[Senate Hearing 108-1027]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 108-1027

                  VOICE OVER INTERNET PROTOCOL (VoIP)

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

                                 HEARING

                               BEFORE THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 24, 2004

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation
                             
                             
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                            
                            
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 24, 2004................................     1
Statement of Senator Allen.......................................    36
Statement of Senator Breaux......................................    39
Statement of Senator Burns.......................................     7
Statement of Senator Cantwell....................................     6
Statement of Senator Dorgan......................................    11
Statement of Senator Lautenberg..................................    10
    Prepared statement...........................................    10
Statement of Senator Lott........................................     8
    Prepared statement...........................................     8
Statement of Senator McCain......................................     1
Statement of Senator Nelson......................................    96
Statement of Senator Sununu......................................     4
Statement of Senator Wyden.......................................     2
    Article dated February 24, 2004 from Wall Street Journal 
      entitled ``Voice Over Internet Protocol (VOIP) of the 
      People'' by Hon. John Sununu...............................     3

                               Witnesses

Alexander, Hon. Lamar, U.S. Senator from Tennessee...............    11
    Prepared statement...........................................    14
Britt, Glenn A., Chairman and Chief Executive Officer, Time 
  Warner Cable...................................................    63
    Prepared statement...........................................    64
Citron, Jeffrey, Chairman and Chief Executive Officer, Vonage 
  Holdings Corporation...........................................    48
    Prepared statement...........................................    50
Post, Glen, Chief Executive Officer and Chairman of the Board, 
  CenturyTel.....................................................    86
    Prepared statement...........................................    88
Powell, Hon. Michael K., Chairman, Federal Communications 
  Commission.....................................................    18
    Prepared statement...........................................    21
Werbach, Kevin, Founder, Supervova Group, LLC....................    42
    Prepared statement...........................................    44
Wise, Hon. Stan, Commissioner, Georgia Public Service Commission 
  and President, National Association of Regulatory Utility 
  Commissioners (NARUC)..........................................    57
    Prepared statement...........................................    59

                                Appendix

Hollings, Hon. Ernest F., U.S. Senator from South Carolina, 
  prepared statement.............................................   101
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared 
  statement......................................................   101
Response to written questions submitted to Hon. Michael K. Powell 
  by:
    Hon. Barbara Boxer...........................................   104
    Hon. Byron Dorgan............................................   103
    Hon. Ernest F. Hollings......................................   102

 
                  VOICE OVER INTERNET PROTOCOL (VoIP)

                              ----------                              


                       TUESDAY, FEBRUARY 24, 2004

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:33 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. Today, the Committee examines 
voice over Internet protocol, or VoIP, a technology that 
enables voice to be carried over the Internet. While this 
technology is not new, recent advances have enhanced the 
quality of voice services delivered using Internet protocol 
such that VoIP may now be competitive with traditional 
telephone services.
    VoIP holds the promise of unleashing many new competitors 
for a voice service that was once the province of a regulated 
monopoly. Numerous large communications companies have 
announced plans to offer voice services using Internet 
protocol; likewise, many smaller entrepreneurial companies have 
begun offering these services, posing another challenge to 
established providers of telephone service.
    Numerous state regulatory agencies have made announcements 
of their own, expressing an interest in regulating these 
services. And the FCC recently launched a proceeding to examine 
the appropriate treatment of this technology.
    In many ways, VoIP is a microcosm of the broad array of 
telecommunications regulatory issues that have been debated 
since the passage of the Telecommunications Act of 1996, 
including the role of state regulators, the legal 
classification of services, universal service, access charges, 
emergency services, and access by people with disabilities. 
It's been nearly 8 years since the passage of the 1996 
Telecommunications Act.
    In that time, the telecommunications industry, the 
technology it relies on, and the services it offers have all 
changed dramatically. The Internet has changed the world and 
the way we communicate. And yet we continue to regulate the 
telecommunications industry under the confines of an outdated 
statutory regime that has been rendered largely obsolete by 
technology. VoIP is a case in point. The FCC is forced to 
shoehorn a newly emerging technology into Congress's 1996 
vision of communications regulation, and to classify, as either 
fish or fowl, that which may be neither.
    Sponsors of the Telecommunications Act will undoubtedly 
herald VoIP, and the potential competition that may result, as 
the product of their legislative efforts. But the truth is that 
the emergence of VoIP has very little to do with the pages and 
pages of law written by lobbyists or the thousands of 
regulations spawned by the Telecommunications Act. VoIP is born 
out of advances in technology, something that is nearly 
impossible to regulate.
    We began the 108th Congress with a hearing on the state of 
competition in the industry, and I reminded the public, the FCC 
Commissioners, and my colleagues that, in my long-held beliefs, 
that the 1996 Act is a fundamentally flawed piece of 
legislation. Since then, some of my colleagues have joined me 
in expressing the need for Congress to take a serious look at 
reforming the Act. We begin that examination today with a look 
at VoIP, one example of the new and emerging technologies and 
services that increasingly blur the lines drawn in the 
legislation. This is the first in a series of hearings the 
Committee will conduct this year reassessing the assumptions on 
which the Act was drafted.
    Finally, I note that two of the important issues that will 
be discussed today are the applicability to VoIP of certain 
requirements related to providing access to services by people 
with disabilities, and requirements related to emergency 
services, like 911.
    Yesterday, I received a letter from Andrew Imparato, 
President of the American Association of People With 
Disabilities, stressing the importance that, ``our nation's 
more than 56 million Americans with disabilities will be able 
to share equally in the benefits of VoIP.'' Likewise, I 
received letters from the Association of Public Safety 
Communications officials and the National Emergency Number 
Association stressing concerns related to VoIP and the Nation's 
911 emergency calling system. I thank these parties for their 
interest, and move to have these letters submitted to the 
record.
    I thank FCC Chairman Powell and other witnesses for being 
here today, and I look forward to their testimony on these 
important and timely issues.
    Senator Wyden?

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. And I very much 
appreciate your holding this hearing today.
    I think in addition to the points that you've correctly 
made with respect to the Telecommunications Act and the effect 
of VoIP on that statute, I think to some extent today's 
discussion is a continuation of the debate that began in this 
room 7 years ago when I introduced the Internet Tax Freedom 
bill.
    Then, as now, it seems to me there are two competing 
approaches. There is one approach that sees the Internet and 
related technologies as critical to the country's well-being, 
and especially our ability to create good-paying jobs. Then 
there's an alternative approach--it's one that is supported by 
some state and local officials--which essentially sees the Net 
and related technologies as the last cash-cow in the pasture, 
one to be taxed and regulated.
    And just as I argued 7 years ago, with respect to the 
Internet and taxation, I would hope that we would tread lightly 
with respect to regulating voice-over. And I'd suggest that for 
two reasons. First, the dire prognostications that so many 
state and local officials made with respect to the Internet and 
taxation 7 years ago simply have not come true.
    I'd like to enter into the record, for example, Mr. 
Chairman, a publication from the National Governors 
Association, of October 27, 1997, where they said the proposed 
six- to eight-year moratorium on state and local taxes would 
cause a virtual collapse in state and local revenues. Can I 
have that entered into the record, at this point?
    The Chairman. Without objection.
    Senator Wyden. Thank you, Mr. Chairman.
    And I think as we go forward with this discussion, we are 
going to hear many of the same arguments with respect to both 
regulating and taxing voice-over that we heard 7 years ago in 
this room, on the Internet. We didn't see, 6, 8 years ago, the 
collapse of the traditional economy, in malls and the like, as 
a result of what we did in the Internet tax area, nor are we 
going to see it if we tread lightly in an area that has so much 
promise for the economy.
    One other point I hope that we will recognize is that VoIP 
doesn't offer a new pipe into consumer homes; instead, it rides 
on existing broadband facilities. And as we create this 
important communications alternative, it seems to me we have a 
chance to create many jobs as broadband is developed. And if 
broadband isn't available at an affordable price, neither will 
be voice-over.
    So I look forward to these hearings. I'm glad that you've 
announced that this will be a series of hearings, so we'll have 
a chance to look at it in detail.
    The Chairman. Senator Sununu has a thoughtful piece in the 
Wall Street Journal this morning, which I urge all of my 
colleagues to review, and I--without objection, it will be 
entered in the record at this time.
    [The article referred to follows:]

                 Wall Street Journal--February 24, 2004

           Voice over Internet Protocol (VoIP) of the People

                             By John Sununu

    Should local governments have an inherent right to regulate and tax 
any communication between two individuals that utilizes a human voice? 
Should we discourage the use of broadband networks for fast, reliable 
and cheap communications simply because a new technology doesn't fit 
neatly into an existing regulatory slot? Should regulations 
discriminate between two data files simply because one carries instant 
messaging and the other someone's voice?
    Until quite recently, these questions were relegated to circles of 
academics, techies or regulation junkies (yes, they do exist) 
speculating about how the Internet might affect entrenched telephony 
providers. Today, these issues have become practical, substantive 
questions that will make or break the implementation of Voice Over 
Internet Protocol (VoIP)--a new technology that utilizes the packet-
based method of Internet communications and, in some instances, the 
architecture of the Internet to bring new voice applications to 
consumers. VoIP generates significant network efficiencies, reduces 
capital expenditures and produces considerable cost savings. Moreover, 
the innovative features and robust functions underscore that VoIP is 
not just a fancy phone network and must not be treated as such.
    The debate has just begun, but the wagons are already being circled 
by those determined to protect a regulatory scheme based on the copper 
wire telephone system invented by Alexander Graham Bell. Our goal 
should be to allow this new technology to evolve, which will 
dramatically reduce the cost of voice communication to a level 
commensurate with that of any other bit of data transmitted over the 
Internet. To ensure that a misguided approach does not develop and to 
provide certainty to the marketplace, I will introduce VoIP legislation 
in the coming weeks to establish several key protections for this new 
technology.
    --First, my legislation will treat VoIP as an information service. 
The broadband cable, DSL or high-speed line you are using does not care 
whether data packaged using the Internet Protocol is a spread sheet, e-
mail, instant message or voice traffic. Recognizing this simple fact 
helps establish a level playing field for all forms of data in order to 
fit a regulatory system designed five, 10, 20, 30, 50 or 100 years ago. 
Conversely, there exists no sound basis for discriminating among 
different types of data. Would anyone argue that taxes for e-mail 
should be different from those imposed for transmitting financial 
spreadsheets or power point presentations? The same principle should 
extend to an Internet voice call as well.
    --Second, we should establish Federal jurisdiction over VoIP 
applications. Internet packet switching routes data across a global 
network requiring a national framework and treatment. Allowing 
thousands of state and local regulators to wrap their tentacles around 
VoIP will place costly and unnecessary burdens on a growing interstate 
communications network. What would happen to e-mail or instant 
messaging if states imposed regulations on those applications? The role 
of the Federal government should be to establish a clear and efficient 
regulatory structure that will not discourage investment in the 
development of these new systems.
    --Third, my bill will protect this data service from taxation. The 
Internet-access tax-moratorium debate has highlighted the need to 
prevent tax commissioners from imposing oppressive tax treatment for 
telecommunication on VoIP. Those who believe that e-mail should be 
taxed will disagree on principle. All others place themselves in the 
awkward position of trying to differentiate different sets of ones and 
zeros in binary code in order to protect tax collections or corporate 
revenues. Both attempts are signs of short-sightedness--one on the part 
of big government, the other on the part of big business.
    Since our Nation's founding, legislators have justified regulations 
on the basis that they serve the public interest. A regulatory 
framework may be advanced to improve public safety, inform consumers or 
protect public health. In fact, public-interest concerns such as 
enhanced 911, disability access, and interaction with law enforcement 
will be among those considered by comprehensive legislation. But 
extending these obligations must be done with an understanding of the 
unique architecture and technical aspects of this new application. 
Unfortunately, within the developing VoIP debate, this governing 
principle of public interest has been turned on its head. The defenders 
of the existing regulatory scheme seek to protect the existing tax, 
distribution of revenues, or other vested interests, at the expense of 
sound public policy.
    If there is one thing we have learned about the information 
economy, it is that innovation circumvents a flawed regulatory regime. 
Let's get this one right from the start.
    (Mr. Sununu is a Republican Senator for New Hampshire.)

    The Chairman. Senator Sununu?

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you, Mr. Chairman, for enabling me to 
avoid the immodest suggestion that my own op-ed piece be 
included in the record.
    [Laughter.]
    The Chairman. That was my intent.
    [Laughter.]
    Senator Sununu. This is an important hearing, obviously. 
This is a new technology, and one that, I think, many of us 
Members of the Senate--House Members probably would agree--
don't necessarily understand especially well, just the nature 
of the technology and the complexity of the systems that we're 
dealing with.
    I would take a few moments to make a few points about the 
uniqueness of this discussion, however, and that is, first, 
that because of the nature of the Internet and the IP protocol 
that's being used to transmit these voice conversations, or 
voice traffic, we're dealing with national and, in fact, global 
networks. And I think that's important to reflect on 
constantly, because the nature of those national and global 
networks call out for a national regulatory framework, and I 
think that's going to be a part and parcel of a lot of the 
discussion that takes place.
    Second is the fact that we need to act in a timely way. We 
don't want to rush any legislation, necessarily. We don't want 
to do anything that would stifle innovation and investment in 
this area. But, at the same time, markets desire and benefit 
from regulatory certainty and clarity. And, at the same time, 
our own FCC and even state regulators benefit from some 
guidance at the Federal level. And I think that's why it's 
important that we have this hearing, and why we move forward 
with legislation, as appropriate, in a very timely way.
    Third is to underscore that we are dealing with, as was 
pointed out by Senator Wyden, an application that rides on 
existing pipes and pathways and wires, but it is an 
application, and not a telecommunications service or system. 
And, in that regard, I would argue that it is an information 
service, because, at the end of the day, what a VoIP 
transmission is, is a data file; these are bits and bytes of 
data that are packetized and sent using the IP protocol. And if 
we try to regulate or legislate, discriminating on the type of 
data that is being sent over a broadband network or a cable 
network or a fiberoptic network or a wireless network, then I 
think we are headed down the wrong path.
    And, in this regard, some of the recent rulings of the FCC 
have directed us--or sent us in the right direction. We don't 
want a regulator to be in the position of looking at data and 
trying to determine, Is this an e-mail message? Is this an 
instant message? Is this VoIP traffic? Is this a data base? Are 
these photographs?--and then trying to regulate or tax, based 
on what kind of data is being sent over an information network. 
And I think that's a very important distinction to make.
    We can, and we will, make sure we respond to the public 
needs that Chairman McCain made reference to--the enhanced 911, 
law enforcement issues, universal service. We, on this 
Committee, and others, know that universal service is something 
that is destined to have a legislative package prepared for--
all of those questions will be addressed and will need to be 
addressed. But we cannot make the mistake of just trying to 
fit, or slot, VoIP into an existing regulatory framework 
because we're trying to protect incumbents.
    And, ultimately, I think this debate is a question about 
who will benefit from the new technology. Who will benefit? Is 
it consumers that we want to benefit from new technologies, new 
ideas, lower-cost transmission; and in particular, I will 
underscore, consumers in rural areas, who haven't yet 
benefited, in many cases, from the rollout of broadband 
networks, and this may be an application that will accelerate 
that rollout if we don't kill it through over-regulation; or 
will it be incumbents that benefit, incumbent regulatory 
structures, incumbent tax structures, incumbent businesses, 
incumbent revenue streams that we decide benefit from the 
legislation that we pass? We've got to decide who we want to 
make sure is protected by the emergence of this new technology, 
and I think that is a significant challenge.
    I am drafting legislation, as many of my colleagues are 
already aware, that address many of these questions. I have 
spoken to many of my colleagues on this Committee. I will speak 
to all of my colleagues on the Commerce Committee before 
introducing legislation. But I look forward to the information 
presented today, and, again, I appreciate the hearing, Mr. 
Chairman.
    Thank you.
    The Chairman. Senator Cantwell?

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman. And thanks for 
holding this important hearing on IP telephony.
    IP telephony is an important innovation in which we can 
give consumers something they deserve, driving down the cost of 
actual phone service.
    Now, I know many people here today believe that this 
hearing--I guess we are in Washington, D.C.--is about 
regulation. Well, the Washington I come from is about 
innovation. And this is about innovation of a technology in 
which we need to preserve its nascent stage so that more 
competition can happen in the future.
    As one of my technology friends said, ``Old technologies, 
like dinosaurs, deserve to die in the tar.'' I think that's 
what we're going to see eventually with circuit-switch 
technology.
    That is not to say that the players that are currently 
playing, like RBOCs and others, can't and won't adopt this new 
packet-delivery technology because they will. They are already 
delivering some of the phone system, right now, on a backhaul 
over the Internet, and saving people dollars.
    So the real question I think we have before the Committee, 
Mr. Chairman, is whether this Committee is going to do its job 
in protecting consumers with the ability to have the evolution 
of technology and competition drive down costs so that the 
public can benefit from new technology.
    Before the Internet was really an open system, and we had 
BBN, we didn't really have much innovation. Once it became an 
open standard, we saw a huge growth in the innovation of new 
applications.
    Well, that's where we are today. Are we going to try to 
make this a proprietary network, or take the old tariffs and 
barriers to the industry and propose them on a new technology 
and, thereby, stifle innovation, and jam consumers with 
continued higher prices in telephone costs?
    The issue today is really that this technology, while good, 
is still developing. The compression--my hat's off to those who 
have developed the compression technology, but it is still not 
as stable as it will be in future generations. The fact that 
this technology needs to develop, get to the level of a 
guaranteed service, needs to have the competition of many 
forces.
    Second, a lot of discussion has been made about 911 and law 
enforcement, and I think there's plenty of time for that to 
transpire and those solutions to be made. But I hardly think--
in fact, I hope that we might even be able to get the FBI and 
the Attorney General on record--my guess is, with Magic Lantern 
and Carnivore, the FBI has probably already all the tools it 
needs to sniff packets, and is probably doing so at this very 
moment. So I don't think that we need to use that as a hangup 
for why we should not move forward on having no regulation of 
this particular industry.
    My hat is off to the Chairman of the FCC for his, as we say 
in technology, ``getting it.'' He has tried a very slow 
approach to this so that innovation can mature and so that 
consumers can be protected.
    There are important issues left to be discussed, and I'm 
sure we will, but this industry does not currently have 
interoperability. And while there is a standard session-
initiated protocol, just like TCPIP for the Internet, people 
build on that, and build on it with proprietary systems. So 
today, Vonage can't call Packet8, and vice versa. So are we 
going to make sure that we protect the development of this 
system so that a proprietary network by anybody isn't 
developed, and that a proprietary system that is closed 
basically curtails the competition that we'd like to see?
    Second, are we going to have open access? For those in the 
broadband business who currently have an ability to bundle this 
service today, are they going to provide open access to the 
other carriers, who might be able to provide lower costs? I 
think that's something very important the FCC should look at.
    How do we get to international success? I'm not advocating 
that we play a role in developing an interoperability standard, 
but that we allow the industry to develop and create that 
standard and move forward.
    The bottom line is, we are just at the very, very beginning 
stages of this technology. Someday I'll be sitting at a 
Starbucks that has a WiFi network, talking to somebody on a 
handheld device, on a video-conference, and also downloading my 
e-mail at the same time, off of one device. That hardly looks 
like the same competition to the current POTS, plain-old 
telephone-line system, that we have today.
    So let's do our job, as Members of this Committee, and keep 
in mind that innovation and technology drive down costs to 
consumers, and that that's what we are here to protect, and not 
jump to the bandwagon of regulating this industry.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Burns?

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Amen.
    [Laughter.]
    The Chairman. Senator Lott?
    Senator Burns. I want to--I'd ask unanimous consent that 
I'd put my statement in, but I want to associate myself with a 
lot of things that's been said around this table.
    You know, when we start dealing with these policy things 
that we try to maintain neutrality, and technologies that are 
used, and interoperability, and all this thing--
interoperability comes with time. And whenever they take a look 
at the market, the market forces interoperability more than 
anything else.
    I've got another hearing, on Mad Cow Disease, and I was 
going to give mad cow to your cash cow over there.
    [Laughter.]
    Senator Burns. And they said, ``Were they sure she was a 
mad cow when she went to slaughter in the state of 
Washington?'' And I said, ``Yes, if I was going to slaughter, 
I'd be a little cranky, too.''
    [Laughter.]
    Senator Burns. But I think there are a couple of areas 
where we'd better do our homework here, as the Senator from 
Washington says. I think it'll boil down to definitions, how we 
define, and what we define, ``services'' and also 
``technologies.'' That'll be an area of great challenge to us 
and to the Commission. E-911 will be an issue that we will have 
to take a look at, because, with over 200 million calls a year 
on E-911, we have to do something in that area, and how we do 
it and how we approach it. And the third one is, of course, the 
universal fund--Universal Service Fund, and how we deal with 
that.
    So, Mr. Chairman, thank you for this hearing, and I 
appreciate your having this hearing, and I look forward to 
reading the testimony. And I've just got to go to this other--
we've got almost as many cattle as we've got telephones, and 
so--in my state, so I've got that to deal with. But thank you 
for this hearing.
    But those are the areas that we will have to--but I think 
the most important area, and where we really get in trouble 
when making policy and dealing with this issue is definitions, 
how we define, how we lay it out, and what--and where we want 
to go.
    But the Senator from Washington had it. She's right on 
target. We've seen this great industry blossom because we 
didn't know how to regulate it. Government still hasn't figured 
it out. And maybe we could put that off for another 5 or 6 
years, and then we'll debate it again.
    And the Chairman is also correct and says there are areas 
of the 1996 Act that should be looked at, and--but when we do 
that, then we're back in the definition business again.
    And I want to thank the Chairman of the FCC for coming 
today, and my opportunity just to say this, and I would submit 
my statement.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Lott?

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Thank you, Mr. Chairman.
    I ask consent that my statement be made a part of the 
record.
    The Chairman. Without objection.
    [The prepared statement of Senator Lott follows:]

  Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
    Mr. Chairman, thank you for holding this important hearing today on 
the rapidly emerging issue of ``Voice over Internet Protocol.'' The 
revolutionary changes that have been brought about in our country by 
the Internet are continuing with its being harnessed for the transport 
of voice calls. I have always believed that Americans benefit when 
there is competition and innovation, and new ``Voice over Internet 
Protocol'' services are serving as a catalyst for the regeneration of 
the telecom sector in the United States. Transporting phone calls over 
the Internet has the potential of offering low cost telecommunications 
options for everyone, and government should be careful and prudent in 
addressing how best to incorporate these new services into our Nation's 
current telecom system.
    I am pleased that this Committee is beginning to look closely at 
the tremendous advantages of ``Voice over Internet Protocol'', 
particularly with an eye towards whether new legislation is necessary 
to provide a framework within which these new voice services will be 
offered in the future. I was encouraged to learn that the FCC has begun 
a rule-making proceeding on ``Voice over Internet Protocol'' in an 
effort to gather as much information as possible in a public record. 
However, it is important for this committee of jurisdiction to provide 
oversight for this regulatory proceeding, with careful consideration 
being given towards any statutory changes which may be necessary to 
keep Federal law current with technological advancements.
    As ``Voice over Internet Protocol'' becomes more widely used, we 
must be vigilant to insure that important telecom policy goals continue 
to be met. Along with the offering of affordable and widely available 
options for making voice calls transported over the Internet comes a 
host of issues that must be addressed. The decisions that are made as 
``Voice over Internet Protocol'' is deployed are critical to the future 
of telecommunications in this country, and to the economy as a whole.
    The roles that the states and the Federal government will play in 
the oversight and regulation of these new services must be defined to 
provide certainty for the companies offering such services and for the 
consumers using them. As existing and new carriers offer ``Voice over 
Internet Protocol'' to the public, they must know which entities have 
jurisdiction over their actions, and whether these new services are 
classified as telecommunications services or as information services. 
Additionally, the law enforcement community and the providers of 
``Voice over Internet Protocol'' must know the rules for conducting 
authorized surveillance and monitoring when a suspect is communicating 
via calls traveling over the Internet.
    Of key importance is the potential impact on the Universal Service 
Fund as ``Voice over Internet Protocol'' becomes a more prevalent 
option for consumers. Contribution obligations for existing and new 
carriers which provide these new services must be clear to make certain 
that telecom services remain available to all Americans--especially 
people living in rural areas such as those in many parts of 
Mississippi. Also, as calls move from traditional wireline carriage to 
the Internet, enhanced 911 deployment must keep up so that the origin 
of emergency calls traveling over the Internet can be determined. It is 
important that disabled Americans also be able to utilize new Voice 
Over Internet Protocol services so that our country's telecom network 
remains open to all.
    I am looking forward to hearing the testimony of the witnesses 
today, and particularly appreciate FCC Chairman Michael Powell being 
here to share his thoughts on this exciting new development in telecom. 
I know that this hearing will be helpful as the committee considers the 
current and potential impact of ``Voice over Internet Protocol.'' I am 
hopeful that we can maximize the benefits of this breakthrough in the 
telecom marketplace, while minimizing any negative repercussions that 
may arise during its growth.

    Senator Lott. I want to thank you for having this hearing, 
and thank our witnesses for being here. I particularly want to 
thank Chairman Powell for stepping up and taking cognizance of 
this issue and taking a look at where we are and where we're 
going.
    You know, talking about it as we were coming to this 
meeting today, and what has happened since we did the last 
Telecommunications Act of 1996 has been breathtaking. And the 
opportunities for technological advancement in the future are 
just staggering, and I think we've got to think about it and 
pay attention to it, not necessarily take control over it or 
regulate it, but at least be conscious of what impact it's 
going to have and what effect it will have on various sectors 
of this important part of our economy.
    So, with that, I'll yield the floor.
    The Chairman. Senator Lautenberg?

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Mr. Chairman, I thank you very much. I 
recognize that we've arrived late, and I would ask consent that 
my full statement be included in the record----
    The Chairman. Without objection.
    Senator Lautenberg.--as if read.
    I do want to say that the--in terms of a base of 
telecommunications, communications generally, New Jersey really 
stands out. We've got a lot of talent and a lot of interests, 
but also a huge infrastructure related to telecommunications 
services, telephone services, over-the-Internet, and otherwise.
    And so, Mr. Chairman, as we examine this, it must be kept 
in mind that there are issues, peripheral issues, that don't 
directly address the question of the technology, but, rather, 
income to the states, how do we deal with the Internet access 
fees, those kinds of things.
    And, Mr. Chairman, as usual, I see that you and the 
Committee have structured a fairly thorough review. I commend 
you for it. And since it is so complicated, I'll end my 
comments there and watch with interest.
    Thank you very much.
    [The prepared statement of Senator Lautenberg follows:]

            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey
    Mr. Chairman:

    Thank you for holding this important hearing on Internet telephony, 
which is commonly referred to as ``Voice over Internet Protocol.'' This 
hearing is indeed timely: in just the past few months, three Baby Bell 
companies (Verizon, SBC, and Quest); three of the largest long distance 
telephone companies (AT&T, Sprint, and MCI); and three cable companies 
(Comcast, Time Warner, and Cablevision) have all announced their entry 
into the VoIP market.
    It is clear that, due to this new technology, there will be direct 
benefits to consumers in the form of competitive prices and expanded 
and personalized service.
    Not surprisingly, consumers have responded favorably to VoIP 
services. Earlier this month, for example, Vonage, a provider of phone 
service over high-speed Internet lines from its offices in Edison, New 
Jersey, signed up its 100,000th customer. That's double the size of its 
subscriber base less than five months ago. That's strong consumer 
response.
    I believe that our discussion today is as much about broadband 
deployment as it is about voice communications over the Internet. After 
all, it is only the continued deployment of broadband that will permit 
consumers in residential markets to consider VoIP as an alternative 
platform for telephone communications.
    I'm interested in knowing whether this Nation has a broadband 
deployment plan. And if we do, what is it?
    According to a report released last week by the Congressional 
Budget Office (CBO), the United States has the largest number of 
subscribers worldwide to high-speed and dial-up Internet access 
services.
    The report also found that by most measures, ``U.S. businesses and 
consumers make more and better use of the Internet than do their 
counterparts in other nations.'' But according to CBO, there are only 
6.9 broadband subscribers for every 100 Americans with Internet access, 
a rate that is only the sixth-highest in the world.
    I know that broadband deployment is not the subject of this 
hearing, per se, but I believe we need to keep that in mind if we truly 
want all of the benefits of Internet access to be widely available and 
affordable.
    Concerning VoIP, today I'm interested in hearing about the 
industry's commitment to fulfilling the communications needs of the 
public safety, law enforcement, and disabled communities, and whether 
the Federal Communications Commission should require Voice over IP 
providers to meet these needs.
    Thank you, Mr. Chairman.

    The Chairman. Thank you, sir.
    Senator Dorgan?

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, I notice my colleague, 
Senator Burns, left for the Appropriations Committee, and 
that's because there's a hearing on Mad Cow Disease, and so I'm 
going to be leaving this hearing to go to a hearing on Mad Cow 
Disease. I regret that I can't be in both places. But coming 
from North Dakota, I would be well-advised to be at the 
Appropriations hearing at the moment.
    But VoIP is critically important. The Chairman of the 
Commission is here today, and I know that he's made some 
speeches about this issue. This is a really interesting and 
important issue. I see it especially important for people in 
rural America. You know, when we learned to talk by 
electricity, as they described it 120-some years ago, things 
haven't changed very much over all of these years. But VoIP is 
the cliff that's going to cause dramatic changes. And I'm very 
concerned about equality for rural consumers, especially in 
smaller states, where we may not have the buildout of 
technology quite the way you have it in some of the larger 
cities. So the issues of the universal service funds and so 
many other issues that relate to this are critically important 
to me and to my state of North Dakota.
    Mr. Chairman, I'm very pleased that you have held this 
hearing. I look forward to a dialogue with the Commission and 
others, and my colleagues on the Committee, and I regret, 
again, that I'll have to go to the Appropriations Committee 
this morning.
    The Chairman. Thank you, Senator Dorgan.
    Senator Alexander, would you please come forward? And, 
Chairman Powell, would you also take a seat at the table, as 
well?
    Welcome, Senator Alexander, and please proceed.

              STATEMENT OF HON. LAMAR ALEXANDER, 
                  U.S. SENATOR FROM TENNESSEE

    Senator Alexander. Mr. Chairman, Members of the Committee, 
Chairman Powell, thank you for the opportunity to join your 
hearing as you take a first look at how we may begin to make 
most of our telephone calls over the Internet.
    I imagine that Chairman Powell will tell you what he told 
me a few weeks ago, that suddenly more and more Americans are 
making their phone calls over the Internet, and it's coming 
down the track like a speeding freight train. I'm here today to 
help make sure that our state and local governments aren't tied 
to the tracks ahead of the train. I'm here to urge that in the 
excitement about the promise of this new technology, we don't 
forget about one of the most important principles that unite us 
as Americans, and that is the principle of federalism.
    Historically, state and local governments have shared the 
responsibility for regulating the telecommunications industry. 
The Chairman has indicated, many of you said, that regulation 
of telephone calls over the Internet, or other information 
services, might have minimal regulation. I have no quarrel with 
that conclusion. But there is another area that state and local 
and Federal governments have shared, in terms of responsibility 
affecting telecommunications, and that is taxation. The Federal 
3 percent tax on telephone service collected nearly $6 billion 
last year. State and local governments collected more than $20 
billion last year on telephone services and service providers. 
Six billion is barely a drop in the Federal bucket. Twenty 
billion is a lot in state and local buckets.
    In Tennessee, for example, we collected $361 million on 
telephone service and providers. That's about 5 percent of the 
state-collected tax dollars in Tennessee, Texas and Florida 
each collected about one billion on telephone services. Senator 
Feinstein said, on the Senate floor, that telephone tax 
collections were 5 to 15 percent of the budgets of many 
California cities and towns.
    Congress has respected the importance of these telephone 
revenues to the stability of state and local governments. In 
1996, the Telecommunications Act specifically said nothing in 
the act should modify, impair, supercede any state law 
pertaining to taxation.
    This Committee and the FCC are just beginning to consider 
how to approach issues of regulation and taxation as 
traditional telephone services migrate to the Internet. I 
salute you for that. But it's not too early to wave the red 
flag of federalism.
    Earlier this year, the House passed a bill that could put 
at risk the entire $20 billion state and local governments 
collect annually on telephone services and providers. The House 
did this in the name of making permanent something else, the 
Federal moratorium on state and local Internet access taxes 
that began in 1998. The House bill sounds innocent enough, but 
if the FCC should decide, as it has indicated it might, to 
designate VoIP as an information service, then the language of 
the moratorium legislation bill would likely ban states from 
collecting taxes on telephone calls made over the Internet.
    The current Senate version of the bill, S. 150, is 
something less of a threat. But according to the Congressional 
Budget Office, it still could cost state and local governments 
up to $10 billion a year in annual taxes collected on the sale 
of telephone services. Those are taxes state and local 
governments are collecting today.
    There's no justification whatever, Mr. Chairman, for 
Congress deciding to give telecommunications companies such a 
bonanza, and then turn around and send the bill to Governors 
and to mayors. It's the worst kind of unfunded Federal mandate, 
a cost on state and local governments imposed by Congress 
without reimbursing.
    The Republican majority came to power in 1995 promising to 
end such unfunded mandates. Banning a tax is just as much an 
unfunded mandate as requiring a service, unless you reimburse.
    The Chairman. Would you repeat that, please?
    Senator Alexander. Banning a tax is just as much an 
unfunded mandate----
    The Chairman. Eliminating a tax?
    Senator Alexander. Eliminating a tax now being collected is 
just as much an unfunded mandate as requiring a service without 
paying the bill. That's what common sense suggests. That's what 
the 1995 unfunded mandate law says, explicitly. And that's what 
the Congressional Budget Office reported to Congress was its 
reading of the law, which was passed by this Congress, and for 
which 62 Senators, who still are here, voted.
    If Congress really wants to pick and choose among American 
business enterprises, and decided that high speed Internet 
access business is one we all want to subsidize, then Congress 
ought to pay the bill, and not send it to the states. I'm not 
at all convinced Congress should adopt such an industrial 
policy. More than 24 million Americans are already paying for 
high speed Internet access, more than in any other country. 
According to the Department of Commerce, high speed Internet 
access is growing today more rapidly than color TV, cell 
phones, or VCRs at similar stages in their development. It's no 
surprise, therefore, that the Congressional Budget Office 
reported to us last year that a government subsidy for high 
speed Internet access is unnecessary. The free market will do 
just fine, I believe.
    But if Congress should insist on a subsidy for high speed 
Internet access, there's a much less expensive and more 
efficient way to do it than by giving a $20 billion-a-year tax 
break to the telecommunications industry. The model comes from 
Texas when George W. Bush was Governor. Governor Bush signed 
into legislation a law that gave every Texas citizen a sales 
tax exemption for the first $25 per month that that citizen 
paid for high speed Internet access.
    If there's to be a national subsidy for high speed Internet 
access, I propose we adopt the George W. Bush Texas plan. Let 
every state and local government give a $25 exemption from 
sales taxes to consumers who buy high speed Internet access. If 
there were, for example, 100 million subscribers, the national 
bill would be about $2 billion. In order to avoid unfunded 
Federal mandates, Congress should pay that bill and reimburse 
states and cities each year for their costs. To help pay the $2 
billion drain on the Federal treasury, Congress should raise 
the Federal excise tax on telephones from 3 percent to 4 
percent.
    Chairman Powell stated, at the National Press Club, that 
the goal of the FCC should be to do no harm to the industry--I 
agree--and suggests that the importance of the principle of 
federalism in American life, that--given the importance of the 
principle of federalism, that the Chairman's goal should be, at 
the same time, that we do no harm to state and local 
governments.
    That's why Senator Carper and I, along with nine Senators 
of both parties, have introduced legislation that would extend, 
for 2 years, the current moratorium on state and local taxation 
of Internet access so that Congress may consider its finding in 
these hearings, may consider deliberations of the FCC, and make 
the best possible judgment about what sort of regulation----
    The Chairman. Senator Alexander, we usually try to limit, 
to 5 minutes or so, statements, so if you could summarize, I 
would appreciate it----
    Senator Alexander. I'm sorry----
    The Chairman.--because we have two----
    Senator Alexander.--Mr. Chairman.
    The Chairman.--two panels waiting to testify.
    Senator Alexander. I will summarize at this point about 
what's----
    The bottom line, Mr. Chairman, is, I hope that, as the 
Commission--as the Committee considers making telephone calls 
over the Internet, that it also considers the principle of 
federalism and avoids the principle of picking and choosing 
winners in our economic marketplace.
    Thank you very much for your time.
    [The prepared statement of Senator Alexander follows:]

Prepared Statement of Hon. Lamar Alexander, U.S. Senator from Tennessee
    Mr. Chairman, members of the Committee, I would like to thank you 
for the opportunity to testify here today as you take a first look at 
``voice over Internet protocol'' (VoIP)--a technology that could lead, 
in a few short years, to all our phone calls being made over the 
Internet. Chairman Powell will undoubtedly repeat what he told me in my 
office just a few weeks ago: telephone service on the Internet is 
coming down the track like a speeding freight train. Companies like 
SBC--one of the country's largest phone companies--have announced that 
they plan to have VoIP available in most metropolitan areas as soon as 
the end of this year.
    I am here today, however, to make sure that our state and local 
governments aren't tied to the tracks ahead of this train. I want to 
take this opportunity to talk about one of the most important 
principles of government that unites us as Americans--federalism. We're 
going to be talking about federalism here today as we discuss the 
regulation of this new technology. Historically, state and local 
governments have shared the responsibility in the regulation of the 
telephone industry. This shared responsibility has given states a major 
say in how service is provided in their states, the provision of 
emergency services, and the provision of services to low income and 
rural customers.
    As the FCC considers how this industry is to be regulated--and 
Chairman Powell has already indicated that he supports minimal 
regulation of VoIP technologies--we must recognize that state and local 
governments have interests that must be preserved. One other area has 
become my focus in recent months: the taxation of telephone services. 
According to the Congressional Budget Office, states are already 
collecting more than $20 billion in taxes on telephone service and 
service providers annually. In Tennessee, the $361 million collected is 
more than 5 percent of its general revenues. In Texas, more than $1.2 
billion is collected. In light of the significance of these revenues to 
state and local government, as Congress and the FCC begin to consider 
how to handle these issues, I think that it is most important to raise 
a red flag on federalism at this time.
    In dealing with the growth and regulation of the telecommunications 
industry Congress has generally respected the tradition of strong state 
and local governments. But, the House of Representatives has already 
passed a bill that would put at risk this $20 billion in revenues. In 
extending the current moratorium on the taxation of Internet access, 
this House bill sounds innocent enough, but, if the FCC should decide, 
as it has indicated it might do, to designate VoIP as an information 
service, then the language of the bill could very likely ban states 
from collecting these taxes.
    The Senate version of this bill, S. 150, though less of a threat, 
still risks more than $10 billion in annual taxes collected on the sale 
of telephone service according to a Congressional Budget Office letter 
that I will include today with my testimony. This letter makes it clear 
what the text of the Budget Act as amended in 1995 and common sense 
tells us: banning a tax without paying for it is just as much of an 
unfunded mandate as requiring a service without paying for it. I 
certainly agree that high-speed Internet access is important to growth 
in our economy and should be encouraged. But, I would point out that 
the Department of Commerce reports that there are already more than 24 
million high-speed Internet users in the United States today.
    The Department of Commerce also reports that high-speed Internet 
has been adopted by consumers at a faster rate in the last five years 
than cell phones, CD players, VCRs, and even color televisions were 
adopted at the same point in their first five years of deployment. The 
Federal Government didn't feel the need to exempt from taxation such 
important industries as telephones, railroads, and automobiles and they 
did just fine. Why then is it so important to exempt Internet access 
from taxation when the numbers show that it's doing just fine on its 
own? But even if it is in the interest of the Federal Government to do 
so, I don't see why we should send the bill to the states.
    If the Federal Government wants to do it, then the Federal 
Government should pay for it and consider former FCC Chairman Reed 
Hundt's proposal for a subsidy of $50 billion to bring high-speed 
Internet to 100 million homes. Chairman Powell stated on January 14, 
2004, at the National Press Club that the goal of the FCC in regulating 
phone calls over the Internet should be to ``do no harm'' to the 
industry. I agree with that, and I think that principle should be 
expanded to include an effort to do no harm to the state and local 
governments that have come to rely on these tax revenues. I believe 
that the bill I have proposed with Senator Carper and nine other 
senators who have served in state and local government positions 
embodies this idea.
    It is a temporary measure that makes sure we don't take a permanent 
action that has drastic long-term consequences, and it protects states 
that are already collecting Internet access taxes to prevent them from 
seeing an immediate loss in revenues. These are the principles we 
should be seeking to apply as the discussion of this technology 
continues, and I hope that the Committee will keep these points in mind 
as it listens to the testimony here today.

    The Chairman. I thank you, Senator Alexander. And I thank 
you for your involvement in this issue in Internet taxation. I 
think you've made great contribution to the debate and the 
education of Members on the issue.
    Senator Alexander, I believe that Senator Wyden would like 
to ask you a question, if that's agreeable to you.
    Senator Alexander. Of course.
    The Chairman. You don't have to. I know you have a busy 
schedule.
    Senator Alexander. No, I'm happy to talk as long as you'd 
like.
    [Laughter.]
    Senator Wyden. Thank you, Mr. Chairman. I thank my 
colleague. You've been a great addition to the Senate.
    Phone calls over the Internet, as the Senator knows, travel 
as packets of light through hundreds and literally thousands of 
tax and regulatory jurisdictions. I'd like to know if the 
Senator believes that state and local governmental authorities 
should have the authority to tax every VoIP call. There are 
7,600 taxing jurisdictions, local and state. It seems to me 
that's what the Senator is saying. And I would just like you to 
state, for the record, whether you think state and local taxing 
authorities should have the jurisdiction to tax, if they choose 
to, every VoIP call.
    Senator Alexander. I think state and local jurisdictions 
should have the authority, as they do today, of taxing 
transactions in their states. Whether they choose to do that is 
up to the Governor and the mayor and the locally elected 
officials. They don't choose to do that with telephones. They 
send a monthly bill and tax the service, and we all pay a 
little tax on that. I don't see any difference, really, in 
that.
    Senator Wyden. Well, what the Senator is calling for is a 
reversal of the Quill decision, and I think it's important that 
that ought to be understood--and, to your credit, you've always 
been honest about that--the Quill decision says you can't tax 
without physical presence. And what you've just said is that 
every taxing jurisdiction in America ought to be able to tax 
without physical presence.
    VoIP calls are going to be made, as we've talked about 
today, through packets of light. So I just want the Senate and 
the country to understand what's really at issue here is, your 
side wants to throw the Quill decision in the trash can. I 
think that would be a great mistake. A huge majority of the 
Senate has opposed it--I hope we will continue that as we go 
forward. And my sense is, is that what this position is really 
going to lead to is taxing, you know, virtually everything--e-
mail and Blackberries and the like--under VoIP. I think that 
would be unfortunate.
    Fortunately, we are going to have a thorough debate, Mr. 
Chairman, in the Committee. But the Senator has been candid 
here, and he'd give state and local authorities taxing and 
regulatory jurisdiction nexus, as it's called, over every VoIP 
call and put them in a position to be taxed, and I think that 
would be a mistake.
    Can I ask one other question?
    The Chairman. First, I'd like for Senator Alexander to be 
able to respond to that----
    Senator Wyden. Of course.
    The Chairman.--if he would like.
    Senator Alexander. Thank you, Mr. Chairman.
    I wouldn't have characterized my answer that way, Senator 
Wyden. My purpose here is to say that if the Congress and the 
Federal Communications, working together, decide to have 
minimal regulation of VoIP and information services as they're 
delivered over the Internet, and that somehow that set of 
decisions affects the $20 billion a year that state and local 
governments rely on, that the Congress take that into account 
in its decisionmaking. I mean, last year, we bailed out states 
with a $20 billion gift. We won't be doing that this year.
    I'm not sure I have the solution. I've suggested one today, 
which is a $25--to adopt the George W. Bush Texas plan and give 
everybody a $25 exemption, let Congress pay that bill, then we 
wouldn't have any of the issues that you just talked about. 
People are still going to pick up the telephone and make a 
call.
    Senator Wyden. Well, you have said that all these 
jurisdictions ought to have authority over a VoIP call. That's 
what you said in response to my first question.
    And I guess the only other one that I want to ask, are you 
troubled at all that this will chill investment in broadband? 
VoIP and broadband are really two sides of the same coin, and 
it seems to me, again, that you would allow, with all these 
taxing jurisdictions, something that would really harm 
broadband development, a big jobs creator, and particularly one 
in rural states, like yours and mine. Are you troubled at all 
by that?
    Senator Alexander. I am not, because there are 24 million 
high speed Internet access providers in America, more than in 
any other country. The Department of Commerce says that's 
growing more rapidly than VCRs, color TVs.
    But if I were troubled by it and wanted to give the high 
speed Internet access industry a big subsidy, as Mr. Hunt, I 
believe, did when he was at the FCC, I'd be straightforward 
about it and recommend that we spend $10 billion, $15 billion, 
$20 billion, and just subsidize the industry, rather than 
subsidizing them by sending the bill to state and local 
governments, who are already struggling. That's my concern.
    Senator Wyden. OK.
    Senator Alexander. And I think if we have 2 years to think 
about it, we might come to a better conclusion.
    The Chairman. We have to move along.
    Senator Allen, did you want to ask one question? But we 
really need to move along. We need to hear from Chairman 
Powell, and then we have another panel.
    Please go ahead.
    Senator Allen. Thank you, Mr. Chairman. Just for 
clarification of our bill that you're a key lead on, along, 
obviously, with Senator Wyden and Senator Sununu.
    S. 150 has to do with Internet access taxes. The opponents, 
who are in favor of allowing access taxes on the Internet, try 
to get--have maybe misunderstood, intentionally or 
unintentionally, in some of their projections of the fiscal 
impact, that this measure somehow affects voice over IP. Our 
measure clearly was never intended to. The manager's amendment 
made clear that the issue of voice over IP would not be 
adjudicated or disposed of in our measure. That's what this 
hearing is about, voice over IP, and I'm glad the Chairman of 
the FCC is here, and, indeed, Senator Sununu's initiative.
    To make it abundantly clear for folks, so that we don't 
have this continued confusion, I will be offering an amendment, 
Mr. Chairman, to our measure on Internet access taxes that 
makes it very clear, plain English, that voice over IP is not 
affected one way or the other. That can be adjudicated 
elsewhere.
    We were trying, Senator Wyden and myself, to make it a 
clear bill, don't get bogged down with all the things--the out-
of-state collection of sales and use taxes, and compelling 
remote retailers to collect and remit sales taxes to 7600 
different jurisdictions. That's not part of this measure, 
either.
    Voice over Internet protocol, in my view, is a great 
advancement. I think we ought to be happy with the enablement, 
and further people--more people wanting to use broadband. This 
Committee has heard dozens of proposals over the years to try 
to get broadband extended to small towns and rural areas 
because of its benefits, whether for telemedicine, for 
education, for commerce, and enabling people to compete 
anywhere in this country or all over the world.
    So I'll look forward to hearing the Chairman of the FCC's 
testimony, but let's just make it clear, for Senator 
Alexander--he and I had a debate a few weeks ago at Heritage 
and made it clear that voice over IP is not a part of our 
measure. It'll be perfectly clear. The actual fiscal impact of 
this measure is maybe $80 to $120 million, at most.
    And I would also point out that what we're having are not 
elected people taxing broadband DSL, but, in fact, they're 
unelected Commissioners and public utility commissions and all 
those, that are taxing the advancements in broadband. And what 
we ought to be about in this Committee is embracing the 
advances in technology, how that's improving people's lives, 
the competitiveness of businesses in our country. And the fact 
that there are so many Internet service providers is actually 
an example of less taxation, less regulation, allowing those in 
the creative private sector to provide consumers with more 
choices at the best prices.
    So, Mr. Chairman, I look forward to hearing the Chairman's 
comments on voice over Internet protocol, but let's make it 
clear, and stipulate for the record, that voice over IP has 
nothing to do with Senate Bill 150, as amended, and will be 
amended even further, and we can even underline it if that will 
assuage those who are concerned, so that we can get accurate 
figures.
    And I will also point out that insofar as an unfunded 
mandate--you know, in the Medicare bill that we passed on 
prescription drug benefits, in the midst of that was a 
prohibition on states putting on insurance premiums taxes on 
drug policies.
    I would also point out that the Federal Government, year 
after year, has come up--where there is a case clearly of 
interstate and international commerce, such as airlines 
tickets, no taxes are allowed there. Food stamp purchases, 
Senator Bob Dole made sure there are no sales taxes put on 
that.
    And I can tell that the Chairman wants to get on to the 
Chairman of the FCC, so we can carry on this debate, hopefully 
soon, on the floor of the U.S. Senate so we can protect people 
in this country from onerous access taxes to broadband 
services.
    Thank you, Mr. Chairman.
    The Chairman. Senator Alexander, your complete statement 
will be made part of the record. We thank you.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. We look forward to the continuation of this 
spirited discussion on the floor of the Senate, because I think 
there's one thing that we are in agreement on, all of us, and 
that is, this issue needs to be resolved. It needs to be 
debated thoroughly and resolved, rather than having it hang out 
there. It's just too much uncertainty for all parties 
concerned.
    I thank you, Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Chairman Powell, welcome.

    STATEMENT OF HON. MICHAEL K. POWELL, CHAIRMAN, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Chairman Powell. Thank you, sir.
    Good morning, Mr. Chairman, distinguished Members of the 
Committee. It's always a pleasure to come before you today, 
particularly to discuss Internet voice services, what I have 
described as one of the most monumental moments in all of 
communication history.
    For the last three and a half years as Chairman, we have 
had an engaged debate in this nation, a dialogue that we've 
called the ``digital migration'' taking place across the 
communications landscape. The digital migration is about 
empowering consumers and replacing yesterday's slow, limited, 
and generally monopolistic communication networks with high 
speed, dynamic, and competitive full-service digital networks.
    Increasingly, these digital broadband networks, whether 
wired or wireless, are using the flexibility of Internet 
protocol to offer Americans a full suite of communications 
services, from voice to video to data. We continue to work hard 
to bring these broadband Internet networks to each and every 
American at affordable prices.
    At the FCC, we have championed the deployment of multiple 
broadband networks in order to rid ourselves of the intractable 
last-mile problem that has plagued the policy for over a 
hundred years. We have pushed for greater deployment of DSL, 
cable modem, third- and fourth-generation wireless systems, 
WIFI, ultra-wideband, satellites, and even broadband over power 
lines, just to name a few of the new platforms and services 
already in commercial use. More broadband platforms mean more 
competition, they mean more innovation, they mean more tools to 
advance important goals, such as universal service.
    The Commission is mindful, however, that networks are 
valuable only if consumers use them, use them to communicate, 
to entertain themselves, to work, and to learn. These uses are 
often referred to as ``Internet applications.'' Successful 
Internet applications are vital to our national broadband 
policy, because they create the demand, and, thus, grow the 
network. Just as e-mail and e-commerce were drivers of the 
narrow-band Internet, higher-bandwidth applications, like 
streaming video, music entertainment, home networking, and, 
yes, Internet voice, will be the killer apps for broadband.
    As you know, the FCC has not generally moved to regulate 
these applications. In part, this is a result of our charge in 
Section 230 of the Communication Act, which states clearly that 
it is the policy of the United States to promote the continued 
development of the Internet and other interactive 
communications services, and to preserve the vibrant and 
competitive free-market forces for these services, and I quote, 
``unfettered by Federal/state regulation.''
    And against this backdrop, in recent months one application 
has grabbed the headlines, Internet voice services. These 
applications have garnered a great deal of attention because 
they allow voice communication among users, much like 
traditional wired or wireless voice networks.
    Internet application--voice applications come in many 
flavors. In some cases, like in Pulver.com, the communication 
is purely computer to computer over broadband infrastructure. 
In other cases, the calls use a traditional phone. But the 
important point is, when packetized, voice applications are 
virtually identical to any other Internet application, such as 
e-mail or instant messaging. Consequently, any would-be 
entrepreneur is just a website and a server away from offering 
services that mirror, sometimes mimic, the phone company. And 
suddenly every consumer with broadband access can choose among 
potentially hundreds of voice over Internet service providers.
    This remarkable development in the growth of competition is 
made possible by tapping into the global and ubiquitous 
Internet to deliver tremendous innovation and opportunity for 
the American people. And voice applications are not alone. We 
are really just at the beginning. Everywhere, Internet 
applications are bringing new competition to old markets, and, 
in turn, ushering in this era of innovation, competition, lower 
prices, and higher quality services.
    So whether we're talking about Internet voice services or 
video and audio services, Internet news services, or Internet 
commerce, the broadband revolution is bringing tomorrow's 
communication and commerce tools to more and more Americans 
today.
    These new opportunities for consumers are also providing 
new opportunities for our Nation's economy. There is a need to 
rip and replace the Nation's infrastructure, and that is 
stimulating previously moribund capital spending. It is opening 
new paths to economic growth. It is increasing our Nation's 
productivity, and holds out the promise of new jobs as 
businesses and consumers increasingly unleash the power of 
broadband.
    Restraining from regulating the economics of Internet 
applications has served us well. The creativity and innovation 
of the marketplace is breathtaking and dynamic, bursting at the 
seams with entrepreneurial spirit. And consumers, who we're 
charged to focus on, are enjoying more choices, better value, 
and more personalized products than any time in communication's 
history. There is little compelling evidence that I can find 
that economic regulation of the sort we are accustomed to for 
such vibrant services is warranted at this stage.
    I do, however, believe that you do have to promote, 
preserve, and advance certain venerable social and security 
policies. I think there's a growing consensus about that. If we 
could agree to focus on just those things, I think this country 
would have moved in a dramatic direction. Paramount among them, 
of course, universal service, 911, law enforcement, and 
disability rights.
    And I recognize that IP services ride atop a physical layer 
that in many parts of our country is still busy--expensive to 
build and maintain, but we're committed to ensuring that the 
entire nation has access to affordable communications services 
as they move to IP.
    At the Commission, we've begun laying the foundation for a 
comprehensive, yet minimal, regulatory environment for Internet 
voice applications. At our February meeting, the Commission 
adopted an MPRM to look at the issues surrounding these 
applications. We're working hard with our colleagues elsewhere 
in Federal Government, state and local governments, to develop 
a sound framework, and we're focused on advancing those goals 
of public safety, universal service, and homeland security, and 
access to people with the disabilities.
    In addressing these issues, for example, I have called for 
a series of solution summits that will focus on the very 
technical problems that these face. The first will be held 
March 18th to address E-911 capability.
    Finally, we are keeping a watchful eye for anti-competitive 
conduct by owners of broadband networks, to ensure citizens 
have the right to tap the full potential of the Internet in a 
broadband world.
    I want to thank you, Mr. Chairman, for calling this 
hearing. I look forward to working with you, Members of this 
Committee, our state colleagues and industry, and my fellow 
Commissioners, on some of the most challenging and exciting 
issues in our history. And I'll be happy to take your 
questions.
    [The prepared statement of Chairman Powell follows:]

        Prepared Statement of Hon. Michael K. Powell, Chairman, 
                   Federal Communications Commission
                      Summary of Written Statement
    Good morning, Mr. Chairman and distinguished members of the 
Committee. It is my pleasure to come before you today to discuss 
Internet voice services.
    For the last three and a half years, I have engaged you and the 
Nation in a dialogue about the digital migration taking place across 
the communications landscape. The digital migration is about empowering 
consumers by replacing yesterday's slow, limited and generally 
monopolistic communications networks with multiple high-speed, dynamic 
and competitive full-service digital networks. Increasingly, these 
digital broadband networks, whether wired or wireless, are using the 
flexibility of Internet protocols to offer Americans a full suite of 
communications services--from voice to video to data.
    We continue to work hard to bring these broadband Internet networks 
to each and every American at affordable prices. We have championed the 
deployment of multiple broadband networks in order to rid ourselves of 
the intractable ``last mile'' problem. We have pushed for greater 
deployment of DSL, cable modem, 3G wireless, WIFI, Ultra Wide Band, 
satellites and broadband over power lines, just to name a few new 
services already in commercial use. More broadband platforms mean more 
competition, more innovation and more tools to advance important goals 
such as universal service.
    The Commission is mindful, however, that networks are valuable only 
if consumers use them to communicate, to entertain themselves, to work, 
and to learn. These uses are often referred to as Internet 
``applications.'' Successful Internet applications are vital to our 
national broadband policy because they create demand and thus grow the 
network. Just as e-mail and e-commerce were drivers of the narrowband 
Internet, higher bandwidth applications like streaming video and music 
entertainment, home networking and Internet voice will be the ``killer 
apps'' for broadband. As you know, the FCC has not generally moved to 
regulate these Internet applications. In part, this has been a result 
of our charge in section 230 of the Communications Act that it is the 
policy of the United States to promote the continued development of the 
Internet and other interactive computer services and to preserve the 
vibrant and competitive free market for these services ``unfettered by 
Federal or State regulation.''
    Against this backdrop, in recent months, one application has 
grabbed headlines: Internet voice services. These applications have 
garnered a great deal of attention because they allow voice 
communication among users, much like traditional wired or wireless 
voice networks. Internet voice application comes in many flavors, in 
some cases--like pulver.com--the communication is computer to computer, 
in other cases the Internet user calls a traditional phone. When 
packetized, voice applications are virtually identical to any other 
Internet application, such as e-mail or instant messaging. 
Consequently, would-be entrepreneurs are just a website and a server 
away from offering services that mirror those of a ``phone'' company. 
And suddenly every consumer with broadband access can chose among 
potentially hundreds of voice over Internet service providers. This 
remarkable development in the growth of competition is made possible by 
tapping into the global and ubiquitous Internet to deliver tremendous 
innovation and opportunity for the American people.
    Voice applications are not alone. Everywhere Internet applications 
are bringing new competition to old markets and, in turn, ushering in 
an era of innovation, competition, lower prices and high quality 
services. Whether we are talking about Internet voice services, or 
Internet video and audio services, Internet news services, or Internet 
commerce, the broadband revolution is bringing tomorrow's communication 
and commerce tools to more and more Americans everyday. These new 
opportunities for consumers are also providing new opportunities for 
our Nation's economy. The need to ``rip and replace'' the Nation's 
infrastructure is stimulating previously moribund capital spending, it 
is opening new paths to growth, increasing our Nation's productivity 
and holds out the promise for new jobs as business and consumers 
increasingly unleash the power of broadband.
    Restraining from regulating the economics of Internet applications 
has served us well. The creativity and innovation of the marketplace 
has been breathtaking and dynamic, bursting at the seams with 
entrepreneurial spirit. Consumers are enjoying more choices, better 
value, and more personalized products. There is little compelling 
evidence that heavy economic regulation of these vibrant services is 
warranted.
    I do, however, believe we must preserve and advance venerable 
social and security policies. Paramount among them are universal 
service, 911, law enforcement and disability rights. I recognize that 
IP services ride atop a physical layer that, in many parts of our 
country, is still expensive to build and maintain. I am committed to 
ensuring that the entire nation has access to affordable communications 
services, as more and more communications move to IP networks.
    We have begun laying the foundation for a comprehensive, yet 
minimal, regulatory environment for Internet voice application 
services. At our February meeting, the Commission adopted a Notice of 
Proposed Rulemaking to look at the issues surrounding these 
applications. We are working with our colleagues elsewhere in the 
Federal government and at the state and local level to develop a sound 
policy framework. We are focused on addressing and advancing our social 
objectives of public safety and 911, universal service, homeland 
security and access for people with disabilities. In addressing these 
issues, I have called for a series of Solution Summits. The first 
Summit is slated for March 18 and will address E911 capability. In 
addition, the Commission is working hard to reform our country's inter-
carrier compensation regime. Finally, we are keeping a watchful eye for 
anti-competitive conduct by owners of broadband networks to ensure our 
citizens can tap the full potential of the Internet in a broadband 
world.
    I would like to thank you, Mr. Chairman, for calling this hearing, 
and I look forward to working with you and other members of the 
Committee, my state colleagues, industry and my fellow commissioners on 
these challenging and critical issues.
                                 ______
                                 
    Good morning, Mr. Chairman and distinguished members of the 
Committee. It is my pleasure to come before you today to discuss 
Internet voice services and the role of the Federal Communications 
Commission (the ``FCC'' or the ``Commission'').
Introduction
    For the last three and a half years, I have engaged you and the 
Nation in a dialogue about the digital migration taking place across 
the communications landscape. The digital migration is about empowering 
consumers by replacing yesterday's slow, limited and generally 
monopolistic communications networks with multiple high-speed, dynamic 
and competitive full-service digital networks. Increasingly, these 
digital broadband networks, whether wired or wireless, are using the 
flexibility of Internet protocols to offer Americans a full suite of 
communications services--from voice to video to data.
    We have worked hard at bringing these broadband Internet networks 
to each and every American at affordable prices. We have championed the 
deployment of multiple broadband networks in order to rid ourselves of 
the intractable ``last mile'' problem. We have pushed for greater 
deployment of DSL, cable modem, 3G wireless, WIFI, Ultra Wide Band, 
satellites and broadband over power lines, just to name a few new 
platforms already in commercial use. More broadband platforms mean more 
competition, more innovation and more tools to advance important goals 
such as universal service.
    The Commission is mindful, however, that networks are valuable only 
if consumers use them to communicate, to entertain themselves, to work, 
and to learn. Although much of our focus has been on bringing these 
broadband Internet networks to each and every American, the Commission 
is now turning its attention to promoting investment, innovation and 
competition at the applications layer of the Internet. Internet voice 
services, coming in many flavors, are some of the first of many 
broadband Internet applications being adopted by consumers today. These 
exciting new services tap into the global and ubiquitous Internet to 
change the make-up of the communications and other industries daily--
all to the benefit of the American people. Successful Internet 
applications are vital to our national broadband policy because they 
create demand and thus grow the network.
    Today, Internet applications are bringing new competition to old 
markets and, in turn, ushering in an era of innovation, lower prices 
and high quality services. Just as e-mail and e-commerce were drivers 
of the narrowband Internet, higher bandwidth applications like 
streaming video and music entertainment, home networking and Internet 
voice will be the ``killer apps'' for broadband. Whether we are talking 
about Internet voice services, or Internet video and audio services, 
Internet news services, or Internet commerce, the broadband revolution 
is bringing tomorrow's communication and commerce tools to more and 
more Americans today. These new opportunities for consumers are also 
providing new opportunities for our Nation's economy. New opportunities 
for job creation can be found in building broadband networks and 
applications. Productivity gains for our economy continue as business 
and consumers increasingly unleash the power of broadband networks. At 
the same time, we are creating opportunities for small businesses and 
entrepreneurs to enter previously prohibited communications markets at 
the applications layer of the network.
    Although the prospects for the digital migration have been 
promising, to date, the realization of its potential and benefits for 
our country are far from certain. This country must continue to promote 
and adopt regulatory policies that promote investment and allow these 
new and emerging broadband Internet services to flourish. A failure to 
do so will lead to more outsourcing of high tech jobs and investment to 
foreign lands, leaving the most powerful nation in the world a second 
class citizen in tomorrow's growing digital economy.
    At the same time, we must leverage these new technologies to ensure 
that many of our core, traditional and vital social objectives continue 
to be met. Regardless of the pace of technological change, we must 
remain committed to universal service, law enforcement access, E911 
capabilities, and access for people with disabilities. And, we must 
effectively manage the transition from the analog to an all digital 
world to ensure that Americans relying on yesterday's communications 
tools are not left behind.
    The Commission is hard at work on these issues. We continue to work 
to bring alternative broadband Internet distribution networks to the 
American people. We have begun laying the foundation for a ``light 
touch'' regulatory environment for Internet voice services. We are 
focused on addressing and advancing our social objectives of public 
safety, universal service, homeland security and access for people with 
disabilities. The Commission is also working hard to reform our 
country's inter-carrier compensation regime. We are working with our 
colleagues elsewhere in the Federal government and at the state and 
local level to develop a sound policy framework. Finally, we are 
keeping a watchful eye for anti-competitive conduct by owners of 
broadband networks to ensure our citizens can tap the full potential of 
the Internet in a broadband world. The public interest is our guide in 
our tireless pursuit to bring the vast benefits--both personal and 
economic--of the digital migration and broadband Internet service to 
every American.
II. Emerging Internet Voice Services--What are They?
    With 50 million people (and rapidly growing) taking advantage of 
broadband Internet access, Internet-based services and applications 
have a promising year ahead. One class of applications, allowing for 
the transmission of voice communications, will continue to grow in many 
shapes and sizes. This application comes in many flavors, but has 
garnered a great deal of attention because it allows voice 
communications among users, much like traditional wired or wireless 
voice networks. Some of these Internet voice services will be delivered 
over the public Internet; others will use Internet protocols over 
private networks to reach end-users. Some of these services will be 
Internet-only applications; others will allow Internet callers to reach 
out to users on the public switched telecommunications network. Some 
will be pay services; others will be free or simple add-ons to other 
types of applications. All, however, will enhance our ability to 
communicate with each other.
    Indeed, Internet voice services are evolving in a number of 
different ways. Some providers, like Vonage, are offering Internet 
voice services using the public Internet and a consumer's broadband 
connection to allow consumers to make calls to other broadband Internet 
users or to people using traditional plain old telephone service. Many 
cable operators, on the other hand, are offering IP-based voice 
services using their private digital networks to interconnect with the 
PSTN and not using the public Internet at all to transmit voice 
services. These types of voice services typically charge a monthly fee 
for a variety of different calling plans and features.
    We are also seeing the development of computer to computer voice 
services. Free World Dial-up, for instance, employs peer-to-peer 
technologies to allow those using the service to transmit calls to one 
another. This particular computer-to-computer service is free to users. 
Internet voice capability is also built in to other services. For 
example, instant messenger software applications generally provide for 
voice add on features. Microsoft's Xbox Live gives those playing 
broadband video games the ability to talk to each other during play.
    As you can see, we are entering a dynamic space in the evolution of 
Internet voice services and applications. As more people begin to take 
advantage of these new and exciting competitive voice offerings, we are 
starting to see substantial consumer and economic benefits of the 
digital migration emerge.
III. Benefits
    As the digital migration continues in earnest, increasing numbers 
of Americans are taking advantage of the increased choices, lower 
prices, innovation and personalization that broadband Internet services 
and applications offer. It is noteworthy that these benefits are 
emerging almost completely in the free market environment.
    IP-enabled communications are unleashing a torrent of innovative 
services and applications from many more sources than users of 
traditional communications services are accustomed to. In the voice 
space, for example, hungry, free radical entrepreneurs and software 
developers are taking advantage of extremely low entry barriers to pour 
investments into service offerings to take on established telephone 
industry giants. These industry giants are not, however, sitting still. 
Cable operators and traditional local and long-distance telephony 
providers are moving to IP-based voice products as a cheaper, more 
efficient way to deliver local and long-distance voice services to the 
public. The result is a degree of choice for consumers never before 
seen in the residential voice market. More Americans have more 
providers to choose from, more services to choose from and more devices 
to communicate with than in any time in American history.
    With increased choice and competition come the additional benefits 
of lower prices and greater innovation. The same forces at play that 
are attracting entrepreneurs to enter the Internet voice business are 
allowing these and more established providers to offer consumers 
cheaper voice services. Lower entry and transaction costs are allowing 
Internet voice services to be offered at low prices, in some instances, 
for free.
    The benefits do not end with competition and innovation for 
American consumers. Our economy is also seeing great gains from the 
digital migration broadly and Internet voice services specifically. As 
firms, new and old, continue to invest in broadband Internet networks 
and services and applications, we are seeing the creation of more 
technology focused jobs in our economy. Small businesses are using new 
technologies, such as Wi-Fi and WiMax to provide competitive last mile 
broadband Internet access. Not only are small businesses and 
entrepreneurs entering communications markets, small businesses are 
using broadband technologies and services to lower the costs of 
business (i.e., using Internet voice services to lower yearly phone 
bills), to enter new markets and more efficiently and effectively 
conduct commerce with suppliers and consumers around the globe.
    As these businesses spur economic and job growth through investment 
in broadband Internet services and applications, we are seeing durable 
productivity gains spreading throughout our economy. A recent Lehman 
Brothers report suggested that by 2007 investment in information 
technology will allow for productivity gains that will bring $140 
billion in savings to six major economic sectors.
    These consumer and economic benefits are not, however, guaranteed. 
While Internet voice services offer great potential, they are also 
extremely easy to establish abroad. If we do not create the proper 
regulatory climate in the United States, it is quite possible our local 
calls will be routed through Canada and Mexico at cheaper rates, rather 
than through Kansas and Montana. We must adopt the right policies to 
foster investment, innovation and competition.
IV. Proper Policies
Economic Regulation
    The development and success of the Internet has been a result, in 
part, of our Nation's desire to maintain its minimally regulated 
status. Congress was mindful of the danger of regulating Internet 
services. Indeed, in section 230 of the Communications Act Congress 
enunciated a national policy to promote the continued development of 
the Internet and other Interactive computer services and to preserve 
the vibrant and competitive free market for these services ``unfettered 
by Federal or State regulation.''
    We will remain vigilant. As I recently described in a speech at the 
University of Colorado at Boulder, I believe that government and 
broadband providers should strive to achieve four key Net Freedoms: (1) 
Freedom to Access Content: Consumers should have access to their choice 
of legal content; (2) Freedom to Use Applications: Consumers should be 
able to run applications of their choice; (3) Freedom to Attach 
Personal Devices: Consumers should be permitted to attach any devices 
they choose to the connection in their homes; and (4) Freedom to Obtain 
Service Plan Information: Consumers should receive meaningful 
information regarding their service plans. These freedoms will preserve 
consumer choice, foster competition, and promote investment in 
infrastructure and Internet applications. If adhered to, they will also 
eliminate the need for much of the anachronistic common carrier 
regulatory regime.
Social/Public Safety Policies
    There are at least four key areas where government should and must 
be engaged for the good of consumers: universal service, CALEA, E911, 
and access to people with disabilities. At our February meeting, the 
Commission adopted a Notice of Proposed Rulemaking to look at the 
issues surrounding these applications. We are working with our 
colleagues elsewhere in the Federal government and at the state and 
local level to develop a sound policy framework. We are focused on 
addressing and advancing our social objectives of universal service, 
public safety and 911, homeland security and access for people with 
disabilities. In addition, the Commission is working hard to reform our 
country's inter-carrier compensation regime.
    Before addressing each of these issues in more depth, I want to 
echo the Commission's recent announcement that we will be hosting a 
series of Solutions Summits in the coming months as we move forward 
with the IP-enabled communications proceeding to quickly address 
important social and public safety policies. The first of these summits 
will be held at the FCC on March 18, 2004 and will address 911 and E911 
issues. I look forward to using these working sessions to develop real 
answers to these challenges thereby allowing these new technologies to 
improve our ability to achieve our policy goals.
Universal Service
    IP communications represent a real opportunity to advance our 
universal service objectives, including ubiquity and affordability. New 
technology can reduce the costs of providing supported services, 
particularly in the higher-cost areas of our country. The introduction 
of technologically advanced, lower-cost networks also can have a 
positive effect on the high-cost fund over time, thereby limiting the 
burden our policies place on consumers.
    Nonetheless, as we progress further in our digital journey, we and 
our colleagues at the state level will have to confront some 
significant challenges in the short and long term. Fully recognizing 
this challenge, the FCC is currently reexamining nearly every aspect of 
the universal service program, as I indicated in October, to ensure 
that the program is administered as efficiently and effectively as 
possible and that the overall program remains sustainable.
    I assure you again today that I remain committed to the enduring 
goals of universal service. This digital migration cannot be complete 
or successful if there are portions of our population left behind. 
Voice service availability to all Americans will continue to be vital 
to the success of our Nation. I recognize that IP services ride atop a 
physical layer that, in many parts of our country, is still expensive 
to build and maintain. True to our Congressional mandate of comparable 
prices and comparable services, the Commission must continue to be 
sensitive throughout the digital migration to the rural areas of our 
country where the cost of service remains high and the march of 
technology can sometimes lag one step behind.
    Some difficult times can be expected as competitive policy 
continues to erode implicit subsidies that skew competition while 
replacing them with explicit support mechanisms that are sustainable in 
a competitive environment. Nonetheless our universal service goals and 
our commitment to obtaining them remain unwavering. Our goal is to 
foster a system of universal service that is fair to all competitors in 
an increasingly competitive marketplace. Through our various 
proceedings and in cooperation with Congress and the states we will 
adopt the universal service fund to meet the progress of technology.
CALEA
    Just as the near exponential rate of technological evolution has 
challenged the Commission, it has challenged law enforcement. New 
services like voice-mail, call forwarding, and mobile phones have 
required industry, the Department of Justice and the Federal Bureau of 
Investigations to work in concert with the Commission to ensure that 
the needs of law enforcement are met in a way that is not overly 
burdensome or too costly for consumers. So again it is with Internet 
voice services. It is our understanding that law enforcement will soon 
be filing a petition requesting that the Commission commence a 
proceeding to help set standards by which the success of CALEA with 
respect to earlier services can be extended to Internet voice services. 
The Commission will devote the necessary resources to expeditiously and 
responsibly complete this task. In the interim, it must be emphasized 
that carriers, the law enforcement community and the Commission are 
working in partnership to ensure that law enforcement retains access to 
the information they have now and to ensure that they have the tools 
they need in this ever changing environment.
911
    Internet-based services provide a tremendous opportunity for 
improving our E911 systems. The existing 911 system is vital in our 
country, but limited functionally. In most systems, it primarily 
identifies the location from which the call was made. But an Internet 
voice system can do more. It can make it easier to pinpoint the 
specific location of the caller in a large building. It might also hail 
your doctor, and send a text or Instant Message alert to your spouse.
    Our 911 potential is limited only by the infrastructure available 
and the creativity we employ in developing 911 applications. Already at 
least 10 Internet voice providers have entered into an agreement with 
the 911 association NENA to extend 911 capabilities to Internet voice 
services. The public safety community has been an excellent partner in 
this endeavor already and I look forward to additional progress at the 
Summit on March 18, 2004.
Access to people with Disabilities
    Technology has consistently permitted Americans with disabilities 
to become more integrated and productive in their daily lives. We will 
not allow Internet-based services to fall short of this precedent. 
Given the Commission's strong record of action in this area and 
Congress's great leadership in passing the ADA, I am confident that 
industry will respond appropriately to ensure access by individuals 
with disabilities. I am pleased to announce that our Solution Summit on 
access issues will be held on May 7, 2004.
V. Recent FCC Actions and Next Steps
    Against this backdrop, the Commission released a comprehensive NPRM 
to examine how best to address VoIP and granted the Petition filed by 
pulver.com at our Open Meeting on February 12, 2004.
    In pulver.com, the Commission continues to encourage investment and 
innovation in the case where the voice application rides entirely over 
the Internet in digital form. Pulver's FWD allows users of broadband 
Internet access services to make VoIP or other types of peer-to-peer 
communications directly to other FWD members, without charge. In this 
petition the FCC looked closely at the FWD offering and concluded that 
it clearly fit the information service definition and could not be 
categorized as a telecommunications service. The record was nearly 
unanimous on this outcome.
    The NPRM takes up each of the important policy areas addressed 
above. The NPRM also examines some of the important definitional 
debates surrounding Internet voice services, with a view to existing 
definitions and how those definitions might apply to today's changing 
communications environment. Once the NPRM is released, the Commission 
will build a record to determine where best to draw the line between 
the various flavors of Internet voice services, and to begin to 
determine how the social and public safety objectives can best be 
achieved when using IP-enabled communications. A full and robust record 
will pave the way for the Commission to adopt policies that facilitate 
economic growth, a more secure homeland, and preserve and advance 
universal service and access to people with disabilities.
    I am pleased that we have made the progress that we have thus far 
and taken the first, bold step of granting the pulver.com petition and 
issuing the NPRM and I thank my fellow Commissioners for their hard 
work in getting this far. But our work is not done. Still other 
petitions remain before the Commission that involve different flavors 
of IP-voice services, with different levels of digitization and 
interaction with the public switched telephone network. Some cannot 
operate without use of the PSTN and offer little in the way of 
innovation for end consumers. Others involve the ability to bridge the 
old and the new. Each will have to be dealt with under its own merits, 
faithfully applying applicable statues.
    Among the open proceedings is a petition for declaratory ruling 
filed by AT&T regarding the applicability of access charges to 
particular types of VoIP services. I wish to emphasize that nothing in 
the NPRM discussed above will preclude the Commission from addressing 
pending petitions before the culmination of the rulemaking. As my 
colleagues work to reach their own decisions in the still pending 
proceedings I want to assure you that I am deeply concerned that 
telephone rates in rural areas remain affordable. I fully recognize the 
gravity of any decision that might cause a precipitous decline in 
access charge revenues and a concomitant impact on universal service.
    All of these decisions illustrate the importance of reforming our 
intercarrier compensation regime. We understand that the industry is 
hard at work to develop such a plan. I implore them to develop a 
proposal promptly. We have an open docket and I hope that the 
Commission will adopt a combined order and further notice of proposed 
rulemaking later this year. This item would take significant steps in 
the direction of a unified regime by providing immediate guidance on 
carriers' transport and interconnection responsibilities, and by 
soliciting comment on the legal and economic issues that must be 
addressed as part of a transition to a more rational and sustainable 
intercarrier compensation regime.
    While many industry players have divergent views on the exact 
solution, nearly everyone agrees that the current system is broken. The 
Commission's intercarrier compensation docket provides an excellent 
opportunity to work together with all industry segments to replace a 
system built in a monopoly environment with one that is designed for a 
competitive market yet still sustains universal service. That policy 
decision will be essential if our Nation is to tap the full potential 
of IP-enabled services.
VI. Conclusion
    In examining voice over IP, we should begin with the non-regulation 
of the Internet as the first article of faith because limiting 
government intrusions--both at the Federal and state level--maximizes 
the potential for innovation and increases opportunity for the Nation 
as a whole. There are clear exceptions to this rule--four of which are 
discussed above--where the security or well being of the Nation and the 
consumer will require our intervention. But we must be sure that such 
exceptions do not swallow the rule. Without a doubt, VoIP will 
revolutionize the way consumers work and play. The choice for us as 
policy makers is to create the kind of environment where these changes 
can flourish.
    I would like to thank you, Mr. Chairman, for calling this hearing, 
and I look forward to working with you and other members of the 
Committee, my state colleagues, industry and my fellow commissioners on 
these challenging and critical issues.

    The Chairman. Thank you, Mr. Chairman.
    Do you have any response to Senator Alexander's testimony?
    Chairman Powell. Well, Senator, for 7 years I have sat in 
this well and been reminded not to do the legislature's 
business, and I think I will take that advice.
    [Laughter.]
    Chairman Powell. I think our founding fathers were wise to 
vest those questions in the legislature of taxing authority. 
But I will say a couple of things.
    The federalism system has often recognized the importance 
of the interstate commerce clause, and as well, the importance 
that certain economic activity, in order to prosper, often has 
to be regulated at Federal and interstate levels. And I'm not 
suggesting--I'm not going to weigh into the tax debate 
specifically, but I do think the federalism scheme includes and 
recognizes that sometimes technologies or commercial systems do 
begin to pour past their traditional jurisdictional boundaries.
    I also would say that I'm not entirely clear that whatever 
decisions we make by VoIP will particularly undermine what 
you're attempting to do, one way or the other, in terms of the 
locus of the tax question. As I understand it, and as Senator 
Allen emphasized, the focus is on Internet access 
functionality. The key to understanding voice over Internet is 
to understand it as content, as an application, as something 
you use the Internet to go get and access. And to that extent, 
one could argue that, no matter how we classify it in the 
communications accents, where ever--you know, if you choose to 
focus on Internet access for taxation purposes, it's unaffected 
by our decision.
    But I leave the harder questions to the Committee and to 
the Congress.
    The Chairman. Throughout our history, there has been 
progress in communications and transportation and other forms 
of modernization. There was a time when the stagecoach stopped 
in every town. And then the railroad stopped in fewer towns. 
And now airliners fly over them. Is there a comparison to be 
made about these changes in what most of us understand have 
taken place throughout history in a comparison about what voice 
over IP is doing?
    Chairman Powell. Absolutely. I think you got it right, in 
terms of the proper analogies are really the development of 
transportation systems. So much of communications takes it 
history from transportation systems--the notion of what common 
carriage is. We even use some of the same lingo that we used 
about railroads. The ``public interest standard'' comes from 
the railroad industry.
    And I do think that you just can't ignore the changing 
character and nature of communications systems just because 
they're inconvenient or they're challenging or they're 
difficult. We can talk about jurisdictional lines all day, but 
to describe the Internet in any terms other than a fantastic, 
global, end-to-end, network that is porous--laughing at 
brightly drawn jurisdictional boundaries developed by lawyers 
and legislators, I think, is to bastardize what the Internet 
is. And I think we can reach our public goals without really 
shoving it into a character that it doesn't have.
    The Chairman. So using that logic, if that comparison is a 
valid one, then we should be having some kind of revenue flow 
to the towns that are flown over by airliners now, rather than 
the railroads or the stagecoaches that go through them.
    Chairman Powell. One could make a similar argument, yes.
    The Chairman. The reason why I tried to put it in those 
terms is, I don't think most Americans understand this 
technology. And to say that somehow a phone call that is 
generated one place and crosses numerous jurisdictions, as 
Senator Wyden said, at the speed of light, it seems to me to 
want to continue to try to get revenue from that, when actually 
this is going to relieve people of an enormous financial 
burden, as far as the cost of communicating with one another is 
concerned. What is that benefit?
    Chairman Powell. Well, I think those benefits are 
tremendous. When you really begin to look at the economics of 
these networks, we're looking at the potential for dramatically 
higher innovation, greater choice for consumers, much higher 
value----
    Many Internet service providers--and I would submit to you, 
not just because of the avoidance of regulatory fees or taxes, 
but because of the beauty of the network--are offering 
consumers all-you-can-eat bundles that are higher and better 
values than what we've been able to produce for a hundred 
years, including a heavy system designed to subsidize those 
rates. To look at services in the marketplace today that are 
unregulated, offering $14.99 voice service, or up to $34.99 
voice service, just to use Vonage's range, that's an amazing 
accomplishment before anybody's come to help them figure out 
how to do that.
    And I think what's more important is the innovation that 
consumers crave, the personalization that consumers crave. Just 
as we, on our cell phones, like to choose our ring tones and 
our colors and our voice lists and our handsets, we are craving 
that same kind of personalization and innovation in all of our 
communications services. And I think that's----
    The Chairman. How do you squeeze in, now, in this 
deregulated scenario--or unregulated, in some respect--the 
requirement for 911 service, facilities for Americans with 
disabilities, all of those sort of fundamental services that we 
owe to certain groups of Americans?
    Chairman Powell. Yes, the first thing I----
    The Chairman. Or certain occasions that may----
    Chairman Powell. Sure. The first thing I would say about 
that is, there are challenges, but the opportunities 
potentially far dwarf the challenges. For example, the 911 
system, we absolutely should ensure as voice becomes a 
substitute for traditional services. But why stop there? The 
potential for first-responder systems that are much more 
sophisticated and capable live in IP. We're listening to people 
talk about a service where I call 911, and as soon as the 
dispatcher gets it, it assembles my medical records, it sends 
an instant message to my wife's cell phone, it notifies my 
doctor. We could have a system in this country, using voice 
over IP, that would dramatically improve, not just maintain, 
our 911 service.
    So one of reasons we're excited about our solution summit 
is, for the first time ever we'll get to work on these issues 
from the ground up. We'll be able to work with the innovators 
and the industry and policymakers at the early stages. Unlike 
the wireless system, where we tried to retrofit 911 on an 
existing system, we'll be able to talk about it as a community 
from the bottom up. And I think we should give that community 
an opportunity to develop technical innovations and technical 
solutions through these partnerships before we're too quick to 
insist that we know exactly what 911 looks like, it should be 
the exactly the same as it has always been, lest we miss the 
opportunity for it to get better than it ever was.
    But we should have no secret about the fact that if this 
service becomes a complete substitute to the traditional 
services, you'll absolutely want to ensure and be able to 
represent to families and communities that if you need 
emergency help, you're going to get it.
    The Chairman. Thank you very much, Chairman Powell.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Chairman Powell, thank you, and thank you for your 
involvement in this, dating back to the letter you sent me 
outlining your general views on this.
    As you heard, Senator Alexander, in response to my 
question, said that he thought it was appropriate that state 
and local authorities have taxing and regulatory jurisdiction 
over voice-over. Now, given that, I think it's important to 
note that a 1999 study by the Committee on State Taxation 
found, nationwide, the average tax rate on telecommunications 
services was 18 percent, three times higher than the rate on 
all other businesses. Also, telecom providers have to file more 
forms. The list of challenges goes on and on. Do you think that 
applying these kinds of tax and regulatory burdens on VoIP is 
going to hinder the growth of broadband?
    Chairman Powell. Yes, unquestionably. I recognize that any 
responsible government has a need to raise revenue for general 
purposes, and even sometimes for specific purposes associated 
with the service, and I think all of that probably needs to be 
rethought as communications services change dramatically.
    But we shouldn't trivialize the degree to which the 
additional costs and impediments to investment and innovation, 
particularly at a nascent stage, are impacted by either--there 
are only two ways, right? Raising costs or diminishing demand. 
And then you don't have a market, you don't have an 
entrepreneur with an opportunity.
    And I think this is something, Senator Wyden, you and I 
have talked about that I think people shouldn't trivialize. 
Sometimes the preference for the heavy regulation is perceived 
as helping the little guys to protect the big guys. I would 
submit to you, regulation, in this case, is the big guys' game.
    If you ask the entrepreneurs you're going to talk to at the 
next panel, their fear is they don't have Washington offices 
with 35 attorneys in them dedicated to the FCC and dedicated to 
this Committee. They don't have the infrastructure in 50, 51 
jurisdictions to go to PUCs and file certifications and tariffs 
and rate-making proceedings and accounting proceedings.
    So you're talking about a huge order-of-magnitude increase 
in what it would take for them to successfully be in business, 
and I personally believe that would benefit large incumbency 
more than competition and entrants.
    Senator Wyden. I also am concerned that under the Alexander 
approach, VoIP providers could just move offshore. If you look, 
for example, at the fact that Internet services are global, 
couldn't offshore VoIP providers make themselves accessible to 
U.S. Internet users, and essentially provide the service that 
way?
    Chairman Powell. Yes. I actually think this is a very 
critical point, you know, and I lecture my staff, ``Be cautious 
about futility.'' When you have something that you think is 
dependent on a physical location, you better realize there's no 
reason why that carrier has to be in your market.
    You know, it's interesting, the cover of Fortune magazine a 
few weeks ago had two gentlemen on the cover, and it said, 
``These pirates invented Kazaa and almost brought down the 
music industry. They're trying to do the same thing to phone. 
Be interesting to talk to them, if you can find them.'' And we 
did, and we found them in Estonia. And they are the developers 
of a system called ``Skype,'' which is a voice over Internet 
protocol system.
    Vonage doesn't have to be in New Jersey. Nobody has to be 
in any particular location. These services can reach consumers 
from any corner of the globe. And I think, therefore, the 
United States has to think about not making its regulatory 
environment and its state economic development environment so 
hostile that we drive more jobs and more services offshore, or 
to other locations.
    A major CEO of a company told me--I asked him, ``How long 
would it take--a major company--to offer your voice over IP 
services from somewhere else, perhaps in Europe?'' He said, ``I 
could move the whole thing in 3 days.''
    Senator Wyden. One last question, if I might, Mr. Chairman. 
VoIP and universal service, I think, is going to be 
particularly contentious as it relates to rural areas. You've 
given a number of speeches since that letter to me, essentially 
saying VoIP is going to reduce the cost of providing phone 
service, and that certainly is going to have ramifications for 
universal service. I think it is very likely that that will be 
the case in urban areas. But I've been hearing from a lot of 
rural folks that they're very concerned about how it's going to 
affect them, because very often they have transmission 
facilities in tough terrain, with scattered populations.
    How would you, at this point, suggest that we proceed to 
make sure we tap the potential of voice-over, while, at the 
same time, being sensitive to these rural areas, who I think 
are going to be presented with some different issues than we'll 
see with respect to universal service in urban areas?
    Chairman Powell. Yes. And we should always be cognizant 
that their problems are, sort of, unique and have significant, 
sort of, intractability to them. But a couple of thoughts about 
that.
    First of all, I think it's important to note that rural 
companies all over this country are just as interested in 
bringing advanced services to their constituents as anybody 
else. I just got back from two and a half days in rural Kansas, 
and many small companies, with tele-density of one home or two 
homes in a mile radius, have brought broadband to their 
consumers and are offering their services, and they're not 
afraid of the applications themselves.
    What they're really pointing out is a problem that VoIP 
isn't causing, but is just another exacerbation, which is 
intercarrier compensation. We have a system in the United 
States that has been built in pieces over decades, in which 
different kinds of uses of the local NECR are compensated 
differently. If you use a local ILEC's network, and you're a 
wireless provider, you pay one set of fees through one 
compensation mechanism. If you're a long-distance company, you 
pay what we call access charges, and you pay a significantly 
higher amount for different kinds of services.
    What's happening is, as we get to a-packet-is-a-packet 
world, the compensation system is going to have to be revamped 
and harmonized so that market entry is not an arbitrage, but 
that everybody's being fairly compensated for use of the 
network. And I think if we fix intercarrier compensation 
correctly, we will take away the significant threat to rural 
America or the rural companies that are most worried about 
this. What this boils down to for them, almost singularly, is 
access charges. And we all know that access charges need 
dramatic and significant efforts at reform, and that's where we 
should focus that effort, and we will.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Senator Sununu?
    Senator Sununu. Thank you, Mr. Chairman.
    With respect to that last answer, are you suggesting that 
you believe that all data should be treated the same way for 
the purposes of intercarrier compensation?
    Chairman Powell. I do ultimately believe data should be 
treated the same. I just think it's a tortuous path to get 
there.
    Senator Sununu. What impact does that have on the current 
exemption for enhanced service providers?
    Chairman Powell. Well, I think that ultimately that is an 
exemption from the existing system of distortions, and I think 
one of the reasons that we're biased toward these kinds of 
exemptions when we have innovations, seriously, is we don't 
want to subject them to the tortures of the distorted system.
    I think that if you actually harmonize the system, and 
people paid their fair share--I haven't met many companies that 
don't understand and respect that if I use somebody else's 
infrastructure, I don't get it for free. The thing that they 
are frightened of and attempt to avoid is, they don't want to 
be sucked into the really distorted, highly inflated system of 
compensation that's been used before. So a lot of times, like 
in this case, when Internet comes along, nobody wants to 
subject them to access charges, so we create an exemption. When 
the exemptions start overtaking the rule, what you should stop 
doing is making exemptions, and start fixing the original rule 
in the first place, and I think that time has come.
    Senator Sununu. I'm very mindful of the fear that can 
sometimes accompany the phrase, ``I'm from the Federal 
Government, and I'm here to help you.''
    [Laughter.]
    Senator Sununu. But bearing that in mind, is this a case 
where legislation might be helpful to the FCC, for us to take 
legislative action? Is that a plus or a minus in your mind?
    Chairman Powell. If done well, it's a plus. And I will tell 
you this, whether it's now or in the near future, it is my 
responsibility, as your expert agency, to tell you, I think the 
days are numbered on the way we're doing this under the current 
statute. I do believe there is going to have to be a statute in 
the future that recognizes these dramatic technical changes and 
gets us out of the buckets of the 1996 Act.
    One of the reasons everything is hard at the FCC right now 
is not because we don't have good ideas of what to do. The 
problem is, once I think I know what to do, we spend hours, 
days, years in courts trying to figure out how to get there 
through the meanderings of the statute. And because there are 
always gray questions and there are always difficult judgments, 
it means there'll be 2 and 3 and 4 years of litigation 
subsequently arguing, you know, we interpreted it wrong, and 
the inherent remand. So, yes----
    Senator Sununu. Are you suggesting that you're not as 
enamored of the 1996 Act as Chairman McCain is?
    [Laughter.]
    Chairman Powell. Well, he's probably less enamored with it 
than me, but----
    Senator Sununu. Industrial policy. I think Senator 
Alexander spoke about some of the current trends in regulation, 
and some of the legislative concepts and proposals out there, 
and suggested that they were acts of industrial policy.
    In your testimony, you talked about replacing monopolies, 
you referenced Section 230 and quoted some language--I'm sure I 
didn't write it down correctly, but about promoting competitive 
environments and free markets. I think the word ``unfettered'' 
was part of the Section 230 language you quoted. Are those 
trends toward deregulation destroying monopolies, or creating 
free markets, acts of industrial policy?
    Chairman Powell. That's the softball we dream of. No.
    [Laughter.]
    Chairman Powell. Absolutely not.
    Senator Sununu. It may be a softball, but I think it's a 
very important distinction to make, because the language that 
we use is extremely important. And simply because we don't like 
the kinds of changes to incumbents that you were talking 
about--incumbent regulatory structure, incumbent tax base or 
revenue base, the incumbent businesses that are all going to be 
affected, potentially, by this replacement of monopolies or 
this de-regulatory environment--I think it's wrong to 
characterize that as an act of industrial policy.
    With regard to broadband deployment, do you think that the 
existence of a strong or healthy market for VoIP services will 
enhance the likelihood that broadband would be deployed? And 
how might that happen?
    Chairman Powell. Absolutely. You know, in preparing for 
today, I spent some time looking through every analyst's report 
I could get my hands on and looking what the market's done in 
the last three or four quarters. And for two and half, 3 years, 
we've all sat here and talked about how sad the telecom sector 
was and how far it had fallen, and how nobody was really 
winning. And in the last 3 to 4 months, we've seen a dramatic 
stimulus in capital expenditure as companies start to have to 
buy voice over IP equipment. We've seen the salvation of 
companies like Cisco, who have gone from the highest heights 
down to their back, who have transformed themselves into the 
VoIP space and are back. We've seen the stock rise of these 
companies. We've seem some of our most cherished assets, 
equipment service providers, like Lucent and Nortel and Cisco, 
who had stock down in the pennies, rebounding as people begin 
to flow money back into the sector for growth and economic 
opportunity. We've seen the potential for reversing job loss in 
the sector.
    So, you know, when people cite numbers about what the costs 
might be, I often think about what the lost-opportunity costs 
will be for a sector, an economy, that continues to stop 
investing in infrastructure and innovation, that keeps firing 
people, continues to fall in capital investment. That is more 
threatening to our Nation's prosperity than anything the 
regulations are about.
    Senator Sununu. Thank you.
    The Chairman. Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman.
    And thank you, Chairman Powell, for your go-slow approach 
on this technology. I think people, for all the excitement 
that's been generated today about voice over IP, I think people 
fail to realize that there are probably only about 200,000 
people who are using voice over IP as their sole telephone 
communication system. So while we're seeing some great 
enterprise deployment, and that's about to become more rapid, 
this is still very, very nascent technology. The fact that, as 
I said earlier, you can't connect to each other with other 
systems, I think, makes the growth of that somewhat problematic 
as we move forward.
    I have a question. You commented on the efficiencies of 
this packet technology, versus the circuit switch. Do you have 
any doubt in your mind that the incumbent telcos are going to 
switch over to this technology?
    Chairman Powell. Oh, no, no. They--not only are they going 
to; they have to. I mean, they have to.
    Senator Cantwell. Right.
    Chairman Powell. The key is, the future of all 
communications is whether you have an infrastructure that'll 
allow you to innovate into the digital applications of the 
future. If you're not, you're going to--my view is, you're 
going to get crushed.
    Senator Cantwell. So the question then becomes, with the 
incumbent player telecommunication companies who are going to 
move to this technology, the new emergent broadband 
heavyweights, cable companies, to the hybrid voice over IP 
solutions, to the pure voice over IP solutions, probably the 
least developed of the four, really it's a battle about how 
fast everybody's going to move to adopt this new technology. So 
isn't the question then, How do we maintain an open environment 
for competition during this time period so that that 
competition and deployment can happen and we can see who wins, 
as far as solutions? Because, ultimately, the consumer wins.
    Chairman Powell. I do agree with that, yes.
    Senator Cantwell. The one challenge I think that we end up 
having is, as this battle takes place, how do you have open 
access and interoperability standards? The first, I'd like your 
comments on that. Obviously, if--not to pick on any one cable 
company, but just for example--say AT&T became a dominant 
player in this area and ended up only having limited access, 
the only VoIP service you could get would be the AT&T bundled 
service. Do you think that's a problem?
    Chairman Powell. Oh, I think if that happened, that would 
be a problem. You know, I've thought a great deal about that 
and, a few weeks ago, at the University of Colorado, gave a 
speech about the importance of Net freedom, and laid out some 
basic principles that I think would guide my thinking and the 
Commission's thinking, and they included principles such as, 
consumers should be able to access broadband content of their 
choosing, they should be able to attach devices of their 
choosing. This has often been debated in some forums as the 
Net-neutrality position, although our view has some variants on 
it. And I think that's very important. Because I think if we 
see lots of broadband platforms competing for consumer services 
and access--we have a lot to be hopeful about there, compared 
to the past--and you have some general principles about, ``If 
it's out there on the Internet and I've paid for my connection, 
I'm generally permitted to reach it and use it,'' then I think 
you have a really rich engine of competition and innovation.
    Senator Cantwell. So you would see it similar to what the 
AT&T/AOL deal was, in which you had to provide access to a 
variety of ISPs or something of that nature?
    Chairman Powell. Not necessarily. There are two things that 
are bantered around public policy today about access. One is 
that no matter who your infrastructure provider is, the 
consumer can go anywhere they want on the Internet. Then 
there's this--the idea that you should allow physical 
interconnection to other carriers, which is what the AOL/Time 
Warner question was about.
    I've always been slightly more dubious of that second 
proposition as--not for the concern that it raises, but 
whether--the effectiveness of that approach.
    I have watched us do the interconnection to the existing 
telephone system for many years now, and the ballooning 
regulatory structure that grows up around that, and the 
difficulty of stewarding it, and the power the incumbent has, 
in terms of interconnection, I think is a real challenge. A lot 
of people describe it, as Steve Case did back then, as, ``Oh, 
it's just a light touch.'' But we--it's called Section 251 in 
the telephone system, and it has been anything but light over 
the 8 years that we've stewarded it.
    The issue--and I think you see more technology companies--
like I know Microsoft has, sort of, moved away from that 
position, moving more toward the free--the open-access 
provision--is because there's a recognition that when you have 
IP and you have Internet-based, you can offer these services 
from different locations, virtually; and as long as the pipe 
provider is not permitted to choke off or refuse to allow those 
bits through, you can still get some of those same--that same 
open architecture capability that you crave.
    Senator Cantwell. Could I also quickly get your comments on 
this issue of interoperability? Because as it exists today, 
even though everybody uses SIP as a protocol to communicate 
with, I'm sure that a lot of people have--I don't know, but I'm 
sure we'll hear from various panelists--but I'm sure most 
people have a proprietary protocol that communicates with SIP, 
and, ultimately, we'll need a system in which everybody has 
interoperability. Do you think that that's best driven by the 
private sector in getting a standard, as opposed to us, like on 
HDTV or----
    Chairman Powell. Yes.
    Senator Cantwell.--coming in. So if you could comment on--
--
    Chairman Powell. I think you answered the question with 
HDTV.
    I think that the Internet community and the high-tech 
community, while there are certainly other examples, have done 
a very powerful job, over the existence of the computer and 
software and the Internet, of demonstrating the power of the 
market and their self-interest in creating standardization. And 
not that I don't think you could envision a role for government 
one day, but I'm always--I'm generally not a fan of the idea at 
the earliest stages, when nobody even knows what SIP is, or 
while things are unsettled--I think standards are something you 
compete and innovate, as well. And you want the best standard, 
and you want the most innovative, and you want the most 
quality-oriented. And if the government, kind of, comes in, 
particularly really early, and says, ``Oh, no. We're going to 
decide what it is,'' I think that the history of that is pretty 
poor around the world. I've seen it done in other countries, 
and they regret it. It often becomes too cumbersome, it doesn't 
evolve.
    In this country, we had balkanized e-mail systems for a 
long time--in its early period, and there's a market reason why 
eventually people want that interoperability, and the e-mail 
system developed interoperability protocols without 
specifically a government agency doing it. I would hope, you 
know, similar things would happen with respect to voice.
    But I would agree with you that for any network like that 
to reach its full value, full interoperability is essential, 
and I suspect they realize that, too. I don't think Vonage or 
8x8 wants to tell its customers, ``You can't ever call your 
neighbor if they're on the other system. I mean, I doubt anyone 
could secure enough of the Nation's 300 million people to make 
that strategy particularly viable.
    Senator Cantwell. Yes. I would just add, quickly, Mr. 
Chairman, I think that that is where, you know, we should tie 
our future look at this industry as we move toward 
interoperability. But we have hundreds of groups and 
organizations working on it now, so we're a long way before 
this becomes a standard by which many people can deploy and 
communicate, so why start regulating it?
    Chairman Powell. I would agree.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman. Senator Allen?

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. Thank you, again, 
for having this most timely hearing.
    Chairman Powell, let's get these definitions straight here 
and then get into--I'd like to question you on how we can 
actually enforce this, and how that might could have an impact 
on jobs here in this country.
    First, the question here is voice over IP and whether it's 
a telecommunications service, or not. That issue has not yet 
been determined completely by you all. But even if voice over 
IP is determined to be, depending on how it--all the different 
configurations--even if voice over IP were to be determined to 
be a telecommunications service, it could not be used for 
Internet or to provide Internet access. Is that your 
understanding?
    Chairman Powell. Yes, it would seem to me that the 
touchstone is, ``What's the definition of Internet access?'' In 
the Telecom Act, there is a definition in, I think, Section 
151(d), and as that description reads, which is what I'm 
familiar with, I don't think anything about what we're doing 
affects that at all. That definition speaks very clearly about, 
you know, separating the difference between the access, and 
physical layers and such, from applications, contents, and 
services. And the way I, at least, look at the development of 
voice over IP, it generally puts it outside--regardless of what 
we say it is in telecom statute--seems to me to put it outside 
of what you're specifically trying to reach.
    Senator Allen. Right. And as I understand, Mr. Chairman, in 
reading your testimony here, you look at voice over IP more as 
an Internet application--it's an application, as opposed to an 
access.
    Chairman Powell. Yes. I mean, there is no question, as a 
technical matter, that is what it is.
    Senator Allen. Now, since voice over IP is an application, 
as opposed to access, that solves the question on definition of 
what's an access tax versus taxes on applications. Then there 
are a variety of applications for broadband.
    Now, if--and, really, voice over IP essentially is a 
software application provided over the Internet, broadband--
now, could a company theoretically provide voice over IP 
outside this country?
    Chairman Powell. Oh, absolutely. And are right now.
    Senator Allen. All right. And so in the event that they 
could--let's assume that the regulations--I want to use your--
``this killer app here, unfettered by state or Federal 
regulations''--if they were more fettering, if they were more 
burdensome, could those voice over IP applications be--if they 
could be provided overseas, how would you have any jurisdiction 
or ability to affect those?
    Chairman Powell. You wouldn't. And the critical point that 
you're making, which I think comes up whether we're talking 
about taxing, whether we're talking about law enforcement, 
whether we're talking about a lot of our goals, we have to be 
very, very careful, because if you're going to regulate on the 
assumption you can physically cap something where it is, you're 
making a serious mistake.
    The last thing I would want to see this country do is 
create a hostile regulatory environment, a hostile technical 
environment, you know, an onerous enforcement regime, which 
would make setting up shop in other parts of the world more 
attractive, and taking with it the revenue associated with that 
company, taking with it the jobs associated with that company, 
taking with it the company that you can go and serve a subpoena 
on for catching the bad guys, because now he lives in a 
jurisdiction in which it becomes very complicated to do any of 
those things, and we lose our effectiveness, and we lose the 
economic benefits.
    Senator Allen. Well, Mr. Chairman, I think--I have no 
further questions--the main point is, as they move forward--
obviously this has nothing to do with our Internet access tax 
measure, but, more importantly, as decisions are made, whether 
by the FCC or in conjunction with this Committee and the 
Congress, we do have to make sure that what we do is not 
excessively onerous; otherwise, we're going to be losing those 
jobs, we're going to be losing that ability to affect companies 
that can virtually be anywhere in the world. And I know that 
you, Mr. Chairman, care a great deal, as do everyone in this 
Committee, about making sure the United States stays 
competitive for more investment and more jobs, as well as 
protecting our intellectual property.
    And I thank the Chairman. You have a very difficult job, a 
balancing act, to determine these definitions. And once you 
determine those definitions, then, even if it is somehow a 
telecommunications service, not doing it--not burdening it in 
such a way as that it harms further deployment of broadband, 
reducing opportunities for jobs here in this country, but, in 
fact, driving jobs away, and companies away, from this country 
to provide those services, voice over Internet protocol, that I 
think people in this country look at as a great innovation for 
the future.
    I thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Lautenberg?
    Senator Lautenberg. Thank you, Mr. Chairman.
    I'd kind of like to see this discussion taken on a road 
show and explaining to the average citizen what it is we're 
talking about here, and see how they feel like they're really 
involved in--or else being cheated by things as they presently 
exist. I'd urge, someday, that a whole bunch of wordsmiths get 
together and simplify the language and the structure and have a 
better understanding of it, because it seems to me, at times, 
we're fighting for definitions.
    I wonder, for instance--and I wasn't sure about Senator 
Allen's question--about whether or not the offshore prospect, 
the grim prospect that Senator Wyden offered and just 
discussed, might be just the fallout of the further development 
of even satellite technology, the fact that these messages can 
be transmitted so effectively through the use of satellites. We 
don't have any satellite broadband providers testifying here 
today, but what about the ease of transmitting information 
being an assist for those who would take this business 
offshore?
    I agree with you, by the way, on one thing, and that is 
that if we try to inhibit it by regulation or rule, that we're 
going to create a marketplace that we have absolutely no 
control over.
    So what is the satellite provider's role here? Is there 
something we ought to be hearing from them on this Committee?
    Chairman Powell. Sure. I would actually encourage the 
Committee to begin to explore the many ways that technologies 
are coming to bear to deliver broadband. Satellites are doing 
it, so are the electric power guys, so are wireless, fixed 
wireless folks, so are people using all kinds of technology. 
And I don't think you can understand broadband any more--unless 
you think about it broadly and really explore all the people 
who are doing it, and see what their unique perspectives are.
    You know, part of your question that--the distinction 
between the danger of satellite-delivered broadband versus, 
say, voice over IP over the Internet, one sometimes is just 
the, sort of, physical transaction costs of being able to do 
it. I mean, a satellite has to be licensed in a country, it has 
to get an allocation of spectrum from the ITU, it has to set up 
ground--physical ground stations to bring traffic down, and 
then has to be in a physical location. It is an interstate 
service; it's not regulated at any level other than the Federal 
level, for example, because of its ability to pass by 
jurisdictions, just like wireless telephones are. Those are 
interstates communications services. Because it would be 
nonsensical for them to be regulated on a jurisdiction basis.
    So, you know, there are a lot more physical presence of a 
satellite than there might seem. The problem with Internet 
protocol--or the problem and opportunity--is the ease and 
almost anonymity of really being able to serve services without 
any sense, on the users' part, of whether you're looking at a 
site in London, or you're looking at a site in Singapore, or 
you're looking at a site next door to your neighbor. And that 
provider can be relatively seamless and anonymous. And the 
barrier to entry is so low, it just doesn't take anything, 
really, to set up a server and connect it to the Internet from 
any location in the world, and be able to reach your neighbor 
just as easily as someone else.
    Satellites do continue to have more kinds of physical 
restrictions. I mean, latency in space, 26,000 feet, they're 
expensive, huge, you've got to license them, you've got to 
build them, there are other--you know, the Internet is an order 
of magnitude more porous, globally, than any satellite.
    Senator Lautenberg. You know, I'm curious about something, 
and that is, what are we missing now, in terms of making 
available VoIP services? Is there any inhibition as a result of 
Internet access fees? There seems to be no shortage of capital 
around. Is there--what is the problem that we have to try to 
fix by regulation, if any?
    Chairman Powell. Well, I think that is the fight. I don't 
see a lot of problems that I don't think the market can solve. 
The questions is--there are a couple of palls hanging over--
clouds hanging over the industry that I think, if anything, may 
dissuade some investment. One, I think this market--both the 
application providers, the service providers, the 
infrastructure guys who want to buy all this equipment--are 
looking for a clear sign that the government is going to let 
this unfold in the way that it currently exists, or that--you 
know, everybody acts like we're changing something. The 
question is, we're not--I disagree with that vehemently. You 
know, a lot of these people are outside this regime now. To 
regulate is to bring them in the regime, not to transform them 
from being in it to out of it. And I think they're looking--
there's an uncertainty element that they're looking for signs 
from the commission, from the Congress, and from governments, 
that they intend to let this unfold in this way, so that that 
little bit of uncertainty risk----
    I think there are market challenges. I'd describe them as 
market challenges. You'll hear, in other panels, about, a 
consumer is going to want to know about 911 if you're asking 
them to cut the cord from one service to the other. And I think 
they have a burning imperative to be able to sell their 
service, to tell the consumer, ``You'll be able to do that,'' 
if I'm asking you to leave your service. Those are issues in 
the marketplace.
    But from an economic standpoint, I think--I really do 
believe that the greatest threat to the service is not venture 
funding or capital or the interest of the market; it's the 
regulatory threat. It's the threat of whether those costs are 
the ones they see now, or if I'm Cliner-Perkins or Verchefirm, 
do I gotta factor in the 30 lawyers you're going to need in 
every jurisdiction in the United--I mean, because you can 
destroy that business model very, very quickly if those 
additional costs are associated with your business.
    Senator Lautenberg. Thanks very much, Mr. Chairman.
    The Chairman. Senator Breaux?
    Chairman Powell. Thank you, sir.
    The Chairman. Senator Breaux?

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Thank you, Mr. Chairman. And thank you, Mr. 
Chairman, for being with us. Happy Mardi Gras.
    Chairman Powell. Thank you.
    Senator Breaux. Technology is truly amazing. On my Internet 
in my office here, I can get video and voice data of Bourbon 
Street right now.
    [Laughter.]
    Senator Breaux. It's absolutely astounding. It's also 
uncensored, and----
    [Laughter.]
    Senator Breaux.--it's probably----
    Chairman Powell. It's a new get-tough indecency thing going 
on.
    Senator Breaux.--it's probably----
    Chairman Powell. You might want to be careful.
    [Laughter.]
    Senator Breaux. Time Warner will testify that the Voice 
over Internet Protocol that they provide is really true 
facilities-based competition and telephone service. And when we 
wrote the 1996 Act, we were talking about that. We wanted true 
facilities-based competition. We tried to get it by requiring a 
number of things in rules and regulations of the telcos, all 
the things that they had to do that nobody else had to do.
    It seems to me that if now we have a new system coming in 
and providing, as they term it, true facilities-based 
competition, which they say feels just like conventional 
telephone service, that we still have a disparity in the rules 
and regulations in the balance between what telco companies 
have to do, in terms of Section 251 requirements, and all the 
things that we listed that they require. They have to go 
through the whole checklist of interconnection and duties to 
negotiate and, some would argue, to have rates that are charged 
that are less than the cost of providing the service. It seems 
to me that when the cable companies come in they are able to 
provide video, like I mentioned, and voice, just like telephone 
service. It seems to me that there is an imbalance. We talked 
about the level playing field we were trying to reach. Can you 
followup? Do you agree with that I'm saying? Do you disagree 
with it? If you--can you elaborate on that?
    Chairman Powell. Yes. In short, I agree with you, and we 
have to get there. The challenge here is the path and the 
timing of getting there. This is why I really do believe that 
someday, in the not-so-near future, you'll really have to re-
calibrate the law, because that's one of the arbitrary 
differences. It's going to be all over the map. You're not 
going to--I don't know how, in the near future, I'll stand 
before--or my general counsel will stand before a court and 
explain why these things apply to this guy, and these things 
apply to this guy, when their services being offered are almost 
identical, and the only reason is because of who your parents 
were----
    Senator Breaux. Well, I think that you----
    Chairman Powell.--you know, what your legacy was.
    Senator Breaux. I mean, you're going to see advertising 
from the cables saying ``just as good, if not better than your 
traditional telco phone service, that this is true facilities-
based competition. It's even better than that, because we're 
giving video.'' With all the video programming that they can 
apply to it, it's going to be a hugely attractive venue to 
offer to the public, which is fine, and we should encourage 
that, but then you still have another set of providers that are 
under a different set of rules and regulations about leasing 
their own equipment and everything else in Section 251.
    What percentage does the FCC estimate of the 
telecommunications traditional telephone service would be 
acquired by the new facilities-based competition coming from 
cable? Is there a ballpark figure? Is it going to be 10 
percent? Can it be 50 percent? Can it ultimately replace it? 
Any comments on that?
    Chairman Powell. Yes. I don't know a number, off the top of 
my head, and I'll look for you. But a couple of things to keep 
in mind. If you just looked at broadband access, the cable 
industry probably has 60 to 70 percent of all broadband access; 
they're going to deliver telephony over that infrastructure. So 
they have a relationship with--to leverage----
    Senator Breaux. The installation of the wire to the house 
is already there.
    Chairman Powell. It's a relatively modest incremental add 
for them. And the only argument, of course, is the degree to 
which competition is important to us that we've subsidized it 
in different forms, either directly, like we do with universal 
service--and, by the way, you know, back to Senator Allen's 
point, the unbundling network regime in 251 is unquestionably a 
dramatic industrial subsidy to incent competition. It's not 
something new to communications.
    Senator Breaux. Well, then----
    Chairman Powell. But I----
    Senator Breaux.--the question becomes, if the competition 
is there, are the economic incentives----
    Chairman Powell. That's right.
    Senator Breaux.--structured by the Congress necessary?
    Chairman Powell. That's right.
    Senator Breaux. And if we wanted to eliminate those, how 
would we go about doing it, from a legislative standpoint?
    Chairman Powell. Well, I know you had one approach, which 
is that legislation----
    Senator Breaux. So did you. Neither one of us won.
    Chairman Powell. I think that there is modest room, within 
the statute, that we can muddle through, but I am quite 
convinced it won't get you all the way there. I am quite 
convinced that, you know, the unmovability of certain aspects 
of this statute make it very, very hard to harmonize different 
services and intercarrier compensation. And that's why I do 
think it's constructive to be talking about legislation.
    And we have new insight. It's not just competition. And I 
think a few years ago when we were talking about this issue, we 
were talking about the equities of just competition. Now we 
have technology. There's a problem--you know, it's four-
dimensional chess now. It's not just the binary--is it fair, 
these guys dominate, these guys dominate. You have the economic 
variations, but then you have the reality of the technology, 
which I think is even more powerful, because it can't be 
stopped. This isn't just a choice of which industry you favor 
or which--you know, which one's arguments you're more persuaded 
about. I can't stop the IP--no one's going to stop it. We don't 
want to stop it.
    So these distinctions are getting obliterated, less because 
of--you know, cable has been sitting relatively quiet on this 
voice thing until IP comes along, and so the--yes, all of that 
means it's time. It's time to start working on it.
    Senator Breaux. Thank you, Mr. Chairman.
    Thank you.
    The Chairman. Mr. Chairman, just one additional question. 
Should the Commission impose network-neutrality requirements on 
broadband providers to ensure the availability of unaffiliated 
providers of VoIP or other services?
    Chairman Powell. Not yet, but it should be vigilant. I gave 
a speech--this is the speech I was referring to earlier, which 
I would submit for the record--which talked about that these 
are important principles, and that while we haven't seen 
significant evidence of anyone doing anything but allowing 
that, I do think that if we saw that in a widespread way or a 
significant way, that the commission would take an interest in 
it and would have to consider whether any response was 
warranted, yes.
    The Chairman. I thank you very much. It's great to have you 
back.
    Chairman Powell. Thank you.
    The Chairman. We appreciate very much your help in this 
very interesting and exciting new technology. Thank you, 
Chairman Powell.
    Chairman Powell. Thank you, Senator.
    The Chairman. Our next panel is Mr. Jeffrey Citron, who's 
the Chairman and Chief Executive Officer of Vonage Holdings 
Corporation; Mr. Glenn Britt, Chairman and Chief Executive 
Officer of Time Warner Cable; Mr. Glen Post, Chairman and Chief 
Executive Officer, CenturyTel, Incorporated; and the Honorable 
Stan Wise, President of the National Association of Regulatory 
Utility Commissioners; and Mr. Kevin Werbach, who's the Founder 
of Supernova Group.
    Welcome to all our witnesses. Mr. Werbach, we'll begin with 
you, sir.

             STATEMENT OF KEVIN WERBACH, FOUNDER, 
                      SUPERNOVA GROUP, LLC

    Mr. Werbach. Thank you, Mr. Chairman and Members of the 
Committee. Thank you for the opportunity to testify here today.
    I'm the founder of the Supernova Group, an independent 
technology analysis and consulting firm. Earlier in my career, 
I had the honor of serving at the FCC as counsel for new 
technology policy, where I participated in the FCC's early 
efforts, nearly a decade ago, to understand the emerging 
technology that we then called Internet telephony.
    I'm here to tell you that Voice over IP presents tremendous 
opportunities for the U.S. economy and the American people. As 
my written statement explains in more detail, we are witnessing 
the most significant transformation in telecommunications since 
Alexander Graham Bell called out for Mr. Watson.
    Historically, telephony and other services, like 
broadcasting, were tied to specific infrastructure and 
regulatory regimes. The service was the network. In the 
converged digital world, however, there is one network of 
networks, the Internet, bound together with common technical 
protocols. Instead of data as a service delivered through 
voice-oriented telephone networks, voice is becoming a class of 
applications on top of data networks. To a data network, a 
voice call is nothing more than an instant message with 
particular latency and reliability characteristics.
    Consider this device. This looks like an ordinary phone, 
but it's actually a voice over broadband endpoint. Instead of 
an RJ-11 telephone jack, it has an ethernet port on the back. 
But should regulation and obligation depend on the shape of a 
jack? Or should it depend on the shape of the device?
    Consider this. This actually came from Mr. Citron's 
company, Vonage. This device doesn't look anything like a 
phone, but it does essentially the same thing as the previous 
one, without a keyboard and speakers and a microphone.
    Or what about this device here? I don't think anyone would 
think that this was a phone. But I can load a piece of 
software, called a soft phone client, on my laptop, plug in a 
simple headset, and use it to engage in voice communication.
    So if I take the laptop and use it to communicate with my 
friends, who is the service provider that would be subject to 
regulatory obligations?
    The Chairman. We proceed here on the premise that there's 
no such thing as a dumb question. How does that work?
    [Laughter.]
    Mr. Werbach. Certainly, Mr. Chairman. It's an example of 
voice as an application. I load the software, and the software 
actually converts my voice into Internet protocol, and then it 
comes out the back as data, just like any other data coming 
out.
    That's what it means for voice to be an application, and 
that's what poses this challenge. Because if we say VoIP should 
be regulated, what's regulated? Are we regulating the software 
provider? Are we regulating IBM for making the laptop? Are we 
regulating the company that makes my broadband service, even 
though they don't know what software I'm loading on my laptop? 
What happens if I'm connecting to this laptop on a WiFi 
wireless connection in Starbucks? What happens if the 
application isn't running on a laptop, but it's running on a 
handheld personal digital assistant? Those are the kinds of 
questions that we face.
    And it doesn't end there. I can buy a $50 webcam, plug it 
into my PC, and use it to engage in multipoint voice and 
videoconferencing all around the world, or I can subscribe to 
the online service that comes with Microsoft's Xbox or Sony's 
PlayStation online gaming consoles, plug in a headset, and use 
it to chat, by voice, with other players in the same game. Both 
are voice over IP applications.
    Even the push to talk services that many cellular carriers 
are now deploying are actually voice over IP services, a 
parallel voice over IP channel alongside the cellular network.
    As these examples show, VoIP is much more than services 
that may look similar to traditional circuit-switch voice 
telephony. Trying to separate out regulated from unregulated 
VoIP will be an unenviable and impossible task.
    Engineers use the concept of layering to describe how data 
networks operate. The underlying physical transmission is a 
separate layer from higher-level application functionality, 
just as cars are separate from the highways that they drive on. 
A layered approach to communications regulation would 
distinguish among content, applications, addressing, and 
physical transmission. Open and nondiscriminatory connectivity 
between these layers ensures innovation and competitive 
deployment of new applications.
    In considering the policy concerns we've been asked to 
address, we must step back and examine the point of existing 
regulatory obligations and taxes, and then we must adapt our 
policy approaches to reflect the changes sweeping the industry. 
As Chairman Powell stated, the current systems of universal 
service funding and intercarrier compensation must be reformed 
if universal service is to endure. Such reforms will only 
succeed if all parties have a reason to come to the table. It 
would be a sad irony if our attempts to impose regulatory 
obligations on VoIP limited deployment of technologies that can 
help bring affordable advanced communications to all Americans.
    For other social policy obligations such as law enforcement 
access, disability access, consumer protection, and emergency 
services, voluntary industry efforts should be given an 
opportunity to work before Congress and regulators consider the 
need for the targeted action.
    With VoIP, we are seeing the Internet realize its destiny. 
We can embrace that future, or we can try to pull the Internet 
back into yesterday's regulatory system. Make no mistake, 
broadbrush regulation of VoIP is tantamount to regulation of 
Internet applications. From the network's perspective, a stream 
of voice bits is no different from an eBay auction or a Google 
search.
    If the U.S. is to remain the leader in the information-
driven global economy of the 21st century, we must continue our 
enlightened policies to favor innovation and competitive 
markets while remaining committed to our central social goals. 
And I commend the Committee for holding this hearing and taking 
on these important issues.
    [The prepared statement of Mr. Werbach follows:]

   Prepared Statement of Kevin Werbach, Founder, Supernova Group, LLC
    Mr. Chairman, and Members of the Commerce Committee, thank you for 
the opportunity to testify on the implications of voice over Internet 
protocol (VoIP) technology.
    This is an extraordinarily important issue for the U.S. economy and 
the American people. We are witnessing the most significant change in 
telecommunications since Alexander Graham Bell called out for Mr. 
Watson. The growth of IP-enabled communications signifies nothing less 
than the transformation of the telecom industry, and the entire 
information sector that depends upon it.
    The decisions regarding VoIP that the Congress, the FCC, and state 
regulators make will determine the path of this transformation. Will we 
try to put the genie back in the bottle, by subjecting VoIP and other 
real-time Internet applications to legacy regulatory obligations? Or 
will we take a forward-looking approach, recognizing the extraordinary 
economic benefits VoIP can provide, and continuing America's global 
leadership in information and communications technology? That is the 
fundamental choice this committee faces today.
    I am the founder of the Supernova Group, an independent technology 
analysis and consulting firm. Earlier in my career, I had the honor of 
serving as Counsel for New Technology Policy at the Federal 
Communications Commission. I participated in the Commission's efforts, 
beginning nearly a decade ago, to understand a new phenomenon we called 
``Internet telephony.'' The FCC wisely decided to allow that technology 
to develop outside the constraints of legacy common carrier regulation. 
Following its longstanding approach to ``enhanced'' or ``information'' 
services, the FCC created a space for the nascent VoIP technology to 
develop.
    As a result, investment and technological innovation has driven 
rapid development of VoIP, despite an extended downturn in the 
communications sector. The growth of VoIP has occurred not because it's 
a regulatory arbitrage trick, but because it's a better technology. It 
is more efficient, and more flexible, than the legacy circuit-switched 
technology. That is why all significant industry participants, 
including the Regional Bell Operating Companies, are deploying VoIP 
equipment within their networks in place of circuit switches.
    This is a true success story of regulatory forbearance creating new 
growth opportunities. VoIP is already used significantly for office 
phone systems and for national and global backbone transport. Cisco 
alone has sold more than two million IP phones to enterprise customers. 
And research firm IDC estimates that 10 percent of worldwide voice 
traffic already uses VoIP technology in some manner.
    The widespread rollout of broadband has created an opportunity to 
deliver VoIP directly to end-users as an application on top of data 
connectivity. This is a crucial conceptual shift, which I will explain 
later in my testimony. As a practical matter, broadband deployment 
allowed new entrants like Vonage and Packet8 to inject new competition 
into the local phone market. More than 100,000 Americans now subscribe 
to consumer voice over broadband offerings. And major players such as 
AT&T, Comcast, Time Warner Cable, and Qwest have announced plans to 
launch voice over broadband offerings in the near future. In short, 
VoIP is helping to fulfill the promises of competition, lower prices, 
and innovation that Congress hoped to achieve when it passed the 
Telecommunications Act of 1996.
    It is now time for government to address the thorny policy issues 
that VoIP raises. The greatest threat to the continued growth of VoIP 
today is regulatory uncertainty and a patchwork of inconsistent 
decisions by state regulators and the FCC. We need a national policy 
that encompasses VoIP and the intertwined issues of universal service 
and inter-carrier compensation.
What VoIP Is . . . and Isn't
    Voice over IP isn't simply another form of telephone service as we 
know it. It is the leading edge of a new communications paradigm. Until 
now, telephony has been tied to a specific kind of network and a 
particular industry structure. The service and the infrastructure were 
one and the same.
    In a digital broadband world, however, there is one network of 
networks tied together by common technical protocols. The 
infrastructure that delivers Web pages and files can also carry voices 
and moving pictures. Voice is just one class of application, which can 
be implemented in many different ways. And telephony is just one of a 
plethora of voice applications.
    It's worth explaining what I mean by voice as an application. The 
Internet is a connectivity platform. At its core, it is a set of 
technical and architectural protocols for interconnecting digital 
networks. Those networks can incorporate any physical media capable of 
carrying digital bits, and they can transport any application or 
content that can be encoded into those digital bits.
    To a data network, a voice call is nothing more than an instant 
message with different latency and reliability characteristics. And 
indeed, all the major instant messaging providers such as Yahoo! and 
AOL offer voice chat capabilities in their applications today.
    Because voice is an application in an IP world, it need not be tied 
to transmission facilities. I can load a piece of software called a 
softphone client onto my laptop computer or a handheld personal digital 
assistant and turn that device into a voice communications end-point. 
If I then use that device to call my friends, who is the service 
provider that would be subject to Title II regulation? The software 
vendor? The laptop manufacturer? My broadband provider? What if I'm 
online through a WiFi wireless hotspot in a Starbucks?
    I can now buy a $50 Webcam from a company like Logitech, plug it 
into my PC, and use it to engage in free or very low-cost 
videoconferencing with other computer users around the world. Or I can 
subscribe to the online services associated with Sony's PlayStation and 
Microsoft's Xbox video game consoles, and chat live with other players 
in the same game. Or I can download a piece of free software called 
Skype and use it to make calls to other Skype users through a web of 
direct peer-to-peer connections, with no central network. Skype has 
announced free five-way conferencing, so that every call can instantly 
become a multipoint conference.
    As these examples show, VoIP is much more than services that may, 
from a distance, look similar to traditional circuit-switched voice 
telephony. The legacy telecom regulatory framework is based on the idea 
of a call that originates and terminates between subscribers at defined 
locations, through a circuit established by one or more carriers. None 
of these concepts necessarily endures in an IP world.
    Trying to separate out unregulated from regulated VoIP applications 
will prove to be a futile exercise. For example, if the full panoply of 
legacy regulation and taxes apply to a service that uses an ordinary-
looking phone, providers will have incentives to make their terminal 
equipment look less like an ordinary phone. Instead of engaging in 
regulatory whack-a-mole, we must step back and examine the point of 
those obligations and taxes.
The Layered Model
    All of this leads to the question now before this Committee: what 
policy approaches to VoIP will best serve the interests of the American 
people?
    Let's be clear on what is not in dispute. No one in the VoIP debate 
questions that law enforcement agencies should have access, subject to 
appropriate procedural safeguards, to the information they need to do 
their jobs. No one questions the need to support emergency services 
such as 911, or to ensure that Americans with disabilities have access 
to essential communications services. And no one questions the enduring 
value of universal service to ensure that all Americans receive the 
benefits of telecommunications.
    However, we must recognize that the communications world is 
changing. The way we meet those essential goals will change along with 
it. Just because certain mechanisms were used in the past doesn't make 
them sacrosanct. And if the system is flawed, or has not kept up with 
the rapid pace of technological development, we should not curtail that 
development in an effort to fix it. The challenge is to achieve our 
essential social policy goals at the least cost to innovation, 
investment, and competition.
    I'd like to offer a general framework and a specific set of 
recommendations.
    As a general matter, the legal framework for converged data 
networks should reflect the architecture of those networks. Engineers 
use the concept of layering to describe how data networks operate. The 
underlying physical transmission is a separate layer from the 
addressing and routing mechanisms that deliver traffic to the right 
points on the network, which is separate from the applications that 
encode and decode that traffic, and which is separate from the traffic 
itself. Open connectivity between those layers ensures innovation and 
competitive deployment of new applications.
    The traditional communications regulatory framework classifies 
services into horizontal categories such as telecommunications and 
broadcasting. From that initial classification flow a host of legal 
obligations. If VoIP and other real-time Internet applications are 
deemed telecommunications services under the 1996 Act, they would be 
subject to the full panoply of regulation designed for circuit-switched 
carriers.
    A layered approach to communications regulation, which I have 
outlined in some of my writings, would approach the problem 
differently. It would distinguish among content, applications, 
addressing, and physical connectivity. Competitive issues of market 
power and interconnection primarily concern the physical layer. If the 
physical layer is open, there is little or no need to regulate what 
runs on top. That is the lesson of the Internet, which emerged because 
Internet service providers and application providers like Yahoo!, 
Amazon.com, and eBay had nondiscriminatory access to underlying 
telecommunications networks.
    The FCC, in its recent decision that Pulver.com's Free World Dialup 
service is an unregulated information service, effectively found such a 
layered model already present in the 1996 Act. The statutory 
distinction between telecommunications services and information 
services, derived from the FCC's earlier basic/enhanced division, 
recognizes that data applications ride on top of regulated transmission 
pipes.
    Of course Congress, unlike the FCC, has the power to change the 
Act. Any reform of the 1996 Act should make the data-centric, layered 
model more explicit. IP is the future of the network.
Specific Policy Issues
    Turning to the specific questions we have been asked to consider 
for this hearing, there are three kinds of policy obligations that 
potentially impact on VoIP:

   Economic regulation to ensure effective market competition.

   Universal service policies designed to achieve social goals 
        for availability of telecommunications itself.

   Policies to support other social goals, such as law 
        enforcement, access for people with disabilities, emergency 
        services, local taxation, and consumer protection.

    It seems quite clear that the bulk of the economic regulation in 
Title II of the Communications Act should not apply to VoIP. Common 
carrier regulation was designed for dominant incumbents like the old 
AT&T and today's Baby Bells. In the VoIP space, there is no such 
incumbent. Moreover, so long as the incumbent network owners do not 
discriminate, there will never be a VoIP provider with that degree of 
control. VoIP is an application using standard protocols. The barriers 
to entry are low, and the opportunities for innovation are high.
    Application of legacy regulation to VoIP would do more than just 
stifle innovation in new competitive phone services. It would cast a 
pall of uncertainty over the entire technology sector. Would Microsoft 
be subject to those obligations for its Xbox Live online gaming chat 
service? Would a software provider that sells a VoIP softphone client 
to run on a handheld PocketPC or Palm device? Would Intel, for putting 
voice over WiFi phones into its reference designs for laptops, as it 
did last week at its developer forum?
    Universal service raises somewhat different issues. It is a 
collective benefit that requires collective contributions. It would be 
a sad irony, though, if those contribution obligations stifled the 
deployment of affordable and innovative new service offerings. We must 
distinguish universal service, the important public policy objective, 
from the existing maze of hidden cross-subsidies and regulatory 
charges.
    Moreover, just because some applications do not explicitly 
contribute to universal service funding mechanisms does not mean they 
provide no support to the system. Free World Dialup may be free, but 
its users must pay for a broadband connection, typically to a local 
phone or cable operator. Companies such as Vonage and AT&T pay for the 
circuits, transport, origination and termination they need to deliver 
their VoIP traffic. A portion of those payments makes its way into 
universal service funding mechanisms.
    When the topic is VoIP and universal service, the elephant in the 
room is access charges. Whether VoIP applications are subject to access 
charges is not the same question as whether they contribute to 
universal service. Access charges are the non-cost-based, regulated 
rates that local exchange carriers charge interexchange carriers for 
originating and terminating telecommunications traffic. They are a 
descendant of internal accounting transfers by the old Ma Bell, 
subjected to twenty years of regulatory tinkering and industry horse-
trading. They are just one of several inconsistent inter-carrier 
compensation regimes that telecommunications providers face, depending 
on the legal classification of traffic. The current system is 
artificial and unsustainable.
    Inter-carrier compensation needs to be reformed for the U.S. 
telecom industry to move forward. The industry knows it. Press reports 
suggest that local and interexchange carriers have been negotiating to 
develop a consensus proposal for inter-carrier compensation reform. The 
FCC is also looking to act. Those efforts will only succeed if all 
parties have a reason to come to the table. Subjecting VoIP to access 
charges, especially before comprehensive inter-carrier compensation 
reform, would be the best way to derail those much-needed reforms.
    VoIP is just one factor putting pressure on the universal service 
and inter-carrier compensation regimes. Eight years after the passage 
of the 1996 Act, we still do not truly have the competitively-neutral, 
transparent, portable, explicit universal service funding system that 
the Act envisioned. Given the money at stake, this is the Bermuda 
Triangle of telecom regulation. Yet we must go there, if we want 
universal service to survive in the IP communications era. Attempting 
to regulate VoIP will not make the challenges facing universal service 
funding go away. It will simply create more confusion, limit 
competition, and delay the inevitable.
    The layered model suggests a possible alternative path to achieve 
our universal service goals. Take a look at the personal computer 
industry. Different companies make chips, build components, assemble 
computers, and develop software. Every layer is a platform. Competitors 
in each layer work to reduce prices and improve quality, with stunning 
results. The PC you buy today is many times more powerful than the PC 
you could buy five years ago, and sells for half the cost. Once only 
for the wealthy, PCs are now in two-thirds of American homes, and the 
number continues to grow. All without any government-mandated 
subsidies.
    The telephone business should follow the same path of rapid price 
reductions and performance enhancements as the PC business. Already, 
VoIP providers are introducing new price points and innovations such as 
area code mobility, real-time billing and service provisioning, and 
easy conference calling. They should be encouraged, not restrained.
    Finally, we come to social policy obligations such as CALEA, 
disability access, consumer protection, and emergency services. 
Especially in the post-9/11 era, there is no question that law 
enforcement authorities must have the tools they need to do their jobs. 
CALEA is one arrow in the quiver of law enforcement agencies seeking 
information to aid their investigations. It is not the only tool they 
have available. And even if VoIP application providers on top of 
telecommunications networks are not subject to CALEA, the 
telecommunications service providers they depend on still are. 
Furthermore, because VoIP decouples the voice application from 
underlying transport, the provider that interfaces with the end-user 
may only have access to the call routing information, not the content 
of the communication.
    The VoIP community must continue to work with law enforcement and 
national security agencies to find the most appropriate technical 
mechanisms for lawful access to information needed to support 
investigations. The FCC has announced its intention to launch a CALEA 
proceeding in the near future that will provide a public forum for 
these issues. There is no reason to short-circuit those processes.
    Similarly, there is no reason to assume that, without rapid 
application of traditional Title II regulation to VoIP, the other 
social policy objectives mentioned above will not be met. As with law 
enforcement access, there may be alternative sources of legal 
authority. Furthermore, VoIP providers have already developed voluntary 
mechanisms to achieve goals such as interconnection with 911 and other 
public safety systems. Such industry efforts should be given an 
opportunity to succeed. If they do not, or cannot, achieve the 
necessary objectives in a reasonable period of time, regulators and 
Congress should consider the need for targeted action.
    Applying the full legacy regulatory regime to VoIP and other real-
time Internet applications, simply to ensure that particular social 
policy objectives are met, would be a colossal case of the tail wagging 
the dog.
Conclusion
    Over the past decade, we have seen the benefits of a policy 
approach that shields Internet-based applications from unnecessary 
application of legacy regulation. Congress expressed its desire for an 
unregulated Internet in the 1996 Act, and the FCC has followed that 
direction in its regulatory proceedings.
    With VoIP, we are seeing the Internet realize its destiny. It is 
evolving into a converged network of networks that delivers an array of 
advanced applications, services, and content to all Americans. Perhaps 
even more powerfully, it is allowing individuals themselves to create 
and share information with their families, friends, communities, and 
extended social networks.
    We can embrace that future, or we can try to pull the Internet back 
into yesterday's regulatory system. Make no mistake. Broad-brush 
regulation of VoIP is tantamount regulation of Internet applications. 
From the network's perspective, a stream of voice bits is no different 
from an eBay auction or a Google search.
    The U.S. led the world in Internet deployment. Other countries are 
rushing to catch up, and by some measures such as broadband penetration 
they have surpassed us. If we are to remain the leaders in the 
information-driven global economy of the 21st century, we must continue 
our enlightened policies to favor innovation and competitive markets, 
while remaining committed to our essential social, public safety, and 
national security goals.
    I commend the Committee for recognizing the need to address these 
critical issues.

    The Chairman. Very interesting.
    Mr. Citron?
    Senator Lautenberg. Mr. Chairman, may I just welcome Mr. 
Citron, whose company has made remarkable progress in a very 
short period of time. And they are significant providers of 
VoIP services. The company started out very small, and it has 
now got 100,000 subscribers. So the industry is moving, and 
this is excellent evidence of that, and I welcome Mr. Citron.
    And I thank you, Mr. Chairman.
    The Chairman. How many employees do you have, Mr. Citron?
    Mr. Citron. About 300.
    The Chairman. Congratulations.
    Mr. Citron. Thank you. We've added 200 in the last year, 
and we're about to add another 200 in the next 12 months, so 
we're real excited.

   STATEMENT OF JEFFREY CITRON, CHAIRMAN AND CHIEF EXECUTIVE 
              OFFICER, VONAGE HOLDINGS CORPORATION

    Mr. Citron. Good morning, and thank you, Chairman McCain. 
Thank you, Senators. Thank you, Senator Lautenberg.
    As Senator Lautenberg said, we are the leading provider of 
consumer and small business voice over IP services in the 
United States, with over 110,000 line equivalents in service 
already.
    Vonage is at the forefront of this new emerging market, 
which has approximately 150,000 users. As such, we are also 
confronting public-policy issues that have never been seen 
before. Policymakers are asking: What is voice over IP? Is it 
like a phone, or is it more like an e-mail? Will it replace the 
traditional switched networks, or just be another option for 
consumers? How can public safety needs be met and improved 
upon? Indeed, voice over IP is turning the heads--turning 
telephony on its head as it blends voice and data into exciting 
new offerings.
    In the face of such change and uncertainty, there is a 
tendency by some to try and wedge this new technology into 
existing telephone regulations. I urge you to resist this 
temptation and to keep this new innovative technology free from 
inappropriate regulation, enabling it to evolve and grow where 
the possibilities are really endless. We also recognize that 
there are a number of public-policy needs that have to be met. 
We believe that voice over IP providers and the government can 
work together to fulfill those needs.
    For the first time, consumers are experiencing widespread 
residential local competition. Competition, in turn, lowers 
prices and improves offerings. Vonage offers customers the 
ability to replace their existing phone service for as little 
as $14.99 per month. This also includes 500 minutes of calling, 
with the most popular features, like caller ID with name, call 
waiting, call forwarding, voice-mail, and a host more, all 
included for free. At the same time, Vonage is meeting public 
policy goals today by supporting 911, 411, and local number 
portability.
    And the good news doesn't stop there. Every day, people are 
upgrading their dial-up connections in order to get access to 
this new killer application that offers better value and new 
innovative features.
    Now, as consumers are increasingly demanding these new 
services, the capital markets are finally taking notice. This 
has spurred investment capital to flow into new and exciting 
companies such as ours, which, in turn, has led to the creation 
of new jobs and has increased capital spending on telecom 
equipment.
    But this resurgence is already in jeopardy. Under attack by 
disparate interests from the State of Minnesota to policymakers 
that just suggest Voice over IP must be subject to a full suite 
of regulations. Should you allow this type of improper 
regulation to take hold, the Voice over IP industry will 
greatly suffer.
    Vonage has taken a leadership role in the area of social 
policy by becoming the first non-geographic-based voice over IP 
provider to adopt a 911 solution. But Vonage is not stopping 
there. Development is already underway with NENA to provide an 
advanced E-911 technical solution to the voice over IP 
industry. In the future, voice over IP will enable new IP-based 
I-911 systems that will allow for the transmission of medical 
data, patient history, and other valuable information to field 
personnel. While this might sound like a pipe-dream to many, 
these dreams are quickly becoming a reality.
    This spring, Vonage released a new enhancement to our 911 
system that will allow users to be notified, via e-mail or via 
message to their cell phone, when someone from their home dials 
911 service.
    In the area of economic policy, the universal service and 
intercarrier compensation systems are broken, and they have 
been for a very long time due to a myriad of reasons, none of 
which have anything to do with voice over IP. Vonage strongly 
urges Congress to take up comprehensive USF reform for the 
purpose of addressing the needs of broadband deployment and to 
institute an appropriate funding mechanism for it.
    As for intercarrier compensation, this Congress already has 
recognized the differences between wireline and wireless 
carriers. Vonage urges Congress to support comprehensive reform 
and put in place a national intercarrier compensation system 
ensuring fairness to all parties, including new entrants, like 
Vonage. While this work is underway, it would be reckless to 
subject voice over IP providers to a broken system.
    In the area of law enforcement, Vonage has been and is 
fully committed to meeting the needs of law enforcement 
personnel. Vonage already has received numerous subpoenas for 
customer information from government agencies. And in every 
case, we have fully complied. Vonage is currently working with 
the FBI to explore a technical standard by which law 
enforcement personnel could intercept calls. If policymakers 
are concerned that CALEA may not apply to voice over IP, then 
we should address the deficiencies of CALEA in the statute.
    As Congress considers voice over IP issues, we remind you 
that with Internet applications, whether they be voice over IP 
applications that send bits of sound from one destination to 
the other, or a Web browser program that sends bits of images 
and text back and forth, each bit of data deserves the same 
treatment regardless of the content it is carrying. Congress 
boldly exercised far-reaching leadership by promoting Internet 
developments, and now we need Congress to act again.
    We urge you to keep two key principles in mind. First, 
voice over IP is an interstate service, like the Internet 
itself. And, second, voice over IP is an information service, 
not a telecommunications service.
    I look forward to answering your questions, and I commend 
the Chairman for holding these hearings.
    [The prepared statement of Mr. Citron follows:]

  Prepared Statement of Jeffrey Citron, Chairman and Chief Executive 
                  Officer, Vonage Holdings Corporation
I. Introduction
    Good morning Chairman McCain, Ranking Member Hollings, 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. The United States Senate Commerce 
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 over 63 percent of the market 
share with a national reach that accounts for more IP telephony lines 
than the entire North American cable industry combined. Early this 
month, Vonage announced that it had activated its 100,000th line--less 
than 5 months after having activated its 50,000th line. Vonage 
continues to add over 15,000 lines per month to its network and 
completes over 5 million calls per week.
    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.
    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, thereby softening the market. 
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 
exportation 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 voice-mail, 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 voice-
mail 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 $34.99 for 
unlimited 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. Vonage argued, in 
general, that its VoIP service was an interstate ``information 
service'' pursuant to the Communications Act, and thus not subject to 
Minnesota PUC regulation.
    The United States Federal District Court for the District of 
Minnesota ruled in Vonage's favor on October 14, 2003. While Vonage was 
pleased with the decision, successfully fighting the case was a serious 
drain on Vonage's resources, and continues to be burdensome. The 
Minnesota PUC is currently appealing the case for a second time, 
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 could not afford to duplicate this effort in 49 
states and the District of Columbia. We would be driven out of 
business.
    A few states have expressly declined to regulate VoIP. In 2003, the 
Florida state legislature mandated that VoIP services should remain 
free from unnecessary regulations, and we commend them for setting an 
early example before the current regulatory push. The Colorado PUC also 
found that imposing common carrier regulation on VoIP services would be 
unnecessary. Numerous other states, however, including New York, Ohio, 
Utah, Missouri, Pennsylvania, Illinois, and Wisconsin, continue to 
explore the possible application of common carrier regulations to VoIP 
providers. The march toward regulation continues: the California PUC 
last week tentatively concluded that VoIP services that enable 
communications with the traditional phone network are public utilities 
and subject to its jurisdiction.
    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, 
the industry will have to develop special technology solutions to 
provide enhanced location information to PSAPs. This will require 
systems upgrades not only by VoIP providers, but also by incumbent 
local exchange carriers (``LECs'') and PSAPs.
    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. We have had serious problems with Qwest in 
Minnesota in this regard, but Qwest in Washington state has been very 
cooperative. So even with the same LEC, there are inconsistencies. 
Indeed, despite direct intervention from the PSAP administrator in 
Minnesota, Vonage has been unable to obtain E911 trunk interconnection, 
and has been forced instead to route Vonage customers' 911 calls to the 
PSAP's administration number. SBC in Texas has been very helpful, and 
we commend them for that and look forward to continuing that productive 
relationship. 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. Vonage independently is 
working with the PSAPs in Minnesota, Texas, Washington, and Vermont. We 
are participating 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 historic 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.
    I look forward to answering any questions you might have.

    The Chairman. Thank you very much.
    Mr. Wise, welcome.

   STATEMENT OF HON. STAN WISE, COMMISSIONER, GEORGIA PUBLIC 
   SERVICE COMMISSION AND PRESIDENT, NATIONAL ASSOCIATION OF 
            REGULATORY UTILITY COMMISSIONERS (NARUC)

    Mr. Wise. Thank you, Senator. Thank you, Members of the 
Committee, for this opportunity.
    I am a Commissioner from the State of Georgia. I've served 
in my current capacity as a Commissioner from Georgia for just 
a little over 9 years. I also currently serve as the President 
of NARUC, representing an association of state commissions that 
has been active since 1889.
    State commissions want VoIP to succeed. Our constituents 
want VoIP to succeed, and we want them to have it. Georgia's 
been innovative in our decisions and choices of VoIP service, 
and we are richer for it. We agree with many of the folks that 
have testified here today that this is an incredible new 
technology, and worthy of this Senate's review.
    State commissions have applied a lighter touch. We have a 
number of states that have opened dockets simply to gather 
information. Two states have, in fact, gone ahead and opened 
dockets and asked VoIP carriers to certify. That was Minnesota 
and California. Time Warner has filed for certification in five 
states, at least as far as we know at this point. So certainly 
any method and any message that state commissions would 
generate at this point would be for that light touch.
    Customer expectations on VoIP has been one that they've 
seen hot technologies come and go in the last few years, and 
not that this is one, but certainly it is one that is worthy of 
everything and all the resources that we have to offer at this 
point. But if it's going to replace the phone in your house, 
then it does have more serious implications, and we're pleased 
that industry is working on solutions--on public interest, 911, 
consumer protection, and advanced notice before termination--
but they are still too serious of issues to remain voluntary.
    We, in our roles as regulators, have found that--in USF or 
any of these other issues, that we must protect our rural 
carriers and their customers and other USF beneficiaries. 
Making VoIP an information service would take it off the books 
for USF and other access charges. This is certainly one of the 
reasons that the FCC should address these issues first and 
quickly.
    We are not interested in seeing additional taxes in the 
telecommunications industry. Certainly, we believe that this 
body is very capable of determining what it a tax-on-tax 
situation and what should be telecom, and what isn't. Our 
initial concern with doing telecom as an Internet tax bill has 
continued to be addressed by this body.
    In the long term, states are concerned that the FCC will 
engage in a de facto tax policy in a telecom rulemaking, 
costing states up to $13 billion. We would hope, and we 
continue to see the consensus at NARUC, that public-service 
obligations come from the functional nature of the service, and 
not the technology used to deliver it. We continue to be 
concerned about these consumer issues on the disabled and on 
911.
    State commissions are intimately familiar with the local 
markets. I call it the government at the lowest common 
denominator. And as much as the connotations of regulators can 
mean, we're that first line when people are unhappy with their 
service, with slamming, with billing, cramming, with their just 
customer service choices. And so we will continue to be 
diligent on that. We will hear from the consumers before many 
other government entities and sometimes even the carriers that 
we regulate.
    We must provide state universal service funds with programs 
to fill in the gaps missed by Federal programs. We will 
continue to be responsible--to be responsive and responsible to 
consumers in ways that remain closest to the customers.
    Thank you very much.
    [The prepared statement of Mr. Wise follows:]

  Prepared Statement of Hon. Stan Wise, Commissioner, Georgia Public 
 Service Commission; and President, National Association of Regulatory 
                   Utility Commissioners (``NARUC'')
    Mr. Chairman and members of the Committee, I am Stan Wise, 
Commissioner with the Georgia Public Service Commission and President 
of the National Association of Regulatory Utility Commissioners 
(NARUC). Thank you for providing me the opportunity to testify today on 
behalf of NARUC.
    Founded in 1889, NARUC represents the interests of State utility 
commissions operating in each of your home States. NARUC's member 
commissions are responsible for implementing: (1) State 
telecommunications laws; and (2) Federal statutory provisions 
specifying incumbent local exchange company obligations to interconnect 
and provide nondiscriminatory access to competitors. See, 47 U.S.C. 
Sec. 252 (1996).
    NARUC has approved two resolutions relating to voice-over-Internet-
Protocol technologies, both of which are attached to this testimony.
State commissions want VoIP and other technologies to succeed
    NARUC's members are committed to making sure consumers in every one 
of our States can realize the benefits of exciting new technologies 
like voice-over-Internet-Protocol (``VoIP'') in the context of a 
telecommunications market that continues to live up to the demands that 
we as a society place on it.
    My own state of Georgia is home to innovative companies like ARRIS 
Corporation, which makes VoIP networking equipment, and trial projects 
by Z-Tel Communications, Charter, and CableCom. Georgia has a vibrant 
and growing technology industry and we thrilled to play host to such 
groundbreaking offerings.
State Commissions Have Applied A Light Touch
    Just like Federal policymakers, State commissions are investing 
substantial effort to understand the unique business models, services 
and consumer opportunities that have sprung up around VoIP technology.
    Numerous States have opened dockets or informal investigations to 
gather all the facts before deciding how to proceed. A few States have 
asked VoIP carriers to certify as telecommunications service providers, 
leading in at least one case to litigation over whether such services 
is actually an information service or can be certificated under State 
law as a telecommunications service. Significantly, that Minnesota case 
was opened as a result of a complaint that the relevant carrier was not 
complying with State emergency calling laws.
    At the same time, Time Warner Cable has to chosen to file for 
certification as a telecommunications carrier in at least five States 
and provide 911 emergency dialing, pay access charges and remit 
universal service fees. In all States where the issue has arisen or 
been investigated, State commissions have applied either a light 
regulatory touch or, to date, no touch at all. Current VoIP providers 
do not have market power nor do they control essential bottleneck 
facilities. Like any other new entrant, they are not generally subject 
to economic regulation or extensive oversight by State commissions.
Consumer Expectations And The Phone System
    Consumers have certain expectations of today's phone system, 
including ubiquitous, reliable service, a minimum level of service 
quality, advance notice before termination and important features like 
E911. Disabled individuals want to participate in the same 
communications system as the rest of us. Law enforcement needs fair but 
effective access to communications to track down criminals and 
terrorists.
    The most important and challenging fact about VoIP is that, if 
industry predictions are correct, it could replace a substantial part 
of the current telecommunications market over the next couple years.
    Today, consumers who use a ``pure VoIP'' product like Free World 
Dialup or ``Skype'' are likely to have a ``plain old'' telephone on the 
same desk as the computer and whatever VoIP hardware they are using. If 
they need to dial 911, call a relative or even order a pizza, the 
current system is there for them.
    But with big players like SBC, Time Warner and AT&T entering the 
market, the stakes are raised because many households will reach a 
situation where the VoIP phone (or computer or whatever you want to 
call it) is the only phone in the house. Eventually, non-technophiles 
will come to rely on VoIP phones they way they rely on the current 
system today.
    Whether we realize it or not, we build our lives around a reliable 
telephone system. If a babysitter, God forbid, has to call 911, she'll 
need a reliable dial tone, clear service and effective routing to the 
nearest public safety answering point, and the local ambulance 
dispatcher will want to know where she is, even if she can't give the 
directions. While policymakers are notoriously bad at predicting the 
``next big thing,'' I am certain consumers will continue to expect many 
of the same things from the phone system of the future, regardless of 
which technology it uses.
    The good news is that industry groups are stepping up to the plate 
and beginning to work on their own emergency dialing and disabled 
access solutions and actively engaging in discussions about how to 
sustain the universal service system and reform intercarrier 
compensation.
    We are happy they are engaging in these activities so they can meet 
their public service obligations in the most efficient, effective 
manner possible. None of us intends to apply old rules to new 
technologies in ways that don't makes sense, but the public interest 
obligations of the telecom system are serious enough to require 
continued governmental oversight and, when necessary, enforcement.
Intercarrier Compensation, Universal Service And Taxes
    In the near term, State commissioners plan to play a pivotal role 
in ongoing dialogues about how to reform intercarrier compensation and 
universal service. In carrying out the Telecommunication Act's mandate 
to make all subsidies ``explicit,'' the Federal Universal Service Fund 
is facing growing demands.
    The FCC has opened a broad proceeding on VoIP technologies. No 
matter what you believe the end game should be, there are undoubtedly a 
host of critical issues raised by that proceeding. However, the FCC 
rules or, alternatively, Congress acts, knotty issues, transition and 
otherwise, that require resolution before moving forward, are 
outstanding. Our November resolution lists a few of the concerns that 
would apply if VoIP services were classified as Title I:

   Additional uncertainty and reduced capital investment while 
        the scope of the FCC's authority under Title I is tested in the 
        courts;

   Loss of consumer protections applicable to 
        telecommunications services under Title II;

   Further disruption of traditional balance between Federal 
        and State jurisdictional cost separations and the possibility 
        of unintended consequences and increased uncertainty;

   Increase risk to public safety;

   Loss of state and local authority over emergency dialing 
        services; and

   Reduced support base for Federal and State universal service 
        as well as State and local fees and taxes.

    How VoIP services are ultimately defined, as well as the FCC's 
reformation of the Federal intercarrier compensation regime, will also 
have obvious effects on intrastate intercarrier compensation schemes 
and possibly funding for State universal service programs.
    Many states also operate their own universal service programs, 
filling in the gaps missed by the Federal system for thousands of high 
cost and low-income consumers. Any comprehensive solution--on VoIP or 
intercarrier compensation--must allow States to preserve these 
programs.
    Most policymakers agree that Federal and State universal service 
and intercarrier compensation regimes are inextricably linked to policy 
choices adopted for certain types of VoIP services. Those choices could 
also impact service quality and reliability as well as impact existing 
mechanisms for constituent/consumer dispute resolution concerning 
issues like ``slamming'' and ``cramming.'' At a minimum, before either 
Congress or the FCC takes precipitous action defining the policy that 
applies to VoIP and other telecommunications, those issues must be 
addressed. Actions that increase incentives for regulatory arbitrage 
before taking care of rural America and low-income consumers or fully 
exploring the impact on a range of related issues will make the task of 
transitioning to these new services exponentially more difficult.
    Moreover, the same issues of traffic migration that bedevil the 
intercarrier compensation system and the universal service fund will 
begin to inflict a major financial hit on state budgets, up to $13 
billion, if the VoIP services that terminate to the Public Switched 
Telephone Network (PSTN) are classified as ``information services'' and 
removed from State taxing jurisdiction. This raises the stakes for 
whatever decision the FCC or Congress ultimately makes.
Principles Moving Forward: Functional Nature Of The Service
    If there is one thing we can be sure of, it is that the technology 
itself will continue to evolve and change as quickly as the ink dries 
on legislation. Not even the industry leaders here on this panel can 
tell you what the technology will look like several years from now. 
Although the technology has been around for a while, as far as I can 
tell, the current ``VoIP boom'' began scarcely five or six months ago, 
so many more twists and turns are sure to come.
    The technology used to deliver voice communications has been in 
constant flux ever since Alexander Graham Bell patented the first 
telephone. Policies that focus on specific technologies risk policy-
makers, rather than markets, deciding which competitors should win or 
lose. The consensus among State commissioners, as indicated by our 
resolutions, is that public interest obligations of a service derive 
from the functional nature of that service--not from the technology 
used to deliver it.

   If a service originates and terminates on the PSTN, it is a 
        telecommunications service.

   If a company controls bottleneck facilities for basic 
        telecommunications services, neither VoIP nor any other 
        technology should shield it from oversight.

   If babysitters and grandmothers rely on a service for voice 
        communications, it should be reliable, should connect you to 
        emergency dialing services and should be available to the 
        disabled.

   Nor should constituents be forced to choose between cutting 
        any phone service and paying a specious charge ``crammed'' on 
        their bill by a third party vendor.

    If we don't expect these things from our phone service, we should 
have a genuine debate about that--for all phone service--as I expect 
this body will over the next several years. Far from slowing down new 
technologies with old rules, this approach actually frees us to be 
clear about the public interest obligations we expect from telecom 
services without creating market distortions or opportunities for 
regulatory arbitrage.
    VoIP is the hot technology of today, but members of this committee 
know that ``hot technologies'' come and go. Some change the world and 
others disappear leaving only their press releases. The public interest 
obligations of the telecom system should be built around the consumer 
and the role that a particular service plays in his life.
                                 ______
                                 
                         The Role of the States
    State commissions will continue to play a valuable role in 
maintaining a telecom system that is reliable, dependable and available 
at comparable prices in every region of the country. Each of us is 
intimately familiar with the telecom markets in our own States and in a 
position to be responsive to local consumers in ways that simply can't 
be done from Washington. We maintain State universal service programs, 
mediate competitor-incumbent interconnection agreements, monitor the 
level of competition in individual markets, and, significantly respond 
and resolve your constituent's complaints about service.
    I know that Vonage, TimeWarner, CenturyTel and lots of others are 
working day and night to do amazing things for consumers and address 
the public interest concerns I've raised today. State commissioners 
applaud the IP communications industry for its dynamism and we have no 
intention of standing in the way of progress. Instead, we look forward 
to working closely with industry on those public interest issues over 
the coming months and years as the innovation that makes this Nation 
great inevitably reshapes our telecom system along with the rest of the 
economy.
                                 ______
                                 
   Resolution Relating To Voice Over The Internet Telecommunications
    WHEREAS, The Internet is providing opportunities for new methods to 
originate, transport, and terminate telecommunications, but is also 
providing new regulatory challenges, and

    WHEREAS, AT&T Corp has filed a petition with the Federal 
Communications Commission requesting in part that the FCC prevent local 
exchange carriers from assessing interstate access charges on certain 
phone-to-phone Voice Over Internet Protocol services, pending adoption 
of final Federal rules, and

    WHEREAS, In 1998 the FCC reached a tentative conclusion that 
certain phone-to-phone IP calls may be telecommunications services, 
even if the carrier converts such a call to IP format and back again, 
and that a user who receives only voice transmission without other 
enhancements is receiving a telecommunications service, not an 
information service, and

    WHEREAS, A decision by the FCC, in this docket or elsewhere, to 
declare all phone-to-phone calls over IP networks to be information 
services by virtue of the technology could have negative effects on 
various telecommunications policies, including universal service, and 
might be inconsistent with the 1996 Act, and

    WHEREAS, Voice over the Internet Protocol and intercarrier 
compensation issues are inextricably linked, and

    WHEREAS, A significant portion of the Nation's total voice traffic 
could be transported on IP networks within a few years, now therefore 
be it

    RESOLVED, By the Board of Directors of the National Association of 
Regulatory Utility Commissioners, convened in its February, 2003 Winter 
Meeting in Washington, D.C., that the FCC should confirm its tentative 
decision that certain phone-to-phone calls over IP networks are 
telecommunications services, and be it further

    RESOLVED, That NARUC asks the 706 Joint Conference to 
systematically address issues relating to Voice Over the Internet 
Protocol and to explore, with the States and the appropriate joint 
boards, and with industry, mutually satisfactory methods of dealing 
with the related jurisdictional rate and separations issues, including 
but not limited to reviewing, revising and simplifying the varied 
existing intercarrier compensation regimes while preserving universal 
service, and be it further

    RESOLVED, That NARUC's General Counsel should file with the FCC 
comments and ex parte presentations consistent with this resolution.

Sponsored by the Committee on Telecommunications
Adopted by the NARUC Board of Directors February 26, 2003
                   Resolution on Information Services
    WHEREAS, Communications consumers are served by an increasing 
number of technologies in today's markets and these technologies will 
continue to evolve and develop in the future; and

    WHEREAS, The existing legal and regulatory constructs evolved in 
markets where almost all consumers were served by the public switched 
network and that new constructs will need to evolve and develop; and

    WHEREAS, These FCC decisions and proceedings have or may assert 
jurisdiction under Title I over new technologies but without 
acknowledging that those technologies utilize and include 
telecommunications services; and

    WHEREAS, When it passed the Telecommunications Act of 1996, 
Congress established a definition of ``information services'' and 
validated the FCC's previous rulings that enhanced services should be 
regulated on a different basis than telecommunications services; but 
Congress did not state that services that combine elements of 
information services and elements of telecommunications services should 
be regulated under Title I; and

    WHEREAS, In 1998 the FCC reported to Congress that carrier 
regulation should be applied solely to companies that provide 
underlying transport, and not to the ``information services'' that are 
``built on top'' of those facilities, and it tentatively concluded that 
certain phone-to-phone VoIP calls ``bear the characteristics'' of 
telecommunications services; and

    WHEREAS, The Telecommunications Act of 1996 preserves the 
jurisdiction of the States to regulate intrastate telecommunications 
services; and

    WHEREAS, Telecommunications Services associated with information 
services may be unregulated or more lightly regulated under the FCC's 
statutory forbearance powers [47 U.S.C. Sec. 160]; and

    WHEREAS, In February, 2003, NARUC adopted a resolution regarding 
VoIP services advising the FCC that a decision declaring all phone-to-
phone calls to be information services by virtue of Internet technology 
might be inconsistent with the 1996 Act and could have negative effects 
on various telecommunications policies, including universal service, 
now therefore be it

    RESOLVED, That the National Association of Regulator Utility 
Commissioners (NARUC), convened in its November 2003 Annual Convention 
in Atlanta, Georgia, that, in accordance with the principle of 
technological neutrality, regulatory jurisdiction should be based, 
whenever possible, on the characteristics of a service, not on the 
technology used to provide that service, whether the service is 
commingled with any other service or the speed or capacity of that 
service; and be it further

    RESOLVED, That NARUC urges the FCC to carefully consider the 
following:

   Uncertainty and reduced capital investment while the scope 
        of the FCC's authority under Title I is tested in the courts;

   Loss of consumer protections applicable to 
        telecommunications services under Title II;

   Disruption of traditional balance between Federal and State 
        jurisdictional cost separations and the possibility of 
        unintended consequences and increased uncertainty;

   Increases risk to public safety;

   Customer loss of control over content;

   Loss of state and local authority over emergency dialing 
        services; and

   Reduced support base for Federal and State universal service 
        as well as State and local fees and taxes, and be it further

    RESOLVED, That State and Federal regulators should work together to 
adapt their regulatory oversight to the technological changes in 
communications markets so that all consumers receive the benefits of 
these new technologies; and be it further

    RESOLVED, that NARUC General Counsel is authorized to make filings 
consistent with this resolution, including filing amicus curiae briefs 
in court proceedings.

Sponsored by the Committee on Telecommunications
Recommended by the NARUC Board of Directors, November 18, 2003
Adopted by NARUC Convention, November 19, 2003

    The Chairman. Thank you, Mr. Wise.
    Mr. Britt?

   STATEMENT OF GLENN A. BRITT, CHAIRMAN AND CHIEF EXECUTIVE 
                   OFFICER, TIME WARNER CABLE

    Mr. Britt. Good morning, Chairman McCain and Members of the 
Committee. My name is Glenn Britt, and I'm Chairman of Time 
Warner Cable. Thank you for inviting me here today to talk 
about our experience in deploying voice over IP.
    I request that my full written statement be included in the 
record.
    The Chairman. Without objection.
    Mr. Britt. Time Warner Cable serves nearly 11 million basic 
television subscribers around the country, and over three 
million broadband subscribers, in over 27 states. We are 
pleased, at this point, to be adding voice service to these 
offerings.
    I'd like to make three points this morning. First, we, in 
our company, are using voice over IP technology today, and we 
have been providing voice service in Portland, Maine, since 
early last year. Our service looks and feels just like 
conventional telephone service. The customers can use their 
existing phones, their existing phone jacks, and they could 
even keep their same telephone numbers.
    In the 9 months that we've been operating in Portland, 
we've gained 12,000 customers, and that's about 8 percent of 
the available homes in that territory. Based on that success, 
we plan to launch voice in almost all of our markets this year 
so that all of our customers will be able to benefit from this 
new service.
    My second point today is that our voice over IP service 
complies with all of the important public policies and social 
issues that we've been talking about this morning. These 
include E-911, or however that may evolve, access for the 
disabled, payment into universal service funds, and cooperation 
with law enforcement agencies.
    My third point is that we believe the introduction of this 
technology presents policymakers with an opportunity to rethink 
the existing regulatory framework. A new regulatory structure 
could encourage investments and deployment of these new 
technologies. And as voice over IP services are introduced, 
there's a need for a regulatory structure that encourages and 
promotes investment in this new technology, and we think the 
time for doing that is now.
    Traditional phone regulation was developed in an era when 
the phone company was established as a business with guaranteed 
financial return, and regulation, the old regulation, was 
intended, in part, to protect against the exercise of their 
monopoly power. This regulation should not apply to this new 
technology or to new competitive entrants.
    We are at a juncture where the government, as you've been 
hearing this morning, really needs to examine many parts of the 
telecommunications regulatory framework, and new regulations 
should promote the development of new technologies and 
competition. But we think we should retain requirements that 
pertain to these very important social policies that we've been 
talking about, E-911, et cetera.
    The NCTA, of which I am chairman this year, has proposed a 
regulatory approach to voice over IP that could accomplish 
these goals. It calls for balancing VoIP providers' rights and 
responsibilities to provide all of the necessary public-policy 
objectives, but through the lightest possible regulation. These 
ideas are described in greater detail in the NCTA white paper, 
which I have attached to my testimony for your consideration.
    Mr. Chairman and Members of the Committee, we are very 
excited about the future, and we believe that establishing an 
environment in which providers feel confident to invest, 
innovate, and deploy this new technology will best serve the 
public.
    Thank you, again, for this opportunity, and I look forward 
to answering your questions.
    [The prepared statement of Mr. Britt follows:]

  Prepared Statement of Glenn A. Britt, Chairman and Chief Executive 
                       Officer, Time Warner Cable
    Good morning Chairman McCain, Senator Hollings, and members of the 
Committee. My name is Glenn Britt, and I am Chairman and CEO of Time 
Warner Cable. Thank you for inviting me to speak here today about Time 
Warner Cable's experience deploying Voice-Over-Internet Protocol, and 
for providing an opportunity to share my thoughts on the important role 
policy makers and regulators can play in facilitating the growth and 
development of this new voice service.
Introduction
    Time Warner Cable is the Nation's second largest MSO, serving 
nearly 11 million video subscribers and over 3 million broadband 
subscribers in 27 states. Time Warner Cable offers subscribers a wide 
array of entertainment and communications services, including basic 
cable, digital cable, high-speed data, video on demand, and 
subscription-based video on demand services. Time Warner Cable is also 
taking a lead role in offering other new products to its customers 
including High Definition Television (HDTV), Digital Video Recording 
(DVR) functionality, and home networking to interconnect multiple 
computers in the household with a single broadband connection. And as I 
will discuss in more detail this morning, we have already begun the 
process of adding to this mix a highly competitive facilities-based 
voice offering to the more than 18 million Americans within Time Warner 
Cable's service areas.
Time Warner Cable's VoIP Service Will Fulfill the Goal of Facilities-
        Based Telecommunications Competition
    Advances in Voice-Over-Internet Protocol technology--or ``VoIP'' as 
it has come to be known--give Time Warner and other cable operators the 
ability to fulfill the vision of the 1996 Telecommunications Act by 
bringing true facilities-based competition in telephony services to the 
marketplace. Since 1996, cable operators have invested more than $84 
billion in private risk capital to rebuild and upgrade their 
facilities. VoIP technology allows cable operators to use these new 
broadband networks to offer subscribers high quality, reliable, local 
and long distance telephony services, making it an economically 
feasible means of competing with incumbent carriers. The development of 
IP-based telephony services also gives the few cable operators that 
have not yet upgraded their systems another reason to do so.
    After several years of testing and developing a potential VoIP 
offering, Time Warner Cable launched what we call ``Digital Phone'' on 
a commercial basis to residential customers in Portland, Maine in May 
2003. Today, we provide Digital Phone service to nearly 12,000 
customers in the Portland area, and we continue to add VoIP capability 
to our cable systems. We recently launched Digital Phone service in 
Raleigh, North Carolina, and I am pleased to report that we plan to 
make Digital Phone operational throughout the majority of the Time 
Warner Cable footprint by the end of 2004.
    To the customer, Digital Phone feels just like conventional 
telephone service. When a customer orders Digital Phone service, Time 
Warner Cable installs a new cable modem/telephony device called a 
Multimedia Terminal Adapter or ``MTA'' in the customer's home. The MTA 
is connected to existing inside wiring, enabling a subscriber to 
receive voice service over each existing telephone jack in his or her 
home. In addition, consumers switching to Digital Phone can maintain 
their current telephone numbers, and have access to toll-free 800 
calling, Telecommunications Relay Services for the disabled, Enhanced 
911 (E911) services, and Directory Listings.
    With respect to matters of particular importance to this Committee, 
let me emphasize that Time Warner Cable contributes to both state and 
Federal universal service funds in connection with our Digital Phone 
service. Digital Phone also includes the capability to assist law 
enforcement agencies by permitting the interception, when necessary, of 
both call identifying information and call content in response to 
lawful requests. Time Warner Cable views this as a critical aspect of 
its service in this time of heightened national security and law 
enforcement concerns.
    Time Warner Cable's Digital Phone service is delivered over a 
managed network with quality of service standards designed to ensure 
that customers are provided with the same high quality of service they 
have come to expect from traditional telephone service. The upgraded, 
two-way capable, digital network that we have built during the past 
several years is the central component of the architecture used to 
provide Digital Phone services. We are deploying devices called 
``softswitches'' on a regional basis, which manage, route, and control 
calls originating from and terminating into our network and provide 
vertical telephone features (such as caller ID and call waiting) 
without the need for a Class 5 circuit switch. Using the softswitch 
architecture, calls travel over a network managed by Time Warner 
Cable--not the public Internet--as they move toward their final 
destination, whether that is on our network or a location on the Public 
Switched Telephone Network (PSTN).
    When calls to reach customers not served by Time Warner Cable must 
traverse the PSTN, Time Warner Cable completes these calls through its 
relationships with competitive local exchange carriers. We recently 
announced strategic relationships with MCI and Sprint under which those 
carriers will assist in the provisioning of Digital Phone service to 
customers, termination of IP voice traffic to the public switched 
telephone network, delivery of Enhanced 911 service, local number 
portability and carrying long distance traffic.
    With the rollout of Digital Phone, Time Warner Cable consumers are 
already benefiting from having a choice of facilities-based telephone 
providers. Moreover, deployment of VoIP service by Time Warner and 
other cable operators also has the potential to offer consumers new 
features and functionality such as multimedia conferencing, interactive 
gaming, and other multimedia applications which will over time 
demonstrate the real benefits consumers can reap from the integration 
of video, data, and voice services over a single broadband network. It 
is the next development in the increasingly competitive communications 
environment where cable competes for customers with telephone 
companies, satellite distributors, and others offering one or more 
services. It is no surprise that cable operators have begun and will 
continue to embrace this technology. Time Warner Cable is leading the 
way.
VoIP Regulation Should Encourage and Promote This New Competition
    The absence of a clear regulatory framework for VoIP posed a 
dilemma for Time Warner Cable as we were preparing to bring the service 
to market. We could assert that VoIP was an unregulated information 
service and risk challenges from state PUCs and incumbent telephone 
companies. Alternatively, we could abide by the regulations applicable 
to more traditional telephone services and risk becoming saddled with a 
legacy regime in which IP technologies and service offerings do not fit 
precisely and that, therefore, is inappropriate to the unique character 
of IP-based telephony. In the interests of rolling out our service in 
the smoothest possible manner, we decided to obtain state regulatory 
certification for our VoIP offerings and to comply with traditional 
telephony requirements while expressly reserving our right to revisit 
this issue when the FCC and Congress established the appropriate 
regulatory structure for VoIP services.
    I respectfully submit that the time for establishing this structure 
is now. Traditional phone regulation was developed in an era in which 
the phone company was an established local monopoly with a guaranteed 
financial return, and regulation was imposed in an effort to protect 
consumers against the exercise of monopoly power. These principles do 
not apply to the new world in which VoIP will operate, and it makes no 
sense to force VoIP--and other technologies that may emerge--into an 
outdated regulatory scheme. The introduction of new technologies such 
as VoIP presents an opportunity for the government to reexamine the 
rules applicable to competitive entrants, and to develop a new, Federal 
regulatory scheme for VoIP that will allow its widespread and speedy 
deployment, regulating only where demonstrably necessary and leaving 
the rest to the marketplace.
    The government's valid concerns--like E911, support for law 
enforcement needs, access for persons with disabilities, continued 
funding for universal service, and other important consumer 
protections--can be satisfied without forcing VoIP into traditional 
telephony regulation. In short, critical public policy objectives can 
be satisfied without the wholesale importation of legacy requirements 
that have failed to keep pace with technological advancements and a 
more competitive environment. The National Cable & Telecommunications 
Association, of which Time Warner Cable is a member and whose board of 
directors I chair this year, has proposed a regulatory approach to VoIP 
that could accomplish this goal.
    NCTA has proposed a four-prong baseline test to determine whether a 
particular IP-based voice service should be subject to a new regulatory 
framework. The test is based on whether the service has the following 
four characteristics:

  1.  it makes use of the North American Numbering Plan (7 or 10 digits 
        phone numbers to reach a called party);

  2.  it is capable of receiving calls from or terminating calls to the 
        public switched telephone network at one or both ends of the 
        call;

  3.  it represents a possible replacement for ``plain old telephone 
        service''; and

  4.  it uses Internet Protocol transmission between the service 
        provider and end user customer.

    If a service meets these qualifications, NCTA calls for balancing 
VoIP providers' rights and responsibilities to achieve all necessary 
public policy objectives but through the lightest possible regulation.
    For example, under this framework, qualifying VoIP providers would 
be assigned vital responsibilities, such as providing assistance to law 
enforcement and public safety according to the principles outlined in 
CALEA; offering 911/E911 services and access for the disabled; 
contributing to the Universal Service Fund; participating in 
intercarrier compensation; and complying with general consumer 
protection requirements. At the same time, such providers would be 
afforded certain rights essential for successful deployment of 
competitive voice services, such as the efficient exchange of traffic 
on public and private networks, number portability, access to 911/E911 
resources, proper compensation for terminating calls, non-
discriminatory access to universal service support, and access to 
rights-of way and other facilities without incremental fees. These 
ideas are described in greater detail in an NCTA White Paper titled: 
``Balancing Responsibilities and Rights: A Regulatory Model for 
Facilities-Based VoIP Competition.'' I have attached to my testimony a 
copy of this paper for your consideration.
Conclusion
    Mr. Chairman and Committee Members, we are excited about the 
future, and believe that a minimally regulatory environment that 
ensures VoIP providers comply with vital requirements, while still 
retaining a framework in which providers feel confident to invest, 
innovate and deploy new technologies like VoIP, will best serve the 
public. I thank you again for the opportunity to appear to discuss the 
exciting opportunity in the communications marketplace presented by the 
emergence of VoIP technology. I look forward to your questions.
                               Attachment

National Cable & Telecommunications Association--February 2004--An NCTA 
                              Policy Paper

     Balancing Responsibilities and Rights: A Regulatory Model for 
                   Facilities-Based VoIP Competition
                           Table of Contents
Introduction and Executive Summary

I. What is VoIP?

II. The Opportunity Presented by Facilities-Based VoIP Services

III. The Regulatory Challenge of Deploying New Services

IV. VoIP Regulatory Proceedings in the States

V. NCTA's Approach: Balancing Responsibilities and Rights

VI. The Responsibilities and Rights of VoIP providers

        Public Health and Safety

        Universal Service

        Intercarrier Compensation

        Consumer Protection

        Inappropriate Legacy Utility Requirements

        Rights of VoIP Providers

VII. Regulatory Restr aint and Regulatory Classification

Conclusion
                                 ______
                                 
        A Regulatory Model for Facilities-Based VoIP Competition
Introduction and Executive Summary
    Today, most American households do not have a choice of facilities-
based local telephone service providers. They have not realized the 
benefits of such choices despite nearly a decade of efforts by 
lawmakers and regulators to promote facilities-based competition in the 
local telephone marketplace. Although some cable companies are 
providing an alternative with circuit switched telephone service, with 
the deployment of cable-based Internet Protocol (``IP'') phone 
services, customers will enjoy new options for a full suite of 
facilities-based voice services.
    Forms of non-facilities-based Voice over Internet Protocol 
(``VoIP'') service exist today, but they generally do not offer the 
reliability and quality that consumers have come to expect from ``plain 
old telephone service'' (``POTS'') offered by incumbent local exchange 
companies (``ILECs'') and most competitive local exchange companies 
(``CLECs''). Cable communications companies are working to introduce a 
new generation of phone services that will offer the flexibility and 
economy of IP technology (i.e., the shared transmission of voice, data, 
and video information via a managed network) and the reliability and 
quality of service that consumers desire. Importantly, VoIP services 
delivered over a broadband cable network will, over time, provide wide-
scale residential phone competition that is both facilities-based and 
sustainable.
    The cable industry is excited about the consumer benefits and 
business opportunities that VoIP services will create, and the industry 
is devoting capital, personnel, and other resources to make facilities-
based VoIP services a marketplace reality. Resources and the state of 
technological development, however, are not the only factors that will 
affect the availability of VoIP services. Regulatory uncertainty--and 
the potential for application of unnecessary or overly burdensome 
regulation--will also affect whether, when, and how VoIP services are 
deployed.
    The Internet and information services generally have succeeded, in 
large measure because of regulators' prescient and courageous decision, 
made more than two decades ago, to promote competition in interstate 
information services and to fence them off from unnecessary Federal and 
state regulation. Commercial mobile radio services (``CMRS'') have 
similarly been the subject of pro-competitive and deregulatory 
policies, again with salutary results in terms of investment, speed of 
innovation, and competition. Unfortunately, this has not generally been 
the case for CLECs. Although some states have adopted a hands-off 
approach to regulating new entrants, many states have imposed varying 
levels of traditional telephone regulation on those new entrants. It is 
unknown how the costs of this regulation have affected the willingness 
of companies to commit risk capital and provide competitive 
alternatives. Establishing a clear legal framework that promotes the 
emergence of VoIP services and ensures their freedom from unnecessary 
regulation can have equally beneficial results for the development of 
telephone competition, particularly in the residential mass market.
    Much of the public policy discussion surrounding VoIP has centered 
on the appropriate regulatory classification of such services. Such an 
approach, however, has several shortcomings, as each regulatory 
category carries with it a history of regulatory assumptions that may 
or may not be appropriate for new technologies such as VoIP and the 
services they spawn. For that reason, this policy paper chooses instead 
to describe the cable industry's vision for a regulatory approach that 
will lead to efficient and rapid deployment of facilities-based VoIP 
services. We describe the public policy objectives that should be 
pursued to encourage the growth of VoIP services. We propose a 
regulatory roadmap that: (1) assigns to VoIP service providers vital 
responsibilities; (2) discusses certain responsibilities that VoIP 
service providers may undertake on a voluntary basis, but which should 
not be imposed upon them; and (3) identifies rights that are essential 
for VoIP service deployment. We also establish a baseline definition as 
to which VoIP services should have such rights and responsibilities. In 
doing so, we suggest that such an approach be applicable to new entrant 
VoIP service providers based upon the precise nature of the services 
they provide, regardless of whether they provide those services over 
their own facilities or the facilities constructed by others.
    Protecting VoIP services from unnecessary regulation does not 
require that important public policies be neglected. Even under a 
generally deregulatory regime, any VoIP service that meets a baseline 
test as proposed herein \1\ can, and should, meet certain public policy 
responsibilities and requirements such as the principles set forth in 
the Communications Assistance for Law Enforcement Act (``CALEA''), the 
offering of 911/E911, access for the disabled, and appropriate 
contributions to universal service. But the overall direction of public 
policy should be toward a deregulatory environment in which even the 
most vital public policy objectives are secured through the lightest 
possible regulation, so as not to forestall the many benefits of these 
new services.
---------------------------------------------------------------------------
    \1\ The proposed four-prong test requires that a VoIP service (1) 
use North American Numbering Plan (``NANP'') res ources, (2) receive 
calls from--or terminate them to--the public switched telephone network 
(``PSTN''), (3) represent a possible replacement for POTS, and (4) use 
Internet Protocol transmission between the service provider and the end 
user customer, including use of an IP terminal adapter and/or IP-based 
telephone set.
---------------------------------------------------------------------------
    Similarly, there are a number of legacy utility requirements that 
should not be imposed on VoIP service providers. Most such requirements 
date from the era of a single provider of phone service and are 
inappropriate for competitors using nascent technologies that offer 
alternatives to incumbent providers. In particular, a number of legacy 
requirements relate to billing, payment, credit and collection, and 
quality o f service standards. Competitive marketplace forces, rather 
than prescriptive rules, can address these issues much more effectively 
for non-incumbent providers of VoIP services. Regulators should make a 
comprehensive effort to review and eliminate such regulatory 
requirements for VoIP services.
    VoIP service providers, particularly facilities-based providers, 
do, however, require certain rights irrespective of whether the 
provider's service is ultimately determined to be an ``information 
service,'' a ``telecommunications service,'' or another type of 
service. These rights relate generally to interconnection and the 
exchange of traffic, the right to obtain telephone numbers and have 
them published in telephone directories, the right to access the 
facilities and resources necessary to provide VoIP customers with full 
and efficient 911/E911 services, the right to be compensated fairly for 
terminating traffic delivered from other entities and the right to non-
discriminatory access to universal service support. In addition, 
facilities-based VoIP providers need access to poles, ducts, conduits 
and rights-of-way, regardless of the ultimate regulatory classification 
of VoIP services.
    In the final analysis, facilities-based VoIP services can be the 
breakthrough that fulfills the vision of the Telecommunications Act of 
1996 \2\ (``1996 Act'') for vast numbers of residential consumers. The 
cable industry stands ready to play a lead role, just as it has done in 
making residential broadband Internet service a widespread and 
desirable service. This breakthrough will occur most rapidly and 
ubiquitously if Federal and state policymakers and regulators 
affirmatively promote VoIP services as an important policy objective 
and adopt a predominantly deregulatory approach to VoIP services.
---------------------------------------------------------------------------
    \2\ Telecommunications Act of 1996, Pub.L. No. 104-104, 110 Stat. 
56 (1996).
---------------------------------------------------------------------------
I. What is VoIP?
    VoIP is the convergence of voice and data into a single bitstream, 
which enables the provision of innovative offerings that integrate the 
two in ways not possible using traditional circuit-switched technology. 
Voice communications are digitized into data packets and routed in that 
form over either managed IP networks and/or over the public Internet to 
the desired location using IP addressing. As such, VoIP, in and of 
itself, is not a service. Rather, VoIP is a technology that allows 
voice traffic to be packetized and transported or routed over privately 
managed networks as data packets. Because the vast majority of 
telephone subscribers continue to be served by incumbent LECs on the 
public switched telephone network (``PSTN''), most VoIP -based calls 
made today continue to traverse, at some point, the PSTN. As VoIP -
based services become more prevalent, however, the technology will 
eliminate the need for both traditional circuit switching and the 
public switched telephone network (``PSTN'').
    In traditional circuit-switched telephony networks, a dedicated 
path, or channel, is opened between the parties participating in the 
call. No other traffic can pass over that channel while the call takes 
place. This dedicated channel remains open until the parties terminate 
the call, thus freeing up the channel for use in another call. In VoIP 
telephony--as with other IP-based services--dedicated circuits are not 
used. Multiple conversations are sent over the same channel as separate 
streams of data packets. When there is a lull in any particular 
conversation, other data packets can be carried over the same portion 
of the network, thus making the network more efficient than a 
traditional circuit-switched network. In technical terms, VoIP uses the 
network more efficiently because it combines, or multiplexes, multiple 
sets of data over the same physical path.\3\
---------------------------------------------------------------------------
    \3\ See VoIP--the Enabler of Real Telecom Competition, Goldman 
Sachs Global Equity Research Jul. 7, 2003 at 3.
---------------------------------------------------------------------------
    VoIP is an attractive technological approach for cable system 
operators who have already entered the local telephone market as well 
as those offering voice services for the first time. Compared to 
circuit-switched telephony, VoIP may result in lower (though still 
significant) rollout costs, increased flexibility, and more innovative 
and advanced services. More specifically, VoIP allows a provider to 
avoid the huge capital expenditures and investments needed to purchase 
and install circuit switches. Furthermore, VoIP utilizes data paths 
that the cable industry has already invested in and built. These 
existing paths facilitate easy software changes and additions to 
service packages, as well as innovative combinations of voice, data, 
and fax services.
    As with many other technical pursuits, standardization is important 
to VoIP . Cable companies want to be able to purchase equipment from 
various vendors, and to know that the equipment will be interoperable. 
To that end, CableLabs, the industry's research consortium, has been 
involved in developing uniform technical specifications for many years, 
including a successful effort to develop cable modem technical 
specifications. The Data Over Cable System Interface Specification 
(``DOCSIS'') is also the underlying specification for a CableLabs 
project known as PacketCable. Very simply, PacketCable is a common 
platform and set of interoperable interface specifications for 
delivering advanced, real-time multimedia services, including not only 
VoIP, but also multimedia conferencing, interactive gaming, and other 
multimedia applications. The VoIP specifications are written to do 
exactly what today's analog, circuit-switched phone network does, from 
dial tone to ring tone. But unlike other VoIP specification efforts 
that address only individual portions of how to make an IP phone call, 
PacketCable addresses the entire journey.
    The term ``VoIP'' encompasses these, as well as many other 
services, ranging from voice-enabled instant messaging and chat and 
voice-enabled gaming (such as Xbox Live) to services which replicate 
POTS. In many instances, ``VoIP'' will simply support a voice 
application or software application. Among the services that some cable 
operators are considering are ``unified'' messaging (whereby users have 
a single message platform for e-mail, voice-mail, faxes, and the like); 
personal portals; caller ID on television sets; talking e-mail; and 
customized dial-tones and greetings. VoIP may also make possible 
advanced video conferencing services including a combination of voice, 
video, and data delivery. Furthermore, with VoIP, some consumers may 
eventually be able to use the Internet from any location and instruct a 
home phone to forward calls to another phone number or listen to voice-
mail via the Internet from any location. Or, in an example offered by 
FCC Chairman Michael Powell, because ``[VoIP ] can be readily 
integrated with other computing syste ms. . .you make an Internet call 
to a doctor's office to make an appointment. The doctor's system calls 
up your medical records, your medications, and your last visit and 
instantly displays them. It also brings up the appointment times 
available, allows you to select one and then calls you back, or sends a 
text message to your cell phone, the day before the appointment to 
remind you.'' \4\
---------------------------------------------------------------------------
    \4\ See The Age of Personal Communications: ``Power to the 
People'', Remarks of FCC Chairman Michael K. Powell Before the National 
Press Club, Washington D.C. (Jan. 14, 2004), available at http://
www.fcc.gov/commissioners/powell/spmkp011404.pdf. In a further example 
``[s]imilar potential rests with police and fire response systems. The 
911 system is vital in our country, but it is limited functionally. In 
most systems, it primarily identifies the location from which the call 
was made. But an Internet voice system can do more. It can make it 
easier to pinpoint the specific location of the caller in a large 
building. It might also hail your doctor, and send a text or Instant 
Message alert to your spouse.''
---------------------------------------------------------------------------
    Even among those VoIP services that are ``phone-like'' there are 
significant differences. For example, the IP data packets used by 
services from some of the currently well-known providers, such as 
Vonage, travel over the public Internet. Facilities-based cable 
offerings, in contrast, will be able to transport IP data packets over 
their private managed IP networks with end-to-end quality of service 
monitoring (while still interconnecting with the PSTN as necessary). 
Moreover, with a cable-based VoIP service, it is possible to offer a 
robust VoIP service to a customer that does not subscribe to high-speed 
Internet access service. At least one cable company is currently 
offering its VoIP product to customers who do not subscribe to high-
speed Internet access.
    The VoIP services of particular concern in this paper might be more 
properly referred to as ``IP Phone'' services--those that in some ways 
mimic traditional telephone service. It appears, however, that the term 
``VoIP'' has come to commonly refer to these phone -like services and 
thus this paper will use that term. It is important to recognize, 
however, that there remain distinc tions among the type of VoIP-based 
services discussed herein. Indeed, nomenclature may be part of the very 
debate over VoIP policies. As discussed in more detail below, however, 
the cable industry believes that regulatory distinctions should be 
drawn based upon the type of services being provided by new entrant 
VoIP providers and not whether, for example, the service provider 
routes calls over the ``Internet'' or owns the facilities over which it 
routes calls. Few would argue, for example, that applications, or 
devices, where voice functionality is ancillary to the actual purpose 
of the service or device and where such applications do not fall within 
the specific VoIP service defined herein--as in voice-enabled gaming--
should be regulated in the same manner as a traditional phone service.
    Given these many distinctions, policymakers should establish a 
baseline test to determine whether an IP -based voice service should be 
subject to any regulation at all \5\ (as described in Section V I). 
Specifically, that test should be based on whether the VoIP service in 
question has the following characteristics:
---------------------------------------------------------------------------
    \5\ While it may, however, be warranted to require applications 
that do not meet this baseline test to provide assistance to law 
enforcement for security reasons, there appears to be no justification 
for imposing traditional telephone regulation upon such applications.

  1.  it makes use of North American Numbering Plan (``NANP'') 
---------------------------------------------------------------------------
        resources;

  2.  it is capable of receiving calls from or terminating calls to the 
        public switched telephone network (``PSTN'') at one or both 
        ends of the call;

  3.  it represents a possible replacement for POTS; and,

  4.  it uses Internet Protocol transmission between the service 
        provider and the end user customer, including use of an IP 
        terminal adapter and/or IP--based telephone set.\6\
---------------------------------------------------------------------------
    \6\ See Federal-State Joint Board on Universal Service, Report to 
Congress, 13 FCC Rcd. 11501 (1998) (``Stevens Report ''). In 
particular, the report established a four-part test, with the fourth 
prong relating to equipment. Given the advances in customer premises 
equipment, and the blurring of the lines between computers and phones 
nearly six years later, the fourth prong in that 1998 report no longer 
seems germane.
---------------------------------------------------------------------------
    IP applications such as voice communications overlaid on video 
gaming or video chat, which do not have the characteristics of the 
first three prongs above, should not be subject to regulation, much 
less traditional telecommunications regulation. Such applications 
generally would not use NANP resources nor would they have the ability 
to receive calls from or terminate them to the PSTN. The services 
covered by the four-prong test, as with others that are facilities-
based, would fulfill the promise of the 1996 Act in promoting the goal 
of greater residential competition. Services lacking characteristics of 
the fourth prong (i.e., lacking an IP based connection to the end 
user), are not addressed by this VoIP proposal.
II. The Opportunity Presented by Facilities-Based VoIP Services
    Over the years, and particularly since the 1996 Act, a consensus 
has evolved that American consumers will reap the greatest benefits 
from communications policies that encourage industry investment, foster 
technological innovation and service deployment, and increase consumer 
choices. To that end, Congress, in the 1996 Act, declared its intention 
to promote competition and to eliminate unnecessary regulation.\7\ 
These goals--investment, innovation, choice, competition, and 
deregulation--should be the primary reference points for policymakers' 
response to emerging VoIP services.
---------------------------------------------------------------------------
    \7\ See 1996 Act at preamble (stating that the purpose of the 1996 
Act is to ``promote competition and reduce regulation in order to 
secure lower prices and higher quality services for American 
telecommunications consumers and encourage the rapid deployment of new 
telecommunications technologies'') (emphasis added).
---------------------------------------------------------------------------
    A central objective of the 1996 Act was to introduce facilities-
based competition into the local phone services market.\8\ Nearly eight 
years later, competition in the local phone services market remains a 
hope rather than a reality for the vast majority of residential 
consumers. Although some markets enjoy the benefits of facilities-based 
competition from companies who have taken the risk and made the 
investment, this is atypical. In a majority of markets, residential 
consumers have no meaningful choice of facilities-based local phone 
service providers.
---------------------------------------------------------------------------
    \8\ The FCC has explicitly found that ``facilities -based 
competition serves the Act's overall goals.'' Review of the Section 251 
Unbundling Obligations of Incumbent Local Exchange Carriers, CC Docket 
No. 01-338, Report and Order and Order on Remand and Further Notice of 
Proposed Rulemaking, FCC 03-36, at 70 (rel. Aug. 21, 2003). 
Specifically, ``[f]acilities -based competition better serves the goal 
of deregulation because it permits new entrants to rely less on 
incumbent LECs' facilities and on regulated terms for access and price. 
And it serves the goal of innovation because new facilities are more 
likely to have additional capabilities to provide new services to 
consumers and competitors' deployment of new facilities is likely to 
encourage incumbents to invest in their own networks. Facilities -based 
competition also increases the likelihood that new entrants will find 
and implement more efficient technologies, thus benefiting consumers. . 
.. Finally, facilities -based competition creates network redundancy, 
which increases reliability and enhances national security.'' Id. at n. 
233 (emphasis added; internal citations omitted).
---------------------------------------------------------------------------
    This is despite the fact that the cable industry has recognized the 
importance to its customers of developing robust, competitive local 
phone services. Companies such as Cablevision Systems Corporation, 
Charter Communications, Comcast Corporation, Cox Communications, Inc., 
GCI Cable, Inc., and Insight Communications collectively serve over 2.5 
million subscribers with circuit-switched telephone service.\9\ And 
even as these companies maintain and improve existing circuit-switched 
local telephone operations in their service areas, they are preparing 
to expand the range of service options--and the places in which those 
options are available--using facilities-based VoIP technologies.
---------------------------------------------------------------------------
    \9\ In the former AT&T Broadband territories, Comcast continues to 
offer circuit-switched telephone services in each of the 18 markets 
where competitive telephone service was previously offered by AT&T 
Broadband, and to solicit and process orders from new customers. As of 
the third quarter of 2003, Comcast had over 1.3 million residential 
phone customers (including a small number of customers from preexisting 
Comcast operations in Maryland, Michigan, and Northern Virginia), 
making it the largest residential facilities -based CLEC in the U.S. 
Comcast currently offers a facilities--based circuit-switched 
competitive choice to nearly nine million households.
    Cox, a pioneer in circuit-switched cable telephony offers 
competitive circuit-switched telephone services to over 4 million 
households in 11 major markets across the country. As of the third 
quarter of 2003, Cox had nearly 1 million resident ial phone customers.
---------------------------------------------------------------------------
    In other areas where a choice exists, it typically consists of mere 
resale of the incumbent's services or the use of the incumbent's 
unbundled network elements in a combination known as ``the unbundled 
network element platform'' or ``UNE-P.'' The regulatory regimes of 
resale and UNE-P were intended, pending the emergence of facilities-
based competition, primarily as transitional mechanisms. Unfortunately, 
the telecom industry has been mired in nearly eight years of 
rulemakings and litigation over the UNE regime and related provisions 
of the 1996 Act. What has languished, especially in the residential 
marketplace, is the development of the robust facilities-based 
competition that Congress believed could best provide enduring consumer 
benefits.
    Now, however, VoIP technology offers the key to this long -awaited 
competition. The potential exists--by harnessing the same IP technology 
that is the foundation of the Internet--for a p latform other than the 
incumbents' local exchange network to deliver telephone service on a 
wide scale, providing residential consumers with real choice in 
facilities-based local phone service. IP technology offers the 
additional consumer benefit of enabling third parties to utilize this 
new platform to provide VoIP service in competition with one another as 
well as with the incumbent telephone companies.
    As a result of more than $84 billion of private investment in 
upgrades and enhancements to cable technology since 1996, cable 
operators are preparing to provide innovative facilities-based VoIP 
services in many areas--services that support 911/E911 and the 
principles of CALEA and are delivered via a managed network with a 
quality-of-service standard. Vo IP regulatory policy must ensure that 
cable operators who invest in the platform that makes this competition 
possible are not disadvantaged by regulation in favor of those who use 
that platform to compete with cable's VoIP services. With the right 
regulatory framework, VoIP technology will increase industry 
investment, foster innovation, and provide consumers with attractive 
alternatives to POTS and to other communications services.
III. The Regulatory Challenge of Deploying New Services
    Potential providers of any new services face the uncertainty of 
regulation at the federal, state and/or local level. Until now, 
consumers and providers have benefited from the decision by 
policymakers not to legislate or regulate in a manner that discourages 
innovation and investment in VoIP services.\10\ This is particularly so 
at the Federal level. For several years, limited forms of VoIP service 
have been offered without regulation. While the earliest forms of non-
facilities-based VoIP service did not provide traditional phone service 
quality or reliability, consumers used those services to replace calls 
to countries with high international toll rates--with the strong 
encouragement of the Federal Communications Commission (``FCC'').\11\ 
Today, providers such as Vonage, ePHONE, ICG Communications, Inc., and 
pulver.com are providing forms of VoIP services with little or no 
governmental regulation.\12\
---------------------------------------------------------------------------
    \10\ See, e.g.,Stevens Report (noting the FCC's desire for the VoIP 
industry to develop from a nascent service prior to making regulatory 
decisions that could stifle development: ``[W]e recognize the need, 
when dealing with emerging services and technologies in environments as 
dynamic as today's Internet and telecommunications markets, to have as 
complete information and input as possible'').
    \11\ See, e.g., Rules and Policies on Foreign Participants in the 
U.S. Telecommunications Market, Report and Order and Order on 
Reconsideration, 12 FCC Rcd. 23891 at  16 (1997) (noting that new 
technologies such as ``Internet telephony are already putting 
significant pressure on international settlement rates para.and 
domestic collection rates''); see also Kevin Tanzillo, FCC to Teach Old 
Tricks to New Dogs, Communications News, Jul. 1, 1996 (quoting former 
FCC Chairman Reed Hundt: ``'I think that Internet telephony will 
initially have the biggest impact on the price of international long-
distance calls. . . . When China is more accessible to the Internet, it 
will come to pass that the current $4.35 per minute charge for a long-
distance call to China will dissolve like spit in the wind'').
    \12\ See Petition for Declaratory Ruling That AT&T's Phone-to-Phone 
IP Telephony Services Are Exempt from Access Charges, FCC WC Docket No. 
02-361, Joint Comments of Association for Communications Enterprises, 
Big Planet, Inc., ePHONE Telecom, ICG Telecommunications, Inc., and 
Vonage Holdings Corp. (filed Dec. 18, 2002). But see infra Section IV 
(describing the efforts of some states to regulate VoIP service).
---------------------------------------------------------------------------
    While the Federal Government to date has suggested it will take a 
``hands-off'' approach to regulating VoIP, a major concern for would-be 
VoIP service providers is that one or more states could subject their 
services to existing state-specific regulatory schemes and/or establish 
new and equally burdensome regulations for VoIP services. State 
regulators have recognized the danger inherent in such an approach, as 
well. For instance, Colorado PUC Chairman Gregory E. Sopkin has warned 
that the ``nascent VoIP industry should not be subject to death-by-
regulation, which could well occur by having 51 state commissions 
imposing idiosyncratic, inconsistent, and costly obligations.'' \13\ 
(State regulatory activity is described in the next section).
---------------------------------------------------------------------------
    \13\ Colorado's VoIP proceeding (Dkt. 03M-220T), begun in May 2003, 
ended based on the ``legal uncertainty of whether a state may regulate 
VoIP services,'' concluding that ``t he most prudent course is to take 
no action with respect to VoIP pending FCC action.'' See TR State 
Newswire, PUC ends VoIP Investigation, Sopkin voices views on VoIP, Jan 
6, 2004. ``Sopkin added that VoIP shouldn't be regulated like 
traditional phone service. `We should treat VoIP not as a problem, but 
a new opportunity for regulators to look at changing how the use of 
wireline infrastructure is compensated--through subsidies, intercarrier 
charges, and regulated rates.' The chairman called on VoIP providers to 
seek free market solutions to intercarrier compensation and 911 service 
issues, urging them to negotiate service agreements `to show they are 
good corporate citizens and to show that traditional regulation is not 
necessary.' ''
---------------------------------------------------------------------------
    The application of traditional state telephone regulations risks 
encumbering VoIP services with a web of costly and potentially 
inconsistent rules that will inevitably deter potential market entrants 
from offering the services, especially since the efficient multi-state 
rollouts of VoIP will depend on new centralized ordering, provisioning, 
and billing systems. Encumbrances are also possible at the local level, 
where at least some communities argue that all services delivered over 
cable plant should be subject to separate and duplicative municipal 
fees, requirements for additional permits, quality standards, privacy 
rules, and the like.\14\ This local layer of regulation makes no sense 
when the new services can be offered simply by changing the pattern of 
signaling sent over an existing physical transmission facility, without 
imposing any additional burden on rights-of-way. This is precisely the 
situation with cable-delivered VoIP services.\15\ Moreover, local 
micro-regulation of new services such as VoIP would stifle them. Cable 
operators today can be subject to dozens or even hundreds of local 
franchising authorities for their cable systems in a single state . 
Offering VoIP services would be immensely more difficult with dozens or 
hundreds of inconsistent regulations.
---------------------------------------------------------------------------
    \14\ See Inquiry Concerning High Speed Access to the Internet over 
Cable and Other Facilities, Appropriate Regulatory Treatment for 
Broadband Access to the Internet over Cable Facilities, FCC GN Dkt, 
Nos. 00-185, 02-52, Comments of Alliance of Local Organizations Against 
Preemption (filed Jun. 17, 2002).
    \15\ Likewise, regulators must not subject VoIP services to 
financial penalties in the form of high pole attachment fees. VoIP 
services will normally be carried over pre-existing facilities already 
attached to utility poles. There will be few if any new poles placed or 
new trenches dug, and there will be few if any new wires attached to 
existing poles. VoIP services delivered by cable operators will be 
offered by simply changing the pattern of electrical and optical 
signals carried over existing physical facilities already in use for 
other purposes (e.g., delivery of video entertainment and/or high-speed 
connectivity to the Internet). Regulators, in considering the issue of 
pole attachment rates, must therefore avoid applying regulatory 
categories or regulatory solutions to those new and innovative services 
developed with other technologies in mind. Clearly, it would make no 
economic or policy sense for regulators to take a regulatory approach 
to VoIP services which would result in an unearned windfall to those 
who control poles merely based on a change in the pattern of optical 
and electrical signals carried over existing facilities and 
infrastructure. A change in these signals has no economic or physical 
impact on poles, conduits, or rights-of-way, yet it is all that is 
needed to offer VoIP service.
---------------------------------------------------------------------------
    Congress, the FCC, state legislatures and commissions, and local 
governments all need to adopt an approach that will encourage the 
deployment of Vo IP services in general, and of facilities-based 
services (VoIP and otherwise) in particular. Factors warranting 
emphasis in the analysis include the nascent nature of the services, 
the desirability of fostering, on a broad scale, a facilities-based 
alternative to incumbent local phone services, delays in deployment 
that could result from a tangle of incongruous state and local 
regulations, the importance of providing regulatory certainty in the 
near term, and the likelihood that the VoIP services of various 
providers will include differing capabilities. For all these reasons, 
it is critical that policymakers and regulators ensure that regulation 
does not become an impediment to VoIP service testing, investment, 
innovation, and deployment.
    Ultimately, however, much of the responsibility lies with the FCC. 
The FCC has the ability to bring states and providers together (for 
example, through its announced intention to issue a Notice of Proposed 
Rulemaking or ``NPRM'' on VoIP services soon) to determine on a uniform 
national basis which regulatory requirements are truly needed and which 
regulatory requirements will pose unnecessary barriers to entry and 
growth, as well as to articulate and enforce a suitably deregulatory 
(but not entirely deregulated) policy framework that allows for maximum 
flexibility, innovation, investment, and competition. The FCC's 
announced NPRM appears to have already had the effect of convincing 
states such as California to step back from efforts to possibly 
regulate VoIP providers as traditional telecommunications carriers.\16\
---------------------------------------------------------------------------
    \16\ See Ben Charny, California eases up on Net phone rules, CNET 
News.com (Jan. 5, 2004), available at http://news.com.com/2100-7352-
5135188.html?tag=guts_lh_7352.
---------------------------------------------------------------------------
    The FCC and state regulators, in developing a policy framework, 
should avoid perpetuating approaches that penalize industries such as 
the cable industry that have been willing to assume the added financial 
and other risks of building and continually upgrading the physical 
infrastructure needed to enable delivery of VoIP services. The FCC and 
state regulators should instead embrace regulatory approaches that 
encourage deployment of that competitive infrastructure.
    Notwithstanding the regulatory challenge of deploying new services, 
cable operators have been among the early leaders in developing 
facilities-based VoIP technology to serve the residential market. 
Current company rollouts include:

    Armstrong has partnered with VoIP service provider Vonage to offer 
Zoom phone service to cable customers throughout Armstrong's 11 cable 
systems, located in Kentucky, Maryland, Ohio, Pennsylvania, and West 
Virginia. The service is essentially a private label rebranding of 
Vonage service. Armstrong's residential packages range from a $24.99 
product with unlimited local and regional calling and 500 minutes of 
long distance across the U.S. and Canada to a $34.99 product with 
unlimited local and long distance calling across the U.S. and Canada. 
Just as with the Vonage product, a potential Zoom customer must 
subscribe to broadband service and use a digital phone adapter which 
plugs into the DSL or cable modem (in this case a cable modem). The 
adapter has ``[b]uilt in Quality of Service (QOS) technology [which] 
prioritizes your voice data over other [I]nternet traffic . . .'' \17\
---------------------------------------------------------------------------
    \17\ See http://www.zoom-phone.com/features.php or http://
www.vonage.com/features.php.

    Cablevision launched Optimum Voice, a digital voice-over-cable 
service, in the fourth quarter of 2003 throughout its New York City 
metropolitan service area of more than 4 million homes (which includes 
Bronx, part of Brooklyn, Long Island and the Lower Hudson Valley as 
well as southern Connecticut and northern New Jersey). Optimum Voice is 
currently the largest facilities-based VoIP deployment in the United 
States. The service provides unlimited local, regional, and long 
distance calling across the U.S. (including Alaska and Hawaii) and 
Canada for a flat rate of $34.95 per month. It includes five customer 
calling features (call waiting, caller ID, call return, three-way 
calling and call forwarding) and E911. Currently, Cablevision is 
offering Optimum Voice to its more than 1 million high-speed Internet 
service customers. Area code and phone number assignments are based on 
---------------------------------------------------------------------------
the location of the customer's residence.

   Charter launched commercial VoIP service in September, 2002 
        in Wausau, Wisconsin and is now gearing up its marketing 
        efforts. In addition to expanding VoIP in its Wisconsin 
        footprint, Charter will launch VoIP service in several other 
        markets this year.

   Comcast, the largest cable company with 1.3 million 
        telephony subscribers nationwide, is currently testing VoIP 
        near Philadelphia, Pennsylvania and plans to trial the service 
        in several markets including Indianapolis, Indiana, and 
        Springfield, Massachusetts in 2004. Comcast has indicated its 
        intention to ``differentiate itself from telcos with 
        inexpensive deals on four lines, since they don't cost the 
        provider more than one, and video enhancement of service 
        comparable with instant messaging, Internet chat or voice 
        mail.'' \18\
---------------------------------------------------------------------------
    \18\ See Cable VoIP Will Provide the Facilities -Based Phone, 
Communications Daily (Dec. 15, 2003), at 6, quoting Comcast CEO Brian 
Roberts speaking at the Commonwealth Club (San Francisco).

   Cox launched its first VoIP service, Cox Digital Telephone, 
        in December 2003 in Roanoke, Virginia, representing the twelfth 
        market in which Cox has introduced phone service. (In its other 
        eleven telephone markets, Cox relies on traditional circuit-s 
        witched technology.) Cox Digital Telephone subscriptions grew 
        on the order of forty percent in 2003. In the past several 
        years, Cox has pioneered cable telephony via circuit switched 
        technology, gaining experience central to its VoIP launch while 
        earning highest honors in J.D. Power and Associates' 2003 
        Residential Local Telephone Customer Satisfaction Study in the 
        Western Region. Cox's telephony launch using VoIP -based 
        technology provides customers with the same lifeline service as 
        traditional telephone service, including E911 access and 
        popular calling features such as call waiting, caller ID and 
        voice-mail. Cox's self-managed VoIP architecture also supports 
        local number portability, enabling customers to switch their 
---------------------------------------------------------------------------
        existing phone numbers to Cox Digital Telephone service.

    According to CNET News ``[s]maller markets such as Roanoke 
        represent 19 of the 21 other markets into which Cox wants to 
        expand its voice service. VoIP is an ideal candidate--these 
        areas might not generate the profits necessary to validate the 
        outlay involved with a more traditional system, Cox spokesman 
        Bobby Amirshahi says. `In smaller markets, it becomes a major 
        question of whether you can justify the cost of circuit 
        switched,' according to Amirshahi.'' \19\
---------------------------------------------------------------------------
    \19\ See Ben Charny, Cox Communications Dives into VoIP, CNET 
News.com (Dec. 15, 2003), available at http://news.com.com/2100-7352-
5124440.html?tag=guts_lh_7352.
---------------------------------------------------------------------------
   GCI has begun deployment of a hybrid VoIP/circuit switched 
        service in Anchorage, Alaska, where it currently serves over 40 
        percent of the market, primarily via UNE-loop. The service 
        being deployed is based on PacketCable standards from the 
        customer premises to a media gateway and then uses GCI's 
        circuit-switched facilities. As GCI transitions customers to 
        its own loop facilities, it will be able to reduce its use of 
        the incumbent local exchange carrier's facilities

   Time Warner Cable launched Digital Phone, its VoIP service, 
        to subscribers in Portland, Maine in May of 2003. By year-end 
        2003, Time Warner Cable had signed up more than 9,000 
        subscribers who pay $39.95 (for digital cable television and/or 
        high-speed Internet subscribers) or $49.95 (for customers that 
        do not subscribe to digital cable television or high-speed 
        Internet services) for unlimited local and domestic long 
        distance calling. The service includes call waiting, caller ID 
        and call waiting ID, access to E911, and the option of local 
        number portability. Subscribing to digital cable television or 
        cable Internet service is not a prerequisite to purchase 
        Digital Phone, although a potential Digital Phone subscriber 
        must, at a minimum, subscribe to either cable television 
        service or high-speed Internet service.

    Time Warner Cable recently launched its Digital Phone service to 
        select customers in North Carolina and plans to offer the 
        service by the end of 2004 in most, if not all, major markets 
        in the 27 states it serves. This means the company's Digital 
        Phone product should be available to nearly its entire 
        footprint of over 11 million subscribers and over 18 million 
        homes passed.

    In December, 2003 Time Warner Cable announced a partnership with 
        long distance companies MCI and Sprint to assist in 
        provisioning Digital Phone service and to use their networks to 
        carry calls from its cable network to receiving callers served 
        by traditional PSTN-based providers. In addition to providing 
        long distance services, MCI and Sprint will support E911access 
        and local number portability, permitting Time Warner Cable to 
        continue its aggressive rollout in 2004.

    As these services are deployed, cable companies continue to test 
and develop back-office support systems, provisioning and operational 
processes (including billing), and marketing programs. These efforts, 
and the various announced deployments, attest to the industry's belief 
that VoIP technology will ultimately permit cable operators to provide 
innovative, high-value residential local phone services at competitive 
prices. Clearly, the industry is excited about and committed to the 
potential benefits that can result from the widespread availability of 
VoIP services. Yet, a broad roll-out of these services is not assured. 
A key factor that will affect the ability of cable companies to offer 
commercially viable VoIP services is the (de)regulatory framework that 
applies to these services, particularly the services offered in 
competition with incumbent providers. Where incumbent utilities offer 
VoIP services in their legacy franchise or service areas as substitutes 
for POTS services, it is important for regulators to consider whether 
to maintain appropriate regulatory safeguards, particularly in light of 
the goal of promoting facilities-based competition in the 1996 Act.
IV. VoIP Regulatory Proceedings in the States
    Some states, such as Colorado, Florida, and Pennsylvania have 
appropriately taken a deregulatory approach to VoIP services. As 
described below, other states are applying existing intrastate access 
charge regimes to VoIP services without awaiting the outcome of FCC 
proceedings addressing interstate access charges. Still others have 
required (or are considering requiring) VoIP service providers to 
comply with most or all state laws and regulations that apply to 
traditional telephone service. Below is a brief description of the 
major VoIP proceedings underway in the states:
    Alabama--In July 2003 a group of local exchange carriers filed a 
Petition for Declaratory Ruling at the Alabama Public Service 
Commission (the ``Alabama PSC'') seeking to classify VoIP providers as 
``transportation companies'' under Alabama law, and declaring that they 
are responsible for the payment of intrastate access charges. In August 
2003 the Alabama PSC opened a proceeding to consider that request. 
Initial comments were filed October 31, 2003, reply comments were filed 
December 2, 2003, and the matter is under review.
    California--On September 30, 2003, the California Public Utilities 
Commission (``CPUC'') asked six VoIP providers, including Vonage and 
Net2Phone, to apply by October 22, 2003 for the same license that 
landline phone companies need to operate in California. In response to 
that request, all six providers sent letters to the CPUC arguing that 
their VoIP services are exempt from state telephone regulations because 
they provide interstate information services that are not subject to 
the CPUC's jurisdiction. The CPUC then held a VoIP Forum on November 
13, 2003 and has considered opening a formal inquiry into VoIP service 
regulation. The decision to open such proceedings has recently been at 
least temporarily delayed at the request of the lead commissioner based 
on her assessment that California should conduct any proceeding after 
the FCC has established national policy.\20\
---------------------------------------------------------------------------
    \20\ See Ben Charny, California to License VoIP Providers, CNET 
News.com (Sep. 30, 2003), available at http://news.com.com/2100-7352-
5084711.html?tag=guts_lh_7352. See also Ben Charny, California eases up 
on Net phone rules , CNET News.com (Jan. 5, 2004), available at http://
news.com.com/2100-7352-5135188.html?tag=guts_lh_7352.
---------------------------------------------------------------------------
    Colorado--The Colorado Public Utilities Commission (the ``Colorado 
PUC'') opened a docket to determine the appropriate regulatory 
treatment of VoIP in May, 2003. The Colorado PUC closed the docket in 
January 2004, based in part on the ``legal uncertainty of whether a 
state may regulate VoIP services,'' concluding that ``the most prudent 
course is to take no action with respect to VoIP pending FCC action.'' 
\21\
---------------------------------------------------------------------------
    \21\ Dkt. 03M--220T, See p. 11 supra.
---------------------------------------------------------------------------
    Florida--The Florida legislature in 2003 passed, and the Governor 
signed, legislation stating ``[that] the provision of voice-over-the-
Internet protocol (VoIP) free of unnecessary regulation, regardless of 
provider, is in the public interest.'' The law also specifically 
excludes VoIP from the statutory definition of a ``service'' subject to 
regulation, although the question of whether VoIP-based services are 
subject to intrastate access charges remains under the jurisdiction of 
the Florida Public Service Commission.\22\
---------------------------------------------------------------------------
    \22\ See The Tele -Competition, Innovation and Infrastructure 
Enhancement Act, CS/SB 654 (FL, signed May 23, 2003).
---------------------------------------------------------------------------
    Minnesota--On August 13, 2003, the Minnesota Public Utilities 
Commission (the ``Minnesota PUC'') ruled that Vonage is offering a 
telecommunications service and required Vonage to seek a certificate, 
file a 911 plan and submit tariffs within 30 days. A U.S. District 
Court granted Vonage's request to enjoin that decision on October 7, 
2003 and the Minnesota PUC stayed its decision while it is enjoined. 
The district court ruled Vonage provides an ``information service'' not 
subject to Minnesota PUC jurisdiction. The Minnesota PUC requested the 
district court to amend its findings or to make its injunction 
temporary and to allow further investigation and discovery or grant a 
new trial. Oral argument took place on December 13, 2003. The District 
Court declined to amend any aspect of its order and concluded that a 
new trial was not necessary. \23\
---------------------------------------------------------------------------
    \23\ See Matter of the Complaint of the Minnesota Department of 
Commerce Against Vonage Holding Corp. Regarding Lack of Authority to 
Operate in Minnesota, Docket No. P-6214/C-03-108, Order Finding 
Jurisdiction and Requiring Compliance (rel. Sep. 11, 2003) (requiring 
Vonage to comply with all state laws pertaining to telephone service), 
enjoined, Vonage Holdings Corp. v. Minnesota Public Utilities Comm'n, 
No. 03 -5287, slip op. at 22 (D. Minn. Oct. 16, 2003).
---------------------------------------------------------------------------
    Missouri--On September 12, 2003, while reserving its rights to 
argue for or benefit from any future regulatory determination relating 
to VoIP -based services, Time Warner Cable Information Services 
(``TWCIS'') filed an application for authority to offer IP based voice 
services in Missouri. The parties to the resulting docket agreed that a 
general discussion of VoIP was not necessary but, although TWCIS had 
agreed to abide by existing Missouri telephone rules until the 
regulatory classification of VoIP is resolved, the parties disagreed 
about the characterization of the service TWCIS intends to offer and 
the related regulatory restrictions and obligations associated with 
that service. Separately, the Missouri Public Service Commission (the 
``Missouri PSC'') sought comment from the Public Counsel as to whether 
it should open a generic proceeding to address regulatory issues 
surrounding VoIP services. The Missouri PSC subsequently chose not to 
open a generic proceeding, preferring instead to address issues in the 
context of the TWCIS application. A prehearing conference is scheduled 
for January 30, 2004. A proposed procedural schedule is to be filed by 
February 13, 2004.
    New York--The New York Public Service Commission (the ``NYPSC'') 
has ruled that VoIP service providers must pay access charges while 
preserving their right to be granted forbearance from regulation or to 
be alternately regulated based on any applicable decisions from the 
NYPSC or the FCC. The decision was based largely on the NYPSC's view 
that under the Stevens Report the company was operating as a phone-to -
phone VoIP provider offering a ``telecommunications service''. Some 
parties have argued that the decision was based on a misreading of the 
report.
    The NYPSC, pursuant to Frontier Telephone of Rochester's complaint 
against Vonage for providing telephone service without complying with 
state regulation, opened a generic investigation of VoIP issues. Ini 
tial comments were due October 31, 2003 and reply comments were due 
November 14, 2003. The matter is now under review.\24\
---------------------------------------------------------------------------
    \24\ See, e.g., Complaint of Frontier Telephone of Rochester 
Against U.S. DataNet Corporation Concerning Alleged Refusal to Pay 
Intrastate Access Charges, No. 01-C-1191 (N.Y. Pub. Serv. Comm'n May 
31, 2002) (subjecting VoIP service to access charges, but preserving 
U.S. DataNet's right to be granted forbearance from regulation or to be 
alternately regulated based on any applicable decisions from the NYPSC 
or the FCC); Complaint of Frontier Telephone of Rochester Against 
Vonage Holding Corp. Concerning Provision of Local Exchange and Inter-
Exchange Telephone Service in New York State in Violation of the Public 
Service Law, No. 03-C-1285, Notice Requesting Comment (N.Y. Pub. Serv. 
Comm'n Oct. 9, 2003) (initiating a similar proceeding involving 
Vonage).
---------------------------------------------------------------------------
    North Carolina--In May 2003, TWCIS applied for a certificate of 
public convenience and necessity to provide IP based voice services. 
The North Carolina Utilities Commission (the ``NCUC'') granted TWCIS 
its certificates in July 2003 and rejected efforts by the Alliance of 
North Carolina Independent Telephone Companies to address a number of 
issues in the context of the certification proceeding. At the time, 
BellSouth also sought a generic proceeding to address VoIP issues. The 
Commission determined that no such proceeding was necessary at that 
time.
    Ohio--The Public Utilities Commission of Ohio (the ``PUCO'') opened 
a generic investigation in April 2003 to examine how VoIP services are 
provided, and the form and level of regulation that should apply to 
those services. Answers to PUCO questionnaires were filed in May, 2003; 
initial comments were filed on June 13, 2003 and reply comments were 
filed July 7, 2003. Since that time TWCIS has applied for, and has 
received from the PUCO, authority to provide service, contingent on the 
outcome of the generic investigation. TWCIS's application requested 
authority to provide IP voice services targeting the residential market 
using VoIP . TWCIS also requested waivers of various rules with which 
it found difficult to comply for its bundled service offering (in 
particular, offering stand-alone local service). The PUCO's decision 
granted waivers contingent on the outcome of the open investigation 
into whether VoIP technology should be regulated as a telephone 
service.\25\ Since then, Cincinnati Bell, the Ohio Telecommunications 
Association, and SBC-Ohio filed applications for rehearing of TWCIS' 
application.
---------------------------------------------------------------------------
    \25\ See Public Ut ilities Commission of Ohio (Case 03-581-TP-ACE).
---------------------------------------------------------------------------
    Pennsylvania--In May 2003 the Pennsylvania Public Utility 
Commission (the ``Pennsylvania PUC'') opened a generic investigation 
into VoIP and it is effectively forbearing from regulating those 
services pending the outcome of that investigation.\26\
---------------------------------------------------------------------------
    \26\ Investigation into Voice over Internet Protocol as a 
Jurisdictional Service, M-00031707 (May 5, 2003).
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    Texas--In August 2003, TWCIS filed for a certificate of authority 
to provide IP based voice services in Texas. Several parties, including 
the Texas Coalition of Cities (``TCOC'') attempted to intervene. In 
particular TCOC raised issues regarding the classification and 
jurisdictional status of the services proposed by TWCIS, and how 
compensation for rights-of-way would be administered for those 
services. The Texas Public Utility Commission (the ``Texas PUC'') 
denied intervention for all parties and it granted TWC IS' application 
on December 12, 2003.
    Wisconsin--On September 11, 2003, the Wisconsin Public Service 
Commission (the ``Wisconsin PSC'') sent letters to VoIP providers 8x8, 
Vonage, and Delta 3 seeking information on the specific services being 
offered by those entities in Wisconsin. The PSC's letters stated that 
such entities were not permitted to provide resold intrastate services 
in Wisconsin without certification and that any customer bills for 
intrastate services were void and not collectible.\27\ The providers 
filed responses which are under review.
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    \27\ See 8x8 Announces Receipt of Notification from Public Service 
Commission of Wisconsin, 8x8 Press Release (Sep. 12, 2003), available 
at http://www.8x8.com/news_events/releases/2003/pr091203.asp.html.
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V. NCTA's Approach: Balancing Responsibilities and Rights
    Much of the discussion about VoIP services has focused on whether 
they should be classified as ``information services,'' 
``telecommunications services,'' or another type of service. The 
assumption seems to be that VoIP service offerings first need to be 
assigned to a preexisting regulatory ``box,'' from which a variety of 
regulatory consequences will flow. It is usually assumed that 
classification of a VoIP service as a ``telecommunications service'' 
means that it will be subject to a wide range of traditional Title II 
requirements, and that classification of a VoIP service as an 
``information service'' means that it will be entirely unregulated. As 
discussed later in this paper, we believe neither assumption is 
correct.
    Rather than focusing on this regulatory classification issue, NCTA 
suggests that policymakers focus on the responsibilities and rights 
that are appropriate for new entrant competitors offeri ng VoIP 
services, whether they do so through their own facilities or over the 
facilities of others. The cable industry believes that VoIP service 
providers that meet the four-prong test described above must assume 
certain fundamental regulatory responsibilities, including consumer 
protections of general applicability, assistance to law enforcement, 
and public safety obligations. The industry also believes that in order 
to provide service, VoIP providers--particularly those operating their 
own facilities--must be accorded certain rights. The regulatory 
classification under which this set of responsibilities and rights is 
established is important, though ultimately less important than those 
responsibilities and rights being established in a minimally regulatory 
framework.
VI. The Responsibilities and Rights of VoIP Providers
    VoIP service providers, particularly those who build infrastructure 
that enables delivery of these services in competition with established 
local exchange carriers, must not be subject to unnecessary regulation, 
nor should they be disadvantaged as compared to VoIP providers who 
build no facilities. The strong presumption should be that regulations 
designed for legacy telephone service should not apply to VoIP services 
unless they are essential to meet the key public health, safety, and 
other crucial responsibilities described below, even if regulators 
determine they are necessary for customers of incumbent telephone 
utilities who may use VoIP technologies in substitution for legacy POTS 
services. Experience has shown, time and again, that the best way to 
encourage new and innovative technologies and to secure the resulting 
public benefits is to ensure that only the most vital regulations 
apply--and even then, that those vital regulations be adapted to the 
characteristics of the new technology.
    This approach would encourage innovation, conserve regulatory 
resources, derive the greatest public benefits and provide the 
certainty in the marketplace that investors need in order to support 
the deplo yment of facilities-based VoIP services. The alternative--
presuming that legacy regulations do apply, unless expressly found not 
to apply--is a recipe for doubt and delay. Few, if any, competitive 
communications technologies have ever achieved widespread market 
acceptance where government has followed that path; policymakers should 
be careful to avoid it here.
    The set of responsibilities to which providers of services meeting 
the four-prong test should adhere may be broken into several 
categories: public health and safety; universal service; intercarrier 
compensation; and consumer protections of general applicability.
Public Health and Safety
    Providers of VoIP services meeting the four-prong test should have 
the following responsibilities, implemented in a manner appropriate to 
the technology:\28\
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    \28\ The FCC has ruled, for example, that, while facilities used 
solely for the provision of information services are not subject to 
CALEA, facilities used to provide both telecommunications and 
information services are subject to the requirements of the Act. See 
Communications Assistance for Law Enforcement Act, Second Report and 
Order, 15 FCC Rcd. 7105 at  12, 27 (1999). However, for both CALEA 
and 911/E911, some adjustments may need to be taken into account 
related to the specific features and capabilities of VoIP services.

   The obligation to cooperate with law enforcement, including 
        compliance with the principles of CALEA based upon an IP -
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        specific standard endorsed by an industry body.

   The obligation to provide consumers access to 911/E911 
        capabilities and to collect and remit funding for state or 
        municipal 911/E911 systems. (In turn, statutory and other 
        liability limitations for the provision of 911/E911 services 
        should also apply.) \29\
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    \29\ As with all service providers that offer 911/E911 
capabilities, VoIP service providers should be protected by statutory 
and other limitations on liability pertaining to the provision of 911/
E911 services.

   The obligation to make services available to disabled 
        consumers, in a manner consistent with Section 255 of the 1996 
        Act, and to collect funding for state and Federal TRS 
        systems.\30\
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    \30\ These rules have already been extended beyond the conventional 
range of Title II-type services, and the same considerations may apply 
to VoIP service. See Implementation of Sections 255 and 251(A)(2) of 
the Communications Act of 1934, as Amended by the Telecommunications 
Act of 1996, 16 FCC Rcd. 6417 at  8 (1999).
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Universal Service
    In addition, regulators should expect VoIP services that make use 
of NANP resources to ultimately contribute to Federal and state 
universal service programs on a par with other contributors. The 
principle of universal service--ensuring that affordable telephone 
service is available to high-cost areas and low-income users--has long 
been a cornerstone of communications policy. The 1996 Act codified 
principles of universal service and extended them to schools, 
libraries, and nonprofit rural health care providers.\31\ Cable 
companies that offer telecommunications services subject to assessment 
currently pay into the fund.
---------------------------------------------------------------------------
    \31\ See 47 U.S.C. Sec. 254.
---------------------------------------------------------------------------
    At some point, VoIP services that make use of NANP resources should 
also pay into the fund. It would be premature to impose such an 
obligation, however, without resolution of several critical issues 
related to universal service, which the FCC is examining.\32\ Among 
these issues is the question of whether the Federal universal service 
fund is properly sized and funded.
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    \32\ In addition to the assessment methodology, other major 
unresolved issues include determining how high-cost support is 
computed; designating ``eligible telecommunications carriers''; and 
reviewing the operations of the schools and libraries program (which 
the FC C had initially planned to conduct as part of a comprehensive 
universal service review in 2001, but which has not yet been 
initiated).
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    It is critical that policymakers recognize the need to modify the 
current universal service contribution mechanism, particularly with 
respect to VoIP services.\33\ Under the current contribution mechanism, 
assessments are based on interstate telecommunications revenues. 
Applying this mechanism to VoIP service would be fraught with 
difficulty for several reasons. First, because most consumer VoIP 
services today are offered without regard to interstate and intrastate 
distinctions, arbitrary judgments would be required as to which portion 
of VoIP service revenue is interstate and which is intrastate. Second, 
because the regulatory classification of VoIP service has not been 
determined, an arbitrary judgment would be required as to what portion 
of VoIP revenue is telecommunications revenue.
---------------------------------------------------------------------------
    \33\ See Federal-State Joint Board on Universal Service, Report and 
Order and Second Further Notice of Proposed Rulemaking, CC Docket No. 
96-45, rel. Dec. 13, 2002 (``Second Further Notice'').
---------------------------------------------------------------------------
    The best solution to this problem would be the adoption of a 
numbers-based contribution mecha nism.\34\ Any service which makes use 
of NANP resources would be assessed on a per-number basis (special 
access and private line services would be assessed in a manner which 
results in a contribution approximately equal to that of today).\35\ 
This is also consistent with the four-prong test previously described. 
Under such a system there would be no need to distinguish, for 
universal service purposes, between various types of VoIP offerings. 
e.g., a voice service with the potential to substitute for a POTS line 
vs. a gaming service with a voice component. VoIP services that use 
telephone numbers would be assessed; those that do not use telephone 
numbers would not. At the same time, VoIP providers must be afforded 
nondiscriminatory access to universal service support. Any other 
approach would fail the competitive neutrality principle for universal 
service and discriminate against otherwise eligible providers based on 
technology.
---------------------------------------------------------------------------
    \34\ See Reply Comments of the National Cable & Telecommunications 
Association in Second Further Notice, April 18, 2003.
    \35\ See AT&T Oct. 22 Ex Parte; Ad Hoc Oct. 3 Ex Parte in Federal -
State Joint Board on Universal Service, CC Docket 96-45, Further Notice 
of Proposed Rulemaking and Report and Order, FCC 02-43, rel. Feb. 26, 
2002 (``Contribution Methodology Further Notice'').
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Intercarrier Compensation
    Similar considerations apply to intercarrier compensation rules. 
The issue here is not whether the rules should or should not apply but 
how to reconcile the many different rules--and different prices--that 
apply to exchanges of traffic.\36\ Those differences, in turn, dictate 
not only different prices per unit of traffic, but also which party 
pays.\37\ The FCC has a proceeding under way to resolve these 
issues.\38\ When that proceeding is concluded and the system has been 
rationalized, the new rules should apply to VoIP -based services that 
utilize the PSTN as well.\39\
---------------------------------------------------------------------------
    \36\ Today, the exchange of traffic is governed by a hodgepodge of 
differ ent rules depending, for example, on whether an ILEC is 
exchanging traffic with a neighboring ILEC, a CLEC, an interexchange 
carrier (``IXC''), a CMRS provider, or an information service provider, 
and also depending on whether the traffic is deemed to be 
``intrastate'' or ``interstate.''
    \37\ For example, an ILEC handing off a call to a CLEC is required 
to pay that CLEC, but when an ILEC hands off a call to an IXC, the ILEC 
receives, rather than pays, compensation.
    \38\ See Developing a Unified Intercarrier Compensat ion Regime, 
Notice of Proposed Rulemaking, 16 FCC Rcd. 9610 (2001).
    \39\ This proposal presupposes that equitable rules will be 
established for all classes of entities that exchange traffic. If 
classification as an interexchange carrier, Internet service provider, 
etc. triggers differing compensation regimes, then the problems of 
arbitrage and gamesmanship will be perpetuated. Under the current rules 
various classes of entities may have an economic incentive to deliver 
traffic in an uneconomic or inefficie nt fashion in order to avoid high 
intercarrier compensation rates.
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Consumer Protection
    In addition, generally applicable consumer protection rules that 
apply to all businesses should apply to VoIP service providers. These 
include such requirements as ``do not call'' and ``do not mail.'' By 
contrast, as explained below, requirements that were developed to 
protect consumers from the monopoly utility in a single-provider 
environment are unnecessary and inappropriate.
Inappropriate Legacy Utility Requirements
    VoIP services provided in competition with incumbent utility phone 
services should not be subject to legacy utility requirements designed 
largely in a monopoly environment. Most such requirements date from the 
era of a single provider of phone service and are inappropriate for 
competitors that offer alternatives to the incumbent providers. Legacy 
utility requirements all impose substantial burdens, none of which are 
justified in the case of competitive facilities-based VoIP services. 
The provider-subscriber relationship would be better served by consumer 
protection rules of general applicability, including appropriate 
disclosure requirements of any limitations of nonessential utility 
requirements, rather than the full panoply of detailed and cumbersome 
requirements applied to some public utility providers. In particular, a 
number of legacy requirements relate to billing, payment, credit and 
collection and quality of service standards. For example, many states 
have rules dictating the format and content of customer bills; rules 
regarding permitted forms of payment, the allocation of partial 
payments, and in-person payment obligations; and rules regarding call 
center metrics, installation intervals, and service establishment 
requirements. This is but a partial list of utility provider 
requirements that typical competiti ve entrants should not face.
    As competition increases, marketplace forces, rather than 
prescriptive rules, can address these issues much more effectively--
subject to informing potential customers, so they can make judgments 
about the service. For instance, because of the industry-wide trend 
(spurred by consumer demand) towards bundled products and services, 
various legacy utility mandates such as equal access, tariffing, and 
dialing parity are simply inappropriate, and particularly so where VoIP 
services are bundled with services which are not subject to such 
requirements.\40\ VoIP providers may, however, choose to adopt them on 
a voluntary basis. But, any unnecessary rules will increase costs for 
VoIP providers and deter investment, delay deployment, and slow the 
growth of these promising new services. Regulators should make a 
comprehensive effort to identify and eliminate all such unnecessary 
rules. This will be an essential element of a successful VoIP policy.
---------------------------------------------------------------------------
    \40\ Notions of ``equal access'' may be inapplicable to (or prevent 
the offering of) innovative service packages that give a customer a 
fixed quantity of usage for a set monthly price, and/or where there is 
no price differentiation between local and long distance calls.
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Rights of VoIP Providers
    Just as VoIP service providers meeting the four -prong test must 
accept certain responsibilities, such providers require certain rights. 
These rights must be available to the provider irrespective of whether 
the provider's service is ultimately determined to be an ``information 
service,'' a ``telecommunications service,'' or another type of 
service. Additionally, granting these rights should not influence the 
regulatory classification of the VoIP service.
    These rights include, but are not limited to: (1) the right to 
interconnect and efficiently exchange traffic and control signaling 
with both IP and PSTN entities on a peer-to-peer basis;\41\ (2) the 
right to obtain telephone numbers, including numbers secured through 
number portability, to assign those numbers to VoIP customers and to 
have them published in the telephone directories; (3) the right to 
access the facilities and resources necessary to provide VoIP customers 
with full and efficient 911/E911 services (e.g., interconnection to 
incumbent utility E911 selective router switches, and Master Street 
Address Guide and Automatic Location Identification database uploads); 
(4) the right to be compensated fairly for terminating traffic 
delivered from other entities, in accordance with the results of an 
industry-wide review of payments for traffic termination and 
origination that specifically addresses VoIP service;\42\ and, (5) the 
right to non-discriminatory access to universal service support.
---------------------------------------------------------------------------
    \41\ Including access to codes needed for network interconnection 
and traffic exchange with other providers and the PSTN, NPAC databases 
and capabilities, SS7 interconnection for call management between VoIP 
calls and the PSTN, and customer service records housed in ILEC/CLEC 
databases.
    \42\ This is an area where it would be sensible for a PUC to await 
FCC rulings on petitions pending before that body, rather than to make 
determinatio ns applicable only to intrastate VoIP service traffic, or 
that might be out of harmony with what Federal regulators ultimately 
require for interstate VoIP traffic.
---------------------------------------------------------------------------
    Policymakers must also ensure that facilities-based VoIP service 
providers have the right to use rights-of-way, including pole 
attachments, ducts, and conduits. Moreover, VoIP services delivered by 
cable operators will normally be conveyed over pre-existing facilities 
already attached to poles, located in underground conduits or crossing 
rights-of-way. Accordingly, policymakers must ensure that cable 
operators are not subject to additional or incremental assessments and 
fees when they change the pattern of signaling in their pre-existing 
physical transmission paths to add VoIP services to their existing 
video and Internet offerings. In addition to unnecessarily and 
unjustifiably burdening cable operators' VoIP services, such fees and 
assessments would put cable operators at a competitive disadvantage 
vis-a-vis incumbents who usually control such essential facilities, and 
non-facilities based providers of VoIP services who utilize cable 
facilities to make their offerings available. In particular, higher 
pole rates should not be a barrier to entry for facilities-based VoIP 
providers.\43\
---------------------------------------------------------------------------
    \43\ The FCC has statutory authority to establish an appropriate 
pole attachment rate for at tachments by cable operators. Setting an 
appropriate rate would be an important part of creating a hospitable 
environment to encourage the deployment of facilities -based VoIP 
offerings. See National Cable Telecommunications Association v. Gulf 
Power, 534 U.S. 327 (2002).
---------------------------------------------------------------------------
VII. Regulatory Restraint and Regulatory Classification
    As noted, the cable industry's approach to a VoIP regulatory 
framework is to focus on the responsibilities and rights appropriate 
for providers meeting the aforementioned four -prong test, rather than 
focusing on the regulatory classification of those services. But those 
issues cannot be avoided. NCTA supports the view of FCC Chairman 
Michael Powell that VoIP services warrant a fresh assessment, from a 
highly deregulatory perspective. We agree that policymakers should, as 
Chairman Powell has stated; ``build from a blank slate up as opposed to 
from the myriad of telecommunications regulations down. . . . [I]t is a 
nasty, entangled litigious exercise to start from a phone company world 
of regulation and work your way down this way, rather then to try to 
say, no, this is something new.'' \44\
---------------------------------------------------------------------------
    \44\ See Remarks of FCC Chairman Michael K. Powell at the Meeting 
of the Technology Advisory Council, at 2 (Oct. 20, 2003). See also 
Powell VoIP Forum Remarks at 1 (``As one who believes unflinchingly in 
maintaining an Internet free from government regulation, I believe that 
IP -based services such as VoIP should evolve in a regulation-free 
zone. No regulator, either Federal or state, should tread into this 
area without an absolutely compelling justification for doing so.''). 
The results of this exercise may also produce insights that could also 
be applied to traditional circuit-switched, facilities -based CLEC 
services. Clearly, all CLECs lack market power, and sound public policy 
(as well as the dictates of the 1996 Act) commands that all unnecessary 
regulation of telecommunications services should be avoided.
---------------------------------------------------------------------------
    Though complex, the challenge of developing an appropriate 
regulatory framework for new network applications is not entirely new 
to the FCC. The FCC's decision in the Second Computer Inquiry (Computer 
II) \45\ to eliminate regulation for ``enhanced services'' and customer 
premises equipment led to investment and innovation that reverberates 
more than twenty years later. Likewise, the Commission's decision to 
forbear from entry and exit regulation as well as tariffing 
requirements for CMRS \46\ produced similarly salutary results.\47\
---------------------------------------------------------------------------
    \45\ See Amendment of Section 64.702 of the Commission's Rules and 
Regulations, Final Decision, 77 FCC 2d 384 at  84 (1980) ('' Computer 
II''), aff'd sum nom. Computer & Comm. Ind. Ass'n v. FCC, 693 F.2d 198 
(1982) (subsequent history omitted). It was Computer II that prevented 
Federal or state regulation of interstate information services. See 77 
FCC 2d 384 at  7. Computer II also ensured the deregulation and 
competitive provision of customer premises equipment (``CPE''). See id 
at  9.
    \46\ See Implementation of Sections 3(N) and 332 of the 
Communications Act, Regulatory Treatment of Mobile Service, 9 FCC Rcd. 
1411 at  173-182 (1994) (subsequent history omitted) (forbearing from 
many Title II requirements, stating that ``Congress and the Commission 
have determined that the public inherently benefits from the promotion 
of competition among the carriers that results from market-based 
pricing for their services''). See also Petition of the People of the 
State of California and the Public Utilities Commission of the State of 
California to Retain Regulatory Authority over Intrastate Cellular 
Service Rates, Report and Order, 10 FCC Rcd 7486 at  96-97 (1995) 
(denying a California PUC petition to extend state regulatory authority 
over CMRS services). Recognizing that wireless services operate without 
regard to state boundaries, Congress also preempted state and local 
rate and entry regulation of CMRS. 47 U.S.C. 332(c)(3).
    \47\ See Annual Report and Analysis of Competitive Market 
Conditions with Respect to Commercial Mobile Services, Eighth Report, 
18 FCC Rcd. 14783 at  57 (2003) (noting the results of the 
deregulatory environment created for wireless carriers by the FCC: ``C 
ontinued downward price trends, the continued expansion of mobile 
networks into new and existing markets, high rates of investment, and 
churn rates of about 30 percent. . .demonstrate a high level of 
competition for mobile telephone consumers''). This report also noted 
that wireless subscribership increased in 2002 to over 141 million 
users in the U.S., see id. at  59, a tenfold increase in less than a 
decade.
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    Conversely, application of the full panoply of traditional 
telecommunications regulation would impede deployment of facilities-
based VoIP services.\48\ Only in an environment in which the burdens of 
regulation are kept to a reasonable minimum will potential VoIP 
providers be in a position to deploy sustainable facilities-based VoIP 
services quickly and to their full potential. Such an environment 
enjoys broad governmental and industry support.\49\ In this regard, 
Congress has directed the FCC and the state PUCs to ``encourage the 
deployment on a reasonable and timely basis of advanced 
telecommunications'' by ``utilizing. . .regulatory forbearance . . . 
[and] other regulating methods that remove barriers to investment.'' 
\50\
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    \48\ While it is clear that unnecessary regulation would create a 
significant business problem for circuit-switched CLECs, the case 
against excessive Title II regulation of VoIP services is even more 
compelling. Circuit-switched telephony is an existing service, using 
proven technologies. By contrast, VoIP service uses nascent 
technologies that have yet to be depl oyed on any significant 
commercial scale, and which could present a host of as-yet-undetermined 
financial, technical, and operational challenges. As noted above, the 
development of a minimally regulated environment for VoIP services 
ought to provide a bas is for revisiting--and reducing--the regulatory 
requirements that apply to traditional circuit-switched, facilities-
based CLEC services.
    \49\ Numerous policy leaders (including many in the FCC and in 
state government), industry representatives and others have recognized 
the importance of limiting regulation of facilities-based VoIP 
services. FCC Chairman Michael Powell and FCC Commissioners Martin and 
Abernathy have called for regulatory restraint with respect to VoIP 
services. See, e.g., Cable Monitor, FCC and NTIA Call for Regulatory 
Protection for VoIP, Aug. 26, 2002. Similar--if not more strongly 
deregulatory--statements were made by multiple FCC Commissioners at the 
FCC's Dec. 1, 2003 VoIP Forum. Acting NTIA Administrator Michael 
Gallagher is reported to have said that ``any regulation of VoIP should 
be `minimalist and narrowly tailored' to meet public interest goals'' 
and that excessive regulation could drive providers overseas. See 
Communications Daily, Powell Sees FCC Focusing on Discrete Issues on 
VoIP, at 2 (Dec. 2, 2003) (``CommDaily Report on VoIP Forum'').
    \50\ Pub. L. No. 104-104 Sec. 706, 110 Stat. 56 (1996); see also 47 
U.S.C. Sec. 157(a) (establishing Federal policy of encouraging the 
provision of new technologies and services to the public).
---------------------------------------------------------------------------
    For the reasons detailed above, public policy strongly and 
unquestionably favors a pro-competitive, deregulatory approach to 
facilities-based VoIP services. Fortunately, Federal law and FCC 
precedents are largely consistent on this point. However, state laws 
and regulation are varied; as described above, states have taken widely 
differing approaches to VoIP--ranging from minimal regulation in states 
such as Florida to attempts to apply full common carrier service 
regulation in states such as Minnesota. NCTA's view is that state 
regulation of VoIP services should be consistent with FCC regulatory 
treatment. State consistency with Federal regulation is important 
because an Internet-based service has an interstate (even global) 
reach; 51 different approaches would make it difficult to develop VoIP 
service.
    And Federal leadership for the states will also prevent a legal 
logjam where one state regulatory regime, if appealed, becomes law in 
that region of the country while the rest of the Nation comes to follow 
the Federal scheme. This anomaly is not theoretical. One panel of the 
U.S. Court of Appeals for the 9th Circuit ruled that its earlier 
decision on the regulatory classification of cable modem service--
reached before the FCC had made its own regulatory determination--
continued to govern. That prior determination held, regardless of the 
analysis made by the FCC and despite the usual deference owed to expert 
agencies over just these sorts of policy questions.\51\ A premature 
state decision could lead to a similar unfortunate result in the VoIP 
policy context.
---------------------------------------------------------------------------
    \51\ See Brand X Internet Services v. FCC 345 F.3d 1120 (9th Cir. 
2003) (per curiam); AT&T Corp v. City of Portland 216 F.3d 871 (9th 
Cir. 2000). See also Chevron U.S.A., Inc. v. Natural Resources Defense 
Council, 467 U.S. 837 (1984).
---------------------------------------------------------------------------
    In considering how to proceed under the Act, both state and Federal 
regulators would do well to consider the ``nascent services doctrine,'' 
\52\ articulated by FCC Commissioner Kathleen Abernathy. It is a set of 
principles, which, while not a legal mandate, is instructive for 
policymakers.
---------------------------------------------------------------------------
    \52\ The Nascent Services Doctrine, Remarks of FCC Commissioner 
Kathleen Q. Abernathy Before the Federal Communications Bar 
Association, New York Chapter (Jul. 11, 2002), available at http://
www.fcc.gov/Speec hes/Abernathy/2002/spkqa217.html.
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    This doctrine recommends that regulators exercise restraint when 
dealing with new technologies and services and to reevaluate the need 
for any regulation of those technologies and services as they evolve. 
Such restraint would facilitate the development of facilities-based 
VoIP services that compete with the established telephone companies 
without the burden of anachronistic regulations and would promote the 
goal of enhancing facilities-based local telephone competition.\53\
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    \53\ In a sense, this is what the Commission did in the Stevens 
Report where, by essentially deciding not to address the regulatory 
classification of VoIP services, it allowed for five years of 
technology development, servi ce experimentation, and capital 
investment. See Stevens Report, 13 FCC Rcd. 11501 at  86-93 (1998). 
Similarly, in the AT&T/TCI Merger and in the first Report to Congress 
under Sec. 706, the FCC declined to interfere with emerging high-speed 
cable Internet services, thereby fostering the massive investment that 
today makes broadband service available to 80 percent of American 
homes. See Applications for Consent to Transfer the Control of Licenses 
and Section 214 Authorizations from Tele-Communications, Inc ., 
Transferor, to AT&T Corp., Transferee, Memorandum Opinion and Order, 14 
FCC Rcd. 3160 at  94 (1999); Inquiry Concerning the Deployment of 
Advanced Telecommunications Capability to All Americans in a Reasonable 
and Timely Fashion, and Possible Steps to Accelerate Such Deployment 
Pursuant to Section 706 of the Telecommunications Act of 1996, First 
Report, 14 FCC Rcd. 2398 at  106 (1999); National Cable & 
Telecommunications Association, Cable & Telecommunications Overview, 
Mid Year 2003 at 10, at http://www.ncta.com/pdf_files/
Mid'03Overview.pdf (stating that 85 million of approximately 106 
million U.S. homes had access to cable broadband service at the end of 
2002).
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    The doctrine further suggests that o nce new facilities-based 
competitors demonstrate their viability, policymakers and regulators 
reexamine the overall regulatory scheme applicable to incumbent 
providers in the marketplace to assess whether existing regulations 
applicable to incumbents should be modified. If appropriate, regulatory 
schemes over time would be harmonized, but with much less regulation 
than previously, reflecting the effects of competition.
    The focus of the ``nascent services doctrine'' is not on 
establishing the appropriate regulatory classification (i.e., whether a 
VoIP service is a ``telecommunications service,'' an ``information 
service,'' or another type of service), but on how best to allow both 
facilities-based and non facilities-based VoIP services to develop 
naturally in the marketplace in response to consumer demand and 
technological innovation. Applying this doctrine, regulators would 
avoid those regulations that will unnecessarily hinder the evolution 
and growth of a new service, and ultimately lessen all regulation as 
competitive circumstances warrant.
    While adherence to the principles of the nascent services doctrine 
is a worthwhile goal, policymakers must follow such principles within 
the context of an appropriate statutory framework. Based on the 
appropriate set of responsibilities and rights, as articulated above, 
VoIP providers need an approach which either begins with Title I and 
layers on responsibilities and rights, or begins with Title II and 
forbears significantly from a number of responsibilities--effectively a 
Title ``1.5.''
    More specifically, the FCC and the states can secure a reasonable 
and minimally regulatory environment for VoIP services through 
classification of VoIP applications as ``information services'' under 
Title I of the Communications Act. An alternative but potentially more 
problematic approach would be to use the FCC's ``forbearance'' and 
preemption powers under Title II to minimize regulation. Each path is 
discussed briefly below.
Title I Regulatory Approach
    The designation of certain VoIP services as information services--
and the use of Title I ancillary authority to impose only those 
regulations that are essential to helping regulators meet key public 
health, safety, and other responsibilities--is the primary way in which 
policymakers could minimize burdens on these emerging services. Since 
Computer II, designation of a service as a Title I information service 
has meant that it is deregulated, in the sense that it is not subject 
to common carrier regulation by federal or state regulators.\54\ Even a 
Title I service, however, can be regulated under the FCC's ``ancillary 
authority,'' but o nly in furtherance of specific statutory 
objectives.\55\
---------------------------------------------------------------------------
    \54\ See Computer II, 77 FCC 2d 384 at  84 (1980).
    \55\ See People of State of Cal. v. F.C.C., 905 F.2d 1217, 1241 at 
n.35 (9th Cir.) (1990).
---------------------------------------------------------------------------
    A pure Title I approach may be particularly well suited to certain 
forms of VoIP services that provide capabilities and features that make 
them markedly different from conventional phone services. Examples of 
such services may include video phone, voice chat, and video chat 
services. Depending on their characteristics, however, even VoIP 
services that more closely resemble conventional telephone offerings 
may well meet the definitions of an information service. Specifically, 
VoIP services could be designed in ways that easily satisfy the 
statutory definition, i.e., ``the offering of a capability for 
generating, acquiring, storing, transforming, processing, retrieving, 
utilizing, or making available information via telecommunications.'' 
\56\ They could even more easily be designed to satisfy the enhanced 
service definition of Computer II, i.e., services ``which employ 
computer processing applications that act on the format, code, protocol 
or similar aspects of the subscriber's transmitted information; provide 
the subscriber additional, different, or restructured information; or 
involve subscriber interaction with stored information.'' \57\
---------------------------------------------------------------------------
    \56\ 47 U.S.C. Sec. 3(20).
    \57\ 47 C.F.R. Sec. 64.702(a).
---------------------------------------------------------------------------
    As noted above, classification of a service as an information 
service does not necessarily mean that it should be exempt from all 
regulation. The FCC retains ``ancillary authority'' under Title I to 
adopt those regulations that are reasonably necessary to advance 
explicit statutory objectives.\58\ We have already outlined the social 
responsibilities appropriate for VoIP providers whose service meets the 
four-prong test described above, where those responsibilities are 
associated with certain rights. Significantly, classification of VoIP 
service under Title I does not mean that those rights could not be 
conferred on VoIP providers. For example, it is likely that the 
Commission could order local exchange carriers to interconnect with 
Title I VoIP providers or even provide unbundled network elements. 
Prior to 1996, using its Title II authority over local exchange 
carriers, the FCC ordered the Bells to interconnect with information 
service providers in the Expanded Interconnection \59\ and Computer III 
\60\ proceedings.
---------------------------------------------------------------------------
    \58\ See People of State of Cal. v. F.C.C., 905 F.2d 1217, 1241 at 
n.35 (9th Cir.) (1990).
    \59\ Expanded Interconnection Order, 7 FCC Rcd 7369,  65 (1992).
    \60\ Computer III Phase I Order, 104 FCC2d 958  113 (1986); 
Computer III Further Remand Proceeding, 10 FCC Rcd 8630  18-19 
(1995).
---------------------------------------------------------------------------
    After enactment of the 1996 Act, the Commission sought comment on 
whether those requirements were still valid and appropriate.\61\ As of 
now, the requirements remain in effect. Nevertheless, it is an open 
issue whether the 1996 Act, by establishing specific interconnection 
and unbundling duties of local exchange carriers that are owed only to 
providers of telecommunications services, precludes the Commission from 
imposing the same or similar duties on carriers for the benefit of VoIP 
providers.
---------------------------------------------------------------------------
    \61\ Computer III Further Remand Proceeding, Notice of Proposed 
Rulemaking, 13 FCC Rcd 6040 (1998); Request to Refresh the Record, 16 
FCC Rcd 5363 (2001).
---------------------------------------------------------------------------
    NCTA emphasizes that the rights set forth in Section VI supra are 
critical to any VoIP regulatory regime under Title I, including 
interconnection, eligibility to receive universal support and 
participation in a sustainable intercarrier compensation regime.
Regulatory Forbearance and Preemption Under Title II
    The FCC has (and PUCs may have) considerable authority to decide 
that even ``telecommunications services'' need not be subject to 
various requirements under Title II of the Communications Act. For 
example, the FCC's Competitive Carrier rulemaking, which scales 
regulatory responsibilities according to the presence or absence of 
market power associated with a particular service, allows the FCC to 
eliminate regulations for entities or classes of providers that have 
low market shares and no potential to acquire and to wield market 
power.\62\ Obviously, facilities-based VoIP service providers, newly 
entering the market, who compete against dominant 100-year-old 
telephone service providers, will have little or no ability to engage 
in the abuses that full common carrier regulation is designed to 
prevent.
---------------------------------------------------------------------------
    \62\ See Policy and Rules Concerning Rates for Competitive Common 
Carrier Services and Facilities Authorizations Therefor, First Report 
and Order, 85 FCC 2d 1 at  4 (1980) ('' Competitive Carrier ''). See 
also Policy and Rules Concerning Rates for Competitive Common Carrier 
Services and Facilities Authorizations Therefor, Fifth Report and 
Order, 98 FCC 2d 1191 at  19-23 (1984) (forbearing from most 
regulation of nat ionwide common carrier digital transmission networks 
(``DEMS''), holding that forbearance will help promote the entry and 
expansion of DEMS by relieving carriers of the costs and delay of 
required tariff filings and will help promote competition).
---------------------------------------------------------------------------
    Building upon the principles of the FCC's Competitive Carrier 
decision, Congress in the 1996 Act created a mechanism of regulatory 
restraint that extends not only to FCC-made rules but also to statutory 
provisions. Under Section 10 of the 1996 Act, the FCC is empowered and 
required to eliminate any statutory or regulatory requirement that 
applies to any telecommunications service or telecommunications service 
provider if: (1) the requirement is unnecessary to prevent unfair and 
unjust charges and practices, (2) enforcement of that requirement is 
not needed to protect consumers, and (3) forbearance would otherwise 
serve the public interest.\63\ VoIP services offered by new entrants, 
especially in their initial phases, are ripe for Section 10 
forbearance. Such regulatory restraint is essential to promote 
investment, innovation, and widespread deployment.
---------------------------------------------------------------------------
    \63\ See 47 U.S.C. Sec. 160(a). Some parties have sought Section 10 
forbearance under the 1996 Act. See e.g., CTIA Petition for Forbearance 
from Section 310(d) Regarding Non -Substantial Assignments of Wireless 
Licenses and Transfers of Control Involving Telecommunicatio ns 
Carriers, 11 C.R. 61 (1998), Forbearance From Applying Provisions of 
the Communications Act to Wireless Telecommunications Carriers, 21 C.R. 
802 (2000).
---------------------------------------------------------------------------
    The FCC followed this line of reasoning in its cable modem 
Declaratory Ruling and NPRM. There it said that ``to the extent cable 
modem service is classified as a telecommunications service [in the 9th 
circuit] . . . forbearance would be in the public interest because 
cable modem service is still in its early stages; supply and demand are 
still evolving; and several rival[s] . . . are still developing. For 
these same reasons [the Commission] tentatively conclude[s] that 
enforcement of Title II provisions and common carrier regulation is not 
necessary for the protection of consumers or to ensure that rates are 
just and reasonable and not unjustly or unreasonably discriminatory. As 
such, [the Commission] believe[s] that forbearance from the 
requirements of Title II and common carrier regulation is appropriate 
in this circumstance.'' \64\
---------------------------------------------------------------------------
    \64\ See Inquiry Concerning High Speed Access to the Internet over 
Cable and Other Facilities, Appropriate Regulatory Treatment for 
Broadband Access to the Internet over Cable Facilities, FCC N Dkt, Nos. 
00-185, 02-52 Declaratory Ruling and Notice of Proposed Rulemaking, at 
 95 (rel. Mar. 15, 2002)
---------------------------------------------------------------------------
    There are several observations about ``forbearance'' worth noting. 
First, this approach ordinarily presumes that Title II requirements and 
rules apply in the first instance, and then eliminates them one (or a 
few) at a time. A more flexible and deregulatory approach might couple 
the notion of forbearance with the ``nascent services doctrine'' so as 
to identify only the Title II requirements appropriate to VoIP and 
forbear from the rest in accordance with the standards of Section 10. 
Such an approach would ensure that VoIP services are never subject to 
the full panoply of Title II-type regulations, but rather are subject, 
from the outset, only to those regulatory obligations that have been 
affirmatively determined to be necessary.
    Second, forbearance can be slow; at the Federal level, 
telecommunications service providers must apply for forbearance, either 
individually or as a class, and the FCC may take up to 15 months 
(during which time regulation continues) before a final decision is 
rendered.\65\ This problem can be solved if the FCC takes action 
promptly, through its contemplated NPRM \66\ and through other 
appropriate steps to provide a measure of regulatory certainty for VoIP 
services.
---------------------------------------------------------------------------
    \65\ See 47 U.S.C. Sec. 160(a).
    \66\ See XChange, FCC to Open Proceedings on VoIP Regulation, Nov. 
7, 2003 (citing a letter from FCC Chairman Michael Powell to U.S. 
Senator Ron Wyden, in which Powell stated that: ``Over the course of 
the next year, after full public comment and thoughtful consideration 
of the record, the FCC plans to follow up. . .[an] NPRM with a report 
and order on the VoIP issues raised in the proceeding.'').
---------------------------------------------------------------------------
    Third, FCC forbearance standing alone operates only to curtail 
interstate regulation but does nothing to address excessive and 
inconsistent intrastate phone regulations.\67\ Two solutions to this 
problem are apparent. One is for PUCs to embrace a light-handed 
regulatory approach and ensure that any state regulation of VoIP 
services is consistent with FCC regulatory treatment. Failing that, the 
other solution is for the FCC to use its preemption powers to constrain 
state action. Indeed, a determination under Title I that VoIP is an 
interstate information service would preempt states by definition. If 
VoIP is classified as a telecommunications service under Title II, then 
Section 253 requires the FCC to preempt state laws, regulations, and 
rules that prohibit or have the effect of prohibiting any entity from 
providing such services.\68\ More broadly, the FCC has preexisting 
preemption powers, resident in Sections 1, 2, and 4(i) of the 1996 Act, 
to preempt state regulations that impede the provision of interstate 
communications services.
---------------------------------------------------------------------------
    \67\ But note that a number of state public utility commissions 
also operate under laws that allow for the exercise of regulatory 
forbearance.
    \68\ See 47 U.S.C. Sec. 253.
---------------------------------------------------------------------------
    Given the range of possible paths to a suitably deregulatory 
regime, there appears to be every reason for Federal and state 
policymakers to embrace a minimally regulatory regime for VoIP 
services, so that vast numbers of residential consumers will enjoy the 
benefits of competition, new and exciting services will be introduced, 
and new investment and jobs will be stimulated. Only a regulatory 
framework that is minimally burdensome can create the right incentives 
and a favorable climate in which service providers can invest, 
innovate, and deploy VoIP services.
Conclusion
    Cable's massive investment since the 1996 Act has e nabled the 
industry to offer a host of new services. These services include high-
speed Internet access, digital cable, HDTV and video-on demand. Several 
cable companies also have substantial circuit-switched telephony 
operations. VoIP, however, is more than just the next new application. 
The cable industry believes that VoIP technology will permit cable 
companies to provide innovative, high-value facilities-based 
residential local phone services at competitive prices across the U.S. 
Such services, especially offered by facilities-based providers like 
cable competitors, hold the promise of breaking the logjam that has 
long denied consumers the benefits of real and sustainable competition 
and choices for local telephone service. While cable companies are 
excited about the potential benefits that can result from the 
widespread availability of VoIP services, a broad rollout cannot be 
assured unless a (de)regulatory framework applies to these services.
    If policymakers affirmatively embrace and promote VoIP services, 
and keep them free of unnecessary and inconsistent regulation, the 
result will be to attract additional investment and propel rapid and 
ubiquitous deployment. This is the lesson to be drawn from the 
broadband explosion since the 1996 Act: pro-competitive, deregulatory 
policies work as nearly 18 million cable modem customers bear witness. 
Conversely, public benefits will inevitably be reduced and delayed if 
unnecessarily restrictive regulations from the monopoly telephone era 
are applied. The choice is clear.

    The Chairman. Thank you very much.
    Mr. Post?
    I'm sorry, Senator?
    Senator Breaux. Mr. Chairman, I just want to also comment 
on one of our witnesses, Glen Post, with CenturyTelephone, who 
is headquartered in Louisiana. They serve about 22 states, I 
guess, now in rural telephone services, and we're real proud of 
the contribution they've made, and glad to have them as a 
witness.
    The Chairman. You're not responsible for the Mardi Gras 
being streamed over the Internet?
    [Laughter.]
    Mr. Post. We had nothing to do with that, thank you.
    The Chairman. Thank you.
    Welcome.

STATEMENT OF GLEN POST, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF 
                     THE BOARD, CENTURYTEL

    Mr. Post. Mr. Chairman and Members of the Committee, I 
appreciate the opportunity to appear before you today.
    CenturyTel is a leading providing of telecommunications 
services in rural communities in 22 states, as Mr. Breaux has 
just pointed out. Many of our service territories are 
represented by Members of this Committee, including Louisiana, 
Mississippi, Montana, Nevada, Oregon, Texas, and Washington 
State. Our principal business focus is providing high-quality 
long-distance, Internet, broadband, and advanced services to 
rural and small urban markets. The majority of our three 
million customers and 7,000 employees live and work in the very 
areas we believe have the most critical stake in the issues we 
will discuss today.
    Mr. Chairman, technology and market forces are driving our 
industry faster than regulations have been able to adapt. Voice 
over Internet protocol is an exciting new service that signals 
the way our country communicates. It is becoming increasingly 
varied, and the pace of change will accelerate even more.
    It is an exciting time in our country's telecommunications 
development, but also a time of great uncertainty for the 
country's local phone companies and their investors. Our 
ability to invest in our network and bring high-quality 
services to our customers is now controlled, to a great degree, 
by increasingly volatile regulatory decisions, an outdated 
regulatory environment that no longer reflects reality, and 
government-managed competition whose rules are unevenly applied 
to market participants.
    Lost in the avalanche of news stories and advertisement by 
those promoting voice over IP technology is one critical but 
seldom mentioned fact. Voice over IP service providers cannot 
deliver their services without utilizing and relying upon 
someone else's network. Their ability to compete depends, in 
large part, on the network in which we have invested to make 
broadband connections available to rural America. They do not 
concern themselves with the capital-intensive task of building 
and maintaining a broadband-capable network that universally 
serves all customers.
    I believe the discussions about voice over IP cannot take 
place in a vacuum. We cannot discuss voice over IP without also 
talking about universal service, intercarrier compensation, 
competition, public safety, and how the promised benefits of 
broadband-based services such as voice over IP can become a 
reality for all consumers.
    Regarding intercarrier compensation, access charges are 
nothing more than legally required payments for use of another 
carrier's network. They play a critical role in keeping local 
rates affordable and encouraging investment in the 
telecommunications infrastructure that plays a huge role in our 
national economy. At their foundation is the commonsense 
recognition that all customers benefit when all customers are 
connected to the public switched telephone network.
    Certain petitions now before the FCC would lead us to 
believe that injecting the words ``Voice over IP'' or 
``Internet'' into the description of a voice service magically 
changes the nature of that service. AT&T's petition to have its 
traditional long-distance service be exempt from access charges 
because it contains a small IP component is alarming. AT&T is 
not offering a new product or service, yet AT&T seeks to avoid 
paying a legitimate cost for use of phone company loops and 
switches, and shows no regard for the need to protect consumers 
or maintain much needed stability in the industry.
    The truth is, nothing changes in our network when voice 
over IP or other IP-based services travel across it. Today, we 
originate, transport, or terminate voice over IP calls, 
sometimes all three, so that two or more people can have a 
voice conversation on telephones just like the ones you have in 
your homes and offices today.
    Vonage, Level 3, and long-distance companies such as AT&T 
should not be allowed to unilaterally exempt themselves from 
access payments. There is no consumer benefit, and the granting 
of the petition is not in the public interest.
    The question that we must ask ourselves is whether voice 
over IP will bridge the digital divide between rural and urban 
America, or make it wider. If the universal service issues 
surrounding voice over IP are not properly addressed, it will 
be the latter. For this reason, there is no question in my mind 
that all voice service providers, including voice over IP 
providers, such as Pulver.com and Vonage, must contribute to 
universal service funding.
    The availability of affordable telecommunications services 
has long been a cornerstone of our Nation's telecommunications 
policy. It is the principle that makes our telecommunications 
network one of our most valuable national assets, and it is a 
significant factor in the economic and social development of 
our Nation. We must not allow the hype surrounding this 
promising new technology to distract us from this important 
policy principle. All service providers must contribute to 
universal service to help make services available and 
affordable for all.
    The government has an important role to play in making sure 
certain public-interest objectives are met, including universal 
service, 911, carrier-of-last-resort obligations, and law 
enforcement access. Some regulators have already discussed 
applying a light touch when it comes to regulating voice over 
IP. But if a light touch means no social or economic 
responsibility, I fear such an approach will, in time, 
undermine the high-quality service and near ubiquitous 
deployment that this country has worked long and hard to 
achieve.
    There is no downside for consumers if all providers 
shoulder responsibility for supporting the network, assume law 
enforcement and national security responsibilities, comply with 
911 requirements, and adhere to disabilities access 
obligations.
    Voice over IP is an exciting technology that highlights the 
need for a broad revisiting of the Nation's communications 
policy. We need to move beyond government-managed competition 
that rewards those who make no network investment while 
handcuffing those who do.
    In conclusion, how you and the FCC proceed has critical 
implications to the long-term future of this Nation's 
telecommunications infrastructure and our ability to keep pace 
with the rest of the world. Our efforts in creating new 
policies today are, indeed, necessary, but we should seek to 
avoid unintended negative consequences for consumers of 
tomorrow as we open this new chapter in telecommunications 
history.
    Voice over IP must be considered in the broader context of 
all the fundamental changes that are underway in the new 
telecommunications marketplace, and reform must take place for 
the rules governing all competitors today. If nothing else, 
voice over IP accelerates the need for universal service reform 
and free market competition. Hopefully, today's hearing will 
advance that effort.
    I appreciate the opportunity to discuss these important 
issues with you today, and look forward to your questions.
    [The prepared statement of Mr. Post follows:]

       Prepared Statement of Glen Post, Chief Executive Officer 
                 and Chairman of the Board, CenturyTel
                           Executive Summary
Introduction
    CenturyTel is a leading provider of telecommunications services in 
rural communities in 22 states. Many of our service territories are 
represented by members of this committee, including Louisiana, 
Mississippi, Montana, Nevada, Oregon, Texas and Washington State. Our 
principal business focus is providing high quality telephone, long 
distance, Internet, broadband and advanced services in rural and small 
urban markets. We also use IP technology in our network today, and 
offer IP-based voice services to small business and enterprise 
customers. The majority of our three million customers and 7,000 
employees live and work in the very areas that we believe have the most 
critical stake in the issues we will discuss today.
Voice Over Internet Protocol--The Most Recent Sign that the 
        Telecommunications World is Changing
    Technology and market forces are driving our industry faster than 
regulations have been able to adapt. Voice Over Internet Protocol is an 
exciting new service that signals that the way our country communicates 
is becoming increasingly varied and that the pace of change will 
accelerate even more. It is an exciting time in our country's 
telecommunications development, but also a time of great uncertainty 
for the country's local phone companies and their investors. Our 
ability to invest in our network and bring high quality services to our 
customers is now controlled to a great degree by increasingly volatile 
regulatory decisions, an out-dated regulatory environment that no 
longer reflects reality, and government-managed competition whose rules 
are unevenly applied to market participants.
The Facts About Rural Markets and Voice Over IP
    We have all heard plenty about Voice Over IP in the last few 
months. But lost in the avalanche of news stories and advertisements by 
those promoting the technology is one critical, but seldom-mentioned 
fact: VoIP service providers cannot deliver their services without 
utilizing and relying upon someone else's network. Their ability to 
compete depends in large part on the network in which we have invested 
to make broadband connections available to rural America. They do not 
concern themselves with the capital-intensive task of building and 
maintaining a broadband-capable network that universally serves all 
customers. We cannot lose sight of this fact as we consider the effect 
that the regulatory treatment of VoIP will have on the continued 
availability of telecommunications service in all markets.
The Important Role of Intercarrier Compensation
    Intercarrier compensation issues must be addressed in the VoIP 
debate. Access charges are nothing more than legally required payments 
for use of another carrier's network. They play a critical role in 
keeping local rates affordable, encouraging investment in the 
telecommunications infrastructure investment that drives a huge portion 
of our national economy and promoting interconnection between carriers. 
At their foundation is common sense recognition that all customers 
benefit when all customers are connected to the public switched 
telephone network. In order for all customers to be connected, carriers 
must compensate each other fairly, and end-user rates must be 
affordable.
A Commitment to Universal Service
    The question that we must ask ourselves is whether VoIP will bridge 
the digital divide between rural and urban America, or make it wider? 
If the universal service issues surrounding VoIP are not properly 
addressed, it will be the latter.
    Our country's commitment to universal service must be renewed and 
strengthened. Without it, customers who live in rural areas face the 
real risk of being left behind as our Nation's communications network 
continues to evolve. For this reason, there is no question in my mind 
that all voice service providers, including VoIP providers such as 
Pulver.com and Vonage must contribute to universal service funding.
The Government's Role in Preserving Key Social Objectives
    Some regulators already have discussed applying ``a light touch'' 
when it comes to regulating VoIP. But, should a ``light touch'' mean no 
social or economic responsibility? I fear such an approach not only 
will subject consumers to second-class service--such as no E-911, or 
access for people with disabilities. But even more troubling, it will 
in time undermine the high quality service and near-ubiquitous 
deployment that this country has worked long and hard to achieve--
service and coverage that is the envy of other nations.
    From a consumer standpoint, there is nothing wrong with demanding 
some level of accountability from all providers. There is no downside 
for consumers if all providers shoulder their fair share for supporting 
the network, assume law enforcement and national security 
responsibilities, and comply with 911 requirements, numbering resource 
conservation, and disabilities access obligations.
Consumers Deserve a Robust Market Where ALL Competitors Can Compete 
        Freely
    Voice Over IP is an exciting technology that highlights the need 
for a broad revisiting of the Nation's communications policy. We need 
to move beyond government-managed competition that rewards those who 
make no network investment while handcuffing those who do. We should 
allow the local phone companies to bring our longstanding commitment to 
the community, to innovation, and to customer service to the 21st 
century communications marketplace. State and Federal policy makers 
must understand that a new world brings new challenges, such as 
encouraging infrastructure investment in an uncertain environment, and 
preserving important social objectives such as universal service, 
emergency services, and access for law enforcement.
Conclusion
    VoIP must be considered in the broader context of all the 
fundamental changes that are underway in the new telecommunications 
marketplace--and reform must take place for the rules governing all 
competitors today. Hopefully, today's hearing will advance that effort.

    The Chairman. Thank you very much, Mr. Post.
    Mr. Wise, most witnesses and some Members of this Committee 
have expressed strong reservations about applying state 
regulation to VoIP. In fact, Mr. Citron says that state 
regulation carries serious consequences--there are other very 
serious concerns raised about state regulation. Do you have any 
response to that?
    Mr. Wise. Yes, Senator. Yes, there's no question, at this 
point, that the majority of the states in this country have 
applied this so-called light touch that we've all been looking 
at. It is not the intent of the state commissions to stifle 
this exciting new technology, and that it truly could be the 
vanguard of the new wave of telecommunications.
    But it is telecommunications. And to the extent that it 
touches the network, they should have obligations for the 
public service. And unless you want to see a dramatic swing to 
some of these high-cost rural areas, dramatically see phone 
bills rise, then there should be a clear and concise message 
that the FCC and this body sends about the public interest and 
what's going to happen to rural telephone rates.
    The Chairman. But, Mr. Wise, well-diggers dig wells, and 
regulators regulate.
    Mr. Wise. That is the curse of my last 9 years as a 
regulator, and I find it very difficult, at times, to mix my 
role as a regulator with my own personal sentiment. But my 
obligation, even though flawed, under what--as you said, about 
the telecom act, but my job is to facilitate competition in our 
state, and we've done so. And so as much as I can--and I think 
many of the states agree with you that it is our role to 
protect that consumer, that person that pays the bill and is 
the first to pick up the phone and to speak to me and tell me 
their story of poor service, of customer choice, and the like. 
And so that I really hope that we don't have that so-called 
patchwork of regulation around the country, and that's why I 
commend this body for addressing this issue early in the 
debate.
    The Chairman. Thank you.
    Mr. Werbach, what's your comment on that issue?
    Mr. Werbach. I think, Senator, you've raised an important 
point. And the trouble is, the regulatory structures that we 
have, have been built up over a hundred years based on a 
traditional kind of network, based on the idea that, for 
example, a telecommunications network was one thing, and a 
broadcast network that sent video was something else. Well, 
now, with the Internet, with voice and other real-time services 
as applications, again, there is just one network, and 
applications on top of it. So when regulators try and get 
involved at every level, piecemeal, when, as Senator Wyden 
said, every jurisdiction throughout the country can potentially 
get a piece of a service as long as it touches the network 
somewhere, we wind up potentially with a very confusing 
situation and a situation which just inherently limits the 
growth of new services and limits the kind of innovation and 
competition that we all want to see.
    The Chairman. Do you believe that the Commission may have 
to impose network neutrality requirements on broadband 
providers?
    Mr. Werbach. I think, you know, Chairman Powell, you know, 
as he said in his speech a couple of weeks ago, rightly 
highlighted the importance of what he called Net freedom, the 
idea that--if you look at the history of the Internet, the 
Internet is a success story of the FCC imposing pro-competitive 
safeguards on the underlying infrastructure, which historically 
was the telephone network, so that it didn't have to regulate 
what came on top, it didn't have to regulate Internet service 
providers, it didn't have to regulate application providers 
because the network was open.
    So I think it's a very legitimate concern to ensure, as we 
move into this broadband world, as we move into this world of 
new kinds of applications, like VoIP, that we ensure that that 
openness takes place.
    Now, specifically whether we need to impose new rules 
today, whether the FCC needs to impose new rules, I think is an 
issue the commission needs to take on, take a look at, look at 
what's happening in the market, and define specifically what 
sorts of tests would be needed to ensure that the network is 
truly open.
    The Chairman. Mr. Britt, as we all know, USA Today 
reported, ``Comcast, the Nation's largest cable operator, will 
boost average cable rates by 5.4 percent. Time Warner Cable 
will raise average rates by 4.9 percent,'' on and on. As you 
know, increases in cable rates have been a very important issue 
before this Committee, but, more importantly, before the 
American people.
    You state, in your written testimony, VoIP technology 
allows cable operators to use these new broadband networks to 
offer subscribers high-quality reliable local and long-distance 
telephony service, and that Time Warner Cable plans to offer 
VoIP services throughout the majority of its cable footprint by 
year-end.
    Can consumers expect to see a corresponding decrease in 
their cable rates since the entire cost of this network will no 
longer need to be borne by cable subscribers alone?
    Mr. Britt. Mr. Chairman, we actually provide a large number 
of services now that would fill a long list of--sheet of paper.
    The Chairman. None of those have been cause to see a 
reduction in your increase in cable rates, though.
    Mr. Britt. I will address that in a second. All of them are 
priced at different levels. One of the things I worry about 
every day is doing a lot of market research, determining what 
the right prices for the different services are, in light of 
competition, because we have competition for each of our 
services, and then figuring out the best way to offer that to 
the market to get the most number of people to buy our 
services.
    Many of our prices for services have not changed for 
several years. We've been in the Internet-access business for 7 
years, and changed our price once. Pay television prices have 
actually come down over the last 10 years. So there is one 
particular--one of our offerings that was a business we were in 
30 years ago, it was our only business then, and that 
particular price has gone up. But when you look at the average 
price that our customers are paying, that has not gone up 
nearly as fast as that one number.
    The Chairman. Well, my time is expired. I'm sure that's of 
very little comfort to the majority of your subscribers who 
don't have other services but continue to see their cable rates 
go up in dramatic fashion.
    I think Mr. Wise would agree that that's a matter of 
concern to his constituents. Is that correct, Mr. Wise?
    Mr. Wise. Yes, sir. And certainly competitive choices don't 
always give us lower prices. It might just give us the correct 
price. And certainly that's what we see from unfettered and 
uncontrolled companies in this marketplace.
    The Chairman. And I question your comment about where 
competition lies, but that'll be the subject of another 
hearing, and we thank you for being here today on this issue.
    Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman.
    Mr. Citron, Mr. Post made a comment about some of the new 
arrivals in this area of Internet telephony may not be making 
network investments. Do you think you're making network 
investments?
    Mr. Citron. Oh, absolutely--we do. First, Vonage is not a 
traditional facilities-based carrier. We spent, you know, over 
$10 million in buying of telecom equipment to place on top of 
the underlying telecommunications infrastructure, the services 
that we use today. Of course, we purchased that infrastructure.
    One of the great stories for the CLEC industry is, Vonage 
has been purchasing a tremendous amount of capacity from the 
CLECs in order to interconnect back into the existing PSTN. At 
the same time, we are buying plenty of bandwidth, IP, from 
next-generation networks in order to transport our calls over 
the Internet. So there are a lot of investments going on, both 
by us and by our partners.
    Senator Cantwell. So, Mr. Werbach, in your testimony, you 
kind of hit the head--I apologize for having to attend another 
hearing on why we should pass standalone legislation on getting 
reliability standards for our electricity grid, I'm sure 
something that everybody would appreciate here, something we 
need to do to make sure we have reliable services. So I 
apologize for not being present at your testimony, but I have 
most of your testimony in front of me.
    And on this particular point, Mr. Werbach, you're pretty 
clear in kind of debunking the access-charge issue. I mean, I 
think that's really what people are saying, is that somehow 
these people aren't making investments in this legacy 
technology--and that's right, they're not, to certain degrees. 
But, as Mr. Citron just said, he's paying for certain things. 
So how do we further debunk this issue about access?
    Mr. Werbach. Well, you know, Senator, I think you've 
brought up a good point, that there's a lot of mythology around 
here. And we need to understand, when we're discussing 
important issues, like universal service, that sometimes things 
get labeled as just, ``That's universal service.'' And when you 
actually peel pack the onion, it's much more complicated than 
that.
    Access charges, you know, I think, by universal agreement, 
are a system that needs to be reformed, and they're not the 
only system for intercarrier compensation, they're not the only 
way that companies that use networks or hand off traffic pay 
for that.
    Senator Cantwell. Explain what that means to the consumer, 
because what you just said is a pretty big statement.
    Mr. Werbach. What what piece means to the consumer?
    Senator Cantwell. Basically, you're saying, ``Why should 
consumers of the future, with new technology, be tied to the 
business models of legacy technology?'' Isn't that correct?
    Mr. Werbach. Essentially. I mean, IP is the future of the 
network. That's going to happen regardless of what the 
regulatory environment is. However, applying traditional rules, 
applying charges and regulations, that were designed with the 
network of the 1950s or 1970s or even early 1990s in mind, will 
retard that transition.
    So certainly, you know, the idea that there's a technology 
of IP and voice over IP that's more efficient, that provides 
more choice, and that can pay for network connectivity as an 
application that rides on top of infrastructure, that has 
tremendous benefits for consumers. And I think, you know, 
Chairman Powell and some of the other witnesses have 
illustrated some of them.
    I think the problem is, trying to force that technology 
back into the traditional box and force it to pay into these 
inflated non-cost-based access charges, which, you know, are 
applied to certain kinds of traffic and not other traffic, will 
only harm consumers by preventing the kind of benefits we want 
to see from being realized.
    Senator Cantwell. Thank you.
    Mr. Britt, the Chairman asked a question about your 
services, moving forward. In general, I would assume that most 
broadband carriers who are delivering access to homes today and 
digital choices in the future would love to bundle this service 
as a complete package to consumers. Do you think that you 
should offer access to competitors onto your broadband network? 
Do you see working with Mr. Citron in the future on offering 
that package?
    Mr. Britt. The interesting thing about this technology is 
that Mr. Citron can offer his service whether we do something 
together cooperatively or not. I'm sure that we have people on 
our cable networks today that subscribe to Vonage, just--
actually, I don't know that we do, but I assume we do, because 
there's no way for me to know whether we do or not. And I think 
that's what this technology is about, the idea that Mr. Citron 
can offer this as an application that rides over our broadband 
network, and that can exist whether we do anything or not. That 
doesn't preclude our working together for marketing or some 
other business relationship if that makes sense to both of us.
    Senator Cantwell. So you don't think there is a place in 
the future for things like most-favored-nation clauses, where 
you drive down--where you basically give your entire broadband 
network over to one carrier?
    Mr. Britt. I don't foresee that at the moment. I think 
we're in a very early stage of lots of new ideas, lots of 
competing business models. In a sense, what Mr. Citron is doing 
is competing with what we're doing, really with a different 
model. And I think as time goes by, the consumer will vote with 
his or her dollars, and we'll see how this all evolves.
    Senator Cantwell. Mr. Citron, isn't your major concern 
really not the existing telecommunication companies, but the 
broadband carriers, who are major players, with fat pipes into 
lots of households, who are now going to bundle this service 
and, as the Chairman said, maybe not give us any discount on 
our current service, but having consumers pay more, and closing 
you out of opportunity?
    Mr. Citron. Sure. Let me address the points separately.
    First, you know, Vonage has to maintain backward 
compatibility with existing PSTN, so clearly we have concerns 
in that area, in terms of accessing--in getting access to 
facilities.
    But in regards to competing with Time Warner, per se, I 
will tell you, factually, that, yes, there are lots of Time 
Warner customers who use the Vonage service. And every single 
day, people that have Time Warner cable call Vonage up, asking 
to get Vonage's service. In doing so, we point them in the 
direction of Time Warner's Roadrunner Cable offering. And, 
therefore, those customers go and sign up for those services. 
So, in one sense, Vonage is really benefiting--you know, Time 
Warner's really benefiting from Vonage's deployment in signing 
up customers to broadband. But, at the same time, Vonage is 
going ahead and competing head on with Time Warner for 
customers at the application layer.
    The only concern Vonage would have in the future is, sort 
of, around the area of neutrality on bits, themselves. Today, I 
think that Chairman Powell pointed out, very correctly, we've 
not seen anyone going ahead and favoring one bit over another 
bit. But, in the future, that's a possibility. And so we urge 
this panel and this Congress to take a look at that issue and 
to make necessary changes where appropriate.
    Senator Cantwell. Is your standard open, or proprietary?
    Mr. Citron. Our standard is open. Just to clarify, SIP is 
an open standard. It is recognized internationally. And Vonage 
today is already developing an open platform to allow other 
networks to connect with us. To this regard, we're currently in 
the interoperability testing phase with, for example, Free 
World Dial-up, a service done by Pulver, to allow them to 
interconnect with us. But as part of that interoperability 
testing, Vonage will be making public a server to anyone who 
has access to that can send calls to our customers, so our 
customers can choose to receive those calls from them in order 
to protect our customers' privacy.
    Senator Cantwell. I know my time is up, but do you think 
that that's what everybody in the business is going to do?
    Mr. Citron. I think, over time, they will. The nice thing, 
though, is that because we issue our customers phone numbers 
that are e-dot 164 numbers, there's always a mechanism to go 
find that customer. I think there are economic incentives for 
us to peer with other networks directly so we can bypass legacy 
infrastructure, and, thus, reduce the cost of both our 
services. So I think the marketplace will really deal with 
that, for the most part.
    Senator Cantwell. Thank you.
    Senator Breaux. [presiding]. I'd like to thank all the 
panel members.
    Mr. Britt, you said that digital phone, which Time Warner 
provides, feels just like conventional telephone service. Is it 
as good as conventional telephone service, in your opinion, 
now?
    Mr. Britt. Yes, I believe our customers think--they tell us 
they think it's just as good.
    Senator Breaux. So you think that you really have true 
facilities-based competition with your new digital phone type 
of system.
    Mr. Britt. Yes, that's true.
    Senator Breaux. Do you have any comment on Chairman 
Powell's, I think, expression--I don't want to put words in his 
mouth--about the wisdom of reopening the 1996 Act with regard 
to the Section 251 requirements that traditional telephone 
companies have?
    Mr. Britt. It's a little beyond my expertise, but I do 
think there's a lot of existing regulation that needs to be re-
examined in light of this new competition.
    Senator Breaux. I take it you all contribute to the 
universal fund at Time Warner. Do the other--do you?
    Mr. Britt. Yes, we do.
    Senator Breaux. Do you know if the other cable Internet 
providers, voice over Internet providers, contribute, as well?
    Mr. Britt. I don't know that for a fact. I think a number 
of them are, but, potentially, some aren't.
    Senator Breaux. I guess, Mr. Post, do you have any comments 
on what I was exploring earlier on? Because it seemed to me 
that the 1996 Act was, as Chairman Powell indicated, that we 
provided a subsidy or assistance to get others started in this 
business to provide this competition. It seems to me that Mr. 
Britt is indicating that their service is just as good, and 
probably, may argue, better. He certainly has the capacity to 
provide, in addition to telephone service, video service, and 
that wire is already in the house. It seems to me that the 
phone companies are still following 251 to help these 
competitors get up and started, and it looks like they're doing 
pretty good at it. Do you have any comment?
    Mr. Post. Yes. We believe that competition is in the 
networks and in our markets across the country today, with 
cable companies, wireless competition, Internet-based 
competition today. So competition is widespread. There is a 
need for our companies, telephone companies, to be unleashed 
from many of these regulations that are in place to day. We 
want a level playing field. We don't want--we're not asking for 
compensation, a new compensation--just compensation for folks 
who use our network, and when we talk about the voice over IP.
    Senator Breaux. Well, you benefit from universal service 
fund to go out into rural areas. If Mr. Britt, through the 
cable, goes out into a rural area, should he participate in 
that fund, as well?
    Mr. Post. Yes. To the extent that they utilize a network to 
reach rural America--or have the same requirements or 
obligations that we have for serving all the customers in a 
certain area, then that--quality requirements--then there's no 
reason they should not participate.
    Senator Breaux. Do any of the other witnesses have a 
comment on the wisdom, or lack thereof, of--I think Mr. Powell 
suggested it; I would agree with--of re-looking at the 1996 
requirements, in terms of Section 251, because of the advent of 
the new competitive facilities-based competition that's now in 
place? Anybody else have a comment on that? You don't have to. 
I'm just asking.
    Mr. Werbach. Well, I would just add, I think, Senator, that 
that--that's a reason to re-examine the 1996 Act, but also the 
technological change is an independent reason, that basically 
the world looks very different today than it did then, and it's 
going to look much, much more different a few years down the 
road.
    Senator Breaux. OK.
    OK, thank you, gentlemen, very much. Now I'll recognize 
Senator Nelson.
    You go ahead and close it up when you finish, Bill.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. [presiding]. OK. And, Mr. Chairman--that 
kind of sounds nice, doesn't it?
    Senator Breaux. I'm turning it over to you now.
    [Laughter.]
    Senator Nelson. I have been elsewhere, dealing with this 
little crisis we have down in Haiti right now, so some of these 
questions may have been already addressed. And if so, if you 
will just tell me.
    For Mr. Werbach, how successful do you think VoIP will be 
in attracting customers and rivaling the traditional phone 
service?
    Mr. Werbach. To the first part, I think everywhere we go 
and look around the world, we see that VoIP is a killer app, if 
not the killer app, for broadband. I mean, we talk, in this 
country, about a hundred or two-hundred-thousand voice over 
broadband subscribers today. In Japan, there are three million 
voice over broadband subscribers. People like to talk to one 
another. People like to engage in not just traditional phone 
service, but videoconferencing, the ability to connect to many 
people at once, the kinds of services that we see with instant 
messaging.
    But what that means is that VoIP functionality may attract 
customers, but to something that's not necessarily the same as 
traditional phone service. It may let you talk at a distance, 
but we shouldn't assume that just because it does that, it's 
the same as the existing kinds of service that have been 
regulated for a hundred years. I mean, you shouldn't regulate 
me as a phone company just because I have a tie that has a 
telephone on it. And I think that's the issue that really needs 
to be addressed here. Because it's easy to just assume that it 
lets you talk over a network, and, therefore, it's a phone 
service; but, in reality, it's a totally different animal.
    Senator Nelson. Mr. Wise?
    Mr. Wise. Yes, sir.
    Senator Nelson. How might the regulation of VoIP benefit 
and harm states on such things as revenues, consumer issues, 
and universal service?
    Mr. Wise. Yes, sir, that is certainly one of the issues in 
the public interest that we've taken on, is the issues that 
need to be addressed by this body and by the FCC. Certainly, 
there are huge amounts of monies that go to--and as much as we 
might not like the word--the ``subsidy'' of the rural customer, 
and it would be a substantial cost shift to these rural 
customers if, in the hard light of reality, that there was 
absolutely no fees of universal service or access charges 
applied to these people that are touching the network.
    And so I'll be a proponent all day of this new technology, 
and I believe that many of the state commissions are, as well. 
But it is vital that we address these issues in the public 
interest.
    Senator Nelson. So you like to see the Congress get into 
this and provide for some kind of VoIP regulation.
    Mr. Wise. Well, certainly, that minimizes the chance of 
disruption and heavy-handed regulation, and it is something 
that the Congress should be aware of as these new technologies 
emerge, and the impact on the law. And our role, at the state 
commissions, are to apply the law as written, whether it comes 
from our states or from this Congress.
    Senator Nelson. Mr. Post, have you all already talked about 
how VoIP may harm or help rural telephone service?
    Mr. Post. Not specifically. Voice over IP is, of course, 
just a technology using the IP backbone. I believe that the IP 
network--voice over IP service will continue to grow. Our 
company expects to migrate to voice over IP over time. The real 
benefit there is combining data management and voice over the 
same network, which can reduce costs to consumers.
    Our concern is that companies today--the voice over IP 
providers today are not paying access use of the network that 
we own and have invested in. And we think that if that 
continues, obviously all voice carriers are going to move to 
voice over IP, there'll be no access charges, and the impact on 
rural America, on the consumers in rural America, would be 
huge. On average, $25 per customer access at CenturyTel, and up 
to $60 in the more rural areas, on a per-customer basis.
    Senator Nelson. Mr. Vonage----
    [Laughter.]
    Senator Nelson. Oh, he's not here. OK, who'd like to take 
this one?
    Mr. Citron. I'm here. Mr. Citron, Senator.
    Senator Nelson. Oh, Citron, all right.
    Mr. Citron. That's OK.
    Senator Nelson. Tell me how technically feasible and how 
expensive would it be to equip your service to allow 
appropriate and legal law enforcement surveillance of Internet 
phone calls?
    Mr. Citron. Sure, Senator. Today, first, let me remind you, 
since you weren't here earlier, that Vonage already complies 
with subpoenas for information requests from virtually most 
governmental agencies, both local and Federal, for information 
regarding the calling patterns of our customers and billing 
information. Today, we're currently already working with the 
FBI to explore ways of creating a technical standard to go 
ahead and intercept those calls.
    It is technically feasible. It is doable. But because voice 
over IP is so different at the application layer, where it 
doesn't ride on physical facilities, like Time Warner, or it 
could be--you could be at a Starbucks, or you can be here at 
Congress or in the Four Seasons Hotel or back at your home, 
those kind of interoperability elements have to be discussed 
and designed. We think there will be expense involved, but we 
think the industry can bear the expense.
    Senator Nelson. Any of you have any comments on the ease of 
transition for a senior citizen with regard to this new 
technology and being able to use it, or to have alternative 
service? Any comment there?
    Mr. Britt. Senator, I would say that our--the service we 
have launched actually doesn't look any different than the 
phone service that a consumer has today, other than it's a 
different price. So, really, for a senior citizen or anyone 
else, there's really no adjustment to be made.
    Senator Nelson. So they'd just pick up a phone receiver and 
proceed.
    Mr. Britt. Exactly. They use the same phone they have 
today.
    Senator Nelson. OK. Any further comments?
    Yes, sir, Mr. Citron?
    Mr. Citron. Yes, I'd like to just add to that. Like Time 
Warner, Vonage also offers a device that allows for the use of 
a regular telephone, and very similarly, as such. But also, as 
Kevin pointed out earlier, there are a number of different 
kinds of devices and applications, since voice over IP is just 
a software program, that could really benefit people, whether 
it be elderly or disabled, and we're obviously working on those 
products today. Whether they be WIFI phones that people can 
carry around with themselves, or whether they be video phones 
that'll be coming out later this year, they could really 
improve people's ability to communicate, both, again, for 
seniors, for people with disabilities, or just for regular 
people, like you and I.
    Senator Nelson. Did you say that presently there are, 
nationwide, maybe a couple of hundred thousand that are 
connected?
    Mr. Citron. That is correct.
    Senator Nelson. Say, in 5 years, how many will be 
connected?
    Mr. Citron. I think that's a very hard number to project 
forward. I think a lot of it has to do with what this Committee 
is going to take up in the area of regulation. Should you allow 
for regulatory certainty that allows for us to develop this 
industry, you could have millions of people using the service 
within a few years. Should you stifle our growth by imposing a 
myriad of layers of regulation on our industry, the industry 
will suffer, slow, and probably die.
    Senator Nelson. You said that there are three million users 
in Japan?
    Mr. Werbach. That was mine. There are three million 
Japanese customers who have voice over broadband service, which 
is a similar kind of service to what Vonage offers, yes.
    Senator Nelson. Why so few?
    Mr. Werbach. Why so few? That's----
    Senator Nelson. In Japan.
    Mr. Werbach. I think that's a lot, and it's growing very 
rapidly. That's people that are using voice over IP as their 
primary phone service. And I would add--again, this is just 
talking about voice over broadband service. There have been, I 
believe, six or ten million downloads of SCIP, which is a piece 
of software that you can download to make voice calls through 
your computer. And there have been tens of millions of 
downloads of instant messaging service, like AOL Instant 
Messenger and Yahoo! Messenger, most of which now have voice 
chat capabilities.
    Senator Nelson. We want to thank you all. I have long 
looked to be the Chairman of the Commerce Committee.
    [Laughter.]
    Senator Nelson. If I had my druthers, we'd just keep going 
on.
    [Laughter.]
    Senator Nelson. But thank you all for being here. The 
meeting is adjourned.
    [Whereupon, at 12:06 p.m., the hearing was adjourned.]

                            A P P E N D I X

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    Thank you, Mr. Chairman. Today's hearing allows our committee to 
consider how advances in technology--more specifically ``voice-over-
internet-protocol'' technology--are affecting the communications 
marketplace and our regulation of this industry. While some 
international and long distance companies have used ``packet-
switching'' technology in parts of their conventional telephone 
networks for some time, the slow, but steady growth of broadband 
technology is fueling the development of a new wave of voice, video and 
data applications that will give broadband subscribers greater control 
over how they communicate.
    But the promise of this technology does not come without 
significant challenges for policymakers and regulators. In particular, 
in a world where voice services are no longer intrinsically tied to the 
network provider, the growth of VoIP communications services will 
pressure existing regulatory schemes that assure universal service 
availability in rural, insular, and high-cost regions; provide 
consumers with effective 911 emergency assistance; and ensure that law 
enforcement personnel can access the conversations of criminals and 
terrorists, to name just a few. Moreover, the promise of greater 
competition may not materialize if adequate safeguards are not created 
to prevent dominant network owners from disadvantaging non-network VoIP 
providers.
    Without question, these are important issues that deserve careful, 
up-front consideration. In addition, we should be wary of adopting a 
``shoot first, ask questions later'' approach to regulation that 
emphasizes deregulatory ideology over sound judgment. Such an approach 
may be an effective way to make headlines, but it is not conducive to 
making headway toward resolving these difficult issues.
    Mr. Chairman, it is time to roll up our sleeves and get to work. 
Pending efforts to rationalize inter-carrier compensation and to 
improve our contribution mechanism for universal service should be 
released from regulatory limbo in order to provide us with a clearer 
picture of how VoIP services will contribute to the support of a 
ubiquitous communications network. In addition, we should consider what 
social obligations--such as 911 service, access for persons with 
disabilities, and others--will demand regulatory intervention and what 
goals can be met through industry consensus.
    In a nutshell, Mr. Chairman, the future is not yet written. VoIP 
services have the potential to revolutionize communications and provide 
consumers with yet undiscovered benefits. However, we must not let such 
promise blind us to the need for rules that will assure basic consumer 
protections, the wide availability of communications infrastructure, 
and a competitive marketplace.
    I look forward to the testimony of the witnesses and to their 
answers to our questions.
                                 ______
                                 
 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
    I would like to thank the Chairman for holding this important 
hearing on what I believe will be on of the most critical 
telecommunications issues facing this Committee over the next several 
years--how the government should regulate in the broadband age. Like 
Senator Stevens, I believe that the world of communications has changed 
dramatically since passage of the 1996 Telecommunications Act. In 
telecommunications technology terms eight years is a lifetime. 
Therefore, it is appropriate that this Committee take a hard look at 
developments in the communications marketplace to ensure that the law 
keeps pace with the rapidly advancing technology.
    As technology improvements permit consumers to receive voice, data 
and video capability over a single Internet protocol (IP) transmission 
line, new regulatory issues arise. I welcome these new technologies and 
support their deployment, but would caution our regulators against 
being so overawed by the promise of technology that they desert the 
core social and national security principles such as universal service, 
E911, access for persons with disabilities, and assistance for law 
enforcement that have made the U.S. communications network the most 
robust and reliable in the world.
    Voice over Internet Protocol (VoIP) may change the way Americans 
communicate, but it will not change consumer expectations. Regardless 
which technology powers their telephone service, consumers expect to 
reach a public safety operator when they dial 911. When there is an 
electricity black-out, consumers expect their phones to work. These and 
other capabilities, however, are not easily implemented in the new VoIP 
world. Should these consumer protections be preserved through 
regulation or should the marketplace determine their future? History 
has demonstrated that voluntary commitments and market forces are not 
adequate to guarantee such goals.
    Congress has given the FCC the tools to foster the development of 
new technologies and services and also to safeguard our core social and 
national security objectives. Under the 1996 Act, the FCC may forbear 
from applying any regulation or statutory requirement to 
telecommunications services or carriers. Utilizing forbearance 
authority rather than reclassifying services to avoid regulatory 
requirements, may be the more prudent approach.
    Finally, while the primary reason for our hearing today is to 
discuss the regulatory landscape for VoIP services, it is important to 
recognize that an FCC decision reclassifying VoIP services as an 
information service could have ramifications beyond communications 
policy. In addition, to the social and national security concerns that 
I have raised, such a decision could prohibit State and local 
governments from collecting taxes on VoIP services. I would submit that 
it is an odd result to have FCC regulatory decisions affect tax policy, 
but this is what we have unwittingly done in the Internet Tax Freedom 
Act by preserving state and local taxes on ``telecommunications 
services'' as that term is interpreted by the FCC.
    I hope that the haze of deregulatory fever will not cloud our 
better judgment. I look forward to the testimony of the witnesses.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                         Hon. Michael K. Powell
    Question 1. In filings before the FCC, law enfordement personnel 
have expressed concern that FCC's efforts to classify broadband and 
VoIP services as ``information services'' might excuse providers of 
these services from any obligations under CALEA. If VoIP services are 
classified as ``information services,'' will VoIP providers have any 
CALEA obligations?
    Answer. The FCC recognizes the critical importance to homeland 
security and law enforcement that VoIP services be accessible for 
properly authorized wiretaps. The FCC has committed to an expedited 
rulemaking proceeding on the CALEA obligations of IP-enabled service 
and broadband platform providers, addressing CALEA issues on a separate 
track from the issues raised in the broader IP-Enabled Services 
rulemaking. The Department of Justice, Federal Bureau of Investigation 
and the Drug Enforcement Administration filed a petition for rulemaking 
on March 10 identifying a number of issues that are in need of 
resolution to implement CALEA for broadband services. The Commission 
issued a Public Notice on March 12, 2004 inviting public comment on the 
petition. The petition argues that CALEA's definitions of ``information 
services'' and ``telecommunications carrier'' can and should be applied 
differently from the similar definitions in the Communications Act to 
address law enforcement's requirements. The Commission plans to 
initiate a rulemaking proceeding to address the matters raised in the 
petition soon after comments are filed.

    Question 2. Given the importance of making emergency communications 
available to all consumers regardless of the particular technology 
used, how can the FCC ensure that those on the front lines of providing 
emergency services--states and localities--can get the location 
information they need from communications providers torender emergency 
aid. Given our experience with wireless carriers, do you have any 
confidence that ``voluntary measures'' and the absence of functional 
obligations will be sufficient?
    Answer. The FCC sees an opportunity for first responders to benefit 
from the strength and flexibility of IP-based services. In our IP-
Enabled Services rulemaking, we specifically ask questions about E911, 
including whether the Commission should mandate certain capabilities. 
On March 18, 2004 the FCC held a Solutions Summit on precisely this 
topic and heard from our colleagues in state and local governments, the 
National Emergency Number Association, VoIP industry leaders, wireline 
and wireless industry representatives, equipment manufacturers, and 
scholars. We heard from them not only how E911 can be expanded to VoIP 
services, but also how the use of IP can expand the capabilities ofE9l 
1 beyond providing ``just'' location information. While we are 
encouraged by the voluntary steps that have been taken so far, we will 
examine this question very closely in the IP-Enabled Services 
rulemaking to ensure that American consumers benefit from the 
capabilities of these new and powerful networks.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Byron Dorgan to 
                         Hon. Michael K. Powell
    Question 1. The current intercarrier compensation regime encourages 
arbitrage as providers seek to pay the lowest rates possible. Certainly 
this is understandable, but doesn't this call for attention by the FCC? 
What is your plan to address the intercarrier compensation regime while 
ensuring that local exchange carriers are compensated for the use of 
their networks?
    Answer. The Commission currently is engaged in a rulemaking 
proceeding for the purpose of reexamining the existing patchwork of 
intercarrier compensation regulations. The Intercarrier Compensation 
rulemaking was initiated with the express purpose of developing a 
unified intercarrier compensation regime to eliminate arbitrage 
incentives. In the Intercarrier Compensation rulemaking proceeding, the 
Commission is taking a fresh look at the costs associated with the use 
of local networks, and the possibility of a new approach to 
intercarrier compensation that is more consistent with how these costs 
are incurred today, as well as the pro-competitive and deregulatory 
goals of the 1996 Act. Currently, Commission staff is working 
diligently to develop long-term solutions to issues arising under the 
current regime. At the same time, industry groups are meeting 
separately to develop possible proposals for consideration by the 
Commission. There are challenges associated with developing a unified 
and sustainable regime. I remain hopeful, however, that the industry 
will assist the Commission in formulating a new approach--one that will 
address issues raised by existing regulations and one that is designed 
for a market with increasing competition and new technologies.

    Question 2. Landline, wireless, and cable voice service providers 
pay access charges to terminate voice calls on a competing provider's 
network. Do you see a day when this is not the case? And if so, how do 
you envision rural carriers recovering their costs? Why shouldn't VoIP 
providers pay access charges for the cost they impose on a competing 
voice provider's network in terminating a voice call? i.e., who will 
pay for the network?
    Answer. The Commission is considering a number of proposals in the 
Intercarrier Compensation rulemaking proceeding, including a bill-and-
keep approach to intercarrier compensation. Under this approach, 
neither of the interconnecting networks charges the other network for 
terminating traffic that originates on the other party's network. 
Rather, each network recovers from its own end users the cost of both 
originating traffic delivered to the other network, and terminating 
traffic received from the other network. Some carriers, particularly 
rural carriers, have expressed concern that recovering costs from end 
users rather than other carriers might lead to unaffordable end-user 
rates in rural areas. I want to assure you that the Commission is 
sensitive to the needs of rural carriers and the need to maintain 
affordable rates in rural areas. There will be a universal service 
component to any plan we adopt to ensure that carriers can recover 
their costs without threatening affordability.
    The Commission currently is considering the question of whether 
VoIP providers should pay access charges in the IP-Enabled Services 
rulemaking proceeding. As a policy matter, the Commission believes that 
any service provider that sends traffic to the public switched 
telephone network should be subject to similar compensation 
obligations, irrespective of whether the traffic originates on the 
public switched telephone network, on an IP network, or on a cable 
network. We maintain that the cost of the network should be borne 
equitably among those that use it in similar ways.

    Question 3. Are the current definitions and regulatory scheme of 
the 1996 Act sufficient to deal with changing technologies and 
preserving necessary universal service and other support mechanisms?
    Answer. The current definitions were created at a time when the 
telecommunications landscape looked very different. As the 
communications marketplace evolves, it may become increasingly 
difficult to classify services as either telecommunications or 
information services. The distinction between telecommunications and 
information services is particularly meaningful in the context of 
universal service, because the statutory categorization of services can 
affect whether something may be supported by universal service, as well 
as whether the service may subject to universal service assessments.
    In recognition of these challenges, the state members of the 
Federal-State Joint Board presented to Senator Burns possible 
modifications to section 254(d) that would allow the Commission to 
assess universal service contributions on intrastate and interstate 
telecommunications revenues. Others have proposed modifications to 
section 254(d) that would make clear that the Commission has authority 
to adopt alternative connection- or numbers-based contribution 
methodologies.

    Question 4. Do you believe that rural areas are equipped with the 
broadband facilities to move forward with VoIP like other areas in the 
country? If not, won't further draining universal service or access 
charges by exempting VoIP just make rural areas lag even more behind?
    Answer. As discussed in more detail in response to Senator Boxer's 
third question, it does not appear that people in rural areas are 
receiving unreasonable or untimely access to broadband services 
compared to people in urban areas. Through its section 706 inquiries, 
the Commission has found that advanced telecommunications capabilities 
are being deployed throughout the Nation on a reasonable and timely 
basis. Although carriers in rural areas may face challenges to 
deployment, such as long loop lengths and sparsely populated areas, 
many have already developed strategies to overcome those challenges.

    Question 5. VoIP, while advanced technology, is still a telephone 
call. Why should this form of voice communication be treated 
differently than voice communications over wireless, cable or the 
traditional landline? Won't treating VoIP differently just encourage 
the type of regulatory arbitrage that is the subject of concern in the 
intercarrier compensation regime?
    Answer. It is important to distinguish between regulation that is 
applied to telephone calls because they are telephone calls, on the one 
hand, and regulation that is applied in response to some specific 
characteristic of the telephone network, on the other. I agree that 
there are various ``social policy'' regulations that we must consider 
in the context of VoIP precisely because VoIP calls resemble 
traditional calls. For example, the Commission--or the Congress--may 
well determine that VoIP providers must render their offerings 
accessible by people with disabilities, or must establish means by 
which subscribers can dial 911 and receive emergency assistance, or 
must pay into universal service mechanisms, or must ensure access to 
law enforcement for authorized wiretapping purposes. However, a great 
deal of the economic regulations that are applied to traditional 
telephony--including, for example, tariffing requirements, market entry 
prohibitions, and constraints on rates--were designed to counter the 
monopoly power of a single provider that owned the only facility that 
could be used to provide service. This rationale is not applicable to 
the VoIP market, which is quite competitive. First, there is 
competition in the market for the broadband access services used to 
facilitate VoIP calls: wireline broadband providers currently compete 
with cable-based providers, and in the near future, both will likely 
compete with wireless providers, satellite providers, and maybe even 
providers of broadband over power lines. Second, there is competition 
in the market for VoIP applications, as both facilities owners and 
companies that own no facilities at all have begun to offer VoIP 
service. In this competitive environment, I believe that traditional 
economic regulations are not appropriately applied to VoIP, because the 
rationale supporting their application with regard to other services is 
absent.
    As you note, we must work to minimize opportunities for regulatory 
arbitrage and ensure that the customers, not regulators, determine 
which offerings will succeed and which will not. Thus, for example, in 
the Notice of Proposed Rulemaking that we recently issued regarding 
VoIP, the Commission made clear its view that any service provider that 
sends traffic to the PSTN should be subject to similar compensation 
obligations, irrespective of whether the traffic originates on the 
PSTN, on an IP network, or on a cable network.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Barbara Boxer to 
                         Hon. Michael K. Powell
    Question 1. You testified that VoIP is an application like e-mail 
or any other content that flows over the Internet. Would you agree, and 
is it relevant, that VoIP or broadband phone service is the first 
Internet application that is a near-perfect substitute for a telephone 
call?
    Answer. I expect that as the quality of service offered by VoIP 
products improves, those products will increasingly be viewed as 
substitutes for traditional telephony. Even now, VoIP providers are 
competing with traditional carriers in both the residential and 
enterprise markets. That substitutability is relevant in some important 
ways. For example, as end users replace traditional wireline telephone 
services with VoIP service, we will increasingly face questions 
regarding how to pursue various important public policies, including 
those ensuring access to emergency services, disability accessibility, 
appropriate carrier compensation, and universal service. I should 
emphasize, though, that the fact that VoIP may represent a substitute 
for traditional telephony is not relevant to questions concerning 
certain other types of regulation, particularly economic regulation. 
These regulations--including, for example, tariffing requirements, 
market entry prohibitions, and constraints on rates--were designed to 
counter the monopoly power of a single provider that owned the only 
facility that could be used to provide service. But VoIP services are 
offered by numerous providers and may be accessed over a variety of 
broadband platforms. This multiplicity of platforms and providers 
ensures vibrant competition and destroys the rationale for economic 
regulation. In short, VoIP's substitutability to traditional telephony 
may justify application of certain ``social policy'' requirements, but 
it does not justify the application of regulations designed for 
monopoly conditions that are not present in this market.

    Question 2. In your testimony, you assert that VoIP providers have 
been able to offer lower prices because of greater efficiency and lower 
entry and transaction costs. But right now, the VoIP providers enjoy 
some cost advantages because they do not pay access charges and they do 
not pay either state or Federal universal service charges?
    (a) If they had to pay the same fees as traditional telecom 
competitors, how much cheaper would their products be?
    Answer. In the IP-Enabled Services rulemaking proceeding, the 
Commission currently is examining whether VoIP providers should be 
subject to the same access charges currently paid by traditional 
interexchange carriers, or if VoIP providers should pay some other 
charge for use of the public switched telephone network. Even if VoIP 
providers are required to pay the same access charges as traditional 
telecommunications competitors, however, there are still cost benefits 
and efficiencies available through VoIP that traditional circuit-
switched telecommunications competitors cannot provide. VoIP calls are 
packetized and routed over a single data network along with other types 
of packets, which may be carrying data, voice, or video. The 
traditional circuit-switched network requires two separate networks--
one to route the voice portion of a call and another to transmit the 
routing data for each call. There are cost savings associated with 
utilizing only one, as opposed to two, networks to send and receive 
voice calls. Furthermore, VoIP applications offer consumers increased 
functionality that is not available through traditional circuit-
switched telephony. For example, VoIP providers can consolidate 
consumers' messages from various sources, such as wireline phones, 
faxes, pagers, e-mails, and wireless phones, into one location, 
allowing consumers to save time in checking one place for messages. Use 
of VoIP technology also makes office moves by employees very easy to 
accomplish, saving companies time and resources. Therefore, even if 
VoIP services pay the same access charges as traditional telecom 
competitors, there are cost benefits and efficiencies associated with 
using VoIP.
    Although VoIP providers do not make direct contributions to 
universal service, they are considered end users for universal service 
contribution purposes. Thus, entities providing interstate 
telecommunications or telecommunications services to VoIP providers are 
subject to universal service contributions and may pass through those 
contributions to the VoIP providers. The universal service contribution 
factor for first quarter 2004 is 8.7 percent. The proposed contribution 
factor for second quarter 2004 is also 8.7 percent.

    (b) Do you believe that VoIP phone service providers should have a 
competitive advantage over traditional telephone service providers 
because they do not have to pay into programs like Universal Service?
    Answer. Section 254(d) of the Act sets forth the Commission's 
authority to assess Federal universal service contributions. Section 
254(d) requires all telecommunications carriers that provide interstate 
telecommunications services to contribute to universal service. The 
section authorizes the Commission to require providers of interstate 
telecommunications to contribute, if it woula serve the public 
interest. If an entity is neither a telecommunications carrier nor 
provider of telecommunications, the Commission cannot require that 
entity to contribute to universal service.
    The Commission recently sought comment on the regulatory 
classification of IP-enabled services, including VoIP services. In that 
Notice of Proposed Rulemaking, the Commission also sought comment on 
the universal service contribution obligations of IP-enabled service 
providers. Comments and reply comments are due 60 and 90 days, 
respectively, after the item's publication in the Federal Register.

    Question 3. As traditional voice service migrates to VoIP services 
there is a concern about how states will continue their role (as under 
section 254 of the Act) to fund universal service at the state level if 
VoIP services are exempt from state jurisdiction. As I understand it, 
states now can only assess INTRAstate services to fund their own 
programs. Right now, California provides almost $1 billion in universal 
service support, which is critical to serve low-income customers, deaf 
and disabled customers, and customers in rural hospitals. According to 
state experts, in four years, up to half of the current revenue base 
for these programs will have migrated to VoIP services.
    (a) Are you aware of this situation and is it a problem in other 
states?
    Answer. Over the past several years, trends in the 
telecommunications marketplace have led to decreases in the Federal 
universal service contribution base--interstate end-user 
telecommunications revenues. Specifically, telecommunications carriers 
have increasingly begun to bundle interstate and intrastate 
telecommunications services and telecommunications and information 
services, which makes the identification of interstate 
telecommunications revenues difficult. In addition, traditional voice 
services are migrating to new technologies, which may not be subject to 
universal service assessments. Accordingly, the Commission has 
initiated a proceeding to consider whether to adopt an alternative 
contribution methodology.
    If states utilize an intrastate telecommunications revenues 
methodology, these marketplace trends would likewise affect the ability 
of states to fund their own universal service programs.

    (b) Do you acknowledge that the beneficiaries of universal service 
programs--the poor and residents of rural communities-are those least 
likely to have access or service, incapable of benefitting from VoIP 
efficiencies and lower costs? Does this cause you any concern?
    Answer. It does not appear that people--rich or poor--in rural 
areas are receiving unreasonable or untimely access to broadband 
services compared to people in urban areas. Indeed, at the Commission 
we have initiated a number of forums and proceeding to encourage not 
only wireline broadband, but also broadband via wireless technologies, 
satellites, and broadband over powerlines, often focusing on ensuring 
deployment to underserved areas.
    Pursuant to section 706 of the Act, the Commission conducts regular 
inquiries to determine if advanced telecommunications capabilities are 
being deployed throughout the Nation on a reasonable and timely basis. 
To date, the Commission has released three section 706 reports and has 
concluded that deployment of advanced telecommunications capabilities 
has been reasonable and timely. According to the Commission's data, as 
of June 30, 2003, there is at least one subscriber of high-speed 
services in 91 percent of the Nation's zip codes.
    In addition, the National Exchange Carrier Association (NECA) 
recently published a study that concluded that technological advances 
among small, mostly rural local telephone companies between 2001 and 
2003 were greater than expected. According to this 2003 study, 78.95 
percent of member companies' access lines now are equipped for DSL. 
NECA concluded that rural telephone companies are meeting the growing 
consumer demand for advanced services in spite of the hurdles they must 
overcome, including the lack of economies of scale that large, non-
rural companies are afforded.

    (c) How do you recommend the state make up the shortfall in funds 
lost of VoIP in state universal service programs?
    Answer. States that have intrastate revenue-based assessment 
systems may wish to consider the alternative contribution assessments 
methodologies being reviewed by the Commission. For example, the 
Commission is currently considering three connection-based 
methodologies: (1) a connection-based system that assesses residential 
connections to public networks a flat charge and multi-line business 
connections the residual finding requirement on the basis of capacity; 
(2) a connection-based system that assesses all connections on the 
basis of capacity and splits the charge betweeii access and transport 
providers; and (3) a system that assesses all assigned telephone 
numbers.

    Question 4. On page 12 of your testimony, you say that an Internet 
voice system can ``make it easier to pinpoint the specific location of 
the caller in a large building'' for 911 purposes. Are there 
technologies now available that make it possible to tell the origin of 
a Voice over IP call?
    Answer. To our knowledge, technologies that pinpoint the origin of 
a VoIP call are not currently in widespread use. However, IP-based 
communications, by their nature, are capable of transmitting a great 
deal of information completely independent of the content of the 
communication itself. Thus, in cases where a phone (or other equipment 
used to make a call) is stationary, it seems very likely that a system 
could be designed to transmit the caller's precise location alone with 
the caller's voice communication.
    Certainly, many VoIP offerings are ``mobile'' in the sense that 
users can access their accounts wherever they can access the underlying 
network. Those systems, of course, present a different set of issues, 
which the Commission is now working to resolve. The Commission recently 
held a ``solutions summit'' at which government and industry experts 
convened to discuss E911 issues relating to VoIP. Moreover, in its 
current rulemaking proceeding regarding VoIP, the Commission has 
expressly sought comment from the public regarding the state of 
geolocation and other technologies that might be utilized to pinpoint a 
user's location.

    Question 5. You stated in your testimony that, ``We have championed 
the deployment of multiple broadband networks in order to rid ourselves 
of the intractable last mile problem. We have pushed for greater 
deployment of DSL, cable modem, 3G wireless, Wi-fi, Ultra Wide Band, 
satellites and broadband over power lines, just to name a few new 
services already in commercial use.''
    (a) How many small businesses in California and the U.S. have a 
choice between more than one provider of broadband service? More than 
two? More than three?

    (b) How many homes in California and America have access to at 
least a single broadband provider and how many homes have a choice 
between more than one provider of broadband service? More than two? 
More than three?
    Answer. Facilities-based broadband providers report to the FCC that 
they were providing 20.6 million high-speed connections to residences 
and small businesses (considered as a single category) in the United 
States as of June 30, 2003, and 3.0 million in California. (Industry 
Analysis and Technology Division, Wireline Competition Bureau, FCC, 
High-Speed Services for Internet Access: Status as of June 30, 2003, at 
Table 11 (Dec. 2003).) As defined by the Commission's data collection 
program, this group consists of all consumers of broadband services 
that are primarily designed for, and marketed to, residential 
consumers. (Broadband service provider may offer several services that 
are distinguished by price, ``download'' and/or ``upload'' speeds, and 
other features such as number of e-mailboxes.) Consistent with industry 
advertising and record-keeping practices, the data reported to the FCC 
do not separately identify the number of small business and residential 
broadband service subscribers, or where they are separately located.
    The number of broadband service choices that are available depends 
to some extent on location. (Satellite-based broadband service is 
available to any location that has a sufficiently unobstructed south-
facing view.) In reports to the FCC, wired and wireless facilities-
based broadband providers identify those Zip Codes in which they have 
at least one subscriber for their broadband service(s). As of June 30, 
2003, more than one facilities-based broadband provider reported having 
at least one subscriber in 75 percent of U.S. Zip Codes, and in 91 
percent of California Zip Codes. For more than two broadband providers, 
the comparable figures as 58 percent and 80 percent, respectively. For 
more than three broadband providers, the figures are 44 percent and 69 
percent, respectively. (See Id., at Table 13.) While not all areas 
within a Zip Code necessarily have access to any or all of the 
broadband services that are available somewhere in that Zip Code, the 
presence of subscribers indicates some level of broadband service 
deployment in the Zip Code.

    (c) Do you believe that regulation will remain necessary in markets 
with only one or two broadband service providers? Should the fact that 
different technologies offering different capabilities at different 
prices be considered as well?
    Answer. To date, there appears to be little evidence that a 
broadband provider will charge higher prices in markets without 
competition than it does in markets with competition. For example, a 
survey of cable modem prices across markets found that cable modem 
providers charged the same monthly access fee regardless of whether 
they faced competition from DSL providers in a given market. Thus, at 
the present time, it does not appear that regulation is necessary to 
curb excessive broadband access rates. Moreover, the number of markets 
with only one or two broadband providers is rapidly diminishing with 
the advent of broadband platforms other than cable and DSL. Even in 
rural areas, for example, subscribers increasingly have access to 
broadband via satellite.
    Differences in the capabilities and prices associated with 
different broadband access technologies do not appear to raise 
anticompetitive concerns at this time. While it was generally believed 
that cable modem service would offer faster access than DSL and other 
technologies when those services were first rolled out, we now know 
that numerous technologies are capable of offering extremely high 
bandwidth. Broadband access providers have begun offeringdifferent 
pricing packages according to how much bandwidth (and speed) a customer 
desires. These arrangements appear to offer competitive prices and to 
provide consumers with real choice in the broadband access market.

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