, there will always be 
VOIP call traffic using and imposing costs onto the PSTN. Even if all 
VOIP and other IP-enabled services were accommodated on broadband-only-
facilities, the costs of these facilities are still higher in rural 
areas. Some form of access and/or universal service will be needed to 
ensure that rural consumers continue to receive access to advanced 
telecommunications and information services that are reasonably 
comparable in urban and rural areas of the United States.
    Recognizing that the transition of all voice communications to an 
IP-only platform will not occur in a flash cut, policymakers should 
take a flexible and evolving approach to deciding the issues related to 
the regulatory classification and level of regulation placed on 
specific types of VOIP and IP-enabled services and should follow 
competitively neutral principles when considering the formulation of 
VOIP policy.
    First, to the extent that VOIP and IP-enabled service providers use 
the PSTN to originate or terminate voice calls, they should be subject 
to the same inter-carrier compensation obligations as interexchange 
carriers (IXCs), irrespective of whether the traffic originates on the 
PSTN, on an IP network, on a wireless network, or on a cable network. 
Second, all VOIP and IP-enabled service providers, regardless of their 
VOIP service's regulatory classification as an ``information service,'' 
``telecommunications service,'' ``cable service,'' or ``wireless 
service,'' should be required to contribute to the universal service 
fund (USF) to ensure that all Americans have access to affordable 
communications services. Third, VOIP providers should adhere to similar 
regulatory obligations to provide consumers with 911 service, CALEA 
compliance and disability access, or require VOIP providers to provide 
other alternatives that meet the public's interest in security and 
safety. Fourth, policy should allow for the possibility that some VOIP 
and IP-enabled services may fall under exclusive state jurisdiction or 
shared state and federal jurisdiction. Fifth, policymakers should 
expand the list of USF contributors to include cable, wireless and 
satellite broadband Internet access service providers and facilities-
based and non-facilities-based VOIP/IP-enabled services providers to 
ensure all Americans, rural and urban, have access to affordable and 
comparable communications services.
    Regulation is necessary in order to provide for equitable and non-
discriminatory compensation to underlying carriers that supply VOIP 
providers access to their networks to complete VOIP originated calls. 
Without universal service and compensation by carriers that use rural 
networks, we would not have the ubiquitous high quality network we have 
today. Exempting such companies would lead to a disinvestments in 
network infrastructure and result in the deterioration of the national 
network in the future. Simply because VOIP providers use an IP-network 
platform to provide voice communications, VOIP providers should not be 
granted with Most Favored Nation (MFN) status and be given a free pass 
on access charges. This will only create an unfair competitive 
advantage in favor of VOIP providers in the highly competitive voice 
communications market. VOIP providers and competing voice providers 
using different network platforms all impose terminating traffic costs 
on rural ILECs. In order to adhere to the FCC's principle of 
competitive neutrality, all VOIP and other IP-enabled service providers 
must be required to pay access charges. All providers, regardless of 
the technology they utilize, should pay for their use of other 
carrier's networks.
    Existing VOIP providers do not actually make universal service fund 
(USF) contributions. As VOIP calls move more voice minutes off the 
PSTN, these lost minutes and revenues assessed for USF funding will 
increase the overall USF contribution burden on existing landline and 
wireless telecommunications carriers. Over time, this will make it more 
and more difficult for some small, high-cost, rural ILECs to recover 
the cost of their total network facilities. Consequently, some high-
cost ILECs that provide the high-speed Internet connections may not 
have enough access revenues and/or USF support to cover their costs. 
Without these rural networks many consumers in high-cost rural areas 
would be left without landline, wireless and/or cable telephone and 
broadband service. To avoid this outcome, NTCA urges Congress and the 
FCC to require all VOIP/IP-enabled service providers to contribute to 
the universal service fund to support the underlying networks that 
enable broadband Internet access to carry VOIP traffic.
    In addition, all VOIP providers should be required to adhere to 
similar regulatory obligations concerning 911, CALEA and disability 
access services. VOIP consumers deserve the same protections that other 
voice carriers are forced to provide. Landline, wireless, cable and 
VOIP providers provide similar voice services. No provider of voice 
communications services, regardless of the technology used to provide 
the service, should have an unfair competitive advantage in the 
marketplace. Imposing similar 911, CALEA and disability access 
obligations on VOIP providers will promote the public health and safety 
and ensure competitive neutrality.
    We also ask Congress to urge the Commission to refrain from making 
a blanket ruling that it has exclusive federal jurisdiction over all 
VOIP and/or IP-enabled services. The Commission has recognized that if 
an information service is characterized as ``purely intrastate'' or it 
is practically and economically possible to separate interstate and 
intrastate components of a jurisdictionally mixed information service 
without negating the federal objectives, state commission jurisdiction 
could apply over such services. With the creation of new IP-based 
services and their tracking mechanisms there will likely be some 
``purely intrastate'' VOIP and IP-enabled services and the ability to 
track the intrastate and interstate components of these services. The 
FCC should allow for the possibility that some VOIP and IP-enabled 
services may fall under exclusive state jurisdiction or shared state 
and federal jurisdiction.
    The enhanced service provider (ESP) exemption for Internet service 
providers (ISPs), which provides ISPs with an exemption from access 
charges and USF contributions should also be eliminated. With the 
implementation of the CALLS and MAG access reform plans for non-rural 
and rural ILECs, access charges have been reduced to historical lows 
and are based on cost. At the same time, ISP usage of the PSTN has 
continued to increase dramatically and has placed a significant and 
rapidly growing cost burden on ILECs without adequate compensation for 
ISP usage. If VOIP services are added to the list of services exempt 
from access charges and USF contributions, the entire universal service 
funding system will be at risk of collapsing. All ISP's and VOIP 
service providers using the PSTN must pay access charges and universal 
service contributions.
    Finally, just as the current definition of universal service must 
evolve to keep pace with consumer needs and evolving technology, so 
must the USF assessment base. The universal service support ensures 
comparable and affordable services throughout the Nation. Cable, 
wireless and satellite broadband Internet access providers and 
facilities-based and non-facilities-based VOIP and other IP-enabled 
services providers will benefit from the nationwide network made 
possible by universal service. They should therefore all contribute. 
Expanding the list of contributors to the fund will be critical to this 
Nation's continued success in providing all Americans, rural and urban, 
access to affordable and comparable communications services.
    In addition, as the committee moves forward on telecom policy, we 
would implore the committee to remain cognizant of the following 
specific areas that are so critical to rural carriers and the consumers 
they serve--the preservation of universal service for the high cost 
carriers, compensation by carriers that use rural networks; targeted 
regulation over outright deregulation in order to protect rural 
consumers; reasonable access to spectrum; and, finally, strong, 
meaningful leadership to encourage nationwide broadband deployment and 
ensure a level playing field for all carriers in this competitive 
environment.
    Congress must continue to support the longstanding policy of 
providing all Americans with access to comparable affordable 
telecommunications services at comparable rates now and in the future. 
That is why public policy must ensure that the underlying networks that 
deliver voice, and data to consumers remains affordable and reliable. 
Therefore, it is essential that the regulatory treatment of VOIP 
applications not negatively impact the existing public switched network 
or slow the deployment of broadband in rural areas.
    Mr. Chairman, thank you for this opportunity to provide testimony 
on a topic so critical to the future success of rural 
telecommunications.

    Mr. Upton. Mr. Kirkland?

                   STATEMENT OF JAMES KIRKLAND

    Mr. Kirkland. Good morning, Chairman Upton, Ranking Member 
Markey and members of the subcommittee. My name is James 
Kirkland, and I am Senior Vice President and General Counsel of 
Covad Communications.
    Let me start by thanking the chairman for convening this 
important hearing on VOIP services, and for asking Covad to 
provide its perspective on these important issues. We would 
also like to commend Congressman Pickering for his leadership 
on these issues in introducing the VOIP Regulatory Freedom Act 
of 2004. We support the Pickering bill's national declaration 
that VOIP is an unregulated information service, with a focus 
on industry-led, rather than government-mandated solutions. We 
believe that this deregulatory framework is a good starting 
point for further dialog on this very important technology.
    Covad is very excited to be a critical ingredient in the 
deployment of voice over IP. We've invested hundreds of 
millions of dollars in building a facility's based alternative 
broadband network to compete with the large incumbent providers 
who provide broadband services. Our network reaches more than 
50 million homes in 35 States.
    Our facilities include state-of-the-art DSLAM or DSL 
multiplexers that are located in 2000 central offices 
throughout this country, as well as 19 Internet points and 
presence. Our network incorporate local loops provided by the 
incumbent carriers, but other than those local loops is 
entirely facilities-based.
    Covad was responsible for kick-starting DSL competition in 
the United States. In fact, we were the first company to launch 
commercial DSL service in the United States. We currently 
provide service to 500,000 consumers and businesses.
    We also provide competitive DSL services so that our 
partners like AT&T can compete in the bundling arena providing 
full bundles of broadband and telecommunication services.
    We agree with everything that's been said about the 
potential for voice over IP to revolutionize the 
telecommunications industry within the next few years. And 
Covad will be at the forefront of that.
    One critical fact about voice over IP is that for this 
service to really effectively work, broadband is required. And 
so diverse sources of broadband will be critical ensuring that 
VOIP develops in a competitive manner. Covad's management of 
our own facilities allows us not simply to provide service on a 
best efforts basis over a third party's network, but to control 
the quality of the communications that reside over a network. 
Some of the early entrants currently provide service over 
existing networks such as the phone company and cable network 
on what's called a best efforts basis. To put that into 
practical terms, if you are using your broadband connection to 
download files and you're also using it to make phone calls, 
the phone calls will vie with the data usage for that broadband 
pipe, and the quality of service is not necessarily guaranteed 
depending on what your usage patterns are.
    Covad by being a facilities-based carrier is able to 
engineer its network to ensure that voice, which you really 
don't want interruptions of, gets the priority over the network 
and the quality can be maintained. So facilities-based 
competition is essential to allow differentiation, competition 
across all different features and allow consumer's choice of 
who their provider is.
    On the other hand, if you limit the facilities-based 
competitors to two, the decisions on how VOIP is deployed, the 
features that you get will be dictated by the decisions of 
essentially two entities in anyone market. And Covad submits 
that the history of innovation in this country is driven as 
much by the small entrepreneurial companies as by the large 
well funded incumbents with substantial resources to invest.
    Next week we are celebrating the launch of VOIP service in 
Washington, DC. And I think all of you will have received 
invitations, and we hope you can hope. Voice over IP, while we 
have talked about it a lot today, it is hard to really 
understand what it is until you actually see a service like 
CallVantage or like Vonage, or like our service which we 
acquired by a company called Gobeam. The amazing diversity of 
features that you can get is really something that you have to 
see to believe. It is also, I am sure you have all had the 
experience of looking at all the data that is in your computer 
and then having to write down on a scrap of paper what a phone 
number is so you can dial it over your phone connection. VOIP 
eliminates all that. You can do instantaneous conference calls, 
instantaneous callback just by clicking your mouse. And it 
really is a great service. We're very excited about it.
    Again, I think Covad's perspective here is that VOIP does 
have tremendous potential, but the true potential of VOIP will 
not be met unless there is full facilities-based competition. 
We still need to utilize phone company loops. These are a 
ubiquitous resource that was developed with ratepayer money. We 
believe that it is the only ubiquitous infrastructure. While we 
hear much talk of new technologies, it is the only network that 
connects virtually all homes and small businesses in this 
country. And without continued access to unbundled elements in 
the network, it will be very difficult for competitive 
facilities-based competition to develop.
    And I look forward to the questions from the panel.
    [The prepared statement of James Kirkland follows:]

 Prepared Statement of James Kirkland, General Counsel and Senior Vice 
              President, Covad Communications Group, Inc.

                              INTRODUCTION

    Good morning Chairman Upton, Ranking Member Markey, and Members of 
the Subcommittee. My name is James Kirkland, and I am the General 
Counsel of Covad Communications. Let me start by thanking Chairman 
Upton for convening this important hearing on VOIP services, and for 
allowing me the opportunity to offer Covad's perspective on ensuring 
the rapid rollout of VOIP. Let me also commend Congressman Pickering 
for his leadership on these issues by introducing the VOIP Regulatory 
Freedom Act of 2004, H.R. 4129. We support the Pickering bill's 
national declaration that VOIP is an unregulated information service, 
with a focus on industry-led, rather than government-mandated, 
solutions. We believe that the deregulatory framework set forth in the 
Pickering bill is the right place to start in considering the critical 
policy issues raised by VOIP.

            COVAD: LEADING FACILITIES-BASED VOIP COMPETITION

    Covad will be at the forefront of deployment of VOIP technology. 
Covad was the first company to deploy mass market DSL services in the 
nation. Covad has invested hundreds of million of dollars in building 
the leading nationwide facilities-based broadband network, reaching 
nearly 50 million homes and businesses in 35 states. Covad's broadband 
facilities include Digital Subscriber Line Access Multiplexers 
(DSLAMs), IP routers, and ATM switches in over 2000 central offices 
across the nation.
    Today, Covad continues to invest in facilities-based competition. 
This year, Covad acquired a leading VOIP service provider, Gobeam, and 
in March we raised $125 million in new capital to help fund a 
nationwide VOIP rollout. By the end of 2004, Covad plans to roll out 
its business-class VOIP services nationwide to 100 major markets. In 
2005, Covad will develop consumer VOIP services across its nationwide 
broadband facilities.
    Covad is particularly excited by the revolutionary enhanced 
features that VOIP services make possible, in comparison to the 
relatively limited features available with legacy POTS services. As its 
name suggests, Voice over Internet Protocol based services bring the 
flexibility and capacity for rapid innovation found in other IP enabled 
services to public voice services. These services have traditionally 
relied upon the hard wired, and relatively inflexible, capabilities of 
the public telephone network. Covad's VOIP services illustrate the 
power of this combination of voice and IP. Covad's services provide 
businesses with all of the capabilities of expensive PBX systems, with 
little investment in hardware. Each user receives a unique phone number 
to consolidate their multiple phone numbers. Find me and follow me 
capabilities allow calls to find you no matter what phone you are 
using, and are all configurable in real time using a ``Dashboard'' web-
interface to manage incoming and outgoing phone calls through a 
computer. The service includes a personal virtual fax number to handle 
all incoming faxes; a unified visual mailbox to manage voicemail and 
faxes like e-mail; and robust call logs and integration with Microsoft 
Outlook, allowing users to make and return calls from their PC. Covad's 
VOIP services also include easy to use web collaboration and voice 
conferencing tools. These features dramatically enhance the speed and 
ease with which end users can access the enhanced functionalities of 
VOIP telephony, combining the familiarity of a traditional telephone 
handset with the flexibility and power of a computer-based interface.
    Covad's services are available today. Gobeam, which was a small, 
venture capital backed company, had 13,000 VOIP lines in service when 
Covad acquired it. Covad is now launching this service nationwide. Next 
week, to celebrate our launch of VOIP services in the Washington, D.C. 
area, Covad will host a launch party with live demonstrations of its 
new VOIP services. We will shortly send you all invitations for this 
event, and welcome the opportunity to demonstrate our innovative VOIP 
services firsthand.

                             CURRENT MARKET

    It is not an understatement to say that facilities-based VOIP 
services truly hold the potential to revolutionize the 
telecommunications industry, all within a few short years. Indeed, the 
VOIP revolution is not just around the corner--it is already underway. 
The U.S. VOIP market has been forecasted to grow to more than five 
million subscribers by 2007, a five-fold increase over 2002 levels. 
Furthermore, the Internet Protocol-PBX market, which has just under 
100,000 lines today, is expected to grow to more than 1.7 million lines 
by 2007. Covad adds a unique and critical ingredient to this 
revolution--namely, its own nationwide, facilities-based broadband 
network. Covad's management of last-mile broadband transmission 
facilities enables it to offer VOIP services that rival the legacy 
public switched telephone network in their reliability, quality of 
service, and public safety features, such as access to 911. Because 
Covad's VOIP services are facilities-based, they offer more than simply 
a rough, ``best efforts'' imitation of traditional telephone services. 
Instead, Covad's VOIP services offer a complete, high quality 
alternative to traditional telephony services--with all the additional 
features and enhancements that VOIP makes possible.

                 FOSTERING FACILITIES-BASED COMPETITION

    Covad is able to provide innovative new services like VOIP because 
Congress had the vision and the foresight in 1996 to create a flexible 
regulatory framework to manage the transition from local telephone 
monopolies to robust local competition. This transition is still at a 
very early stage. The local telephone network remains the sole, 
ubiquitous public infrastructure connecting virtually every home and 
business in this country. By requiring that the local telephone 
companies allow competitors to utilize and integrate these ubiquitous 
loops into innovative, facilities based service platforms, competitors 
can develop new and innovative services like VOIP.
    True innovation in the provision of telecommunications services 
requires that a service provider control both the ``application'' 
portion of the service it provides as well as the underlying 
transmission capabilities used to carry a service. By controlling its 
own broadband facilities, which utilize telephone company loops from 
customer premises to central offices where Covad maintains its own 
broadband points of presence, Covad is able to control the quality of 
service it provides to its customers, and introduce innovative features 
that are both software and network based. On the other hand, if the 
loops which connect homes and businesses become the exclusive province 
of a single phone company in any area, the deployment of new 
technologies like VOIP will be determined by the decisions and business 
objectives of one, or at most two large incumbents that control 
facilities in any market. Covad respectfully submits that the history 
of innovation in this country has been driven as much, if not more, by 
small entrepreneurial companies as large, well funded incumbents. If 
VOIP is to truly flourish, there must be room for both small and large 
competitors. With the competitive spur of smaller, often nimbler and 
more focused competitors, the large incumbents are far more likely to 
deliver on their promises of future investment in advanced facilities.
    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.

                  IMPORTANCE OF BROADBAND COMPETITION

    Robust facilities-based competition in the provision of the 
broadband services that VOIP requires does not yet exist. Amidst all 
the hype over the broadband future and new technologies, the underlying 
reality is stark. In most areas of the country Covad remains the only 
provider of broadband access services left to compete with cable and 
ILEC broadband. According to the Commission's latest data, the 
incumbent telephone companies and cable providers control more than 93% 
of the nation's broadband access lines.5 Moreover, many end 
users lack a choice even amongst this limited set of two providers--for 
example, cable providers have historically focused their network 
deployment in residential areas, leaving most businesses with the 
incumbent telephone company as their only broadband option. In fact, 
recent figures show that cable penetration in the small business 
segment has actually dropped: ``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. , 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. , 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 has no 
legacy business to protect--Covad has always been a broadband company, 
with a network designed from the ground up to provide advanced 
broadband services like VOIP. Covad has every incentive to roll out 
VOIP services as quickly as possible to as many businesses and 
consumers as it reaches. Thus, we believe that including Covad's 
facilities-based VOIP offerings in the overall marketplace will 
significantly speed the rate at which broadband services like VOIP are 
adopted.

            TRANSITION TO FULL FACILITIES-BASED COMPETITION

    Covad is well aware of the controversy surrounding unbundling 
requirements. Recently, the U.S. Court of Appeals for the D.C. Circuit 
has issued a ruling that many predict will result in the phase-out of 
UNE-P competitive voice services. Although Covad disagreed in many 
significant respects with the Court's reasoning, the Court's decision 
is now the law of the land. Today, Covad stands ready to participate in 
the transition to facilities-based services, including VOIP, that do 
not rely on unbundled phone company switching. Covad believes strongly 
that the Court's decision and the expected phase out of unbundled 
switching should not and need not mean the death of telephone 
competition. Instead, by migrating to facilities-based VOIP services 
using unbundled loops, competitive carriers can respond to the Court's 
mandate, ensuring that consumers retain continued choice among multiple 
telephone providers. Covad stands ready to meet the Court's mandate and 
offer that choice, with a facilities-based VOIP solution. Furthermore, 
Covad is currently the leading nationwide provider of wholesale 
broadband services, including broadband services to many of the 
companies currently relying on UNE-P. Thus, Covad is well poised to 
answer the Court's call by providing a migration path for these 
companies away from UNE-P and onto facilities-based VOIP services.
    In order to achieve this transition, it is critical that the FCC 
respond to the Court's decision by quickly developing judicially 
sustainable rules for competitive access to critical last-mile 
transmission facilities. For facilities-based mass market VOIP 
competition to transform from vision to reality, Covad will need 
continued non-discriminatory access to unbundled local loops and local 
transport. These last-mile transmission facilities provide the critical 
link between end users and Covad's backhaul network facilities. These 
simple last-mile transmission links, which no single company could ever 
duplicate, represent the bare minimum unbundling regime needed to fully 
realize a facilities-based VOIP revolution. And, as I've already 
mentioned, Covad's facilities-based broadband network and existing 
wholesale relationships offer a viable migration path for the 20 
million consumers currently served using UNE-P. But this transition 
cannot happen overnight or without rules that foster facilities-based 
competition such as ensuring that hot cut processes facilitate an 
orderly transition from UNE-P to UNE-L and maintaining rate stability.
    The experiences of countries like South Korea and Japan are 
instructive. Both nations enjoy significant leads over the U.S. in 
broadband penetration, and both nations have experienced explosive 
growth in broadband deployment after adopting and enforcing unbundling 
regimes. South Korea's market-opening measures included $400 million in 
loans to competing broadband carriers,17 the formation of a 
new company (Hanero) to compete with incumbent Korea 
Telecom,18 and opening Korea Telecom's network with 
requirements for local loop unbundling, including sharing of the local 
loop.19 The result has been thriving competition in the 
broadband market, with three main suppliers,20 and rock-
bottom prices (as low as $25 a month 21) for consumers. As a 
result, ``[a]t the end of June 2003, South Korea ranked third in the 
world by the total number of DSL lines and first in the world in terms 
of DSL penetration, with 14.27 DSL lines per 100 population.'' 
22 Japan's market-opening measure included being one of the 
first countries to introduce line sharing, reducing line sharing 
charges to the lowest rates in the world, reducing collocation costs, 
shortening provisioning intervals, and unbundling backhaul 
facilities.23 As a result of such actions, at the end of 
2003, Japan led the U.S. in broadband penetration, and a competitor 
named Softbank--not the incumbent--was the top DSL carrier in 
Japan.24 The experiences of South Korea and Japan show that 
maintaining competitive access to local loop and transport facilities 
spurs the deployment and adoption of innovative new services like 
broadband. Similarly, preserving competition among multiple facilities-
based providers of VOIP will dramatically speed the pace at which VOIP 
services are developed, deployed and adopted here in the U.S.
---------------------------------------------------------------------------
    \17\ Seoul's Strong Hand Sets Pace on Web, International Herald 
Tribune Online, November 26, 2001.
    \18\ Id.
    \19\ 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).
    \20\ Korea Broadband, PDS Consulting Short Paper, Version 12 June 
2003.
    \21\ Seoul's Strong Hand Sets Pace on Web, International Herald 
Tribune Online, November 26, 2001.
    \22\ South Korea, Korea Broadband Overview, Point Topic, October 
20, 2003.
    \23\ On a roll: Japan's success with DSL, Ovum Research, DSL: 
Business Models for Exploiting the Local Loop, July 2002.
    \24\ How the ``Japanese Miracle'' of Broadband Came About, Glocom 
Platform, Japanese Institute of Global Communication, Colloquim #43, 
December 24, 2003.
---------------------------------------------------------------------------
                        SOCIAL POLICY OBJECTIVES

    Apart from the minimal regulation over last-mile transmission 
facilities needed to preserve competition among multiple service 
providers, we believe that regulators should adopt a generally 
deregulatory stance towards VOIP. We believe there is promising 
evidence that traditional social policy objectives can be met without 
enacting new regulatory requirements for VOIP services. For example, 
last December, the National Emergency Number Association (NENA) and the 
Voice on the NET (VON) Coalition, of which Covad is a member, announced 
a voluntary agreement on approaches to provide VOIP subscribers with 
basic 911 service, and to work together to develop solutions for 
enhanced 911 functionality. Likewise, in the area of law enforcement 
access to IP enabled services, industry standards setting bodies have 
been working on developing solutions enabling law enforcement access to 
packet-mode and broadband transmission technologies, calling into 
question the need for intrusive new regulation of overlying information 
services like VOIP.
    Furthermore, we believe that many critical social policy objectives 
can be met by focusing on enforcing and rationalizing existing 
telecommunications service regulations, rather than by extending them 
to information services like VOIP. For example, we generally believe 
that regulators should refrain from imposing legacy access charge 
regulations on VOIP services, and instead should focus their efforts on 
reforming existing regulations to develop a comprehensive intercarrier 
compensation mechanism. Similarly, rather than imposing new universal 
service obligations on information services like VOIP, we believe that 
regulators can help safeguard universal service by rationalizing the 
existing contribution mechanism, so that all providers of broadband 
transmission services contribute equitably. In sum, we believe that the 
enforcement of existing regulations on broadband telecommunications 
service providers like Covad, combined with voluntary industry 
collaborative efforts and standards setting, can meet critical social 
policy objectives like public safety and universal service--without 
imposing intrusive new forms of regulation on information services like 
VOIP.

                               CONCLUSION

    Mr. Chairman, Members of the Subcommittee, we are in the midst of a 
revolution in the telecommunications industry. We are witnessing a 
revolution away from the limitations of traditional phone service to 
all of the enhancements, efficiency gains and innovation that VOIP 
makes possible. We are witnessing a revolution away from competition 
through legacy circuit switches to facilities-based competition over 
packet-switched broadband networks. We are witnessing a transformative 
revolution in the way the entire telecommunications industry does 
business. Covad is excited to be part of that revolution, and looks 
forward to working with the Subcommittee to maximize the potential of a 
facilities-based, broadband future.
    Thank you again for this opportunity and I welcome questions from 
the panel.

    Mr. Upton. Ms. Martine?

                   STATEMENT OF CATHY MARTINE

    Ms. Martine. Mr. Chairman and members of the committee, 
thank you for giving me the opportunity to discuss voice over 
IP today.
    AT&T intends to provide IP-based services to all of the key 
market segments; large enterprises, call centers, small 
offices, teleworkers and residential users. We have been 
delivering voice over IP services in the business market since 
1997, and in March 2004 we launched our residential VOIP 
service known as AT&T CallVantage. Now, less than 4 months 
later, it is offered in 22 States and 72 major markets. Soon it 
will be available in over 100 markets.
    VOIP is the foundation for our future. Much of the Silicon 
Valley will benefit from an IP explosion. Small and medium 
sized businesses will also profit from affordable VOIP 
services. The resulting productivity gains can, in turn, drive 
broader economic growth. These benefits will only emerge if 
policymakers limit regulations to a light handed regime, and 
most importantly avoid saddling VOIP with flawed intercarrier 
compensation requirements.
    We support the legislation proposed by Congressman 
Pickering which recognizes the need for regulatory restraint if 
VOIP is to develop to its fullest potential. Let me provide 
some details on these points.
    As you have heard, VOIP holds the promise of choices and 
capabilities far beyond today's offerings. In the IP 
environment VOIP services and features can be provided and 
enhanced much more efficiently. VOIP could well be the killer 
application that drives broadbanded option.
    AT&T fully intends to lead the VOIP revolution. We have 
invested heavily to upgrade our total network including some $3 
billion in 2003 alone.
    AT&T CallVantage service provides a host of new advanced 
features such as the ability to detect voicemail from your 
computer and dynamically control your feature settings 
yourself.
    Innovations will increase as manufacturers, service 
providers and software developers take advantage of the ability 
to integrate voice, data and advanced consumer computer 
capabilities.
    AT&T has been committed to providing a choice in the market 
for local telephone service. We have invested billions of 
dollars in our own facilities. Today we provide local service 
to more than 4.3 million residential users and 4.5 million 
business lines. Last year AT&T began developing residential 
VOIP services as yet one more means of competing for local 
phone customers.
    The recent Federal court decision invalidating the FCC's 
unbundling rules could impede our deployment of VOIP. Without 
access to unbundled network elements, AT&T will not be able to 
offer residential local services to households that lack 
broadband services. AT&T will also have far less ability and 
incentive to invest in VOIP absent a mass market base of 
customers.
    Equally important to our ability to deploy VOIP are the 
decisions that the Congress and the FCC make about its 
regulation. We welcome the fact that many policyholders and 
makers such Congressman Pickering support a hands off approach 
to VOIP. His bill recognizes that to accomplish this goal a 
Federal framework makes the most sense.
    We agree with those who have said VOIP services must 
provide access for the disabled, enable 911 and cooperate with 
requests from law enforcement agencies. These are issues that 
the industry is working hard to resolve, and AT&T is taking a 
lead in this efforts. There is no need to regulate in these 
areas barring a demonstrated failure by the industry to act 
appropriately.
    The universal service and intercarrier compensation schemes 
are badly broken and require substantial revisions before they 
can or should be applied to VOIP.
    Noting about VOIP threatens universal service. The real 
threat is the shrinking base of interstate revenues that 
support the system today. AT&T has proposed moving to a flat 
rate charge for each assigned and user telephone number. This 
system would include VOIP and would be competitively neutral 
and provide a solid foundation for the fund.
    The Commission's access charge regulations are especially 
unworkable, but the long promised overhaul has yet to occur. 
The emergence of VOIP services dramatically underscores the 
urgent need for intercarrier compensation reform. VOIP 
providers collectively serve only several hundred thousand 
customers while the Bells serve nearly 100 million. Having VOIP 
providers subsidizing the incumbents cannot be the right 
answer. No one demanded that the auto industry subsidize the 
buggy manufacturers, the computer industry the typewriter 
providers or email providers the post office. And contrary to 
some claims, VOIP providers do not get a free ride when they 
don't pay legacy access charges. VOIP providers purchase high 
speed or other local business lines to connect to the public 
switch network and pay for termination as an enhanced service.
    AT&T agrees that affordable service needs to be maintained 
in high cost areas of the country. Applying the old access 
charge regime to VOIP will not achieve this result. If VOIP is 
to deliver on its promising potential, then it can not be 
regulated like plain old telephone service. Today we are asking 
your support to keep that from happening so that all Americans 
can realize the competitive and innovative benefits of VOIP 
technology.
    Thank you for inviting me here today, and I look forward to 
your questions.
    [The prepared statement of Cathy Martine follows:]

   Prepared Statement of Cathy Martine, Senior Vice President, AT&T 
            Internet Telephony, Consumer Marketing and Sales

    Mr. Chairman and Members of the Committee, thank you very much for 
giving me the opportunity today to discuss Voice Over Internet 
Protocol. AT&T intends to provide IP-based services to all of the key 
market segments--large enterprises, call centers, small offices, 
teleworkers, and residential users. In March 2004, AT&T launched its 
residential VOIP service, known as AT&T CallVantagesm Service. Now, 
less than four months later, it is offered in 22 states and 72 major 
markets. By the end of September, it will be available in over 100 
markets.
    VOIP is the convergence of voice and data, with the potential to 
bring choice and innovation to the telecommunications marketplace. If 
allowed to grow unimpeded by legacy regulation, it will offer consumers 
an increasing array of advanced features not available today to enhance 
ways of communicating and simplify busy lives.
    VOIP will also contribute significantly to the business world. 
Teleworkers using VOIP will be far more productive and successful at 
their work. VOIP will bring the kind of advanced voice and data service 
now available only to Fortune 500 companies within the reach of small 
and medium-sized businesses. Much of Silicon Valley is now in the IP 
value chain and will benefit from an IP explosion in this market. The 
resulting productivity gains can, in turn, drive broader economic 
growth and raise standards of living for all Americans.
    These benefits will only emerge, however, if policymakers limit 
regulation to a light-handed regime that allows VOIP to develop free of 
burdensome regulation at the federal, state or local level and, most 
importantly, avoids saddling VOIP with flawed intercarrier compensation 
requirements. The VOIP legislation proposed by Congressman Pickering--
H.R. 4129--would do just this.
    Imposing today's inflated access charges on nascent VOIP providers 
would severely impede the growth of VOIP. VOIP providers are already 
paying substantial compensation to local exchange carriers for the 
right to terminate traffic on their networks. They should not have to 
subsidize their established competitors as well. With respect to 
intercarrier compensation, the priority should be on reform rather than 
burdening innovative new services and technologies with an outmoded 
regulatory model heavy with subsidies.
    If VOIP is to develop into a robust alternative service for 
residential consumers, then competitive carriers must first have the 
opportunity to develop the residential subscriber base for local voice 
service that is necessary to justify our continued and growing 
investment in VOIP. To accomplish this, we and other competitive local 
exchange carriers need ongoing access to unbundled elements of the Bell 
networks at reasonable rates. While we do not like being dependent on 
the Bell network, the transition cannot occur overnight.
    Firm resolve in enforcing the pro-competitive policies of the 1996 
Act is a necessary first step on the path to VOIP. Unfortunately, those 
policies are in dire jeopardy. In the face of the Administration's 
refusal to appeal the recent decision striking down the FCC's 
unbundling rules, we have reluctantly concluded that we cannot incur 
the costs to solicit any additional local and long distance customers 
in seven states. Without the swift adoption of new rules to ensure 
local competition, we will have to consider similar steps in other 
states. Such retrenchment in the offering of traditional communications 
services will directly hinder the growth of next generation VOIP 
services.
    Let me provide more detail on each of these points.

   VOIP HOLDS THE PROMISE OF NEW CHOICES, MORE CAPABILITIES AND THE 
       POTENTIAL FINALLY TO ELIMINATE LOCAL TELEPHONE MONOPOLIES

    VOIP holds the promise of choices and capabilities far beyond 
today's 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 make the necessary changes to 
our network--some $3 billion in 2003 alone--and we have announced that 
we will be providing VOIP service in the top 100 markets in the country 
this year.
    With VOIP, voice service is just another ``hosted application'' 
like e-mail, letting customers take their phone numbers wherever they 
go and access connections over any device, such as a standard home 
telephone, wireless phone, or computer. AT&T's consumer offer, AT&T 
CallVantagesm Service, for example, already includes a host of new 
advanced features, including advanced call forwarding features and ``do 
not disturb'' options that enable consumers to program the service so 
that the phone answers to their needs instead of the other way around. 
AT&T CallVantagesm Service provides subscribers a ``Personal Call 
Manager Web Site,'' which gives subscribers complete control over their 
answering, voice mail and other capabilities. Subscribers can check 
their voicemail from their computer and forward information as a 
``talking'' e-mail. These benefits will only increase as device 
manufacturers, network operators, service providers and application 
developers take full advantage of the ability to integrate voice, data 
and advanced computer capabilities.
    In the IP environment, voice services can also be provided much 
more efficiently. IP technology allows for more efficient routing of 
calls than traditional 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'').

                  AT&T'S HISTORY AS A LOCAL COMPETITOR

    AT&T has long been committed to providing a choice in the market 
for local telephone service. Today we provide local service to more 
than 4.3 million residential lines and 4.5 million business lines, 
including 1 million small business lines. We have done so through a 
combination of facilities-based entry--we have invested billions of 
dollars in our own local facilities since 1996--and the lease of Bell 
network elements, both means established by Congress in 1996 and 
pursuant to rules crafted by the FCC as instructed by the Act.
    In both the business and residential markets, however, facilities-
based service requires a significant concentration of demand to be 
economic. To the extent multiple networks can ever economically 
compete, a significant customer base is needed to justify network 
deployment and reduce the risk of such deployment. Up to this point, 
the economic challenges presented by facilities-based competition and 
the incumbents' legacy advantages in this area have made the lease of 
capacity on the incumbent carriers' networks--``UNE-P''--the only 
viable means of competitive local market entry in the mass market.
    I cannot emphasize enough how important access to fairly priced 
network elements is to the widespread availability of VOIP: without 
access to unbundled network elements at reasonable prices, AT&T will 
not be able to offer mass market residential local competition to those 
households that have not signed up for broadband service for reasons 
ranging from availability to affordability. And without a mass market 
customer base, AT&T will have far less ability and incentive to fund 
the customer support, billing and back-office systems that are 
necessary to offer VOIP services on a very large scale. Even then, we 
will not be able to compete if the Bells are allowed to restrict the 
ability of AT&T and other competitors to provide VOIP services to the 
Bells' DSL customers.
    Until just last month, UNE-P provided the stepping-stone to 
facilities-based competition by enabling competitors to build a 
customer base that justifies investment in facilities. Unfortunately, 
however, a recent federal court decision invalidating the FCC's 
unbundling rules will prevent us from doing just that. AT&T strongly 
believes that this decision is both wrong and flatly contradicts 
Supreme Court precedent, but the Administration has refused to appeal 
it. The Bell companies' refusal to negotiate reasonable interconnection 
and leasing agreements in the wake of that decision has left AT&T no 
choice but to stop incurring the costs to solicit new local phone 
customers in many residential markets. With the Bell companies poised 
to raise wholesale rates for UNE-P as early as November, we will simply 
not be able to provide a bundle of local and long distance services 
economically and build the customer base for VOIP. We therefore 
urgently need interim rules ensuring fair competition so that more 
consumers will not face higher rates for their telephone service and to 
provide much-needed stability in the marketplace.
    Interim rules should guarantee, at a minimum, that the rates 
competitors pay the Bells for lease of unbundled network elements do 
not rise above current levels, which have already been judged by the 
Supreme Court to allow the Bells a reasonable profit. The new rules 
must also foster the transition to facilities-based competition by 
ensuring that the Bell companies continue to provide so-called ``UNE-
L'' access to copper loops, high-capacity loops, transport and dark 
fiber at current rates. UNE-L service will, among other things, allow 
competitors to offer service options to customers who lack the 
broadband connections that enable VOIP.
    There is also a direct correlation to the availability of unbundled 
loops and the growth of broadband. Of the ten countries that surpass 
the United States in per capita broadband penetration, nine of them 
require local loop unbundling. AT&T proposed a plan earlier this year 
to transition from UNE-P to UNE-L, and even offered to pay higher 
wholesale rates if we failed to meet our own deadlines for 
construction, but the Bells were unwilling to enter into any such 
agreements.
    The fact is, we do not regard UNE-P as a panacea, and we never 
have. We do not like being dependent on a reluctant supplier for our 
critical service inputs, and we are highly motivated to escape our 
dependence on the Bells. VOIP has the potential to allow us to end this 
dependence, but only if we and other national carriers can remain in 
the market today. If we are squeezed out of the local marketplace now, 
our ability to deploy and grow our VOIP service will be far more 
difficult and take far longer, leaving VOIP as yet another technology 
controlled by the Bells.
    Remember that these are the same companies that held back the 
deployment of DSL services to residential customers for some ten years 
so customers would have to take their other, higher priced services. 
Only when forced by competition, in that case the deployment of 
broadband Internet connections by cable operators and competitive 
carriers Covad and Rhythms, did the Bells finally introduce mass-
market, high-speed Internet access service. Similarly, without the 
threat of losing customers to a VOIP rival, the Bells will have no 
incentive to invest in and deploy this new technology or the rich array 
of features it is capable of providing. Competition will spur VOIP 
investment by the incumbents, not deter it.

  A ``HANDS-OFF'' APPROACH IS THE APPROPRIATE REGULATORY APPROACH FOR 
                                  VOIP

    Allowing VOIP to develop in the marketplace is a critical step to 
bringing this Nation into the digital age. AT&T welcomes the fact that 
many Members of Congress, such as Congressman Pickering, support a 
``hands off'' approach to VOIP and have introduced legislation that 
would bring the benefits of competition and innovation to the 
telecommunications marketplace. Congressman Pickering's deregulatory 
approach to VOIP--H.R. 4129--acknowledges the need to reform the 
current subsidy system and allow this nascent service to flourish.
    In particular, the bill recognizes that because the Internet is 
global in nature and these services will be deployed nationwide, a 
federal framework makes the most sense. Forcing U.S. VOIP providers to 
develop 50 different varieties of VOIP services to comply with a 
patchwork of potentially inconsistent state regulatory burdens could 
hinder their development. Continuing regulatory uncertainty as to 
federal versus state regulation of VOIP, or worse yet, the regulatory 
uncertainty that would accompany implementation of 50 different regimes 
to regulate VOIP, would inevitably impede investment, in direct 
opposition to the federal policy of creating a regulatory framework 
that promotes the growth and development of broadband services. Indeed, 
recognizing the critical importance of a uniform, nationwide 
deregulatory environment, the Pickering bill prohibits even the FCC 
from regulating VOIP applications except as specifically authorized.
    Such an approach will be critical to VOIP's ability to lead the 
United States' broadband revolution: the United States' broadband 
penetration lags behind that of a number of other countries. Many of 
those who have higher rates of broadband penetration have recognized 
that allowing VOIP to flourish will contribute to a positive economy 
and allow them a competitive edge in the global marketplace. The United 
States, too, must protect its economic interests by abandoning outdated 
policies favoring and protecting incumbent revenue streams.
    AT&T strongly supports the approach of this legislation. Allowing 
emerging VOIP services to develop free of unwarranted, legacy 
regulation allows carriers to design the service to respond to customer 
needs and interests, and to remain flexible in their business plans as 
customer preferences emerge, rather than be bound by a government-
dictated vision of what the service should include and what is a 
benefit to consumers. As FCC Chairman Powell stated on February 8, 
2004:
        the case for government imposed regulations regarding the use 
        or provision of broadband content, applications and devices is 
        unconvincing and speculative. Government regulation of the 
        terms and conditions of private contracts is the most 
        fundamental intrusion on free markets and potentially 
        destructive, particularly where innovation and experimentation 
        are hallmarks of an emerging market.
    The wisdom of this approach was confirmed recently--in reverse--
when a new local VOIP provider concluded it could not stay in business 
in any of the states in which it had been operating when faced with an 
order from Washington state regulators to register as a telephone 
company and comply with the same laws as other long distance companies 
(including the payment of access charges). Regulators must be able to 
approach VOIP service flexibly if they expect VOIP to bring its 
promised benefits to consumers and competition. As Congressman Upton 
has recognized, VOIP services ``revolutionize how we communicate, and 
as is the case with any innovative technology, will call into question 
many aspects of today's antiquated regulatory regime.'' 1 
Congressman Stearns has similarly recognized the ``problem in pigeon-
holing [VOIP] into an outdated regulatory framework.'' 2
---------------------------------------------------------------------------
    \1\ Congress Daily AM, February 24, 2004
    \2\ Congress Daily AM, February 5, 2004
---------------------------------------------------------------------------
    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 the lead in 
these efforts. While government has a legitimate role in ensuring that 
these things get done, it should refrain from regulating this new 
service in these or other areas in the absence of a demonstrated 
failure on the part of industry to act appropriately. We may also need 
some flexibility and reasonable transition periods to come into 
compliance, in recognition of the fact that IP-enabled services present 
different technical and operational issues than those considered when 
the legacy common carrier regulations were originally developed. 
Nonetheless, we believe that the enormous flexibility and power of VOIP 
promises to address these issues in ways superior to current circuit-
switched technology.
    Other legacy regulations, however, will require substantial 
revisions before they can or should be applied to VOIP. The universal 
service and intercarrier compensation schemes are irremediably broken 
and indeed, no longer make sense even in the context of the 
traditional, circuit-switched wireline telephone services for which 
they were developed. Prompt attention to these fundamental flaws in 
existing regulation is urgently needed so that IP-enabled services are 
not burdened with costly and outdated, broken regulatory schemes that 
would prevent VOIP services from reaching their potential.
    Let me emphasize that nothing about VOIP threatens universal 
service. The problem with the universal service fund (USF) is that it 
is still supported by a shrinking base of interstate revenues for 
traditional telecommunications services. A growing fund with a 
shrinking base cannot be sustained. It's long past time for the 
universal service systems in this country to be reformed, and we 
support VOIP being part of the broader reform of the USF system. We 
think VOIP providers should contribute to a reformed universal service 
system--in a sustainable, fair, and nondiscriminatory manner.
    AT&T has proposed a contribution system to the FCC that would 
replace the current revenues-based system with a numbers/capacity-based 
system that is fairer and more sustainable. Under our proposal, 
providers would pay a flat-rated charge for each assigned telephone 
number that maps to a unique end-user's service. Services known as 
``special access services'' would also be assessed a flat-rated charge 
based on the capacity of the service. Such a system would be 
competitively neutral, and would provide a solid foundation for the 
fund because the use of numbers is increasing. Moreover, VOIP providers 
would be fully included, since their service nearly always uses 
traditional phone numbers--as would future technologies, which are 
likely to retain the use of numbering. The Commission has full 
authority to implement such reforms--but it has yet to do so. Carriers 
need clarity and predictability in the marketplace if they are to make 
the risky investment needed to make VOIP widely available.
    Especially unworkable are the Commission's vastly outdated access 
charge regulations. The access charge scheme was developed decades ago 
to ensure that whenever a long distance company used the local network, 
it would subsidize local service by paying grossly inflated rates to 
the local carrier. While there was much in this framework to which one 
could object, it remained workable as long as local carriers and long 
distance carriers operated in separate markets. Its infirmities became 
apparent and unsustainable when those carriers entered each others' 
markets, and even more so when wireless companies and ISPs became the 
largest users of access minutes. For that reason, eight years ago, 
Congress ordered that implicit subsidies, including those in access 
charges, must be eliminated. Unfortunately, they still remain in place 
eight years later, and the FCC's long-promised overhaul of its 
intercarrier compensation regime has yet to occur. While Chairman 
Powell commendably opened a proceeding examining needed revisions as 
one of his first acts as Chairman, that docket remains unresolved more 
than three years later.
    Now, the emergence of VOIP services dramatically underscores the 
urgent need for the Commission to complete intercarrier compensation 
reform. Whatever the historical wisdom of requiring interexchange 
carriers to subsidize through inflated access charges local exchange 
carriers operating in a different market, it makes no sense to require 
nascent VOIP providers to subsidize the monopoly local exchange 
carriers against whom they will be directly competing. VOIP providers 
collectively serve only several hundred thousand customers, while the 
Bells serve nearly one hundred million. It cannot be the right answer 
for the emergence of VOIP to subsidize the Bells.
    The far better course is comprehensive reform of the intercarrier 
compensation regime to eliminate market distortions and opportunities 
for regulatory arbitrage. Nearly every segment of industry agrees that 
there is a need to move to a rational system in which all traffic is 
exchanged under the same compensation rules. Even OPASTCO--the 
Organization for the Promotion and Advancement of Small 
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 
substantial compensation to the terminating local exchange carrier for 
the right to do so.
    AT&T agrees that affordable service needs to be maintained in high-
cost areas of the country. Applying the legacy access charge regime to 
VOIP, however, is not the way to achieve this result and would prove 
counterproductive and market-distorting. It simply slows the deployment 
of new and desirable technologies while driving users away.
    Today we are at a crossroads where we must call upon your 
leadership. If VOIP is to deliver on its promising potential--and offer 
something truly different in the marketplace--then it cannot be treated 
and regulated like plain old telephone service. We are asking for your 
support to keep that from happening, so that Americans can finally 
realize the long-promised benefits of widespread competition and the 
innovations promised by VOIP.
    Thank you again for inviting me here today, and I look forward to 
your questions.

    Mr. Upton. Thank you.
    Mr. Nelson?

                  STATEMENT OF ROBERT B. NELSON

    Mr. Nelson. Thank you, Mr. Chairman. I applaud you for 
holding this hearing today on what you and others have noted is 
an exciting new innovation in the telecommunications industry 
and holds great promise for all residential and business 
customers alike.
    As representative of our national association, I will 
address today the appropriate role for States in promoting VOIP 
in cooperation with our Federal partners.
    Our challenge is to let innovation take its course while 
preserving the services and features consumers care about and 
expect in the telecom systems. State commissions want VOIP to 
succeed and have pursued a light touch policy where they have 
taken action. Despite the fears of some today, no State to date 
has pursued full scale economic regulation of VOIP. In fact, 
many States have chosen to forgo all regulation.
    In answer to the question that the chairman posed in the 
title to this hearing, regulation can be tailored so it does 
not disrupt this new exciting technology.
    The VOIP services attracting the most attention today are 
actually hybrids that bundle telecom services. They combine 
packets with origination of calls with completion of calls; in 
fact, 90 percent of VOIP calls are completed to the PSTN. They 
are marketed as substitutes for traditional telecom service and 
consumers are actually purchasing a means of connecting to the 
PSTN. In our view, services that rely on healthy publicly 
switch telephone networks should support that network through 
universal service and participation in the carrier 
compensation. Without the support, the customers without access 
to broadband will be asked to share an even increasing burden 
to sustain this network.
    We believe that consumer protection should apply to VOIP. 
Services that replace traditional phone services should meet 
consumer expectations. Consumers depends on their phones on 
ways they don't even realize. State commissions handle tens of 
thousands of consumer complaints every year on issues like 
slamming like cramming, service outages and service quality, 
clarity and honesty in billing and truths of deceptive 
marketing, privacy of customer billing, emergency dialing and 
these protections should apply to VOIP as well.
    State commissions are well suited to be the watchdog and 
referee in these proceedings. We are the laboratories of 
democracy, if you will. We are local and staffed to be 
responsive. We provide a human voice to sort out these 
complaints and usually mediating or explaining the complaint to 
consumers. Distant Federal agencies would be hard pressed to 
handle this case load.
    Cable industry representatives have suggested that States 
should arbitrate interconnection agreements for facilities-
based GOIP providers as we have for wireless and CLECs. It is a 
role we are very much attuned to.
    Chairman Powell and Ms. Martine have indicated that 
independent VOIP providers with no call origination facilities 
may not survive in the near future, And indeed, incumbent 
providers will step into VOIP and be the dominate providers. 
This indicates to me the packets which alone should not be a 
shield against all economic regulation. Market power is a 
better measure of that. Most VOIP providers have none of this 
market power, but we shouldn't unwittingly created a loophole 
for incumbents.
    As Ms. Greene indicated earlier, we should look at the 
function nature of the service and not the underlying 
technology in developing our polices, otherwise we will create 
winners and losers as Congressman Dingell has indicated we 
should not do.
    A consensus of State commissions have concluded that 
writing new polices around specific technologies will always 
leave us one step behind. It's tempting to put our thumb on the 
scale for new hot technologies, but that would actually distort 
the market.
    Now, the New York Commission has taken this functional 
approach to heart and it looked at specific service offered by 
Vonage Holdings and found that economic regulations should not 
apply, but that 911 emergency dialing should apply. Vonage's 
web based form contract had some alarming terms, including the 
fact that it might not work after business hours. This would 
have dire consequences for a consumer who replaced his phone 
with a Vonage phone and had a heart attack after business 
hours. He might be very much out of luck. This is an 
interesting thing that Congressman Shimkus raised and something 
that this committee should be very much attuned to.
    In addressing this dilemma the New York Commission's action 
were very narrowly tailored, flexible and practical. Both the 
New York and Minnesota Commissions have issued orders that have 
now been enjoined by the courts, but they provide a worthwhile 
road map to a ``light touch`'' approach.
    In terms of Representative Pickering's bill, I believe it 
is constructive in recognizing the interdependency of the VOIP 
service with the public switch network, and it does require 
participation in Federal USF, intercarrier comp and CELEA. 
Unfortunately, though, it pursues a technology specific 
approach that will build a new silo for VOIP and ultimately 
distort the market. By dismissing a State role out of hand it 
shortchanges consumers on consumer protection, interconnection, 
emergency dialing and competition. While we have just begin 
studying the Stearns-Boucher Bill, it too may have some of the 
same problems that the Pickering bill has. But it does leave 
out as well consumer protection in our view.
    We appreciate and respect the dialog these bills have 
spurred, but at this time we cannot support them. We look 
forward, however, to participating in that dialog to see that 
new technologies like VOIP are allowed to flourish and achieve 
the promise that they hold within the framework of a ``light 
touch'' regulatory policy.
    Thank you very much.
    [The prepared statement of Robert B. Nelson follows:]

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

    Mr. Chairman, Ranking Member Markey and members of the 
Subcommittee, I am Robert Nelson, Commissioner with the Michigan Public 
Service Commission and Chairman of the National Association of 
Regulatory Utility Commissioners' (NARUC) Committee on 
Telecommunications. Founded in 1889, NARUC represents the interests and 
consensus policy positions of State public utility commissions.
    NARUC applauds your leadership for calling this hearing and 
appreciates the opportunity to testify today on the impact of Voice-
Over-Internet-Protocol (VOIP) and other technologies on the ever-
changing telecom market. Now is an exciting time for the telecom 
industry because so many innovative technologies are entering the 
market to enrich the lives of consumers and the productivity of 
businesses.
    The challenge of policymakers is to stand aside and let innovation 
take its course wherever we can, while still preserving the services 
and features consumers care about and expect in their telecom system. 
This philosophy guides our inquiries at State commissions and will 
undoubtedly guide this Committee as it examines not just VOIP 
technologies but all the aspects of the Federal Telecommunications Act 
and its interaction with the evolving telecom marketplace.
    State commissions are committed to making sure VOIP can reach its 
full potential for consumers and the marketplace. Just like members of 
Congress, State commissioners are constantly gathering information from 
industry and the various stakeholders to understand the unique business 
models, services, and consumer opportunities that have sprung up around 
VOIP technology. Several States have pursued a ``light touch'' 
regulation of VOIP services, while most have declined to regulate VOIP 
at all thus far. No state has pursued any degree of economic regulation 
of VOIP.

                       PSTN/VOIP HYBRID SERVICES

    The VOIP services attracting the most attention are actually hybrid 
services that bundle together packet-switched origination of calls with 
the services of traditional competitive and long-distance phone 
companies, terminating well over 90 percent of their calls to the 
Public-Switched Telephone Network. Such services are generally marketed 
as replacements for traditional phone service and the product they are 
actually selling is access to (and the ability to receive calls from) 
millions of traditional PSTN phones in every home and office around the 
nation.
    These PSTN hybrid services are more than just an ``application,'' 
because unlike with any Internet application, the service provider must 
hand the traffic off to a traditional telecom carrier like Qwest or 
Level 3, convert the traffic to analog and avail itself of the 
interconnection agreements that have been negotiated with the local 
exchange carrier of the called party. Even the FCC has conceded that at 
least some hybrid services, such as that featured in AT&T's petition, 
should be regulated as telecommunications services.
    The vast majority of VOIP customers would never pay a dime for the 
service if they didn't have that universal access to the PSTN. As such, 
it is entirely appropriate for VOIP carriers to support the 
universality of the phone network that completes their business model, 
and for local exchange carriers to receive the same compensation for 
terminating their calls that similarly situated traditional telecom 
carriers must pay.
    State universal service programs are an integral part of the 
universal service system because they fill in gaps that the federal 
program misses. Without state programs, consumers in many states would 
be shortchanged by the nationwide proxy formulas of the federal 
program. Making sure those state programs have a support base as the 
technology of the phone system evolves is critical to their long-term 
health. Such a support base is even more critical in light of the 
substantial contributions to the PSTN made by carriers and customers in 
the form of intercarrier compensation and federal universal service, 
which may be significantly depleted through the emergence of hybrid 
VOIP services.

                          CONSUMER PROTECTION

    Consumers should also receive effective, responsive local consumer 
protection in the phone system of the future. If VOIP providers achieve 
even a measure of the success they have promised their share holders 
and venture capitalists, they will quickly progress beyond the 
technology-savvy early adopters and begin offering services to the 
average consumer.
    Whether we realize it or not, we build our lives around a phone 
system that is reliable and dependable. The telecom business continues 
to be one where an ongoing consumer relationship is formed through an 
extensive and detailed legalese-laden contract that goes largely unread 
until there is a problem with the service. Often the contract locks the 
consumer into a year or more of services with stiff financial penalties 
for quitting the relationship early.
    State Commissions handle tens of thousands of individual consumer 
complaints every year, covering such issues as:

 Slamming and cramming;
 Timely response to service outages, quality deterioration, etc.;
 Clarity and honesty in billing;
 Intrusive or deceptive marketing;
 Access to telecommunications services by blind and disabled 
        consumers.
 Privacy of customer billing or calling records; and
 Making sure the emergency dialing service lives up to the trust that 
        consumers put in it.
    While much has been written about a new telecom system where 
different ``layers'' of service (transmission, application, etc) are 
offered by different companies, consumer protection obligations 
generally apply to whichever company maintains the consumer 
relationship (and collects the bill). Most complaints are resolved 
through Commission mediation or often just explanation, although some 
merit intervention and enforcement.
    State Commissions are well suited to the watch dog and referee role 
because they are in the local communities, staffed to be responsive and 
have unique expertise in the telecom business. Depriving states of 
their consumer protection role would fragment the response effort and 
confuse consumers as they were shuffled from one agency to another 
based on the technology they were using--a federally mandated 
runaround. Distant federal agencies would be hard-pressed to handle the 
load.

                    INTERCONNECTION AND COMPETITION

    Cable industry representatives recently commented that State 
commissions will likely have a critical role to play in arbitration of 
interconnection agreements as the facilities-based VOIP carriers seek 
to knit themselves into the larger phone network. State commissions 
have fulfilled this important role for years already and are prepared 
to safeguard the same rules of nondiscrimination and fair dealing for 
the VOIP industry as they have for CLECs and others.
    Congressman Pickering's bill raises a related issue--also 
highlighted recently by FCC Chairman Michael Powell--of whether 
``independent'' VOIP carriers with no call-originating facilities of 
their own will be able to survive if the facilities owners choose to 
favor their own VOIP products in the long run with preferential packet 
treatment. Vonage CEO Jeffrey Citron recently commented to the 
Washington Post that this might be an area that merits government 
intervention.
    Also, it is important to clarify that simple use of packet 
switching should not absolve a company of all its competitive 
obligations. While a company like Pulver, Packet8 or Vonage may not be 
positioned to exert market power when it acts independently, it is 
entirely foreseeable that a traditional incumbent could migrate 
customers to VOIP service en masse and still position itself to exert 
market power, especially in regions where it was the exclusive 
facilities-based broadband provider.

                         FUNCTIONAL NATURE TEST

    In assessing the impact of new communications technologies, a 
consensus of NARUC commissioners have come to the conclusion that 
writing broad new policies around specific technologies will always 
leave us one step behind and may even hurt the development of 
technology by sending distorted signals to the marketplace. Instead, 
NARUC's resolutions addressing VOIP emphasize that regulatory treatment 
should follow the functional nature of the service, not the way it 
works under the hood. Rather than looking to the technology itself, 
policymakers should look at the salient features of a service. In most 
cases, the starting point in our analysis should be what the service 
provides to the consumer.
    The ``functional nature'' approach does not mean regulating new 
VOIP services just as if they were traditional circuit-switched service 
from Ma Bell. Rather it means a rigorous, intellectually honest 
dialogue about which public interest obligations are attached to which 
features of a particular service. If the physical structure of a 
particular service makes its carrier unable to exert market power, for 
example, that may impact whether the full panoply of economic 
regulations ought to apply.
    The New York Public Service Commission took the functional nature 
approach to heart in its recent decision regarding Vonage Holdings 
Corp. It examined a specific service offered to New York consumers and 
found it to be a telecom service. Based on the salient traits of that 
service, the NY PSC found traditional economic regulations 
inapplicable, but it did rule that consumers should receive reliable 
911 emergency dialing services.
    The service was marketed as a replacement for traditional phone 
service but the lengthy standard contract that consumers had to sign 
contained some alarming provisions. Specifically, the company's Terms 
of Service agreement, on page 7 of a 15 page single-spaced document 
1 said:
---------------------------------------------------------------------------
    \1\ The Terms of Service agreement is contained in a small window 
that consumers may scroll through when signing up for Vonage service 
online. If copied and pasted into a Word document, it takes up 15 
single-spaced pages. The document quoted above was last updated on 
April 27, 2004.
---------------------------------------------------------------------------
          ``You acknowledge and understand that 911 dialing from your 
        Vonage equipment will be routed to the general telephone number 
        for the local emergency service provider (which may not be 
        answered outside business hours), and will not be routed to the 
        911 dispatcher(s) who are specifically designated to receive 
        incoming 911 calls at such local provider's facilities when 
        such calls are routed using traditional 911 dialing.'' 
        (emphasis added)
    Imagine if a consumer in upstate New York who replaced his 
traditional phone line with this service had the rotten luck of 
experiencing a heart attack or stroke after ``normal business hours.'' 
He dials 911 and, because it only goes to the business line, no one 
picks up. Brutal as it sounds, he is simply out of luck!!
    The New York PSC's order suggested this was unacceptable but 
actually invited the company to work with them on an acceptable 
framework for achieving these important goals and to apply for waivers 
where traditional phone regulations did not apply. While the actions of 
New York and Minnesota have been enjoined by federal courts for the 
time being, they provide a worthwhile roadmap that illustrates a 
``light touch'' approach that so many leaders of industry and 
government have sought.

                  THE ``VOIP REGULATORY FREEDOM ACT''

    By requiring the PSTN hybrid services (``connected VOIP 
applications'') to participate in universal service and intercarrier 
compensation, H.R. 4129 recognizes those services' relationship with, 
and dependence on, the Public-Switched Telephone Network. This 
recognition is telling and crucial as we lay the foundations for a 
broader debate about telecom policy that this Committee will 
undoubtedly lead.
    Unfortunately, H.R. 4129 suffers from a technology-specific 
approach that will only serve to create a new market-distorting 
regulatory ``silo'' or ``stovepipe'' for one particular technology, 
even though that technology will almost certainly evolve in 
unanticipated directions. With more time, state and federal 
policymakers could cooperate in parsing out functionalities and 
features that deserve more precise regulatory treatment and, in some 
cases, strategic forbearance.
    We are also concerned that H.R. 4129, by dismissing a state role 
out of hand on such core issues as consumer protection, 
interconnection, emergency dialing, market power and state universal 
service programs, would deal consumers and competitors a poor hand at 
the outset of a new era in telecommunications.
    NARUC commends Congressman Pickering and his cosponsors for their 
leadership in introducing the VOIP Regulatory Freedom Act because we 
appreciate and respect the dialogue it has spurred here in Congress and 
among other federal policymakers. While we cannot support H.R. 4129, we 
look forward to participating in that dialogue, on VOIP and the full 
range of telecom issues before this Committee, to craft a comprehensive 
federal telecom policy that will serve consumers well for decades to 
come.

    Mr. Upton. Mr. Rutledge?

                 STATEMENT OF THOMAS M. RUTLEDGE

    Mr. Rutledge. Mr. Chairman, Congressman Markey, members of 
the committee, my name is Tom Rutledge. I am the chief 
operating officer of Cablevision Systems Corporation in New 
York. Thank you for the opportunity to appear before the 
committee.
    Eight years after the Telecommunications Act of 1996 
advances in technology are giving consumers unprecedented 
ability to choose and create communications packages that meet 
their individual needs. Consumers can choose among wired and 
wireless platforms for a combination of waste, data and tech 
services regularly substituting different, newer products for 
old ways of communicating. Voice over IP service is an example 
of this competition, a true facilities-based service offering 
consumers greater choice and more value enabled by broadband 
networks and improved technologies over IP.
    Since 1998, Cablevision has invested $5 billion in an 
advanced two-way broadband network that reaches 4.4 million 
homes in the New York metropolitan area. That investment 
enables us to offer consumers a range of more robust and 
valuable services, including our high speed broadband service, 
digital video, video on demand, 15 high definition television 
services, interactive services, and voice service.
    Offered on our high speed broadband platform, ``Optimum 
Voice,'' our QoS, quality of voice over IP service, is among 
the most successful products we have ever offered. Launched 
late last year, Optimum Voice today has more than 100,000 
customers and is winning new customers at a rate of more than 
3,000 per week.
    Voice over IP is poised to evolve in conjunction with 
enhanced data and mobile services, such that the concept of 
voice service will mean something far different to users in the 
coming years than what it does today. Prior technological 
innovations did not change the fundamental character of plain 
old telephone service, POTS. VOIP, by contrast, will usher in a 
whole new kind of communications markets.
    Our service, Optimum Voice, is already more than a 
tradition phone service, and this is just the beginning. In 
addition to offering our customers limitless local, regional 
and long distance calling and all the advanced features 
available from a traditional phone service, Optimum Vice is a 
suite of IP applications that includes functionality never 
offered before. Advanced call forwarding options let customers 
route calls to up to three different locations simultaneously. 
The data platform allows them to send and review voice messages 
on email. An interactive web portal lets subscribers customize 
the way they want to receive communications day-by-day, hour-
by-hour, and with total control from any location. And it 
includes E911 and is capable of meeting all law enforcement 
access and surveillance requests.
    It is notable that Optimum Voice today is totally 
unregulated by the States in which it is being provided. 
Because of this deregulatory environment, not in spite of it, 
Optimum Voice is succeeding with customers by meeting their 
needs, providing value and competing in the marketplace.
    Technological advances in VOIP and related services are 
quickly overtaking specific regulations based on the legacy 
networks. The pace of these changes will quickly render 
inapplicable any very specific rule or classification based on 
what is even current technology. Even what appears to fit today 
will no longer fit tomorrow.
    In this new world, I encourage policymakers to embrace the 
potential for consumer choice by establishing a broad, 
deregulatory, national framework that encourages new services 
and technological advancement. It is important that a new 
framework be developed that allows consistent State rules that 
foster growth of IP-based voice applications and permits the 
discipline of choice to ensure protection and value to 
consumers.
    I commend Congressman Pickering for advancing a forward 
looking, deregulatory legislative approach to VOIP. Of special 
importance, the legislation establishes the principle that 
there must be a predictable, national framework for the 
development of these inherently mobile and borderless services 
that allows providers to respond to the marketplace, not the 
government, in designing, pricing and selling services. While 
some States understandably have an interest in VOIP, there must 
be recognition that clear rules of the road that operate on a 
national basis are essential for the service to expand and to 
offer the kind of choice and value envisioned by the 1996 
Telecommunications Act.
    In the tradition from legacy telephone regulation toward a 
modern, deregulatory framework appropriate for the new 
marketplace, we recognize that a number of existing policies 
must be rationalized. I commend Chairman Powell and his 
colleagues on the FCC for initiating proceedings to address 
each of these transitional issues. These include the legacy of 
access charges and intercarrier compensation, and creating new 
mechanisms for supporting universal service. The timely 
resolution of these issues by the Commission by Congress will 
provide much needed certainty to the providers seeking to grow 
and improve on this fledgling service.
    We also recognize that there will continue to be need to 
address significant public safety and security issues. VOIP 
customers must have ready access to E911 and emergency 
services. Law enforcement must have access to VOIP applications 
to support the national security interests. These targeted 
policy goals can be achieved by narrowly tailored regulation or 
industry commitments without carrying forward the costly and 
dates regime of local retail phone regulation from a monopoly 
era.
    Mr. Chairman, members of the committee, we are at the 
beginning of a realignment of mass-market communications, 
Internet-based voice applications promise to give consumers 
real communications choices. These choices will not be limited 
to less expensive versions of POTS, although that is possible, 
but will include access to totally new products and services 
that will remake the entire concept of voice service. This is 
an exciting new market for Cablevision and our customers. We 
are proud to be a leader in offering voice over IP services at 
the forefront of this transition and look forward to working 
with this committee to establish policies that maximize its 
potential.
    Thank you again for this opportunity. And I welcome 
questions from the panel.
    [The prepared statement of Thomas M. Rutledge follows:]

    Prepared Statement of Thomas Rutledge, Chief Operating Officer, 
                       Cablevision Systems Corp.

    Mr. Chairman, Congressman Markey, members of the Committee, my name 
is Tom Rutledge; I am the Chief Operating Officer of Cablevision 
Systems Corporation in New York. Thank you for the opportunity to 
appear before the Committee.

                              INTRODUCTION

    Eight years after the Telecommunications Act of 1996, advances in 
technology are giving consumers unprecedented ability to choose and 
create communications packages that meet their individual needs. 
Consumers can choose among wired and wireless platforms for a 
combination of voice, data, and text services, regularly substituting 
different, newer products for old ways of communicating. Voice over IP 
service is an example of this competition, a true facilities-based 
service offering consumers greater choice and more value, enabled by 
broadband networks and improved voice technologies over IP.

                               BACKGROUND

    Since 1998, Cablevision has invested $5 billion in an advanced two-
way broadband network that reaches 4.4 million homes in the New York 
metro area. That investment enables us to offer consumers a range of 
more robust and valuable services, including our high speed broadband 
service, digital video, video on demand, 15 High-Definition television 
services, interactive services, and voice service.
    Offered on our high-speed broadband platform, ``Optimum Voice''--
our QoS (Quality of Service) voice over IP service--is among the most 
successful products we have ever offered. Launched late last year, 
``Optimum Voice'' today has more than 100,000 customers and is winning 
new customers at a rate of more than 3,000 per week.
    ``Voice over IP'' is poised to evolve, in conjunction with enhanced 
data and mobile services, such that the concept of ``voice service'' 
will mean something far different to users in the coming years from 
what it does today. Prior technological innovations did not change the 
fundamental character of plain old telephone service (POTS). VOIP, by 
contrast, will usher in a whole new kind of communications market.
    Our service, Optimum Voice, is already much more than traditional 
phone service, and this is just the beginning. In addition to offering 
our customers limitless local, regional and long distance calling and 
all the advanced features available from a traditional phone service, 
Optimum Voice is a suite of IP applications that includes functionality 
never offered before. Advanced call forwarding options let customers 
route calls to up to three different locations simultaneously. The data 
platform allows them to send and review voice messages on e-mail. An 
interactive Web portal lets subscribers customize the way they want to 
receive communications day-by-day, hour-by-hour, with total control 
from any location. And it includes E911 and is capable of meeting all 
law enforcement access and surveillance requests.
    It is notable that Optimum Voice today is totally unregulated by 
the States in which it is being provided. Because of this deregulatory 
environment--not in spite of it--Optimum Voice is succeeding with 
customers by meeting their needs, providing value and competing in the 
marketplace.

                                 POLICY

    Technological advances in VOIP and related services are quickly 
overtaking specific regulations based on the legacy network. The pace 
of these changes will quickly render inapplicable any very specific 
rules or classifications based on what is even current technology. Even 
what appears to fit today will no longer fit tomorrow.
    In this new world, I encourage policymakers to embrace the 
potential for consumer choice by establishing a broad, deregulatory, 
national framework that encourages new services and technological 
advancement. It is important that a new framework be developed that 
allows consistent state rules that foster growth of IP-based voice 
applications and that permits the discipline of choice to ensure 
protection and value to consumers.
    I commend Congressman Pickering for advancing a forward-looking, 
deregulatory legislative approach to VOIP. Of special importance, the 
legislation establishes the principle that there must be a predictable, 
national framework for the development of these inherently mobile and 
borderless services that allows providers to respond to the 
marketplace, not to government, in designing, pricing, and selling 
services. While some states understandably have an interest in VOIP, 
there must be recognition that clear rules of the road that operate on 
a national basis are essential for the service to expand and to offer 
the kind of choice and value envisioned by the 1996 Telecommunications 
Act.
    In the transition from legacy telephone regulation toward a modern, 
deregulatory framework appropriate for the new marketplace, we 
recognize that a number of existing policies must be rationalized. I 
commend Chairman Powell and his colleagues on the Federal 
Communications Commission for initiating proceedings to address each of 
these transitional issues. These include the legacy of access charges 
and inter-carrier compensation, and creating new mechanisms for 
supporting universal service. The timely resolution of these issues by 
the Commission or by Congress will provide much needed certainty to the 
providers seeking to grow and improve on this fledgling service.
    We also recognize there will continue to be a need to address 
significant public safety and security issues. VOIP customers must have 
ready access to E911 and emergency services. Law enforcement must have 
access to Voice over IP applications to support the nation's security 
interests. These targeted policy goals can be achieved by narrowly 
tailored regulation or industry commitments without carrying forward 
the costly and dated regime of local retail phone regulation from a 
monopoly era.

                               CONCLUSION

    Mr. Chairman, members of the Committee, we are at the beginning of 
a realignment of mass-market communications. Internet-based voice 
applications promise to give consumers real communications choices. 
These choices will not be limited to less expensive versions of POTS--
although that, too, is possible--but will include access to totally new 
products and services that will remake the entire concept of voice 
service. This is an exciting new market for Cablevision and for our 
customers. We are proud to be a leader in offering Voice over IP 
services at the forefront of this transition and look forward to 
working with this committee to establish policies that maximize its 
potential.
    Thank you again for this opportunity and I welcome questions from 
the panel.

    Mr. Upton. Thank you.
    Mr. Vidal?

                  STATEMENT OF RONALD J. VIDAL

    Mr. Vidal. Thank you, Chairman Upton, Congressman Markey, 
members of the subcommittee for inviting me here today to share 
my thoughts on Voice over Internet Protocol or VOIP.
    I am Ron Vidal, I am the Group Vice President of Emerging 
Opportunities for Level 3 Communications. Part of my 
responsibility is looking into the future for new technologies 
and services on behalf of our company. But first a bit of 
background about Level 3 Communications.
    Level 3 owns a 23,000 mole fiber optic long haul and metro 
network spanning both North American and Europe, which we built 
between 1998 and 2001 at a cost of over $9 billion. Today we 
are a Fortune 500 company which operates one of the largest 
Internet protocol or IP backbones in the world and we sell our 
services wholesale to many of the world's leading 
communications and content companies.
    We have also been an industry pioneer in softswitch, the 
core technology of VOIP. In fact, we hold patents on connecting 
packets switch data networks with the legacy public switch 
telephone network or PSTN.
    Over the last 5 years we have carried over 250 billion 
minutes over our softswitch platform. Today we offer a full 
suite of wholesale VOIP services to our business and consumer 
customers. There is not a single circuit switch in our entire 
network.
    Now let me turn to the regulation of VOIP. You know, it was 
not that long ago that VOIP occupied the fringes of the telecom 
world. Recently, however, VOIP has been able to replicate the 
quality of the PSTN at lower costs while delivering new 
features not possible over the PSTN. Well, why is that?
    Well, first we have had 25 years of incredible performance 
improvements in computing, software and hardware all at 
affordable prices. And many of these technologies were invented 
and developed in districts represented by members of this 
committee.
    Second, and in parallel, the development and worldwide 
adoption of the Internet connected those computers in ways 
unimagined just decades earlier. Again, a set of technologies 
largely invented and developed in the United States. Third, 
broadband has been rapidly adopted by businesses and in homes 
using many different technologies and many different services 
providers. With residential broadband adoption at over 20 
percent, consumers in nearly every district represented by this 
Congress are voting with their checkbooks for the benefits of 
high speed Internet access.
    Bottom line: All things digital are getting better, faster 
and more affordable. The fundamental technology building blocks 
are now in place to extend those benefits to voice. But the 
fate of VOIP does not rest with market forces or technology 
advances alone. In the past, all calls were PSTN-to-PSTN. 
Perhaps in the future all calls will be IP to IP. But for the 
foreseeable future we will have two different networks, each 
born in a different century connected to each other with 
different technologies and with different rules.
    At the moment VOIP service providers and their customers 
continue to live in a kind of regulatory no-man's-land with 
much uncertainty. Fortunately, many members of this committee 
and the House recognize this and are acting to clarify the VOIP 
regulatory through bills recently introduced by Congressman 
Pickering, Stearns and Boucher. As you consider a course of 
action, I would urge you to keep three points in mind.
    Point one, there is a strong need for Federal preemption. 
In the absence of clear Federal rules individual State PUCs 
have begun issuing conflicting rulings on VOIP. Congress needs 
to occupy the field on this important issue. Recently 
Commissioner Susan Kennedy of the California PUC and 
Commissioner Charles Davidson of the Florida PSC have both 
asked FCC Chairman Michael Powell to have the Federal 
Government preempt State jurisdiction no VOIP.
    Point two: Legislate it with a light hand. Congress should 
not force VOIP into outmoded laws and regulations devised for 
the PSTN which were created at different times in history and 
largely to protect consumers from monopolies. In particular, 
the existing intercarrier compensation regime creates 
irrational economic incentives that distort the market. A free 
market economic model must be put in place.
    Point three: VOIP service providers have an obligation to 
support social policies that the government has identified is 
in the public interest. This includes making sure that IP 
networks are compliant with industry standards for CELEA, E911 
and access for the disabled, and that they contribute 
appropriately to Universal Service Funding. It is also 
appropriate for government to enact rules for VOIP services 
providers in these important areas.
    With the history of computing and the Internet as a guide, 
extraordinary innovations are on the horizon for voice over IP. 
For example, we have a vision for how VOIP can improve E911 in 
ways that the PSTN simply cannot match.
    Furthermore, VOIP shows promise as a killer application 
that will drive broadband penetration in this country. American 
companies, entrepreneurs and our capital markets have always 
been in the vanguard of technology innovation. Today they are 
again poised to lead the way in VOIP. But to be successful, 
however, these innovators and investors require a stable 
regulatory environment.
    Remember, our leadership in computing and the Internet 
largely developed with little government regulation. I urge you 
to treat broadband and VOIP in much the same way. Congress has 
a real opportunity today to create an environment that will 
extend the country's long history of innovation into VOIP.
    With that, I would be happy to answer any questions that 
you have, but thank you for the opportunity.
    [The prepared statement of Ronald J. Vidal follows:]

    Prepared Statement of Ron Vidal, Group Vice President, Emerging 
               Opportunities, Level 3 Communications, LLC

    Thank you, Chairman Upton and members of the subcommittee for 
inviting me here today to share my thoughts on Voice over Internet 
Protocol (VOIP) services.
    First I'd like to provide some background about our company. Level 
3 owns a 23,000-mile fiber-optic long haul and metro network spanning 
both North America and Europe, which we built between 1998 and 2001 at 
a cost of $9 billion. Today it is one of the largest Internet backbones 
in the world.
    Level 3 is less well known than some of the other telecom service 
providers here today. Besides being a young company, we sell our 
services on a wholesale basis to large communications and content 
companies, and do not sell directly to residential or business 
customers.
    Today, we are a Fortune 500 company and our customers include:

 The ten largest communications carriers in the world;
 The nation's four largest local telephone companies;
 The nation's top 10 Internet Service Providers (ISPs);
 The six largest cable companies in the U.S.;
 Wireless companies serving more than 140 million U.S. subscribers;
 The 10 largest carriers in Europe;
 And many of the world's leading satellite companies, Internet content 
        providers, media and entertainment companies, research and 
        academic institutions, and government agencies.
    Level 3 has been an industry pioneer in softswitch, the core 
technology of VOIP. In fact, we hold patents on a system and method for 
communicating voice and data over a packet-switched network that is 
adapted to coexist and communicate with a legacy Public switched 
Telecommunications Network (PSTN). Over the last five years, we have 
carried over 250 billion minutes of dial-up traffic over our softswitch 
platform. We introduced the world's first carrier-grade, VOIP long 
distance service back in 1999, and today we offer a full suite of 
business, consumer and wholesale Voice-over-IP services to our 
customers. There is not a single circuit switch in our network.
    Now let me turn to the regulation of VOIP.
    It wasn't long ago that VOIP occupied the fringes of the telecom 
world--as a niche application of interest only to hard-core 
technologists.
    Recently, however, VOIP has been able to replicate the quality of 
the public switched telephone network at far lower cost, while 
delivering new features and functionality not possible over older, 
legacy network systems.
    Why is that?
    First, we've had 25 years of incredible performance improvements in 
computers, software and hardware, all at affordable prices. Many of 
those technologies were invented and developed in districts represented 
by members of this Committee.
    Second, and in parallel, the development and worldwide adoption of 
the Internet connected those computers in ways unimagined just decades 
earlier. Again, a set of technologies largely invented and developed in 
the United States.
    Third, broadband has been rapidly adopted in businesses and homes, 
using many different technologies and many different service providers. 
With residential broadband adoption at over 20 percent, consumers in 
nearly every district represented by this Congress are voting with 
their checkbooks for the benefits of high speed Internet access.
    Bottom line: All things digital are getting better, faster and more 
affordable, from word processing to entertainment. The fundamental 
technology building blocks are in now in place to extend those benefits 
to voice.
    But the fate of Voice over IP does not rest with market forces or 
technology advancements alone. As most members of Congress know, 
government regulators will exercise significant influence over how VOIP 
technologies are deployed. I'm confident that technology questions will 
be answered by the market, but many remaining questions reside in the 
regulatory arena.
    Today, there are misguided calls from some to regulate VOIP with 
the same policies that were developed for the PSTN, as a utility 
business. Others understand that VOIP requires a new approach more 
appropriate to the age of Internet Protocol, as a technology business. 
Twenty years ago, all calls were PSTN-PSTN. Perhaps 20 years from now, 
all calls will be IP-IP. But, for the foreseeable future, we will have 
two different networks connected to each other with different rules. As 
of yet, however, VOIP service providers, and their customers, continue 
to live in a kind of regulatory No Man's Land, with no clear direction 
from regulators.
    This regulatory uncertainty, if it is prolonged, may undermine VOIP 
deployment in this country. Fortunately, many members of this committee 
and the House recognize this, and are acting to clarify the VOIP 
regulatory framework through bills like the one recently introduced by 
Congressman Chip Pickering.
    As you consider a course of action, I would urge you to keep three 
points in mind:

There's a strong need for federal pre-emption. In the absence of clear 
        federal rules, individual states PUCs have been begun issuing 
        conflicting rulings on Voice over IP. Congress needs to occupy 
        the field on this important issue. Recently, Commissioner Susan 
        Kennedy of the California PUC and Commissioner Charles Davidson 
        of Florida PSC have both asked FCC Chairman Michael Powell to 
        have the federal government pre-empt state jurisdiction on 
        VOIP.
Legislate with a light-hand. Congress should not force-fit VOIP into 
        outmoded regulatory constructs devised for the PSTN, at a 
        different time in history and to protect consumers from 
        monopolies. In particular, the existing inter-carrier 
        compensation regime creates irrational economic incentives that 
        distort the market. In order to truly maximize the benefits of 
        VOIP, a free-market economic model must be put in place.
VOIP service providers have an obligation to support social policies 
        that the government has identified as in the public interest. 
        This includes making sure that IP networks are compliant with 
        industry standards for CALEA, E911 and access for the disabled, 
        and that they contribute appropriately to Universal Service 
        funding. It's entirely appropriate for government to enact 
        rules for VOIP service providers in these important areas.
    With the history of computing and the Internet as a guide, 
extraordinary innovations are on the horizon for VOIP. For example, we 
have a vision for how VOIP can improve E-911 by providing first 
responders with more accurate information as incidents develop, in ways 
that the PSTN simply can't match. Furthermore, VOIP shows promise as a 
``killer app'' that will drive broadband penetration by enhancing the 
consumer value of broadband Internet service.
    American companies, entrepreneurs and our capital markets have 
always been in the vanguard of technology innovation. Today, they are 
again poised to lead the way in VOIP, with new technologies and 
applications that will fundamentally change how we communicate. To be 
successful, however, these innovators and investors require a stable 
regulatory environment. Remember, our leadership in computers, software 
and the Internet largely developed with little government regulation. I 
urge you to treat broadband and VOIP in much the same way. Congress has 
a real opportunity today to help foster an environment that will ensure 
the country's long history of innovation continues with VOIP.
    With that, I'd be happy to answer any questions you might have. 
Thank you.

    Mr. Upton. Well thank you very much.
    I would like to say at the outset we are very appreciative 
of the member's attention, and I think we have had 25 members 
for opening statements and for much of the testimony. I am also 
very pleased that I followed the advice of Mr. Markey when I 
took the helm of this subcommittee Mr. Barton, that we have 
only one panel, not two. So I appreciate that.
    A couple of questions. As Mr. Carlisle mentioned, the FCC's 
rulemaking asked the question as to whether the economic common 
carrier regulations are relevant for VOIP providers. And I 
would like to know if, maybe a yes, no, if there is a maybe 
perhaps. But we will go right down the row, Mr. Citron, do you 
think that common carrier regulations are relevant for VOIP 
provider?
    Mr. Citron. Absolutely not.
    Mr. Upton. Ms. Greene?
    Ms. Greene. Most of the common carrier regulations would 
not be. There are some very clear concerns about 911, USF, 
several others that have been mentioned.
    Mr. Upton. Mr. Jensen?
    Mr. Jensen. Common carrier rules probably are not in their 
entirety applicable. I think that is one of the complicating 
factors that we have and we need to work carefully on this 
through the future.
    Mr. Upton. Mr. Kirkland? You had better hit that mike 
button.
    Mr. Kirkland. Sorry. Turned it off.
    We believe that common carrier regulations should not apply 
to the service aspect of VOIP services. It is important, 
though, to distinguish that from the regulation of the 
underlying facilities over which they are carried. And we do 
believe there should continue to be obligations to unbundle 
facilities and provide access to competitors such as Covad.
    Mr. Upton. Ms. Martine?
    Ms. Martine. We believe it should not.
    Mr. Upton. Mr. Nelson?
    Mr. Nelson. Yes. I would agree with Ms. Greene that there 
are certain aspects of common carrier regulations that might 
apply, but for the most part we would support full scale common 
carrier regulations.
    Mr. Upton. Mr. Rutledge?
    Mr. Rutledge. We believe they should not apply.
    Mr. Upton. Mr. Vidal?
    Mr. Vidal. We believe they should not apply.
    Mr. Upton. Now, second question is is the regulatory 
uncertainty at both the State and the Federal level at all 
impeded the roll out of your VOIP services as you have looked 
at them.
    Mr. Citron?
    Mr. Citron. Yes, it has. The clear uncertainty has made 
difficult for capital to be raised not only for service buyers 
like ourselves to deploy services, but also for the funding of 
the hundreds of different companies that will develop the 
technology and the equipment that goes into building these new 
advanced networks.
    Furthermore, as we get attacked State by State, recently in 
New York and formerly in Minnesota and soon to be potentially 
from California, this gives us second thoughts about how we 
want to deploy our networks and where we should deploy those 
assets.
    Mr. Upton. Let me just ask as a follow up to that then part 
of your answer, Mr. Citron, if in fact it has impeded the 
unveiling of VOIP, what additional resources do you think you 
would need to deal with I guess you would have to say 51 
different regulatory groups, 52 if you include the Federal 
Government.
    Mr. Citron. Yes. It's the opposite problem, is that right 
now we spend an inordinate amount of money in resources both 
internally and externally dealing with the regulatory landscape 
where for a company of our nature where a year ago we had 100 
employees sit there and go with 51 jurisdiction PSCs, very 
difficult for us in order to allow us the freedom to really 
innovate and deploy resources in getting the service in the 
hands of Americans who really do need a national framework that 
provides clarity.
    Mr. Upton. Ms. Greene?
    Ms. Greene. Well, I feel Mr. Citron's pain here. We, too, 
believe that the lack of clarity has clouded our ability to 
invest at BellSouth. We need to have a national framework. We 
also need to have relief from computer inquiry rules which make 
us spend an inordinate amount of time deciding where we need to 
place investment, how that investment will be treated, how we 
need to classify, if there's anything we can do to protect from 
regulation. And then in addition, we need to have clarify and 
recognition of the fact that the broadband market is deeply 
competitive even at the network level and there needs to be a 
different hand in regulation.
    Mr. Upton. Mr. Jensen?
    Mr. Jensen. I think our challenge in ruling out the new 
services is more economic than anything else. We deal in one 
State. We have also had to up our regulatory and legislative 
representation, but we find it more on the Federal level than 
we do on the State level. We find ourselves coming to 
Washington much more than we did in the past, and that is a 
very costly trip for us. Our commission, on the other hand, 
understands what it is our customers need and to the extent 
that they can help us with the economics of rural America, they 
have been very helpful in this regard.
    Mr. Upton. Mr. Kirkland?
    Mr. Kirkland. Yes. Covad uses a fairly limited set of 
unbundled elements including T1s and others in access to loops. 
And I think the fundamental uncertainty with the court decision 
around the disruption of that unbundling regime and the vacuum 
now does create uncertainty and inhibits our ability to invest. 
So we really look forward to the FCC, hopefully, working very 
hard to ensure a smooth transition with respect to fallout. But 
anytime you change the rules, you know, we raised private 
capital. We raised $125 million dollars to roll out VOIP, and 
we would like to know the ground rules that we are operating 
under both with respect to regulation of VOIP itself, but also 
in the telecom regulatory framework in general.
    Mr. Upton. Ms. Martine?
    Ms. Martine. Yes. We actually have been concerned about 
this because we think the Internet is not just a national 
opportunity for us, it is a global opportunity and uncertainty 
requires us to really establish a principle by which we invest 
our limited capital. So in some cases we have found the global 
reaction to our VOIP trials in some selective countries more 
open and predictable than we have seen so far in the U.S. But 
we definitely have a duty to our shareholders to ensure we 
invest in the most profitable opportunities for payback and we 
need to make certain we have servitude here.
    Mr. Nelson. Yes. I would take issue with the fact that we 
may have 51 different forms of regulatory framework here. We 
really have just two models here. We have a lot of States who 
don't do anything on VOIP, who have made a decision not to 
regulate. Other States who have entertained a very light touch 
regulation focusing on consumer protection issues and 911. And 
I think it is important that certain cable companies have come 
in and asked for certificates. It is not a very onerous 
process, not very costly and the States can then have the 
discretion to decide how much regulation is warranted.
    Mr. Upton. Mr. Rutledge?
    Mr. Rutledge. As we made the investments in our cable 
system and expanded the capacity of those networks, we 
envisioned that we would have opportunities to involve 
ourselves in new telecommunication businesses. And, actually, 
making it work technically has been fairly simple.
    The biggest issue we have, and we have been rolling out as 
fast as we can go, is that we really do not know what our costs 
our. And so we have a risk from a regulatory perspective that 
we are not sure of and cannot really quantify. And as that 
compounds, that creates issues for us.
    So I think we need to go very quickly here and eliminate 
the risk of the marketplace that is caused by the regulatory 
uncertainty.
    Mr. Upton. Mr. Vidal?
    Mr. Vidal. Yes. I would just add anytime you are going to 
roll out a new product or service you have to ask yourself a 
few basic questions, such as what is it; how much does it cost 
to produce and how much can you sell it for in the marketplace. 
And whereas you can see a set of technologies available today 
that you can purchase and implement yourself, put them in a 
network, if it is strictly an Internet application such as 
email or supporting MP3 or any other myriad of Internet 
applications, that is a very straightforward answer to a fairly 
straightforward question. If, however, the application turns 
out to be voice, then you have to say what is going to cost for 
me to complete this set of packets over my network? You don't 
have an idea what your costs are, therefore it is difficult to 
figure out if you have an ongoing liability or not and what you 
should charge your customers for.
    And part of this is also the fact that we need to 
interconnect these two disparate networks, as I mentioned in my 
testimony, that have completely different characteristics. And 
so we connect in with the public switch telephone network, in 
our case, to 93 percent of the United States population also. 
That is also a fairly intensive activity in terms of dealing 
with every different telephone company and in front of every 
different State public utility commission. And so we would echo 
the fact that you do not know what your costs are and it is a 
laborious process to do so.
    Mr. Upton. Ms. Eshoo?
    Ms. Eshoo. Thank you, again, Mr. Chairman for holding this 
hearing. And to all of the witnesses, thank you for your 
testimony.
    I have four questions. The first one, and I am sure you 
have given thought to this but I do not know, I would like to 
hear what your thinking in preparation for this: In case of an 
emergency the telephone lines do not normally go down but the 
Internet can. What is the backup for voice over the Internet?
    My second question is, and I think this is directed more to 
Covad and to AT&T, you are obviously bullish on voice over the 
Internet and you are moving quickly to make it available. Can 
you explain to what is left of the committee here today why you 
continue to need access to unbundled network elements?
    My third question is to the FCC, and that is as we move 
toward a packet switched model for voice communications does 
not the contents of the packet become less and less relevant? I 
mean when do we get to the point where an email and a phone 
call are given equal treatment and subject to similar 
regulations?
    And my last question, I think to Covad, is what are the 
alternatives to reach the last mile for most residential 
customers? If you are unable to negotiate that with an ILEC, 
what can you do to provide service?
    So those are my four questions, and let us make time for 
whomever to answer them. Whoever would like to start on the 
whole issue of an emergency and voice over the Internet.
    Mr. Citron. Sure. I will take the first one.
    First, one point in fact, POTS lines do go down, and they 
go down and 911 does not work.
    Point two in fact, PSAPs, people who operate 911 response 
centers, do go down. We all remember New York City lost their 
entire 911 operation for almost an entire day due to a 
technical malfunction.
    Third point. The Internet itself was designed in a manor in 
which for single point to failure. In theory, and in 
practicality, the Internet is much more resilient to any kind 
of disaster or problem which allow for the seamless of 
rerouting of packets in real time. Now, I will admit the last 
mile of these networks are all----
    Ms. Eshoo. But what do you do about electricity?
    Mr. Citron. Electricity is a great question.
    Ms. Eshoo. Well, that is my question.
    Mr. Citron. Sure. No. In the area of electricity, our 
customers who have that concern will use a battery backup. 
These battery backups are available two ways. One, increasingly 
imbedded in the physical devices and, two, also stand alone 
units that can provide an easily 8 hours worth of standby power 
in the event of a power outage.
    Ms. Eshoo. Does anyone else want to respond briefly--
because I have three other questions.
    Mr. Rutledge. At Cablevision we offer a similar battery 
backup for modems, but we also--you have to consider our cable 
plant itself is powered by the power grid. So if power goes 
out, we have built battery backup into our cable system at all 
the power supply locations that allows 4 hours of standby 
power.
    The other thing that we have done, though, by upgrading our 
networks we have made them a lot more reliable. And we explain 
to our customers the kind of reliability we have built and we 
have done that through our high speed access business. So when 
we sell a voice over IP products we explain to customers that 
they are getting the same kind of reliability they get on their 
high speed access service. So they have a way of judging what 
they are buying. And so we think there is a marketplace 
expectation. Many customers also have cell phones today, in 
fact the vast majority of our customers have cell phones with 
similar E911 capabilities so that----
    Ms. Eshoo. I wish there were more.
    Mr. Rutledge. [continuing] if there is a failure, it can 
work in.
    Ms. Eshoo. Being very familiar with it.
    Ms. Martine. I would like to support Mr. Rutledge's 
comments.
    Ms. Eshoo. Yes.
    Ms. Martine. We have seen also with customers full 
disclosure matters. Clearly with the amount of customers today 
that have broadband and in fact have taken advantage of web 
services it is very clear about 911 capability. We have 
actually marked it on the TA so people are fully aware of that.
    Most customers who are early adopters and very 
technologically savvy have suggested, as Mr. Rutledge suggested 
as well, they have backup services with mobility services if 
their house phone does not work and they happen to have a VOIP 
phone as well, they go to their car if their cell phone is not 
working and charge it up. So that has not been barrier.
    But again, we have to remember this is not a service that 
we expect all 100 million households in America to adopt 
overnight. This will take time and people will self-select who 
are willing to deal with those issues.
    Ms. Eshoo. Yes. I think it is a good point to raise, 
though, given our heightened sensibilities about emergencies 
now.
    Maybe we can get to the other three questions.
    Mr. Kirkland. Sure. Maybe I'll take since you have a 
question in there for us.
    Ms. Eshoo. Okay. Be as brief as possible.
    Mr. Kirkland. Yes.
    With respect to the emergency service issue, again this is 
the importance of facilities-based competition. Covad manages 
its own network, so the Internet goes down, our network goes 
down. Whereas, I think where you are relying on the facilities 
of a second provider, you are not in a position to control that 
critical input. So having multiple people doing that.
    With respect to access to UNIs, the 1996 Act set forth a 
very flexible framework to manage the transition from local 
monopoly to competition. That transition is still at a very 
early stage, just like VOIP is at a very early stage.
    We serve small businesses who often have only one option, 
which is the phone company, and we provide those small 
businesses with an alternative. There are still consumers out 
there who do not have access to multiple alternatives. So, 
until there is full competition unbundling the framework of an 
Act is still critical.
    We are looking at things like wireless, those technologies 
are available in very, very small percentages of the country. 
So there is really not an alternative to that ubiquitous phone 
network at this point.
    Mr. Stearns [presiding]. The time of the gentlelady has 
expired.
    Ms. Eshoo. I did not make an opening statement.
    Mr. Stearns. I think we gave the extra time to you, as I 
understand. Did we do that?
    We do not have you recorded as being here when the opening 
statement--it did not record you with an extra 3 minutes. That 
is what the staff shows.
    Chairman Barton. Well, Mr. Chairman, could I ask unanimous 
consent that the gentlelady from California have 2 additional 
minutes.
    Mr. Stearns. Yes. She has asked four questions, Mr. 
Chairman, and I am just thinking if all four questions are 
answered, it will be well over. And I would be glad to do what 
you suggest. I am just trying to in deference to all the other 
members that are here that if she has four questions, that we 
should try--and those questions can be submitted for the record 
to her and not necessarily take the entire time to answer those 
four questions. But if that is your----
    Chairman Barton. She should not ask such hard questions, 
see.
    Mr. Stearns. Yes. Yes. So----
    Ms. Eshoo. By the time we comment on this we will use up 
another 3 minutes. So it is up to you gentlemen.
    Mr. Stearns. Mr. Chairman, what is your unanimous----
    Chairman Barton. I would yield to whatever the----
    Mr. Stearns. Well, I would say at this point the other 
three remaining questions that I suggest the panel submit those 
to us for the answer, and possibly we might have a second 
round.
    With that, I would go to the chairman.
    Chairman Barton. Well, I do not want to cutoff the 
gentlelady. I would be happy to yield my time to the gentlelady 
from California.
    Mr. Stearns. The gentleman yields his time.
    Ms. Eshoo. Mr. Chairman, you are enormously generous.
    And I would just ask that two be answered in writing and 
that the gentleman from the FCC just briefly comment on the 
question to him, and then I will yield back.
    Thank you very, very much, Chairman Barton.
    Mr. Carlisle. I can do so very briefly.
    You asked when content of a packet becomes irrelevant. We 
are already there. That is the central issue in why this is an 
important and controversial debate.
    You can look at VOIP from the point of view of telephony 
and say it looks like what a telephone does, or you can look at 
it from the point of the Internet and say it is one bit stream 
just like any other bit stream on the Internet and why are we 
taking that one bit stream out and treating it differently from 
email and file sharing and web browsing?
    We are already there.
    Ms. Eshoo. Thank you.
    Thanks again.
    Mr. Stearns. I thank the gentlelady.
    And the chairman is recognized for a remaining 4 minutes.
    Chairman Barton. I did have four questions, but I am just 
going to put one of them on the record and if we have time, I 
will get the others.
    I am going to go to what I call the $64,000 question. Does 
everybody on this panel support a Federal bill that would 
preempt State regulation of VOIP? And if somebody says no, why 
not?
    Mr. Nelson?
    Mr. Nelson. Yes, Mr. Chairman. My testimony indicates that 
we believe there are certain meaningful roles the States can 
play in this debate, again under a light touch regulatory 
policy but working in cooperation with the Federal regulators 
as well. Such things as I have indicated, the enforcement of 
911 provisions, the consumer protection provisions that we have 
outlined in our testimony and the interconnections agreements 
that have to be made between right now wireless companies and 
wireline companies, between CELECs and ILECs. Those same types 
of agreements can be arbitrated between VOIP providers and 
traditional wireline companies under the auspices of State 
commissions.
    Chairman Barton. Okay. Other than the person who regulates 
the State PUCs, does anybody oppose a Federal bill?
    Mr. Jensen. Mr. Chairman, I do not know that I would oppose 
a Federal bill if it were in concert with allowing input from 
the States.
    I come from Nebraska, and we were required to provide equal 
access a number of years ago, we had long distance providers 
crop up faster than the dot.com mania that went around. And 
there were hearings for certification and rural setup. And as 
far as I know, we had one long distance company that locked its 
doors over 1 weekend and just abandoned the customers that they 
had signed up. I think that is a pretty good record when you 
consider all the number of people that were there.
    I think our State commissions have the opportunity to know 
what my customers much more quickly than perhaps in Washington, 
DC. And our customers would have much greater access than they 
would having to come to Washington to work on quality of 
service, universal service and the other myriad of----
    Chairman Barton. Well, I think any Federal bill that passes 
is going to have adequate input from State regulatory 
authorities. But ultimately there has to be one final 
arbitrator, and it just seems to me self-evident that a service 
is not only national and interstate, but international, it 
seems to be an absolute no-brainer that there should be a 
Federal statute.
    Now I understand what the gentleman is saying and I 
understand what you are saying, but when we created the 
existing telephone system, I mean there was obviously it was 
done on a monopolistic model based on local service and State 
service with some interstate service. I am old enough to 
remember when somebody said you had a long distance phone call, 
that was a big deal and you went right to the phone because you 
are getting charged a $1.00 or something and it must be 
important; somebody had died or been born or something had 
happened because you just did not make long distance calls 
other than that.
    Mr. Jensen. One statistic that I might bring to your 
attention, and if I have it correctly it is subject to check, 
but 73 percent of our customers do not make an interstate phone 
call.
    Chairman Barton. Yes.
    Mr. Jensen. And so there is a lot of intrastate that goes 
on in our States, and I believe the State commissioners are 
useful in determining what should be happening there.
    Chairman Barton. My last question, I will put the others in 
the record, assuming that there is going to be a Federal bill 
that preempts State regulation, do we need to put a definition 
in the bill explicitly certifying in which cases these services 
are FCC jurisdictional? In other words, do we need to put a 
definition that defines an information service if it is purely 
a local loop, purely within a physical headquarters location or 
that that is not jurisdictional but if it goes across State 
boundaries or between buildings, or between different entities. 
Do we need to define what is jurisdictional if we pass a 
Federal statute or is that not necessary? Who wants to answer 
that one?
    You want to think about it? I want to ask that they 
submit--get their lawyers to give them a credible answer to put 
that in the record, Mr. Chairman. And I have several other 
questions I will submit for the record.
    And I yield back.
    Mr. Stearns. Thank you, Chairman.
    Mr. Boucher?
    Mr. Boucher. Thank you very much, Mr. Chairman. And I also 
want to thank the witnesses for taking their time today to 
educate us with respect their views on this very important 
matter.
    I think it is has become increasingly clear that we are 
going to legislate with regard to Internet-based communication 
services in the next Congress. And I have perceived from your 
testimony basic anticipation of that legislation. And so I have 
several questions that are directed toward what the various 
elements of that legislative approach should be.
    I think that in answer to Mr. Barton's question and to some 
of the previous questions including those of Ms. Eshoo, you 
have commented on whether or not there should be exclusive 
Federal authority. You have probably also commented to some 
extent on the need for basic consumer protection regulation. I 
heard Mr. Nelson comment on that.
    And by the way, Mr. Nelson, the Stearns-Boucher Bill does 
leave open the opportunity for basic consumer protection 
regulation. That certainly is our intent.
    So let me start by asking three basic questions, and you 
can make notes on these if you would like, and I appreciate 
your response to these general principles and whether or not 
you think a bill should contain them.
    First of all, would you agree that we need a broad 
framework that encompasses all Internet-based communications, 
not just VOIP but a broader framework that, for example, would 
encompass video-based communications when the services that 
accommodate that emerge in the future. That way we would not 
have to come back and legislate again and again every time 
there is a new Internet-based more sophisticated and capable 
Internet application.
    As a second matter, would you agree that we should clearly 
say that these advanced Internet-based communication services 
are neither information services nor telecommunication services 
so that we make a clean break from the current regulatory 
regime into which existing services are required to fit?
    And then third, would you agree that we should treat the 
offerors of all of these advanced services equally so that a 
cable service that is identical to a telephone service does not 
receive treatment from a regulatory standpoint that is 
different from that which the telephone services receives? 
Should we declare regulatory parity and neutrality with respect 
to all broadband platforms offering advanced communication 
services?
    I have some other questions which I will also submit for 
the record, but those are the three that I would quickly like 
to have your responses to. And please be as brief as you can.
    Mr. Carlisle, would you like to begin?
    Mr. Carlisle. Certainly. I would agree first that we should 
be looking at a broad framework again out of administrative 
efficiency if nothing else. The IP-enabled services NPRM was 
written deliberately to have a broad scope so once we issue an 
order, when somebody shows up with video and voice over IP we 
do not have to go back and formulate an entirely new regulatory 
system.
    So a broad scope makes sense, although we have to be 
concerned about making sure that we do not then fade over into 
unintentionally regulating vast other portions of the Internet 
that have never been subject to regulation and nobody 
reasonably would argue that they should be brought into any 
regulatory regime.
    Second, should we say they are neither information or 
telecom services and make a clean break? The NPRM raises these 
questions, and I think under our current rules there may be 
flavors of VOIP that clearly could be considered information 
services. I think the larger question, though, is whether we 
want to make a clean break.
    In my written testimony I make the statement that I believe 
we should not be getting trapped into the definitional fight as 
opposed to figuring out what kind of world we actually want to 
live in for these services. And that would argue for a more 
sophisticated approach that allows a higher level of nuance to 
be applied to these services.
    You may not want to say everything is a telecommunication 
service or everything is an information service. You may want 
to acknowledge there are different flavors.
    And finally, should we treat all providers equally? I think 
there are very strong arguments for regulatory parity between 
industry actors that are in a similar positions. If you have 
two actors who are investing hundreds of millions if not 
billions of dollars in infrastructure, there may be very good 
arguments to say treat them the same, otherwise the regulation 
is driving investment in a specific direction.
    Mr. Boucher. Thank you, Mr. Carlisle. I think we are going 
to move along given the time.
    Mr. Citron?
    Mr. Citron. Thank you. One, yes, we do agree that there 
needs to be a broad framework that gives us all application 
that live above the physical layer.
    I cannot give a comment as to whether we need to make a 
clean break from a telecom service or information service what 
is clear is it is definitely not a telecom service.
    On the final point, regulatory parity. That is a very 
difficult question as you echo Mr. Carlisle's comments. 
Clearly, we have to recognize that voice over OP is not the 
same as wireline, and thus there never can be regulatory 
parity. Much in the same way, the wireline and wireless 
networks are not the same, and thus there is no regulatory 
parity there either. But within inside anyone in the industry, 
VOIP players against VOIP players, then clearly regulatory 
parity should exist.
    Mr. Boucher. Thank you.
    Ms. Greene?
    Ms. Greene. Yes, yes and yes.
    Mr. Boucher. Thank you, Ms. Greene. That is the kind of 
answer I was looking for. You get the gold star.
    Ms. Greene. Thank you.
    Mr. Boucher. Mr. Jensen?
    Mr. Jensen. I concur with Ms. Greene.
    Mr. Boucher. Wonderful. Can we move along? Thank you very 
much.
    Mr. Kirkland?
    Mr. Kirkland. Yes, yes and it depends.
    Mr. Boucher. Well, elaborate on depends just briefly.
    Mr. Kirkland. Yes. I think, again, the distinction is to 
the extent people are providing like services, if BellSouth is 
providing the same service as Covad, as Vonage, then clearly 
regulatory parity should apply. I just think we need to be very 
careful about identifying situations in which market power 
still exists, people do not have alternative facilities. And 
the fact that those facilities may carry traffic that is IP or 
is voice over IP does not necessarily change the equation on 
market power----
    Mr. Boucher. I understand. You want unbundling and 
interconnection to meet that. I understand it.
    Ms. Martine?
    Ms. Martine. Yes, but it is interesting VOIP is something 
that is being the catalyst to ask this question. There are many 
other applications on the Internet that are not regulated.
    Mr. Boucher. So that is three yeses or one yes?
    Ms. Martine. No, that is just the first one.
    Mr. Boucher. I'm sorry.
    Ms. Martine. The second one is yes.
    And the third one I think we have not had a lot of time to 
digest your bill, but I think there are some issues that I 
support Mr. Kirkland's points with regard to IP UEL and 
facilities-based competition. We can't have the RBOCs being 
advantaged and the others not capable of supporting.
    Mr. Boucher. Thank you.
    Mr. Nelson?
    Mr. Nelson. Yes. I would say yes, no and yes. And I can 
explain the no.
    It is our position that many VOIP services should be 
classified as telecom services, such as Ms. Martine's service 
was classified by the FCC earlier this year. And it does not 
make any difference I think whether the digital conversation 
occurs in the network or at the customer location, as with Mr. 
Citron's product. But, having said that, there should be some 
forbearance because of the nature of this technology so that 
the full scale of common carrier regulation, as I indicated 
earlier, should not be applied.
    Mr. Boucher. Thank you.
    Mr. Rutledge?
    Mr. Rutledge. I think the answer to the first question is 
probably no that I think that most communications, most video 
will ultimately end up in an IP format. And so I just think 
that there is a opportunity now to get this nascent business 
off the ground with VOIP voice communications. But to take all 
IP and subject it to a new paradigm, I am not sure where that 
would go.
    The classification question I am not sure matters.
    And the last question, VOIP is not a traditional voice 
service and not a legacy telecom service. And we think it is a 
completely different product. And so if we were doing is lumped 
under the kind of treatment that currently exists to 
traditional phone companies, that would not be good.
    Mr. Boucher. Okay. Thank you very much.
    Mr. Vidal?
    Mr. Vidal. Yes. On the first no.
    On the second we need to see a bit more details.
    And on the third, regulatory parity presumes a parity 
amongst size, breadth scope of offers and I am not sure that is 
exactly the situation that----
    Mr. Boucher. Yes. Let me say, Mr. Chairman, I appreciate 
your indulgence. And I am not going to ask another question in 
view of the time.
    But, Mr. Vidal, I am surprised by your answer to the first 
one, and I would like to have an exchange with you----
    Mr. Vidal. Certainly.
    Mr. Boucher. [continuing] subsequentially either verbally 
or in writing as to why you would say. That really does 
surprise me.
    Mr. Vidal. Certainly.
    Mr. Boucher. Thanks to each of you. And thank you, Mr. 
Chairman.
    Mr. Stearns. The gentleman's time has expired.
    Mr. Shimkus?
    Mr. Shimkus. Thank you, Mr. Chairman.
    Two questions that I will just put out in the open and for 
submission, because this line of questions has raised a 
question in my mind and a point I want to discuss.
    Would you respond back to the committee who should be 
responsible to make sure that Voice over Internet Protocol 
service also includes E911 service? Is that something the State 
commissions, the FCC or the industry have to tackle? And it is 
listed on the questionnaire E911, but E stands for enhanced, 
which means cellular. We are eventually going to go to laptops, 
probably voice over IP. So if you have got a laptop somewhere 
accessing enhanced 911, I mean do you have to have a GPS chip?
    This is a great hearing because of all the different 
aspects.
    So answer that for me if you can.
    And the second question is can you tell what you are doing 
to make sure that consumers who use Voice over Internet 
Protocol service also can access 911, E911 services? If Voice 
over Internet Protocol services not today capable of supporting 
enhanced 911, when you believe you believe you will have E911 
capable service?
    Now, the question that has stirred my thoughts in this is a 
whole facilities-based discussion, which reminded me of other 
facility-based debates that we have had here, whether it was 
Tauzin-Dingell, my facilities-based discussion in 
telecommunications after visiting with Chairman Upton at the 
Verizon building after September 11. The Verizon building is 
right across the World Trade Towers, which had great damage. 
Verizon, obviously being a big company, could get that up and 
running relatively quick. Talks about entrenched regional Bells 
being able to reconnect where when you have what is not 
facility-based, how does a competitor who is using parts of the 
system get up?
    So, the first question, and I know that Mr. Kirkland has 
said he is a facility-based operation; would anyone else claim 
to be a facilities-based operation by whatever definition you 
want to define that? And you can help education us on that?
    Yes?
    Mr. Citron. Yes. Vonage would be considered a facilities-
based operation with the perspective that we deploy network 
assets into the network but acts as bridges, both to bridge the 
current IP network to the legacy PSTN network, to also bridge 
to other IP networks and of course finally to also bridge to 
next generation wireless networks.
    Mr. Rutledge. Cablevision is also a different kind of 
facilities-based network in a sense that we have our own plant, 
our own wire that goes to every customer we serve. And it is 
complete and differentiated from the public switch network. So 
it is truly a facilities-based network.
    Mr. Shimkus. So that is why your answers to some of these 
questions deal with if it is the regulation aspects under 
traditional phone regulation would not in your opinion be 
appropriate because you are not using the regular phone 
systems?
    Mr. Rutledge. That is correct. Now, we actually terminate 
calls to the public switching network----
    Mr. Shimkus. Right.
    Mr. Rutledge. [continuing] through a CLEC that we happen to 
own called Lightpath, which also provides redundancy to the 
public switch network to big companies in New York, for 
instance, that want redundant routing in case there is an 
emergency of some kind. So we are actually in the business of 
selling redundancy as a communications business.
    But separate from that we have a cable television network 
which is also capable of this IP communication system. And so 
we are selling IP communications on a cable network which is 
separate and distinct from the public switch network, which we 
do connect to, though.
    Mr. Vidal. If I may, I think it is worthwhile so we are all 
on the same page here, for what would be a consensus of 
facilities-based, right? Is it facilities-based in what used to 
be called the local loop or in the local access system, is it 
facilities-based in the long haul, is it facilities-based in 
the international, is it facilities-based inside the premise on 
each end?
    In our particular case our facilities are literally about 
36 inches deep across almost 23,000 miles of property in North 
America and Europe. I mean, we would consider that to be 
facilities-based. At some point in time there is going to be a 
facility there. It depends on who owns it, who has control of 
it and/or who is reselling it.
    So I think maybe a definition or at least a consistent 
definition might be useful.
    Mr. Shimkus. Just confirms my statement that I always make 
that the more you learn, the more you realize you do not know. 
It is a great job of being a Member of Congress.
    Thank you.
    Mr. Stearns. The gentleman's time has expired.
    The gentleman from Florida, Mr. Davis?
    Mr. Davis. Thank you, Mr. Chairman.
    My first question is for those of you who think that the 
Congress needs to act urgently to preempt State regulation. My 
question is which of you think that Congress needs to proceed 
urgently to preempt State regulation and if so, why do you 
think that is urgent?
    Mr. Rutledge. Cablevision thinks that you should act 
urgently because we are rapidly growing our business by 
thousands of customers per week in our service area and we 
really do not know what the regulatory treatment will be, what 
our costs are really going to be. You know, we are making 
estimates but we have no assurance that the cost estimates that 
we put in our business models are in fact correct. And as that 
base of customers gets bigger and bigger, the risk to us gets 
greater and greater. So we would like certainly.
    Another thing is that we operate in the New York 
metropolitan area, which happens to be 3 States. So we have one 
television marketplace, one community with three different 
States that have potential regulatory authority and yet we are 
selling a single product and servicing a single product across 
that entire service area. And so we think that in order to get 
the same quality and the same pricing across our footprint, 
that you urgently need to preempt in this particular limited 
way for VOIP.
    Ms. Martine. I would like to support that position. In 
addition to the comments made about the 3 States, many of you 
know VOIP is a mobile service so you could sign up for service 
in New York and move to Florida and keep your phone number. We 
need to have Federal regulation so that you do not have Florida 
regulating one way if you happen to live there then and a 
different way when you signed up for the service in New York. 
So it is very critical that there is national policy on this so 
you do not subject yourself to customer confusion and 
dissatisfaction saying I do not understand these are the rules 
under which I bought the service, why is not changing. And one 
of the features is mobility in addition to unlimited local and 
long distance service.
    Mr. Citron. I would like to echo the statements of Ms. 
Martine and Mr. Rutledge. I would also like to add that Vonage 
operates and has customers in all 50 States inside the United 
States. And from our perspective, we have already been attacked 
by a number of State regulators to try and take voice over IP 
and put it into common carrier regulation. Of course, we have 
successfully fended off all such attacks to date but at a 
price, and a very expensive price that causes us to rethink 
which markets we are going to go ahead and deploy assets in.
    Ms. Greene. Well, I do not disagree with anything that the 
previous witnesses have said in response to your question. I 
think that those are all reasons why we need to have a Federal 
policy. It is important that we get a timely Federal policy, 
but there are some real issues here about consumer protection 
that need to be addressed comprehensively and fully. It is more 
important to get it right than to get it done quickly.
    Mr. Jensen. If I might add just one more element. My 
segment of the industry being very rural and high cost serves 7 
percent of the population of the United States, but we serve 40 
percent of the land mass. And, unfortunately, many times in 
Washington and other places they forget about us when they are 
talking about all of the rules and regulations and parameters 
that you need to work with. And it just seems to me that a 
comprehensive rewrite rather than a piecemeal rewrite would 
better serve our customers in rural.
    Mr. Carlisle. I'll just briefly say that in a letter dated 
July 6 to Congressman Pickering, Chairman Powell stated: ``The 
time has come for Congress and this Commission to confront the 
legal and policy environment for IP-enabled services, including 
VOIP services.''
    As I mentioned in my oral testimony and in more detail in 
my written testimony, the FCC can act and is moving forward to 
act as best we can. And it is a top priority for the Bureau to 
work on this. However, there are limits to our flexibility and 
if Congress believes that we need more sophisticated tools, 
then we are certainly in favor of Congress acting.
    Mr. Vidal. If I may, I would like to add just an add on to 
that, which is if we look at the problem from a different 
perspective, and that is the benefit of delay or is there a 
benefit of delay? So far we have heard a lot of comments about 
why there should be a benefit to moving quickly and I think my 
definition of quickly would implicitly include an accurately 
and correctly and rightly. But I have yet to hear an argument 
that suggests that the strains that VOIP is putting on 
universal service or the reduction in wireline access line 
counts is going to slow down anytime in the future. I do not 
see any indications from anyone that said that the consumers 
are going to turn around and not continue to operate in which 
they have been operating.
    Thank you.
    Mr. Nelson. Let me just add, if I may, I would support Mr. 
Jensen's call for a comprehensive review of the situation. The 
two States that have been most active, Minnesota and New York, 
have been enjoined by Federal courts. So there really is no 
urgency in my view.
    Mr. Davis. For those of you that advocate a slower 
approach, a more comprehensive approach which I certainly 
understand, would you agree that this Congress could be at that 
issue for 2 or 3 years and that as time goes by, some States 
will at least begin to regulate all of you in terms of the 
delivery of the VOIP and further complicate the issue?
    Mr. Jensen. I can speak for one State; I would not see them 
as wanting to complicate the issue terribly. Their goal, like 
ours, is to get these services out as quickly as possible yet 
maintain the consumer protections that need to be there; CALEA, 
911, TDD and these types of activities plus the quality of 
service. So, from our perspective I do not think that would be 
a problem.
    Mr. Nelson. I would agree with that, too. I think most 
States are like Nebraska in that regard. They want to see this 
technology develop and they are not going to put unnecessary 
roadblocks in the way.
    Ms. Greene. Since I did put a caveat on my response to your 
question, this issue cannot go 2 or 3 years without being 
resolved.
    Mr. Citron. Well, from Vonage's perspective, the one who 
gets all the inquiries from the States, we do not have 2 or 3 
years to wait. It will take that long and clearly if we listen 
to other commissioners in States, while Nebraska may--I am not 
sure if you are speaking for Nebraska, but whereas Nebraska may 
not act, may not move, surely Susan Kennedy from California has 
told us that California will regulate and trying to force a 
common carrier relation on voice over IP if the Federal 
Government does not step in, and I expect other States will 
follow.
    Mr. Davis. I think all of us here appreciate your alls 
expression of confidence and how quickly this Congress can act 
on the broader rewrite. I hope you are correct.
    But for those of you who all that advocate preemption at 
whatever particular time and as part of a particular package, 
should there be some carve out for State regulation in matters 
such a fraudulent advertising or billing?
    Mr. Rutledge. Yes. I think that you can certainly preempt 
VOIP regulation at the State level while not undercutting any 
of the consumer protection laws of the States. And, obviously, 
different States treat different consumer issues legally 
differently. And we already live in that world and are prepared 
to continue to live in that world. So I do not think that 
promoting this legislation as it is currently written you will 
undercut the State's authority generally to protect consumers.
    Mr. Citron. I would like to echo Mr. Rutledge's comments 
and further state that Vonage would not be opposed to States 
taking on that role. But just to make this committee aware that 
the States already have that role. Vonage today is already 
subject to a number of State laws throughout the land that deal 
with things like truth in advertising and other disputes that 
may arise with constituents that live with inside that State.
    Mr. Carlisle. If I may point out, if you think about it 
from the perspective of a function operating on a computer, for 
example, if you have a problem with your spreadsheet program or 
you have a problem with your word processing program, that is 
subject to action by State attorneys general enforcing consumer 
protection laws. That does not necessarily need something like 
common carrier regulation as an additional layer in order to 
protect consumers.
    You can think of it similarly for VOIP. We have asked those 
questions about consumer protection within the NPRM. We will be 
receiving comment on that, and considering it seriously.
    Mr. Davis. Thank you.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    The gentlelady from New Mexico, Ms. Wilson.
    Ms. Wilson. Thank you, Mr. Chairman.
    I would like to yield 3 minutes to my colleague from 
Mississippi, Mr. Pickering.
    Mr. Pickering. I thank the gentlelady from New Mexico.
    And I just have a quick comment, and it is basically 
focused on our most recent conversation here.
    Everyone knows a broad telecom reform act will be very 
intensive and it will take at the minimum from today 3 years. I 
do not think anybody here who has ever done telecom policy has 
ever thought that we could do a broad telecom reform in the 
next year. At the very least it will take both years of the 
next Congress to get to comprehensive reform.
    The other reality is that most people project that VOIP is 
going to have a rapid emergence in the marketplace. Some 
project up to 30 percent of the U.S. market will be voice over 
Internet within 3 years. That gives us great urgency to try to 
get where we have consensus. Where we have consensus among the 
industry from BellSouth to AT&T to cable to Covad to wireless 
where the lions and the lambs have lain down together is 
Federal preemption. And for the certainty of capital and for 
the certainly of new competition we need to in this Congress in 
this year go forward on the Federal preemption.
    Now what else does that mean? In 911 my friend John Shimkus 
and Anne Eshoo both raised questions on public safety. We can 
have an industry led process with a date certain to make sure 
that everyone knows that we will have E911 and public safety as 
we have preemption.
    To my friends at the State level, I would say we want to 
affirm that you continue to have consumer protections against 
fraud. And nothing in this bill or in a preemption would 
undermine that.
    To my friends in rural areas, and I am from a rural area, 
this is not only a catalyst for capital and competition, but 
this would be a catalyst to reach universal service reform that 
will be sustainable.
    We need to do the preemption now. We can do it in a way 
that acknowledges the USF intercarrier comp relationship 
between VOIP and the public switch telephone network. We can do 
those things, find consensus, move forward quickly so that we 
can unleash this new application, the capital, the competition 
and find ways to make sure that we do it in a reasoned wise way 
as it relates to public service, universal service or public 
safety, universal service and law enforcement.
    Mr. Chairman, I would hope that we could find a way to get 
it done this year because if we wait, it will be 3 years and 
the market and the technology cannot wait that long.
    Ms. Wilson. I had a couple of questions that I wanted to 
ask with respect to this technology, but I am in an interesting 
position of watching our incumbent telephone company in New 
Mexico do some really innovative things.
    About a week ago they announced, Qwest announced that it is 
going to start offering Voice over Internet Protocol to 
business customers, and not just in places like Casper, Wyoming 
and Albuquerque, New Mexico and Billings, Montana but the list 
of cities that are going to be covered in their first year, 22 
cities included Baltimore and Boston, Washington, DC and San 
Francisco, Seattle, Los Angeles, San Jose so that it is a 
nationwide business footprint from an incumbent carrier 
offering voice over IP. It is an interesting approach to 
business. And I also understand that they have a different way 
of charging carriers, voice over IP carriers for access 
charges.
    And, Mr. Citron, I wanted to ask you how Qwest does access 
fees differently than other incumbent carriers and what that 
means? How does this work?
    Mr. Citron. Sure. Well, we are not 100 percent sure yet on 
how it is going to work. We have read Qwest's public 
announcement that they would no longer charge access fees on 
terminating VOIP traffic. We have contacted Qwest regarding 
that offering and we are currently in active discussions about 
putting together an interconnection agreement that would take 
advantage of that item.
    I would welcome the opportunity to report back to you on 
the progress of those negotiations.
    Ms. Wilson. I would be very interested in that and what 
that means. Because it looks as though we have one incumbent 
company that is kind of out there on the leading edge of this 
change of being both, a voice over IP offerer nationwide and an 
incumbent carrier. And I would be very interested to see what 
kind of business model you come up with that as that goes 
along.
    I also understand that Qwest is offering something they 
call naked DSL, which is where a subscriber can purchase DSL 
from Qwest without also having to buy the local service form 
Qwest. And I wanted to ask Ms. Green does BellSouth plan to 
offer DSL on a stand alone basis to somebody who may want to 
come in and just buy DSL from BellSouth or do you believe that 
consumers who want to get DSL should also have to subscribe to 
BellSouth's local phone service?
    Ms. Greene. We do not currently offer naked DSL. Our DSL 
subscribers have to have our voice service at this point in 
time. But it is something that we are always looking at. 
Because as the wireless market matures, a stand alone DSL is a 
product that may be something that we need to put into the 
marketplace. We do not currently offer it.
    Ms. Wilson. What do you think about another ILEC coming 
into your territory and offering VOIP?
    Ms. Greene. You know, one of the things that is interesting 
about your question and the thought that was going through my 
mind is we tend to think about the ILECs and the 
telecommunications industry as a monolithic industry, and we 
are not. We are very different companies. Each of us have 
different business plans. And one of the problems that we have 
with the current regulatory regime is it treats everybody, 
including all the CLEC customers as if they have the same 
business model.
    In fact, Qwest has the bulk of its revenues now, I believe, 
come from its long distance operation. And it in many ways are 
much more like Level 3 than it is like a BellSouth.
    So each of our companies are different and we no longer 
have a monolithic telecommunications industry.
    Ms. Wilson. Mr. Rutledge, I wanted to ask you does 
Cablevision require cable modem customers to buy VOIP service 
from Cablevision.
    Mr. Rutledge. No. In fact, most of our modem business was 
developed before we launched VOIP. So the vast majority of our 
modem customers do not have yet to buy VOIP.
    Ms. Wilson. But if a cable modem subscriber wanted to get 
VOIP from one of your competitors----
    Mr. Rutledge. Oh, they do and can. Some of them are Vonage 
customers or AT&T customers. Yes, we do not prohibit them.
    Ms. Wilson. Thank you.
    I think this is one of the most interesting issue facing 
telecommunication, and it likely to cause tremendous changes in 
the way that we are able to communicate with friends and 
neighbors and do business around world. And I think I agree 
with my colleagues here on both sides of the aisle that this is 
an issue we will have to deal with sooner rather than later, 
because if we delay too long we end up preempting certain 
business models without giving guidelines up front as to what 
the rules of the game should be.
    And I thank all of you for your time and helping to educate 
us.
    Thank you, Mr. Chairman.
    Mr. Stearns. Then gentleman from New York, Mr. Engel.
    Mr. Engel. Thank you, Mr. Chairman.
    Mr. Pickering before he left gave an impassioned plea for 
Congress to act quickly saying that if we did not, it would 
take 3 years for us to do a total rewrite. My experience, I do 
not necessarily disagree with what he said, however my 
experience in Congress has told me that sometimes there are 
bigger and broader issues and you can use the need to deal with 
the smaller issue as a catalyst to deal with all the issues.
    My concern would be that if we start dealing with VOIP on 
its own, that we never quite get to the total rewrite because 
there is really no impetus for doing that.
    I do not know that we should try to keep plugging holes in 
a law that was written for the analog age with digital age 
Band-Aids. I think that we might be better to address this in 
context of a larger rewrite. I know that Mr. Davis, others, 
have asked the questions and that many of you have responded. 
But I am wondering if anybody else would care to comment?
    Ms. Greene. Well, you have more articulately expressed what 
my concerns are. Voice over IP is a tremendous pressure point 
in an obvious kind of sexy new technology. It is symptomatic of 
the tremendous disruption that the telecommunications industry 
has undergone. And to treat VOIP by itself I think could 
possibly be a mistake.
    Mr. Engel. Well, anybody else?
    Ms. Martine. I would suggest that this is a very new and 
nascent technology. As I mentioned, there are several hundred 
thousand customers and to overly handicap that with regulation 
at this stage we think is unnecessary and not relevant.
    It needs the opportunity to grow without being handicapped 
by old regulation policies that were done in a very age of the 
telecommunications business where there was monopolistic 
incumbency to which degree is still in place, by the way.
    Mr. Citron. If I might add, if we do not take action in a 
relatively short period of time, not 3 years, something less 
than 3 years, there is a big risk of this issue will be 
oppressed to the point where all the new competitive players 
that come to the marketplace, both old world and new world 
companies, will be permanently impaired. And that would be 
unfortunate because the benefit of VOIP to consumers is very 
dramatic.
    Mr. Engel. Let me ask Mr. Rutledge who was about to speak--
--
    Mr. Rutledge. Well, I was just going to say that--thank 
you, Congressman Engel. That a lot of customers, thousands of 
customers a week in our area are adopting this service. And so 
it is a very attractive product and it is rapidly becoming the 
communications choice of the New York marketplace. And so to 
impede it while granted there are lots of telecommunications 
issues that have to be resolved and there are a lot of open 
questions that are quite complicated in this changing landscape 
that have to be dealt with, we are really looking for an 
opportunity here to set a level field and set a ground work so 
we can develop this business and add a lot of value to 
consumers. And then over the period of time that it will take 
to develop the rest of the regulatory regime, I think you are 
going to have rapid adoption of this service. And so I think it 
would be a shame to hold up regulatory reform in the meantime 
for this particular application.
    Mr. Engel. Mr. Rutledge, let me ask you, because I am a 
Cablevision consumer, I have it in my apartment in New York and 
I am told that 11,000 people just in my district alone have 
already signed up for VOIP, which is an----
    Mr. Rutledge. That is correct.
    Mr. Engel. [continuing] unbelievable phenomenon. For your 
VOIP service you chose to deliver all your calls to a 
traditional telecommunication service provider called 
Lightpath. Can you tell us why Cablevision chose this business 
model.
    Mr. Rutledge. That is right. Well, it is because as 
customers make calls to each other, to the extent that the 
11,000 customers in your district call each other, there is no 
actual termination of those calls anywhere outside the cable 
system. But in order to call someone who is on NYNEX or Verizon 
or SBC, or any other local exchange carriers in our service 
area, you have to terminate the call on their network. And so 
you have to have an interconnection agreement and you have to 
pay for that termination.
    And so Lightpath is Cablevision's CLEC, and it is licensed 
tariffed company that has interconnection agreements. And so in 
order to actually transmit the call to the public switch 
network, we have to go through a regulated entity to do that. 
And that is why we chose the business model we did.
    Mr. Engel. Thank you.
    I am wondering if I could ask Ms. Greene a question. I'm 
quoting your testimony, and you stated that ``we believe the 
legislation should not, as these bills both do, address only a 
single application such as VOIP as Congress will if this 
approach is taken surely wind up having to legislate on each 
flavor of new communications technology.'' That is what I asked 
before. Now, you said that you support a more holistic 
approach, and I do as well. My concern is funding for the E-
rate program, but I want a clear level playing field that it is 
capable of being adapted to new technologies. So those are my 
goals that I mentioned before for a rewrite.
    What are the top issues that BellSouth believes Congress 
needs to address?
    Ms. Greene. Well, I think that we need to have a Federal 
unified perspective. We need to be sure that the continuing 
support for access charges and universal service is a burden 
that is shared equally. We need to have technology neutral 
platforms and not isolate out an application without dealing 
with the underlying service networks and service providers as 
well. And then there are some very real social concerns.
    I do not think that we want to have responsibility on our 
consumers to know whether or not the phone that they are 
picking up is 911 capable or to run out in the yard and pick up 
the cell phone if something happens. I think those are very 
real social concerns and they need to be addressed.
    Mr. Engel. Okay. Thank you.
    And thank you, Mr. Chairman, for your indulgence.
    Mr. Stearns. Mr. Buyer?
    Mr. Buyer. Thank you for the help with the clerk.
    I am going to ask some questions and we are going to go 
right down the line with the questions.
    First question is, and we do not need long answers here, 
what is the right statutory classification? The IP-enabled 
services and VOIP, are they telecommunication services or are 
they information services? So just tell me; telecommunication 
services or information services. And we are going to go right 
down the line. Start with the FCC.
    Mr. Carlisle. Well, it depends on the flavor. Under our 
current rules some might be telecom services, as we found the 
AT&T service to be. Some might be information services as we 
found pulver.com's Free World Dialup to be. We have asked 
questions as to how the regulations might change.
    Mr. Buyer. Next?
    Mr. Citron. Sure. Vonage's service should be an information 
service.
    Mr. Buyer. Next?
    Ms. McCarthy. I agree with Mr. Carlisle. Right now we do 
not have a clear way of separating. Whoever put in their 
testimony we need a Title 1.5, I think that I agree with that.
    Mr. Buyer. All right.
    Mr. Jensen. I would go call them telecom, but I am not sure 
it makes any difference. I think they are still carried across 
our network and they need to be handled and charged the same as 
if they are all the same.
    Mr. Buyer. Okay.
    Mr. Kirkland. In Covad's view VOIP applications are 
generally information services.
    Ms. Martine. At AT&T they are information services because 
they are stored content interacting with advanced features.
    Mr. Buyer. All right.
    Mr. Nelson. Any service that connects that PSTN should be 
the telecommunication service.
    Mr. Rutledge. At Cablevision we think they are an 
information service and are acting accordingly.
    Mr. Vidal. Yes. And last but not least here, if we think 
about things that have a computer on one end that transmits out 
Internet protocol, packets; it sure looks like an information 
service to us.
    Mr. Buyer. Now with the CALEA, since CALEA does not apply 
to information services, should Voice over Internet Protocol 
providers comply with CALEA? Go right down the line, yes or no.
    Mr. Citron. Yes.
    Ms. Greene. Yes.
    Mr. Jensen. Absolutely.
    Mr. Kirkland. Yes, and we do it today.
    Ms. Martine. Yes.
    Mr. Nelson. Yes.
    Mr. Rutledge. Yes, and we do it today.
    Mr. Vidal. Yes.
    Mr. Carlisle. Yes.
    Mr. Buyer. Thank you for the confusion.
    I do it but do not classify me as information services. 
Mmm.
    To BellSouth, you just answered a question just a few 
moments ago about a shared burden, and I suppose you are 
referring to avoiding cost shifts that occur in the marketplace 
since you and others bear a pretty strong burden with the 
national telephone network. And if there is not a shared 
burden, then you obviously are shifting costs to customers. Is 
that what you were referring to?
    Ms. Greene. Well, really, there is two different levels 
that I am talking at. One of them is that there are the social 
costs of 911, CALEA and also universal service support. Those 
are things that are enjoyed by the wireline telecommunications 
industry today. But in addition to that there is the burden the 
social pricing that we have as an industry, meaning that we 
have a 100 years of social pricing where business subsidizes 
residential and urban subsidizes rural, and our State 
commissions still exercise control over our retail pricing. 
Access charges were put in place to help offset some of that 
burden. So our position is that if VOIP or another application 
that has a telecommunications substitute flavor and accesses 
the public switch telephone network, that access charges should 
apply at that.
    Mr. Buyer. Well, let us go right to this one. How should 
Voice over Internet Protocol providers compensate local 
exchange carriers for the use of the public circuit switch 
telephone network? How should that be compensated? Go right 
down the line.
    Mr. Carlisle. We have already stated in the Pulver.com 
order and also in the NPRM that we believe services that use 
the PSTN in a similar manner should compensate it in an 
equitable way.
    Mr. Citron. Vonage believes that there needs to be broad 
based reforms on intercarrier compensation and until such time 
of reforms, it would be difficult to burden us with a method of 
compensation. For example, it can cost as much as .14 cents to 
terminate a call intrastate, yet to terminate a call just a few 
miles away may be as low as half a penny. The system is clearly 
broken and it needs to be fixed. But once it is uniform and 
national and treats all participants fairly, we would be glad 
to participate.
    Ms. Greene. And I do not disagree that there needs to be 
intercarrier compensation reform. But in the meantime, services 
like VOIP do not ride over air. They ride over existing 
networks.
    Mr. Jensen. There may be a need for intercarrier 
compensation reform, but today we must be compensated for 
people that use our network, especially in rural.
    Mr. Kirkland. We agree that there are fundamental issues 
that need to be resolved. For example, mobile carriers 
terminate and use the ILEC network and pay a lot less than 
access charges. This is a new technology and it really should 
not be subject to a legacy regime. The legacy regime should be 
reformed.
    Ms. Martine. We agree that the regime needs to be reformed 
and we should treat this traffic like ISP traffic is treated 
when they are terminate with an ILEC facility today.
    Mr. Nelson. We at NARUC have embraced the need for 
intercompensation reform. And in that context we believe that 
there should be some contribution from all VOIP providers that 
touch the network.
    Mr. Rutledge. WE are currently paying on the unreformed 
intercarrier compensation structure and do think it needs to be 
reformed. But we are paying under it.
    Mr. Vidal. Yes. A clear agreement that the intercarrier 
compensation mechanism is broke and getting more broken by the 
day. In fact, we took the step about 6 or 7 months ago of 
filing a forbearance petition at the FCC for IP calls. One of 
the provisions that we believe is a key provision is to make 
sure that access charges continue to get paid to those rural 
carriers that currently have the rural exemption.
    Mr. Buyer. Thank you.
    Ms. Greene, what are you doing at BellSouth to offer the 
Voice over Internet Protocol to your customers and business and 
your consumers?
    Ms. Greene. We have several business services that we have 
put into the marketplace, both for our enterprise customers and 
small and mid size businesses. We are exploring putting voice 
over IP into our mass market consumer offer.
    The problem that you have as a legacy company is that right 
now the functions that are available using voice over IP 
technology are not compelling to our customers. The price point 
is compelling to our customers. And I think that is why you 
have a lot of customers are making the move right now primarily 
for price. But we are constantly looking at the technology and 
we are also looking at how we can use voice over IP technology 
to transform our own cost structure to be able to better serve 
our consumers.
    Mr. Buyer. So to an earlier question, you would consider 
offering a broadband service an a VOIP even if they did not 
sign up for your local service?
    Ms. Greene. We are considering it. We do not have that 
offer in place today.
    Mr. Buyer. All right. Thank you.
    Mr. Stearns. Mr. Walden?
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Kirkland, I believe you said a couple of times that 
VOIP should not have to pay for the legacy costs of the 
network, is that correct?
    Mr. Kirkland. No. In response to the last question, the 
question was should VOIP pay access charges. And I said that 
there is a legacy structure or framework that needs to be 
reformed. And as Ms. Martine pointed out, information services 
do not pay access charges now. As I said, the mobile carriers 
just as an illustration pay a different set of charges and 
access charges.
    So my point was just to reform that legacy structure and, 
as I think, we are willing to pay to cover those costs if they 
are cost based. But part of the problem is they are not cost 
based right now.
    Mr. Walden. But you would not be in any hurry necessarily 
to start paying those charges?
    Mr. Kirkland. Well, from Covad's standpoint, you know we 
enable voice over IP carriers. We will be terminating traffic 
and we do expect that we will be paying access charges under 
the existing rules of the FCC in certain circumstances. So I 
was addressing what I thought the right outcome was.
    Mr. Walden. I see.
    Mr. Kirkland. And we pay for services from the ILECs all 
the time. We use their network on a regular basis and pay the 
costs for that.
    Mr. Walden. All right. Ms. Martine, one of the issues I 
have is Universal Service Fund. I represent a very, very rural 
district, some areas less than one person per square mile. And 
I know there was comment made earlier, I think by Mr. Rutledge, 
that you cannot have VOIP without broadband.
    And I guess the question I have is connecting those two. 
And the concern I have is that I think VOIP is going to take 
off like wild fire in the west in the summer for those who have 
access to broadband. And how do we maintain access to phone 
service at all in the very remote areas if you narrow that base 
of subscribers on the ILECs over the old legacy network, how do 
you maintain that infrastructure? Because it would seem to me 
if I am an ILEC in that model, it is the last group that I am 
going to have to deal with at all if the new wave of technology 
is over here on VOIP. What happens in these rural areas?
    Cable will be there to the extent it is practical. But let 
us face it, you are not going to string out into some of these 
service areas, or if you did your investors would probably have 
you. So what do we here on Universal Service Fund?
    And perhaps Ms. Martine, you could start, because I am 
curious about your comment about doing it by phone number and 
the affect that has in interindustry. Who loses----
    Ms. Martine. Well, thank you for the question.
    I think we believe that the USF regime needs to be reformed 
because the industry has changed from when it was first set up. 
We believe that the economics, and we could describe this to 
you in a formal writing if you would like, is just by using 
phone numbers or some other equivalence where you charged a 
fixed rate per number so that wireless companies, VOIP 
companies, telephone companies are all required to pay that, it 
is not like anyone gets a free ride. If you have a number, they 
have to pay a dollar or some associated fee that is 
recommended. And we believe there could be equivalence in the 
USF to that number, but it is not going to require--with 
declining interstate revenues, there is no way for USF to keep 
up with what the numbers used to be unless the numbers paid go 
up. And I think that is unfair to those carriers that are 
currently involved in intrastate that they have to pay more 
just because the overall utilization is going down.
    So we want to see equality for wireless companies as well 
as traditional phone companies, as well as VOIP providers that 
everyone should be required to pay, not just those that do 
interstate.
    Mr. Walden. All right.
    Mr. Vidal. Congressman Walden, it seems to me that one way 
of the many ways to look at the Universal Funding debate is 
financially as there are sources of cash that fund that program 
and there are uses of cash which are disbursements that are 
made to the high cost fund, to the low income fund and to 
Internet for Schools, etcetera, and a myriad of other programs.
    Mr. Walden. For just Mississippi. No. Go ahead.
    Mr. Vidal. I did not quite get all that.
    But it seems to me that the concentration today is on the 
sources of funds, not necessarily on the uses of funds. As near 
as I can tell, there is about $6.5 billion a year that goes 
into and out of the Universal Service Administrative--and it is 
distributed out by high cost, low cost and Internet to Schools. 
And I am not so sure I have heard anybody suggesting that the 
sources of funds--that the uses of funds should be different. 
It is just how do you fund a program----
    Mr. Walden. No, I understand that.
    Mr. Vidal. Yes. And so I think to go back to the idea of 
there needs to be another mechanism, whether is on numbers or 
something that is a nondiscriminatory non-arbitrage type of 
funding mechanism that could stay in place for a long time so 
we are not back here in a few years.
    Mr. Walden. Okay. Anyone else? Mr. Jensen?
    Mr. Jensen. One way to work through USF problem, and it is 
a problem and it is becoming worse and worse, is to enhance the 
number of participants that contribute to that fund as they 
utilize it. In other words, you use it you pay for it and help 
with the USF Fund.
    One of the problems I have with Ms. Martine's analysis is I 
am not sure that that sends correct pricing signals. If you 
have flat rate, I am afraid that that would send some incorrect 
utilization of the resources that we have available and it 
needs much more discussion. But we need to enlarge the 
contribution base.
    Mr. Walden. And Mr. Rutledge, tell me cable's role in USF, 
what it should be, what it is?
    Mr. Rutledge. Well, today we pay USF fees through the 
interconnection agreements that we have and through our 
Lightpath subsidiary which does call terminations in both 
directions.
    But I do think that we do need a mechanism that will 
support the needs of the country. About 88 percent of the 
country through cable is serviceable with high speed access, so 
broadband. That leaves well over 10 million homes that are not. 
And what the communications technologies in those homes should 
be, what the most appropriate way to do it is, I really do not 
know. But we recognize that something has to be done. And so 
picking the appropriate mechanism to subsidize I think is also 
important. And we are willing to work out an equitable payment 
structure as an industry and contribute to that. But we need to 
work with you in doing that.
    Mr. Walden. Do you have recommendation on what you would 
like to see on the cable side?
    Mr. Rutledge. I do not think we do today, but we would be 
glad to make some.
    Mr. Walden. Okay. I would welcome those, from all of you, 
actually. Because I think this is an issue--well, I know it is 
an issue that the committee is going to address. It is one we 
need to address just as we need to address the whole regulatory 
framework governing telecommunication and voice. I mean, I 
cannot tell the difference between a packet of voice and a 
packet of data. It is all the same thing, it seems to me, 
technologically when it goes down the line or through the 
airwaves, or whatever. And it seems to me we have got these 
legacy regulations that every time we had a new development in 
telecommunication, we regulated it differently. And that, you 
cannot change this it seems to me without having winners and 
losers. If you change how USF is collected, somebody on this 
panel is going to benefit and somebody is going to lose, it 
seems to me. So I think we are going to have to balance this 
out so that it is fair, but in my mind there are going to be 
winners and losers. And the key is to make sure the consumers 
benefit in the end and we do not totally upend the business 
structure somewhere.
    So I thank you for your testimony. It has been most 
helpful.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    My turn is next.
    Mr. Carlisle, let me talk to you. California was one of the 
first and few States in the Nation to declare VOIP to be a 
telecommunication service. Now we have had other members ask 
how many people think VOIP is an information service. And we 
did not have a complete agreement on the panel here today.
    I guess the question would be for you assuming that we have 
to come up with a Federal bill for a preemption that almost 
everybody agrees on, should we not come up with almost a new 
definition that would include voice, video, high speed data; 
and it might be something new? And I suggest that something new 
might be where you would take a letter and put it into the 
Internet function and it would have a dictation mode, and you 
would call up and it would come in and it would be dictated. So 
I could have a voice over delayed in which the computer would 
speak to me from a letter from you from yesterday.
    Now, that is still voice over the Internet. But there are 
so many different things you could emerging technologies. 
Should we not rewrite the Telecom Act of 1996 to include maybe 
a new definition for voice, data, video and this emerging 
possible new technology? That way we would get out of this 
California deciding that it is a telecommunication service, 
Nevada an information service, Virginia a telecommunication and 
we would not have this disagreement. Why do we not go above all 
this and give it a new name and new regulation and set in place 
a new rewrite of the Telecom Act? What is wrong with that or is 
that okay?
    Mr. Carlisle. Well, one of the problems with the current 
structure that we have under the Act is that everything depends 
on an off/on switch. Is it a telecommunication service, is it 
an information service. So the dynamic that that creates is, is 
that groups that want to have a specific regulation applied say 
it is a telecommunication service without regard to any of the 
other number of things that might flow from applying that 
definition. It is a very sort of broad, sort of meat cleaver 
way toward approaching regulation.
    Now we do have some flexibility. We can forebear from 
applying regulation to telecommunication service, and we may 
have some ability to apply regulations under our ancillary 
jurisdiction to an information service. But again, these are 
sort of making up for the fact that the structure is bipolar.
    If Congress were to tackle this issue, I think a very 
useful way of starting is to avoid that debate entirely and 
define it as something different. Start from the point of view 
of what kind of regulation you want to have apply to it, if 
any, and define the service appropriately. That is a simpler 
way of approaching it. It starts from the ground up as opposed 
to----
    Mr. Stearns. Can I use your words? Then you would say if 
you were in the driver's seat and you could determine what 
would happen, you would go back to the Telecom Act, rewrite it 
such that you would establish what you want and then put it all 
into a new structure? Are you suggesting we rewrite the Telecom 
Act to take care of this?
    For example, we have this intercarrier compensation system 
that they are asking forbearance for, you know. I mean, we just 
have this constant reiteration of problems. Should we not just 
come up with a whole new process here and rewrite it?
    Mr. Carlisle. Well, I think the FCC has ability under the 
current Act to address many issues in intercarrier compensation 
and Universal Service Fund.
    Mr. Stearns. So you think you can solve all these problems 
that we have talked today through the FCC?
    Mr. Carlisle. About VOIP today.
    Mr. Stearns. Yes.
    Mr. Carlisle. I think we can provide a certain amount of 
clarity. And when I say ``certain amount,'' we can provide a 
lot. But we have to acknowledge that whatever we do we are 
going to be sued. There are going to be people who do not agree 
with our interpretation and implementation of the Act. So 
ultimately clarification will depend on whether whatever we do 
can be sustained in the courts.
    Congress may also have to weather scrutiny in the courts. 
But, obviously, you have much more flexibility to start out 
from ground zero and buildup.
    Mr. Stearns. Mr. Rutledge, if your cable modem system was 
subject to regulation as the other transmission providers are, 
would you still be able to roll out the services as quickly as 
possible?
    Mr. Rutledge. First of all, we think the 1996 Act was 
generally successful and that you have a very competitive 
telecommunications marketplace. You have true facilities-based 
competition. You have the broadband roll out that has occurred 
since the Act was put in place. You have multiple competitors. 
And now you have very low cost voice services on a facilities-
based competition level being provided.
    So we think the Act needs some tinkering, and we think this 
particular bill is appropriate, but not necessarily a whole 
rewrite.
    Mr. Stearns. No, I do not mean a whole rewrite, but just 
maybe establish in the area of VOIP and video and data that we 
come up with a new name that includes the telecommunication 
service, information services and just blend them in together 
and then just have one establishment, a new definition and a 
new regulation that applies to everybody who is dealing with 
those services?
    Mr. Rutledge. Well, I guess I would have to see that.
    Mr. Stearns. Yes. I know. I know. I know.
    Mr. Rutledge. Before I said it was a good idea.
    Mr. Stearns. Yes.
    Mr. Vidal?
    Mr. Vidal. I guess the key question here is how good do we 
think we are going be at in predicting the future. Right? In 
1996 we thought we had a pretty good crystal ball into the 
future. And as I have heard someone say today, the Internet was 
given only collateral treatment in something that took 3 years 
to build.
    So, what kind of accuracy can we build into the future for 
things not yet invented? I mean, VOIP was exactly this type of 
not yet invented a few years ago.
    I would also submit to you I think that VOIP today may look 
a bit like an overnight phenomenon, but the stresses that have 
been occurring on the intercarrier compensation scheme, the 
seeds of those were sown long along. VOIP just happens to bring 
it to a head.
    And I am not trying to get a particular answer on this as 
much as trying to raise a question, which is how should you 
treat things that have yet to be contemplated? Because whereas 
in the telephone industry, which I think was largely a 
centrally planned economy with centralized standards, bodies 
that met every couple of years over at the International 
Telecommunications Union. Today you have technologists around 
the world with a lot of capital or little capital building 
servers themselves and writing applications.
    It just seems to me that it is tough to get ahead of the 
curve.
    Mr. Stearns. Anyone else? We have no more series of 
questions and we are getting to close out the hearing. And if 
there is anyone else who wanted to make a few concluding 
comments, we are very respective to that.
    If not, we are not appreciate your time and effort.
    Yes, Mr. Vidal?
    Mr. Vidal. Yes. I just wanted to leave with one thing, and 
that is that we have talked about a lot of things whereas voice 
over IP needs to be able to be backward capable into what the 
public switch telephone network functionality is today, like 
E911, CELEA, etcetera. But I would urge you to consider the 
fact that we may miss a golden opportunity if we do not think 
about the things that VOIP can do that the PSTN simply cannot 
do.
    What is possible, for instance, in the E911 community if 
you are dispatcher is significantly different with VOIP than it 
is with simply getting a screen pop on a computer that shows a 
dialing number and a street address. We think that there are 
significant opportunities to increase public safety, to 
increase first responder safety, to bring interconnection in 
amongst organizations that have never had interconnection 
before.
    So I would urge you to think that no only should we 
consider what we do to be backward compatible to the existing 
system, but to also give our imagination an opportunity to 
prosper into what is possible.
    Mr. Stearns. On that positive note, the subcommittee will 
adjourn.
    [Whereupon, the subcommittee was adjourned at 1:11 p.m.]
    [Additional material submitted for the record follows:]

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