    [Senate Hearing 109-1128]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 109-1128

     S. 2686, COMMUNICATIONS, CONSUMER'S CHOICE, AND BROADBAND DEPLOYMENT
                             ACT OF 2006 (PART III)

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

                                    HEARING

                                   before the

                             COMMITTEE ON COMMERCE,
                          SCIENCE, AND TRANSPORTATION
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 13, 2006

                                   __________

        Printed for the use of the Committee on Commerce, Science, and
                                 Transportation

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    66-172                    WASHINGTON : 2011
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           0SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                         TED STEVENS, Alaska, Chairman
    JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
    CONRAD BURNS, Montana                    Chairman
    TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West
    KAY BAILEY HUTCHISON, Texas              Virginia
    OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
    GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
    JOHN ENSIGN, Nevada                  BARBARA BOXER, California
    GEORGE ALLEN, Virginia               BILL NELSON, Florida
    JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
    JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
    DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                         MARK PRYOR, Arkansas
                 Lisa J. Sutherland, Republican Staff Director
            Christine Drager Kurth, Republican Deputy Staff Director
                 Kenneth R. Nahigian, Republican Chief Counsel
       Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
       Samuel E. Whitehorn, Democratic Deputy Staff Director and General
                                    Counsel
                 Lila Harper Helms, Democratic Policy Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on June 13, 2006....................................     1
    Statement of Senator Allen.......................................    61
        Prepared statement...........................................    61
    Statement of Senator Boxer.......................................    58
    Statement of Senator Burns.......................................     2
        Prepared statement...........................................     3
    Statement of Senator DeMint......................................    50
    Statement of Senator Dorgan......................................     4
    Statement of Senator Inouye......................................     1
        Prepared statement...........................................     2
    Statement of Senator Lautenberg..................................     6
    Statement of Senator E. Benjamin Nelson..........................     6
    Statement of Senator Pryor.......................................     5
    Statement of Senator Smith.......................................    64
    Statement of Senator Stevens.....................................     1
    Statement of Senator Sununu......................................     5
    Statement of Senator Vitter......................................     4

                                   Witnesses

    Fellman, Hon. Kenneth S., Mayor, Arvada, Colorado................    68
        Prepared statement...........................................    69
    Foosaner, Robert S., Senior Vice President, Government Affairs
      and Chief Regulatory Officer, Sprint Nextel Corporation........    97
        Prepared statement...........................................    98
    Glickman, Hon. Dan, Chairman/CEO, Motion Picture Association of
      America........................................................    40
        Prepared statement...........................................    42
    Green, Brigadier General Richard M. (Retired), Legislative
      Director, National Guard Association of the United States......     6
        Prepared statement...........................................     7
    Jones, Hon. Philip, Commissioner, Washington Utilities and
      Transportation Commission; on Behalf of National Association of
      Regulatory Utility Commissioners (NARUC).......................    92
        Prepared statement...........................................    94
    Largent, Hon. Steve, President/Chief Executive Officer, CTIA--The
      Wireless Association'...............................    88
        Prepared statement...........................................    89
    LeGrande, Robert, Deputy Chief Technology Officer, District of
      Columbia Government............................................    33
        Prepared statement...........................................    35
    McCormick, Jr., Walter B., President/CEO, United States Telecom
      Association (USTelecom)........................................    76
        Prepared statement...........................................    77
    McCurdy, Hon. Dave, President/CEO, Electronic Industries Alliance
      (EIA); on Behalf of EIA, and Telecommunications Industry
      Association (TIA)..............................................    25
        Prepared statement...........................................    27
    McSlarrow, Kyle, President/CEO, National Cable &
      Telecommunications Association.................................    72
        Prepared statement...........................................    74
    Putala, Christopher, Executive Vice President, Public Policy,
      EarthLink, Inc.................................................    79
        Prepared statement...........................................    81
    Rose, John, President, Organization for the Promotion and
      Advancement of Small Telecommunications Companies (OPASTCO); on
      Behalf of the Coalition to Keep America Connected..............    43
        Prepared statement...........................................    44
    Rutledge, John, Ph.D., President, Rutledge Capital; President,
      Mundell International University Business School in Beijing,
      China; on Behalf of the U.S. Chamber of Commerce...............     8
        Prepared statement...........................................    10
    Scott, Ben, Policy Director, Free Press..........................    13
        Prepared statement...........................................    14

                                    Appendix

    Letter with attachment, dated June 20, 2006, to Hon. Daniel K.
      Inouye from Robert S. Foosaner.................................   107
    Letter with attachment, dated June 15, 2006, to Hon. Ted Stevens
      from Walter B. McCormick, Jr...................................   103
    Letter, dated June 13, 2006, to Hon. Ted Stevens and Hon. Daniel
      K. Inouye from Ron Sege, President/Chief Executive Officer,
      Tropos Networks................................................   110

                      S. 2686, COMMUNICATIONS, CONSUMER'S
            CHOICE, AND BROADBAND DEPLOYMENT ACT OF 2006 (PART III)

                                  ----------

                             TUESDAY, JUNE 13, 2006

                                           U.S. Senate,
            Committee on Commerce, Science, and Transportation,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:07 a.m. in
    room SH-216, Hart Senate Office Building, Hon. Ted Stevens,
    Chairman of the Committee, presiding.

                OPENING STATEMENT OF HON. TED STEVENS,
                        U.S. SENATOR FROM ALASKA

        The Chairman. Thank you very much for coming. Sorry for the
    delay.
        We have a very full hearing today. We'll have two panels,
    so the Committee can receive diverse opinions on the revisions
    that my staff and I have suggested, working with Senator Inouye
    and his staff.
        To keep this moving smoothly, I would hope the Committee
    would agree to this, that Members will use up to 2 minutes
    before the first panel, or, if they want to forego the opening
    statement, they may use 7 minutes for questioning the first
    panel. And, otherwise, in the second panel, each member will
    have 5 minutes for questions. And if Members have to leave the
    hearing for a substantial period of time, aside from stepping
    out for a moment for a phone call or voting or for personal
    reasons, we are going to treat that as being when the person
    comes in the second time. That's the order that they would be
    called on for asking questions of witnesses.
        I do thank all the witnesses for coming. And I thank
    members of the Committee, who have been very helpful in
    providing comments.
        We will print your statements in the record in full.
    Contrary to what you've heard, we have allocated 5 minutes to
    each one of you on your statements, and I would appreciate it
    if Members would confine their first comments to no more than 2
    minutes.
        Senator Inouye?

                  STATEMENT OF HON. DANIEL K. INOUYE,
                        U.S. SENATOR FROM HAWAII

        Senator Inouye. Thank you very much. May I have my
    statement made part of the record?
        The Chairman. Senator Inouye's statement will be made part
    of the record. I don't know what the order is here yet.
        [The prepared statement of Senator Inouye follows:]

     Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
        Today, we meet again to discuss the issue of telecommunications
    reform and changes made to S. 2686 by the recent staff draft released
    late last week by the Majority.
        While I recognize and appreciate that the new draft makes a number
    of improvements to the language contained in S. 2686, I continue to be
    concerned by the lack of significant progress in a number of key areas
    that, in my view, are critical components of telecommunications reform
    legislation.
        For example, despite significant changes to preserve the legitimate
    interests of state and local governments in the franchising process, I
    remain deeply concerned that further advances are needed so that any
    new franchising process will preserve important consumer protections,
    will promote a fair and neutral process for all operators, and will
    advance the interests of local communities in bringing the benefits of
    modern communications networks to all of their citizens.
        Apart from video franchising, I am also troubled by our failure in
    the current draft to strengthen existing interconnection requirements,
    to promote competition in special access markets in the face of clear
    market failure, and to preserve network neutrality through enforceable
    provisions that will prevent unfair discrimination by broadband network
    operators.
        That said, I realize that the current draft remains a work-in-
    progress and appreciate the efforts made by the Chairman and his staff
    to respond to concerns aired by Members on both sides of the aisle. As
    a result, I look forward to continuing our work on this legislation in
    the days and months ahead.

        The Chairman. Senator Burns?

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

        Senator Burns. Mr. Chairman, can you all hear, out there?
    Can you? Can you hear, in the back? There are some people up
    front that would like to trade chairs with you, if you can't.
        Thank you, Mr. Chairman, for holding this hearing today and
    taking the time on the views, as we try to move this
    legislation forward. I'll submit my full statement for the
    record.
        But I think, you know, in 1996, we worked on the 1935 law,
    and we figured we were trying to deal with 1990s technology
    with a 1935 law. It didn't take very long for the technologies
    to catch up with this one and outdate it a little bit. And now
    we're back revisiting that same law, just 10 years later. But
    that's the way technology moves, and that's the way it is, and
    we have to be flexible with it.
        And so, I'm grateful to the Chairman for putting this bill
    together. Universal service, I have a keen interest in, and
    most of the U.S.--the NetUSA that was in my Universal Service
    bill is also in this bill, and he has to be given a lot of
    credit for, really, offering a far-reaching bill. The goal is
    to permit competition. And I think it does. And now, we're
    going to--now we've gone into the video services business, and
    people have a variety of ways of receiving their video--through
    cable, through telephone, through satellite. And every now and
    again they even go to the movies themselves. So, we are
    contemplating that there'll be a lot of competition in the
    video business.
        As you know, with the telephones going into the video
    business, and the cables going into the telephone business,
    that offers up another challenge for policymakers. But under
    competitive policies, that was expected to happen.
        So, lately now we've heard about net neutrality. I will
    guarantee you, if you walk down Pennsylvania Avenue, or any
    other street in this town, and you ask 20 people what ``net
    neutrality'' is or means, you will get 20 different answers.
    And some--now, there are just a few, maybe, that understand
    that, and--but it's nice that we--and probably convenient--that
    we'll be talking about net neutrality in this bill. And also on
    video franchising, we will talk about that. And so, it's a far-
    reaching bill, and I congratulate the Chairman. And I will
    offer my statement and go away.
        The Chairman. The statement will be printed in the record
    in full.
        [The prepared statement of Senator Burns follows:]

       Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana

        Thank you, Mr. Chairman, for holding this important hearing today.
    I would also like to thank our guests for taking the time to share
    their views with us.
        Congress, and this Nation, have had a commitment to a Universal
    Service for almost 100 years--a commitment that helps keep telephone
    service affordable in high-cost areas such as Montana, helps ensure
    that schools and libraries receive access to the Internet, and helps
    link rural healthcare facilities to urban medical centers, promoting
    telemedicine.
        I'm grateful to see that Senator Stevens incorporated many
    important ideas from my NetUSA bill, including the section that will
    help improve the delivery of telemedicine, which will aid the people
    living in rural areas of the country, like Montana, by keeping their
    phone bills low while expediting the spread of new technologies to
    those rural communities.
        The Universal Service Fund remains crucial for the future of rural
    America--the day has not arrived when technology and the free market
    can make affordable telecommunications services available everywhere.
        Chairman Stevens deserves a lot of credit for introducing such a
    thoughtful and far-reaching telecommunications bill. I'm very pleased
    that most of the principles I set forth earlier this year are addressed
    and adhered to in this piece of legislation in regards to video
    franchising.
        The goal is to promote competition wherever possible. I am well
    aware of how competition for video services has grown over the past
    decade, even in rural areas like Montana. Satellite competitors, such
    as DIRECTV and EchoStar, have had a significant impact on the
    marketplace, and most of our constituents can now choose among three
    service providers for their video programming.
        Technology has enabled cable companies to compete for telephone
    customers, and telephone companies are beginning to compete for cable
    and satellite television customers. A study the GAO put out in March of
    2004, shows that cable TV rates are substantially lower (by 15 percent)
    in markets where competition exists. With this in mind, we have the
    opportunity to bring even more competition to the marketplace, while at
    the same time ensuring that our colleagues in local government are able
    to protect the interests of our communities.
        Under existing law, cable operators and telephone companies must
    obtain a franchise from local governments before they can provide cable
    service. The franchising process ensures that local governments can
    continue to manage their rights-of-way. By taking franchising rights
    away from local governments it would eliminate them from requiring
    build-out requirements, offering consumer protections, preventing
    economic redlining, and offering their community public, educational,
    and governmental programming. But the franchising process must not be
    permitted to become a barrier to entry.
        Lately, we've seen an incredible surge in the argument of net
    neutrality--it's an issue that's unfortunately become political. It's
    unfortunate because if you ask ten people what it is, you'll get ten
    different answers.
        I feel the Stevens approach is the best way to effectively protect
    our Internet without over-regulating, and creating unintended
    consequences by giving the necessary tools for the Federal
    Communications Commission to monitor the net neutrality issue, and act
    to protect consumers accordingly.
        Although I agree with the spirit and intent of the legislation
    Senators Snowe and Dorgan have proposed, I have some serious concerns
    of unintended consequences that this legislation could have on rural
    states like Montana.
        I have concerns that Congress is not as equipped to be a reliable
    consumer watchdog as the FCC, which is why I support the Stevens
    approach to ensuring the issue of net neutrality is properly handled.
        It takes a ``crime before punishment'' angle, as opposed to the
    Snowe-Dorgan bill, and gives the FCC the tools it needs to carefully
    monitor and act if large ISPs try to enter into an exclusive deal with
    a content provider.
        Our telecommunications laws are outdated, which is hurting
    consumers and businesses both large and small. I look forward to the
    thoughts and opinions of our guests today, and working with the rest of
    the Committee to craft the best telecommunications bill possible.

        The Chairman. Senator DeMint?
        Senator DeMint. Mr. Chairman, I appreciate all your work on
    this bill, and I'll withhold my comments until after the
    testimony.
        The Chairman. Thank you.
        Senator Vitter?

                    STATEMENT OF HON. DAVID VITTER,
                      U.S. SENATOR FROM LOUISIANA

        Senator Vitter. I'll do the same, Mr. Chairman, thank you.
        The Chairman. Senator Dorgan?

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

        Senator Dorgan. Mr. Chairman, let me just take a minute
    and--first of all, thank you. I received the revisions to your
    mark, I think, on Friday evening. And I've been traveling--just
    arrived back in town last evening--but I've looked through it,
    and I think that you've done some good things on the Universal
    Service portion of the bill. I think there are some good
    changes in the video franchising title. There are some areas, I
    think, with respect to build-out issues, that we ought to
    address.
        I agree with Senator Burns, that probably not a lot of
    people understand the term ``net neutrality,'' but they
    certainly understand the open architecture of the Internet, and
    the opportunity for everybody, no matter where they are, to
    access the Internet. And perhaps we should call it ``Internet
    freedom.'' I think maybe most people understand the freedom to
    move onto the Internet and move wherever they like. And so, I
    don't--I think it's very important for us to understand that
    that is an important issue. And I hope that Senator Snowe and I
    and others will be able to work with you, and with the Vice
    Chairman, or Co-Chairman, of the Committee on that issue.
        Finally, just--this is all very complicated, and these are
    big stakes. I was here in 1996 when we wrote the 1996 Act. The
    world has changed a great deal since then. And so, as we now
    contemplate additional changes, all of us understand that the
    stakes are very big. These are difficult issues, in many ways.
    But all of us, I think, want the same thing.
        I'd like robust competition to exist. I'd like consumers to
    have many choices. And I think I'd like--I'd certainly like to
    continue to incentivize innovation and creativity and progress.
        So, Mr. Chairman, thank you very much for calling this
    hearing. I look forward to hearing the witnesses.
        The Chairman. Thank you very much.
        Senator Pryor?

                     STATEMENT OF HON. MARK PRYOR,
                       U.S. SENATOR FROM ARKANSAS

        Senator Pryor. Thank you, Mr. Chairman. And I really want
    to just really thank the Chairman and his staff for just
    spending hours, and hours, and hours in trying to get this bill
    right, trying to take in--everybody's views into consideration.
    And I'll have a lot of questions, but, Mr. Chairman, I just
    wanted to say thank you, and thank you to all the staff members
    who worked so hard to get us here today.
        Thank you.
        The Chairman. Thank you very much.
        I've overlooked the Senator from New Hampshire. I
    apologize. I thought the first Senator----
        Senator Sununu. That is quite----
        The Chairman.--was my name, not yours.
        Senator Sununu. Thank you, Mr. Chairman.

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

        Senator Sununu. We do have principles that have already
    been put forward by the FCC supporting Internet freedom, if
    that's what we want to call it, supporting Internet access. But
    what has been contemplated by Senator Dorgan and by others
    previously, such as Representative Markey in the House, are
    Internet regulations. And I think that's something that the
    public can certainly understand.
        A few things have happened in the last 3 days, I think,
    that are important in this area:
        First, that that language, imposing regulations on the
    Internet, was rejected overwhelming in the House of
    Representatives, a bipartisan coalition. I think nearly 270
    votes rejecting that Internet regulation language.
        Second, we have the editorial pages of pretty diverse
    institutions--the Washington Post and the Wall Street Journal--
    again, lining up, saying that it is wrong to impose these
    regulations now. We want to make sure that there is fair
    competition. We want to make sure that there are reasonable
    economic incentives for buildout and for other things. We have
    principles for competition that have been established by the
    FCC. But I think that the language--Chairman Stevens' markup
    and the language that has been accepted in a bipartisan fashion
    in the House--steers it in the right direction. We should be
    very careful before we start imposing Internet regulations,
    because if there is anything that the public will understand,
    it's that a heavy regulatory hand kills incentives to develop
    new products, to deploy new technologies, and that, ultimately,
    will be something that consumers feel and respond to in a very
    negative way.
        So, I think, over the last 3 days, we've seen a number of
    instances that set the right direction for us, and that, I
    hope, we will continue to heed as we mark up this legislation.
        Thank you.
        The Chairman. Thank you very much.
        Senator Nelson of Nebraska?

                 STATEMENT OF HON. E. BENJAMIN NELSON,
                       U.S. SENATOR FROM NEBRASKA

        Senator Ben Nelson. Thank you very much, Mr. Chairman. And
    let me add my appreciation to you and your staff, and to the--
    to Senator Inouye and his staff, for working on this markup.
    And I'm anxious to hear the witnesses, so I'll suspend any
    further comments.
        Thank you very much.
        The Chairman. Thank you, Senator.
        We'll now proceed. I believe everyone that's here has been
    given the chance to comment.
        Senator Burns. Senator Lautenberg just walked in.
        The Chairman. Senator Lautenberg, you got in under the
    wire. Do you wish to make an opening statement?

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

        Senator Lautenberg. I wish to take as much time as I can,
    sir. And so, that means, I guess, I go to the back of the line
    for the 7-minute inning?
        The Chairman. No, you can take 2 now.
        Senator Lautenberg. And sacrifice 2 minutes at the end. Is
    that----
        The Chairman. We add the 2 minutes to the 5, if you don't
    take them at the beginning.
        Senator Lautenberg. I'll take 7, sir.
        The Chairman. All right.
        Our first witness, then, is Brigadier General Richard
    Green, retired as the Legislative Director for the National
    Guard Association.
        General Green?

      STATEMENT OF BRIGADIER GENERAL RICHARD M. GREEN (RETIRED),
                 LEGISLATIVE DIRECTOR, NATIONAL GUARD
                    ASSOCIATION OF THE UNITED STATES

        General Green. Good morning.
        The Chairman. As I said, all your statements are in the
    record in full. You may have up to 5 minutes to give us your
    comments, please.
        General Green. Chairman Stevens, Members----
        Senator Burns. Pull that mike up to you.
        General Green. OK. How's that?
        The Chairman. They're hot, but they're not that hot.
        General Green. All right.
        Chairman Stevens, members of the Committee, thank you for
    the opportunity to testify before you today on issues related
    to Senate bill 2686, to reduce telephone rates for Armed Forces
    personnel deployed abroad.
        Since 1878, when a group of volunteer officers, veterans of
    the Civil War from both the North and South, gathered in
    Richmond, Virginia, to discuss matters of practical reform,
    which would make the militia a more effective instrumentality
    of our system of national defense, the National Guard
    Association of the United States has served as the voice on
    Capitol Hill to represent the interests of our citizen soldiers
    and airmen.
        The main thrust of our early founders was to ensure the
    Guard had the equipment and training necessary to attain
    desired readiness levels, and those efforts continue. However,
    since recruiting and retention is so important, a considerable
    amount of our efforts are now aimed at providing a variety of
    support for our military families.
        During the Cold War years, the Guard was considered a
    strategic reserve. Today, the National Guard represents 28
    percent of the total Army and Air Force, and is considered an
    operational force.
        With boots-on-the-ground for a year or more at a time,
    members of the Guard are up to the challenge, but it doesn't
    come without significant strain on families that may not be
    used to having their loved ones deployed for extended periods
    of time to dangerous locations.
        It is often said that we recruit the member and retain the
    family; however, when members of the military are deployed, the
    ability to communicate over the phone with loved ones back home
    can be confusing and expensive. Additionally, the inability to
    communicate with a spouse on a regular basis can result in
    family issues that, if allowed to fester, could ultimately
    affect the family's perception of life in the military, and
    negatively impact retention.
        The ability to use e-mail has helped, but nothing compares
    to the voice of your loved one having the ability to exchange
    thoughts and feelings, or to discuss an important issue person-
    to-person over the phone.
        It has been the custom of the military to establish
    ``welfare and morale'' phone lines that are free-of-charge at
    deployed locations. But many times these services are extremely
    limited or inconvenient, resulting in some deployed members
    running up expensive phone bills. This is not a Guard-specific
    issue. It applies to all members of our Armed Forces. However,
    on behalf of the men and women of the National Guard who are
    serving our country, we both applaud and enthusiastically
    support your efforts to find creative ways to reduce the cost
    of calling home for Armed Forces personnel.
        Doing whatever we can to support those who risk their lives
    to defend freedom is always the right thing to do. And the
    National Guard Association stands firmly behind your
    Committee's efforts to help provide more cost-effective means
    for our members to stay in touch with those back home.
        Mr. Chairman, members of the Committee, I sincerely thank
    you for your time and look forward to your questions.
        [The prepared statement of General Green follows:]

      Prepared Statement of Brigadier General Richard M. Green (Retired),
     Legislative Director, National Guard Association of the United States

        Chairman Stevens, members of the Committee, thank you for this
    opportunity to testify before you today on issues related to S. 2686,
    the Communications, Consumers' Choice, and Broadband Deployment Act of
    2006, to reduce telephone rates for Armed Forces personnel deployed
    abroad, cited in Title I--War on Terrorism, Subtitle A, Sec. 101-102 as
    ``Call Home.''
        Since 1878, when a group of volunteer officers, veterans of the
    Civil War from both the North and South, gathered in Richmond,
    Virginia, to discuss ``matters of practical reform which would make the
    Militia a more effective instrumentality in our system of National
    Defense'', the National Guard Association of the United States has
    served as the voice on Capitol Hill to represent the interests of our
    citizen soldiers and airmen.
        The main thrust of our early founders was to ensure the Guard had
    the equipment and training necessary to attain desired readiness
    levels, and those efforts continue. However, since recruiting and
    retention is so important, a considerable amount of our efforts are now
    aimed at providing a wide variety of support to our military families.
        During the Cold War years, the Guard was considered a ``Strategic
    Reserve.'' Today, the National Guard represents 28 percent of the total
    Army and Air Force and is considered an ``Operational Force.''
        With ``boots-on-the-ground'' of a year or more at a time, members
    of the Guard are up to the challenge. But, it doesn't come without
    significant strain on families that may not be used to having their
    loved one's deployed for extended periods of time to dangerous
    locations.
        It is often said that we ``recruit the member and retain the
    family.'' However, when members of the military are deployed abroad,
    the ability to communicate over the phone with loved ones back home can
    be confusing, and is almost always expensive.
        Additionally, the inability to communicate with a spouse on a
    regular basis can result in family issues that, if allowed to fester,
    could ultimately affect the family's perception of life in the military
    and negatively impact retention.
        The ability to use e-mail has helped. But, nothing compares to the
    ``voice'' of the one you love, and having the ability to exchange
    thoughts and feelings, or to discuss an important issue person-to-
    person over the phone.
        It has been a custom of the military to establish ``welfare and
    morale'' phone lines that are free of charge at some overseas
    locations. But, many times these services are extremely limited or
    inconvenient, resulting in some deployed members running up expensive
    phone bills.
        This is not a Guard-specific issue. It applies to all members of
    our Armed Forces. However, on behalf of the brave men and women of the
    National Guard who are serving our country, we both applaud and
    enthusiastically support your efforts to find creative ways to reduce
    the cost of calling home for Armed Forces personnel stationed outside
    the United States.
        Doing whatever we can to support those who risk their lives to
    defend freedom is always the right thing to do. And, the National Guard
    Association stands firmly behind your Committee's efforts to help
    provide more cost-effective means for our members to stay in touch with
    those back home.
        Mr. Chairman, members of the Committee, I sincerely thank you for
    your time and look forward to your questions.

        The Chairman. Thank you very much.
        Our next witness is Dr. John Rutledge, the President of
    Rutledge Capital, Consultant to the United States Chamber of
    Commerce.
        Dr. Rutledge?

             STATEMENT OF JOHN RUTLEDGE, Ph.D., PRESIDENT,

     RUTLEDGE CAPITAL; PRESIDENT, MUNDELL INTERNATIONAL UNIVERSITY
                   BUSINESS SCHOOL IN BEIJING, CHINA;

               ON BEHALF OF THE U.S. CHAMBER OF COMMERCE

        Dr. Rutledge. Mr. Chairman and members of the Committee,
    thank you for inviting me to testify today.
        My day job is Rutledge Capital, which is a private equity
    firm, buying and selling companies, leveraged buyouts. Beside
    that, I'm President of the Mundell International University of
    Entrepreneurship in Beijing. So, I advise both Chinese
    companies and the Chinese Government on energy and technology
    issues, and deal with issues on both FOX News and CNBC relating
    to economics.
        I'm here to testify, invited on behalf of the U.S. Chamber
    of Commerce. I was one of the authors of a study the U.S.
    Chamber of Commerce did on telecom reform which was conducted,
    reaching the conclusion that a broadbased deregulatory reform
    of the communications industries in the U.S. over a 5-year
    period could generate $58 billion of capital spending, $634
    billion of extra GDP, $113 billion of extra taxes, 200,000
    additional jobs, and make the U.S. more competitive. The
    Chamber has asked me to testify today on their behalf regarding
    the telecom legislation.
        My summary is really very simple. The communication network
    is the central nervous system of all economic activity in the
    country. Virtually 100 percent of growth in the U.S. economy in
    the next 5, 10, 20, and 50 years will occur in the information-
    driven service sectors. We talk a lot about competing for jobs
    with China and India, but the fact is, we're not competing for
    jobs, we're competing for capital. Every farmer knows you can't
    eat more than you grow. You also cannot take home more than you
    produce in a factory. Productivity is the only number that
    matters, in terms of people's paychecks. Productivity depends
    on workers' access to tools. So, competing for capital with
    others is the issue.
        The U.S. Chamber of Commerce opposes the net neutrality re-
    regulatory concept, on the grounds that it would harm capital
    spending on infrastructure, slow productivity growth, and slow
    overall growth. And I'd like to talk about why for a moment.
        I like to think of the global economy as a set of washtubs
    like my mother used to have. There was a washing tub and a
    rinsing tub. If you put water in one of them and not in the
    other one, it'll stay that way for a long time. But if you put
    a hole in the wall between them, the water will become even on
    both sides. We call that ``water seeks its own level.'' It's
    really the second law of thermodynamics. It's the same thing
    that drives markets with price differentials. It drives capital
    markets with return differentials, as well.
        Most of the capital in the world is bottled up in the U.S.,
    Western Europe, and Japan. Most of the people in the world are
    bottled up in Asia. We are now connected not only through
    international trade, which means ships, but also via fiber
    optic cable that now can transmit an almost infinite amount of
    value at the speed of light between countries. That transfer of
    value is what we've all been thinking of as out-sourcing, and
    it has been disrupting the economy.
        Competing for paychecks is a matter of competing for
    capital, especially tech capital. In my work in China, I have
    understood and learned that the Chinese Government understands
    this issue, is aggressively competing to attract capital from
    the U.S. and Western Europe, especially technology capital.
    They have a particular reason for that. The reason is that the
    air is very dirty, and they're running out of coal, gas, and
    oil. The only way they can deliver 8 to 10 percent growth is to
    deliver $60 billion of foreign direct investment a year. To do
    that, they need tech capital that will grow the economy without
    using more oil. The way you win that game is with rates-of-
    return, taxes, and regulations. By making returns--returns are
    already high in China, but by making taxes and regulations
    attractive, they're attracting large sums of tech capital.
        We need the fastest, deepest information network in the
    world. We don't have it. Asia and Europe are both investing
    much more heavily than we are. Wall Street, so far, is
    unimpressed with the measures that have been taken. The most
    important thing you could do is to pass this bill, which would
    not allow re-regulation of the Internet or price controls on
    information distribution.
        Thank you.
        [The prepared statement of Dr. Rutledge follows:]

        Prepared Statement of John Rutledge, Ph.D., President, Rutledge
    Capital; President, Mundell International University Business School in
           Beijing, China; on Behalf of the U.S. Chamber of Commerce

        Mr. Chairman and Members of the Committee, thank you for inviting
    me to testify today. My name is John Rutledge, and I am the President
    of Rutledge Capital and President at the Mundell International
    University Business School in Beijing, China. I have spent a
    significant amount of time over the past few years researching issues
    related to the impact of technology on the economy, and I was one of
    the authors of the U.S. Chamber of Commerce's telecommunications study,
    Sending the Right Signals: Promoting Competition through
    Telecommunications Reform. In this regard, I developed a macroeconomic
    model of the impact of the regulatory climate on jobs, the economy, and
    international competitiveness. The U.S. Chamber of Commerce has asked
    me to testify today on their behalf. The U. S. Chamber of Commerce is
    the world's largest business federation, representing more than three
    million businesses and organizations of every size, sector, and region.
        Moreover, the U.S. Chamber, in partnership with the National
    Association of Manufacturers, the National Black Chamber of Commerce,
    and the United States Hispanic Chamber of Commerce, leads
    TeleCONSENSUS, a coalition of more than 190 trade associations,
    chambers of commerce, telecommunications providers, and equipment
    manufacturers, businesses, and consumers, formed to educate
    policymakers, the business community, and the public about the need for
    modernized Federal telecommunications laws, and the importance of
    advanced telecommunications services to the U.S. economy, and our
    ability to effectively compete with other nations for jobs and capital.
    Impact of Telecommunications on the Economy
        This year, Congress will have a unique opportunity to set aside
    partisan politics and choose growth and prosperity for our citizens by
    voting to reform our archaic telecommunications laws. A legislator who
    votes to continue second-guessing innovation and regulate competitive
    communications technology services is voting to send U.S. businesses
    and jobs overseas. It is time for the United States to take a stand for
    growth.
        Telecommunications is the central nervous system of today's global
    economy; it is the way all businesses communicate and do business with
    our workforce, our suppliers, and our customers. Fast, accurate
    communications networks have become a crucial competitive tool. It is
    absolutely critical that our businesses have the tools to compete for
    customers and to keep jobs and paychecks growing here at home.
        Inadequate investment in high-speed telecommunications networks has
    the potential to severely undermine our competitiveness. For the past
    decade, policies in Washington have discouraged investment by
    undermining the return on capital invested in U.S. telecommunications
    assets, and adding a great deal of regulatory uncertainty to the
    investment process. During that time, the United States has gone from
    5th place to 16th place among global economies in access to high-speed
    telecommunications networks. America's eroding telecommunications
    position is quietly reducing our workers' standard of living.
        There is an intense global competition for capital underway.
    Workers in the United States are not competing with other states for
    jobs. Our workers and businesses are competing with China, India,
    Korea, and other Asian economies for the capital to build businesses.
    Jobs go where the businesses go. With fiber-optic connections, service
    jobs from customer service in a call center to radiologists reading x-
    rays can be done over fiber-optic cable from anywhere in the world at
    the speed of light. China, India, and Korea are taking steps every day
    to make themselves a destination resort for capital. They have made
    high-speed telecommunications a national priority because they
    understand the role telecom plays in driving productivity and economic
    growth. Ironically, it is easier today to outsource work to companies
    in Beijing or Bangalore than to many small towns in America, simply
    because foreign telecommunications infrastructure is better than it is
    here.
        In the old game, the capital and the workers were less mobile and
    our stable, well-developed markets and well-trained workers attracted
    the capital that made U.S. workers more productive and earn bigger
    paychecks than any place in the world. But the game has changed.
        Radical advances in technology have changed the way we all
    communicate and do business. Markets around the world are now
    connected. Capital can move easily and invisibly, in search of higher
    returns and service jobs can move across country lines independent of
    immigration policy. But policymakers have continued to regulate
    communications as if we were still in the 1950s.
        It's time for policymakers in Washington to allow consumer choice
    and innovation to drive the deployment of new technology, not
    government regulation. In a June 12, 2006, article in The New York Sun,
    former FCC Commissioner Harold Furchtgott-Roth illustrated the impact
    of the Internet on the U.S. economy when he stated that:

            Fees for Internet access services pale in comparison to the
            commercial transactions conducted on the Internet. The most
            recent government report calculates that in 2004 nearly $1
            trillion in manufacturing shipments, or 23.6 percent of the
            total manufacturing, were attributable to electronic commerce.
            For the wholesale sector, more than $825 billion in sales were
            electronic commerce, or more than 17 percent of the total.
            Selected services, including airline ticket sales, had revenue
            of nearly $60 billion in sales.\1\
    ---------------------------------------------------------------------------
        \1\ Harold Furchtgott-Roth, ``The `Network Neutrality' Battle,''
    The New York Sun, June 12, 2006, page 10.

        Congress has the opportunity this year to abandon the misguided
    ideas that they have the ability to predict new technologies, and that
    regulation encourages competition. Reforming telecommunications
    regulations will encourage new investment, innovation, and jobs and
    will free wireline and wireless service providers to engage in the
    capital spending they need to grow, and to ensure that the capabilities
    of their networks are in sync and responsive to user needs. This will
    do more to solve the problem of outsourcing than any form of
    protectionism, or for that matter, practically any other step the
    Federal Government may take to preserve jobs in this country.
    ``Net Neutrality'' and the Economy
        ``Net neutrality'' suggests that the Internet should be operated in
    a neutral manner--meaning that users should be free to visit their
    choice of legal websites, to connect video game systems and other such
    devices to the Internet, and to access online applications, without
    interference from service providers, content providers, or the Federal
    Government. The Federal Communications Commission (FCC) has adopted a
    policy statement that outlines four ``net neutrality'' principles
    designed to encourage broadband deployment, and preserve and promote
    the unrestricted nature of the Internet.
        The FCC principles are straightforward and clear:

            1. Consumers are entitled to access the lawful Internet content
            of their choice;

            2. Consumers are entitled to run applications and use services
            of their choice, subject to the needs of law enforcement;

            3. Consumers are entitled to connect their choice of legal
            devices that do not harm the network; and

            4. Consumers are entitled to competition among network
            providers, application and service providers, and content
            providers.

        While the FCC's ``Four Freedoms'' statement does not formally
    establish rules, they do reflect the core beliefs that each member of
    this Commission holds regarding how broadband Internet access should
    function, according to FCC Chairman Kevin Martin.\2\ The press
    statement that accompanies the Policy Statement notes that . . .
    although the [FCC] did not adopt rules in this regard, it will
    incorporate these principles into its ongoing policymaking activities.
    \3\ FCC Commissioner Michael Copps has stated that while he would have
    . . . preferred a rule that we could use to bring an enforcement
    action, the Policy Statement . . . lays out a path forward under which
    the Commission will protect network neutrality so that the Internet
    remains a vibrant, open place where new technologies, business
    innovation, and competition can flourish.\4\
    ---------------------------------------------------------------------------
        \2\ ``Appropriate Framework for Broadband Access to the Internet
    over Wireline Facilities'', News Release, 2005 FCC LEXIS 4494 (rel.
    Aug. 5, 2005) (Chairman Kevin J. Martin Comments on Commission Policy
    Statement).
        \3\ ``Appropriate Framework for Broadband Access to the Internet
    over Wireline Facilities,'' (FCC Adopts Policy Statement).
        \4\ In the Matter of: Appropriate Framework for Broadband Access to
    the Internet over Wireline Facilities, Report and Order and Notice of
    Proposed Rulemaking, (Statement of Michael J. Copps, Concurring),
    Docket No. FCC-05-150, 20 FCC Rcd 14853, 14979. (rel. Sept. 23, 2005).
    ---------------------------------------------------------------------------
        In granting the Verizon/MCI and SBC/AT&T mergers, the FCC went
    further and declared as enforceable certain voluntary ``net
    neutrality'' commitments by the parties. These obligations state that:

       The applicants committed, for a period of three years, to
            maintain settlement-free peering arrangements with at least as
            many providers of Internet backbone services as they did in
            combination on the Merger Closing Dates.

       The applicants committed for a period of two years to post
            their peering policies on publicly accessible websites. During
            this two-year period, the applicants will post any revisions to
            their peering policies on a timely basis as they occur.

       The applicants committed for a period of two years to
            conduct business in a way that comports with the Commission's
            [Policy Statement].\5\
    ---------------------------------------------------------------------------
        \5\ In the Matter of SBC Communications Inc. and AT&T Corp.
    Applications for Approval of Transfer of Control, WC Docket No. 05-65,
    20 FCC Rcd 18290 (Rel. Oct. 31, 2005). In the Matter of Verizon
    Communications Inc. and MCI, Inc. Applications for Approval of Transfer
    of Control, WC Docket No. 05-75, 20 FCC Rcd 18433 (rel. Oct. 31, 2005).

        Moreover, there has only been one instance in the United States of
    a company trying to block users from accessing a website or
    application. In that case, a small telephone carrier tried to prevent
    its customers from accessing a Voice over Internet Protocol (VoIP)
    service provider. Public outrage and FCC action quickly caused the
    company to halt this behavior. Simply put, the market reacted much more
    quickly to foolish practices than any Federal agency ever could.
        Therefore, based on the FCC's principles, the commitment of the
    companies, and the fact that the market quickly resolved foolish
    conduct, there is no reason this country should assume the unintended
    risks (loss of investment, innovation, jobs, and competitiveness) by
    imposing a ``net neutrality'' law.
        The Internet is like a highway. Without enough lanes to accommodate
    the volume of cars, traffic jams occur. Widening the highway reduces
    congestion. The same principle applies to the Internet. Unless we
    invest in the infrastructure of the Internet, businesses and consumers
    will face massive traffic jams on the information superhighway as
    increasing amounts of high-volume traffic, like video, which has the
    potential to clog the existing transmission lines. Traffic flowing
    through our Nation's information superhighway will increase 500-fold by
    2020 as demand for multimedia applications increases. Internet content
    providers and dozens, if not hundreds, of startups will find themselves
    without the network capacity necessary to offer new services and
    applications. Therefore, this Nation has a choice. It either adopts a
    policy that fosters the build-out of the infrastructure, or it must be
    content to exist with today's limited system and force all traffic over
    lines not built for the convergence of Internet, television, video, and
    massive amount of data. This latter outcome will deny U.S. businesses
    and workers the information tools they need to compete globally.
        As part of the larger ``net neutrality'' discussion, some members
    of Congress have announced their intent to introduce legislative
    language that would deter the investment necessary to avoid these
    traffic jams and realize wide-scale broadband deployment. ``Net
    neutrality'' legislation would, for the first time, impose government
    regulation on the Internet, inviting other countries to do the same--
    something that the Bush and Clinton Administrations have steadfastly
    opposed.
        The U.S. Chamber opposes the enactment of ``net neutrality''
    legislation and believes that telecommunications markets should be
    driven by advances in technology, competition between
    telecommunications companies, and consumer choice, not by government
    regulation. The United States cannot afford for its economy to be stuck
    at an Internet red light. The Internet has succeeded precisely because
    it has not been burdened with government regulation.
        In the final analysis, the Internet is still evolving rapidly in
    both infrastructure and applications. Regulation would freeze current
    infrastructure in place, new applications would crowd the existing
    structure, and eventually those applications would run on more advanced
    systems in other parts of the world, thus harming our competitiveness.
    Simply put, as stated by Charles H. Giancarlo of Linksys in a June 8,
    2006, Wall Street Journal article:

            Regulation would lock in rules and practices that might seem
            correct today, but could create havoc tomorrow. Instead, we
            should allow massive convergence to Internet technology to
            continue unabated, and regulators should address specific
            problems on a case-by-case basis.

        Therefore, if this Nation truly seeks to compete in a world economy
    in which there will be continuing battles over jobs and money, we must
    ensure that our industries have an incentive to create the best
    telecommunications system in the world. That innovation and investment
    can only be achieved by allowing the market-driven convergence of
    telephone, TV, computers, Internet services, and software applications
    without government regulation.

        The Chairman. Thank you, Dr. Rutledge.
        Our next witness is Ben Scott, who is the Policy Director
    for Free Press, here in Washington, D.C.
        Mr. Scott?

          STATEMENT OF BEN SCOTT, POLICY DIRECTOR, FREE PRESS

        Mr. Scott. Thank you, Mr. Chairman and members of the
    Committee. I thank you for the opportunity to testify.
        I sit on this panel today as a consumer advocate and a
    representative of a public-interest organization, a national
    nonprofit group with over 250,000 members. I think all of us on
    this panel, and all of you on the dais, agree on the goal of
    this legislation, if not always on the means to reach it. We
    all want to expand access to competitive video and broadband
    services, and we want to bring those services to the consumers
    who need them most. This bill takes some welcome steps in the
    right direction.
        First, the bill protects the right of municipalities to
    offer broadband service. It removes the barriers to entry that
    stand between broadband services and the people who need them.
        Second, the bill gives those communities the spectrum they
    need to bring broadband to their citizens. Opening the empty
    broadcast spectrum for unlicensed use will spur innovation, and
    bring affordable access to broadband technologies to millions
    of Americans.
        Third, the bill includes positive reform to stabilize and
    manage the Universal Service Fund toward a broadband future. We
    think it might even go farther in that direction.
        Fourth, the bill beefs up the nondiscrimination rules for
    video distributors to guarantee that popular programming
    reaches all consumers, especially regional sports.
        Yet, ultimately, we believe this bill has very significant
    weaknesses. Our haste to bring competition into the video
    market must not simply jettison public policies that both
    enhance competition and protect consumers. This could easily
    leave us with more anticompetitive activity in the marketplace,
    and not less.
        We see two of the most important issues in the bill remain
    unresolved: First, strong network neutrality protections; and,
    second, reasonable buildout requirements in video franchising.
    I fear that a franchising framework without reasonable buildout
    requirements will cement the digital divide into statute. It
    will allow telephone companies to cherrypick the most
    profitable franchises in the country and ignore all the others,
    including rural areas. It also gives the incumbent cable
    operators an incentive to lower prices in those areas where
    competition arises, and to raise them in those areas where
    there is no competition. The bill strips some basic protections
    against rate discrimination without conditioning that change on
    effective competition.
        At best, we could see competition in a patchwork quilt of
    the most lucrative markets in the country, but those less
    prosperous in rural areas may be left out. The unintended
    consequences could well be systematic redlining on a national
    scale, a result I think none of us would welcome.
        On the question of network neutrality, this principle of
    nondiscrimination has been the cornerstone of Internet policy
    since the birth of the network technology. Nondiscrimination
    has made possible the greatest successes of the Internet. Its
    removal could well take them away.
        Once the practice of network discrimination begins, it will
    be very, very difficult to reverse. Consumers favor the
    lightest-possible regulatory touch that still guarantees the
    preservation of Internet freedom. I urge this Committee not to
    overlook the importance of this baseline protection and its
    impact on the future of the Internet.
        Notably, the principle of nondiscrimination is applied
    throughout the bill in several different titles. It is used to
    prevent abuses in the marketplace and to promote competition.
    For example, local franchising authorities must treat
    competitive video providers in a nondiscriminatory manner.
    Local governments that build broadband networks must not use
    local ordinances to discriminate against competitors. Cable
    operators may not use their market power to make discriminatory
    deals with programmers. Telecommunications networks must not
    give discriminatory treatment to other facilities-based VoIP
    providers.
        It seems to me that the only section of the bill that does
    not enjoy this protection against discrimination is the
    Internet, which is the most dynamic marketplace in our
    telecommunications economy. The very same network owners that
    oppose nondiscrimination through network neutrality embrace it
    when it benefits their own properties and purposes.
        We believe that the principles of nondiscrimination should
    be applied in an evenhanded fashion. The move toward
    discrimination and exclusivity on the Internet will mean higher
    prices, fewer choices, and a gatekeeper standing astride the
    Internet for the first time. With this new legislation,
    Congress has a great opportunity to bring broadband and video
    services that are competitive and affordable. However, if we
    are going to make policy that solidifies a duopoly of wireline
    triple-play network providers, we must also protect consumers
    with network neutrality and systemwide buildout requirements.
        I thank you for your time and attention, and I do look
    forward to your questions.
        [The prepared statement of Mr. Scott follows:]

          Prepared Statement of Ben Scott, Policy Director, Free Press

    Summary
        Free Press, \1\ Consumers Union, \2\ and Consumer Federation of
    America \3\ appreciate this opportunity to testify on the revised draft
    of the Communications, Consumer's Choice, and Broadband Deployment Act
    of 2006 (S. 2686). We strongly support the goal of this legislation: to
    expand consumer choice and access to competitive video and broadband
    services. American consumers currently face high prices and very little
    competition in both the video and broadband Internet markets. Monopoly
    and duopoly provision of these essential communications services limits
    innovation, widens the digital divide, and permits rates to rise beyond
    the reach of many households. As the United States falls further behind
    in the global race to lead the world in broadband, action must be taken
    to remedy the failures of the 1996 Telecommunications Act, and bring
    vigorous competition to video and broadband that will enhance the
    diversity of media choices for consumers. This is a window of
    opportunity to make broadband and video services available and
    affordable with robust content choices for all Americans.
        However, our haste to bring competition must not result in a blind
    giveaway to one industry or another. Such action would simply yield
    anti-competitive activity in another direction and leave our problems
    unresolved. S. 2686 takes many positive steps, but leaves much undone.
    Without substantial changes to the bill, the benefits of video and
    broadband competition will not reach many American households--
    particularly in the low-income and rural areas which need those
    benefits the most. The bill opens the door to competition, but doesn't
    ensure that new networks will be built universally. Key public interest
    protections and services have been abandoned, the most important of
    which is Network Neutrality--the foundation of the free and open
    Internet.
        Any franchising framework without reasonable build-out requirements
    cements the digital divide into statute. On the one hand, it allows
    telephone companies to cherry-pick the most profitable franchise areas
    in the country and ignore all the others. On the other, it gives the
    incumbent cable operators an incentive to lower prices in competitive
    areas and raise them in non-competitive ones. Without regard to
    conditions of effective competition, the bill would eliminate
    prohibitions against discriminatory cable pricing. The end result will
    be that the most lucrative markets in the country will have video
    competition, new technologies and lower prices. But less prosperous and
    rural areas will be left out of the new networks and may well
    experience higher prices for the monopoly service still available. The
    unintended consequence will be systematic redlining on a national
    scale--leaving millions of consumers with empty promises.
        On the question of Network Neutrality, this bill applies the most
    important principle in communications law--nondiscrimination--
    indiscriminately, leaving out its most important application. The
    firewall of Network Neutrality, which protects competition, maximizes
    consumer choice, and guarantees fair market practices, has been
    abandoned on the Internet space--endangering the most important engine
    for economic growth and democratic communication in modern society.
    Nondiscrimination made possible the grand successes of the Internet.
    Its removal can take them away. This will not happen immediately, of
    course. But once the practice of network discrimination begins, it will
    be virtually impossible to reverse. The loss of Network Neutrality will
    be a perpetual regret to all consumers and producers of Internet
    content and services, as well as to this Congress. Yet, S. 2686 merely
    instructs the FCC to study the process that will destroy the Internet
    as we know it.
        Notably, nondiscrimination is applied throughout this bill as a
    critical protection against abuses in the marketplace and a promoter of
    competition. The bill has it right in each case, but fails to bring the
    same logic to the Internet. For example, local franchising authorities
    must treat competitive video providers in a nondiscriminatory manner in
    the use of the public rights-of-way. Local governments that propose to
    build broadband networks must not use local ordinances to discriminate.
    Under the program access rules in S. 2686, cable operators may not use
    their market power to make exclusive or discriminatory deals with
    programmers that are denied other operators. Telecommunications
    providers must treat facilities-based VoIP providers in a
    nondiscriminatory manner. Universal Service Fund (USF) support must be
    distributed according to principles of competitive-neutrality. The only
    sector that does not enjoy this protection against discrimination is
    Internet content, applications and service providers--the most dynamic
    marketplace in our economy.
        We should apply the principles of nondiscrimination everywhere in
    an even-handed fashion. We must protect Internet freedom by preventing
    the telephone companies and cable operators from putting toll booths on
    the information superhighway. It is both just and reasonable to apply
    nondiscrimination protections across the communications sector.
    Everyone loves nondiscrimination until it is applied to their own
    properties. The same telephone and cable companies that demand
    nondiscrimination in program access and interconnection hypocritically
    deny its importance in the broadband market. This duplicity must not be
    codified into law. The move toward discrimination and exclusivity for
    Internet content spells disaster for consumers--meaning higher prices,
    fewer choices, and a gatekeeper standing astride what was heretofore
    been a truly free market.
        This legislation also takes some positive and welcome steps. First,
    we applaud S. 2686 for opening up more unlicensed spectrum for
    innovative wireless broadband applications. The empty broadcast
    channels represent a massive public asset for next-generation
    communications that is ready for immediate use. This type of spectrum
    reform contained in this bill is much needed and overdue.
        Second, we also strongly support the protections against pre-
    emption given to municipalities that would offer broadband to their
    constituents, either via public networks or the public-private
    partnerships already enjoying success in hundreds of communities. It is
    critical to remove all barriers to the development of broadband
    services.
        Third, we believe that the reforms of the Universal Service Fund
    proposed in this bill are steps in the right direction. The expansion
    of the base of contributions, and insertion of stringent accountability
    and audit measures will help stabilize a critical public-service
    program. We also support the application of USF funds to broadband in
    underserved areas. However, we are disappointed to note that the
    requirement for USF-supported networks to become broadband compatible
    has been removed from the bill. The USF programs must evolve to bring
    the dominant communications technology to all American households.
        Fourth, we support the establishment of mandatory channel
    allocations and funding for public, educational, and government access
    television. This bill will bring online thousands of new channels that
    will provide an important public service and dedicate funding to
    support them. We must ensure that our most successful access channels--
    those currently operating at budgets above the 1 percent franchise fee
    allocation--are not harmed by this bill.
        Finally, we support a rigorous application of non-exclusivity and
    nondiscrimination requirements to Multichannel Video Programming
    Distribution (MVPD) programming. Consumers have long been denied
    choices in video programming because of the anti-competitive activities
    of the system operators. This bill recognizes that the program access
    rules must be strictly applied and expanded to prevent MVPDs from using
    market power to execute anticompetitive practices. The terrestrial
    loophole certainly should be eliminated, but Congress should also move
    toward expanding diversity of programming through an a la carte pricing
    system and reform of the retransmission consent rules.
        The Communications, Consumers' Choice, and Broadband Deployment Act
    of 2006 presents Congress with a great opportunity to make broadband
    and video services competitive, affordable, and open to all content,
    applications and services that flow over the networks to consumers. In
    many ways, this bill is a step in the right direction. However, the
    lack of build-out requirements and the failure to protect Network
    Neutrality are severe flaws. If left unaddressed, they will undermine
    the positive outcomes of this bill and leave consumers worse off than
    they were before. No reform of communications law that solidifies a
    duopoly of wireline triple-play providers can be pro-consumer without
    Network Neutrality and system-wide build-out requirements.

    Assessment
    USF Programs Must Be Stabilized, Held Accountable, and Applied to
            Broadband--Title II--Universal Service Reform; Interconnection
        The key requirements for reforming USF for the 21st century are a
    stable base of contributions, rigorous standards of accountability, and
    the modernization that extends the programs to broadband. To that end,
    we applaud the provisions in S. 2686 that expand contributions into the
    Universal Service Fund to all providers of communications services. We
    will monitor the Federal Communications Commission's choice concerning
    which methodology of collection to use, and we support the adjustments
    to protect low-volume customers from disproportionate fees. Expanding
    the base of contributions will improve equity on a technology-neutral
    basis, and address the economic inefficiencies that exist in the
    current contributions system. Most importantly, it will rectify
    shortfalls in the revenue needed to adequately execute USF programs. We
    support the injection of accountability standards, performance
    measures, and audits into the system. We hope that the FCC will work to
    resolve the problems of parity surrounding the compensation of
    Competitive Eligible Telecommunications Carriers (CETCs) and rate-of-
    return carriers that has stressed the financial viability of the Fund.
    This will ensure that the fees that consumers pay into USF are
    commensurate with the benefits of an expanded network available to
    every household.
        We support the creation of the account for funding broadband in
    unserved areas, but we do not believe that alone will be sufficient to
    solve our rural broadband problem. For example, if the per-line cost of
    deployment is $1,000, approximately 500,000 lines could be added per
    year--about a 1 percent increase in broadband penetration. We regret to
    note the removal of the provisions in the prior draft of S. 2686 that
    would have required providers receiving USF contributions to provide
    broadband service within five years of passage. To achieve the goals of
    universal broadband, it will be critical that carrier eligibility for
    USF be contingent on making broadband available to all of its
    customers.
        We also suggest the following additional provisions: First, we
    recommend that municipal broadband systems be made explicitly eligible
    for funding from the Broadband for Unserved Areas Account, enabling
    communities to finance the construction of broadband networks where
    private players refuse to invest. Second, we recommend that Congress
    instruct the FCC to explore expanding the Lifeline and Link-Up programs
    to broadband. A major factor curtailing broadband penetration in the
    United States is the price of connectivity. Removing this barrier could
    greatly expand the reach of the technology and the opportunities it
    brings. The Fund for unserved areas will not likely bring universally-
    affordable broadband. A complementary program will be necessary to
    address the rich-poor digital divide in addition to the rural-urban
    digital divide. For similar reasons, we recommend thirdly that a
    requirement for USF eligible networks to become broadband compatible
    within 60 months be reinstated in the bill. Finally, we recommend that
    all network operators that receive public subsidies through USF
    programs be subject to nondiscrimination rules with regard to the
    content, applications, and services that they transmit.

    New Franchising Practices Must Include Build-Out Requirements--Title
            III--
            Streamlining Franchising Process
        We strongly support policies that will bring video competition to
    all consumer households as rapidly as possible. However, we must take
    great care not to abandon our commitment to public service requirements
    and to expanding competition as broadly as possible. A duopoly is
    better than a monopoly in wireline video services, but it is not a
    competitive marketplace. By creating new franchising processes to ease
    new market entry, we run the risk of creating a lowest common
    denominator of public service policies that do a disservice to
    localities while failing to maximize competition.
        In principle, we support the policy of keeping the franchising
    authority at the local level. Localities know best how to manage their
    own rights-of-way, administer fees, protect local consumers, and offer
    public services like PEG channels. However, the Federal framework that
    now guides these local franchising agreements must provide for adequate
    safeguards and consumer protections to maximize availability and
    quality of service. As we have testified before on this issue, \4\ the
    franchising section of S. 2686 contains many liabilities in this
    regard.
        The legislation removes too many public service protections upon
    the entrance of a second wireline competitor into a market. It
    immediately allows incumbent cable providers to jettison their existing
    franchise obligations without any demonstration of effective
    competition. The standardized franchise agreement would then apply to
    both the cable incumbent and the newcomer, requiring neither to hold to
    build-out, upgrade, or basic tier regulations. Allowing incumbent
    providers to backslide on their existing franchise obligations would
    have devastating impacts in any community where the new video entrant
    is not providing service throughout the community. If a telephone
    company offers its video service in only an affluent part of a
    franchise area, as allowed under the legislation, an incumbent cable
    provider will have both the ability, and the financial incentive, to
    offer service upgrades only to competitive areas, while denying them to
    customers in neighborhoods not served by the new entrant. While the
    National Cable and Telecommunications Association has pointed out the
    importance of providing network upgrades in an equitable and non-
    discriminatory manner,\5\ it has refused to pledge that cable providers
    will not deny service upgrades or withdraw service to currently served
    areas, if a national system of franchising is adopted.\6\
        S. 2686 appropriately prohibits redlining based on income, race,
    and religion. However, it opens up substantial loopholes that will
    render these protections all but meaningless. The limitations in
    Section 642, under which discriminatory service provision will be
    permitted, are broad and indeterminate. Service may be denied because
    of ``technical feasibility,'' ``commercial feasibility,'' and
    ``operational limitations.'' It is hard to imagine how an operator
    could fail to construe its decision to redline under one of these vague
    categories. This puts the burden-of-proof squarely on the victims of
    discrimination and gives them little hope of redress. Further, even in
    a best-case scenario, anti-redlining protections will only ensure that
    service is provided throughout the franchise areas selected by the
    telephone companies. We will very likely see a patchwork quilt of
    affluent Local Franchising Authorities (LFAs) with service agreements,
    while neighboring towns and counties (particularly those in rural
    areas) will languish without competition.
        Skepticism that telephone companies will offer their video services
    to just the wealthiest counties is particularly warranted given
    statements by SBC (now AT&T) last year that it would roll out Project
    Lightspeed, the company's Internet Protocol Television (IPTV) video
    offering, to 90 percent of its ``high-value'' customers (those willing
    to spend up to $200 on communications services per month). These high-
    value customers make up just 25 percent of its subscriber base. SBC
    also contended it would provide the video service to just 5 percent of
    ``low-value'' customers who constitute 35 percent of its customer
    base.\7\ Assurances that lowvalue customers would still be able to
    receive satellite video through SBC's affiliation with Dish Network
    ring hollow, given the failure of satellite to provide meaningful price
    discipline. Instead, SBC's statements suggest it will offer services
    only in mostly affluent areas, disregarding communities made up
    predominantly of rural or lower-income residents.
        Similarly, Verizon's conduct to date strongly suggests it is
    seeking franchise agreements for its FiOS service in only the
    wealthiest counties. For example, Verizon has negotiated, or signed
    franchise agreements with largely affluent local franchise areas--such
    as in Fairfax County, Virginia, (where it has four franchise agreements
    in place for Herndon, Fairfax County, Fairfax City and Falls Church);
    Howard County, Maryland; Massapequa Park in Nassau County, New York;
    Nyack and South Nyack, in Rockland County, New York; and Woburn in
    Middlesex County, Massachusetts In terms of median family income,
    Fairfax County ranks Number 1 nationally; Howard ranks 4th; Nassau
    10th; Rockland 12th and Middlesex 17th.\8\
        Unfortunately, in the absence of meaningful and enforceable
    requirements to build out services throughout a franchise area, the
    porous anti-redlining provisions of S. 2686 will be not be sufficient
    to prevent redlining by video providers. Existing Title VI anti-
    redlining provisions have only been effective because they exist in
    tandem with the ability of local franchise authorities to require
    service throughout the franchise area over time. Without requirements
    for build-out, anti-redlining provisions provide inadequate incentives
    or enforcement tools to ensure that all American households receive the
    same benefits from service provision. Our policy goal must be to
    deliver competitive video services as widely as possible, not as widely
    as a duopoly market will accomplish of its own volition.
    Incremental Build-Out Across System-Wide Franchises
        We strongly recommend that the Committee amend S. 2686 to include a
    build-out requirement that addresses the service territory of the
    Incumbent Local Exchange Carriers (ILECs) entering the video
    marketplace. The concept of the systemwide franchise is appealing for a
    variety of reasons. It is elegant in its simplicity--everywhere an ILEC
    has a telephone line, it must make available a video service over a
    reasonable period of time. Most importantly, it would provide for
    build-out across its existing service territory in a state, rather than
    just permitting build-out in a patchwork of counties and cities with
    the most desirable economics and demographics for a network operator.
    Variations of this model have been adopted by legislatures in Virginia
    and New Jersey.
        A build-out requirement for a system-wide franchise cannot be
    executed all at once for obvious reasons of scale. There must be
    incremental steps to ensure that there is sufficient revenue to make
    the investment in the next round of expansion. The key is finding the
    right balance that will both permit the ILEC to expand its fiber
    infrastructure on a schedule that makes business sense, and maintain a
    commitment to universal availability of the service, over time and
    across each state. Further, in the interest of the level playing field,
    the same kind of build-out requirement would need to apply to the cable
    incumbent, if and when it chooses to upgrade its lines to compete with
    the new fiber offerings from an ILEC.
        The balance in each case could be found by applying an incremental
    build-out plan (based on market-share) on a state-by-state basis across
    the provider's service territory in that state. For the first few years
    of deployment, the ILEC would be permitted to establish its own service
    area. After a period of time, if 15 percent of the market was captured,
    that measure of effective competition would trigger a build-out
    requirement. This requirement would be to reach an additional 20
    percent of the service territory in the state over several years. There
    would then be another check for market share capture, and the
    subsequent trigger for a further 20 percent build-out would repeat
    every few years. If the ILEC failed to capture sufficient market share
    (and, therefore, did not have an established revenue stream), the
    build-out benchmark would not be triggered. Eventually, all lines in
    the state service territory would be reached with the new, upgraded
    system (subject to density-based limitations).
        The overall rules for the franchise would be Federal. The authority
    of oversight and enforcement of the build-out would be at the State and
    local level. This model also provides a legislative framework that
    would integrate with the USF reform plans that extend to broadband. The
    overall public policy goal would be to ensure that high-capacity
    networks carrying voice, video, and data reach all American households
    over time, making universal the benefits of video competition and high-
    speed broadband.

    Consumer Protection and Public Services in the Franchise
        Under current law, states and localities have authority to
    establish more stringent cable customer service standards than required
    by Federal law. Localities are able to enforce those standards through
    the terms of their local franchising agreements. Many franchise
    authorities have staff and offices dedicated to resolution of cable
    complaints that provide for speedy resolution of customer billing
    concerns, service outages, and more. Penalties in the form of
    liquidated damages or mandatory discounts for customers harmed by a
    provider's violation of customer-service standards are not uncommon.
        Establishing baseline Federal consumer-protection rules is not a
    bad thing, provided they are strong and permit local governments to add
    additional protections to meet local needs. However, S. 2686 strips
    states and localities of the authority to establish consumer
    protections that exceed Federal minimum standards, and eliminates the
    ability of localities to use the franchise agreement itself as an
    enforcement tool. The legislation provides no guarantee that federally
    established consumer protection standards would take into account
    unique local needs, or be able to respond quickly to adapt regulations
    to novel anti-consumer behaviors.
        Any national franchise legislation should retain some state and
    local authority to establish customer-service standards and consumer
    protections. When facing billing errors, failures to make service
    repairs, property damage by cable employees, and other related hassles,
    consumers need a means for timely and local resolution of complaints
    against their service providers. Federalizing rules and appeals of
    local consumer protection decisions is not the most consumer-friendly
    solution. The FCC is ill-equipped to establish regulations in a timely
    manner to protect consumers, nor can it handle the thousands of
    potential cases brought on appeal.
        We are pleased to see the recognition that public, educational, and
    governmental (PEG) video channels are an important local service, and
    should be preserved and extended to all franchise holders. We strongly
    support minimum channel allocations, dedicated funding for PEG
    channels, and all of the technical requirements needed to bring this
    programming to local consumers. This bill will create thousands of new
    channels and public services where none existed before. We also believe
    that those access centers that currently rely on funding in excess of
    the 1 percent franchise fee set-aside in the bill should not be harmed.
    There is no public benefit from punishing the most successful PEG
    producers and their audiences with a hefty budget cut.

    Video Programming Should Be Available to All Providers on a
            Nondiscriminatory Basis and to All Consumers Exclusive of
            Bundles--Title IV--Video Content
        The 1992 Cable Consumer Protection Act banned cable companies from
    refusing to make their programming available, but the ``terrestrial
    loophole'' and lax enforcement have allowed cable operators to use
    control of programming to frustrate new competition. The situation has
    always been a fierce battle between cable incumbents and Direct
    Broadband Satellite (DBS)--and consumers often have been denied the
    programming they want. The entry of the ILECs into the video market
    should lead to reform.
        We strongly support a rigorous application of non-exclusivity and
    nondiscrimination requirements to MVPD programming. This bill
    recognizes that the program access rules must be strictly applied to
    prevent MVPDs from using market power to promote anti-competitive
    practices. We are particularly pleased to see these nondiscrimination
    requirements apply to dominant MVPDs that have made exclusive
    arrangements with unaffiliated programming and unfairly denied access
    to other distributors. This is notable because it recognizes the
    ability of a monopoly or duopoly distributor to distort the free market
    of content even when that content is not affiliated with the
    distributor.\9\
        The elimination of the terrestrial loophole is the first in a
    series of steps that Congress must take to maximize choice and
    diversity in the video content market. Congress also must take up a la
    carte programming and retransmission consent. In each case, as in non-
    exclusivity requirements, the policy goal is to maximize diversity,
    lower barriers to entry for independent content providers, and thwart
    the anti-competitive activities of vertically integrated network
    operators that use market power to distort the content choices
    available to consumers.
        The content and distribution markets are both badly in need of new,
    pro-competitive policies. As the cable distribution market consolidated
    through mergers, concentration in video programming has increased
    dramatically. Broadcast giants and cable programmers have merged;
    broadcast and satellite distributors have merged; and cable
    distributors increasingly offer their own programming, or have gained
    ownership stake in other video programmers.
        The premise of video franchise reform policy is to bring ILECs into
    competition with cable incumbents to drive down prices. To realize this
    goal, we must also deal with the problem of bundled programming, or
    offering programming in a package which artificially inflates prices.
    Innovative programming deals that offer consumers smaller bundles or a
    la carte pricing would differentiate new entrants in the market.
    Surveys have shown that the majority of consumers want the option to
    buy video service channel-by- channel.\10\ In countries where such
    choice exists, cable prices are significantly lower. For example,
    according to FCC's chief economist, Hong Kong consumers who select
    channels a la carte, pay 50 percent less than those who buy programming
    tiers.\11\ However, program carriage-contracts preclude cable
    competitors from offering consumers smaller bundles or individual
    channels. These bundling requirements have contributed to increased
    size and price of the expanded basic tier, which has increased in cost
    by two and a half times compared to the basic tier.\12\
        Media companies can secure these commitments because of their
    market power. Six media giants, including the top four broadcasters,
    dominate the programming landscape, accounting for three-fourths of the
    most-popular primetime channels.\13\ Four are networks (ABC, CBS, FOX,
    and NBC) and two are cable operators (Time Warner and Comcast). The
    networks use the retransmission consent negotiations for carriage of
    the local stations they own and operate to leverage local cable
    carriage of their other channels. These six companies also completely
    dominate the expanded basic tiers and the realm of networks that have
    achieved substantial cable carriage. They account for almost 80 percent
    of the more than 90 cable networks with carriage above the 20 million
    subscriber mark.
        Moreover, cable operators are majority owners of one-fifth of the
    top 90 national networks.\14\ The Government Accountability Office
    found that vertically integrated distributors, or those affiliated with
    media companies, are more likely to carry their own programming,
    contributing to the size and cost of the expanded basic tier.\15\
    Program ownership by dominant incumbent cable distributors also
    provides the incentive to withhold carriage of cable networks they own
    from competitive video distributors. This is the basis of Verizon's
    recent complaint against Rainbow Media and Cablevision over sports-
    channel carriage.\16\ Independent, unaffiliated video service providers
    that do not own their own programming have consistently expressed
    concerns about exclusionary tactics, contractual bundling requirements,
    and coercive retransmission consent negotiations that limit their
    ability to respond to customer demand for lower prices and more choice
    in program packages.\17\ Telephone companies attempting to enter and
    compete in new markets will face these same barriers.
        It is, therefore, essential that Congress address the anti-
    competitive practices of cable operators in any franchise legislation
    that hopes to expand competition in video markets. Failure to do so
    will impede the ability of any new video market entrant, including
    Verizon and AT&T, to compete on price or packages. They will be forced
    to buy the same channels their competitor is carrying; pay the same or
    greater licensing fees; and offer the same packages. Worse, they will
    be precluded from offering channels individually or in specialty tiers,
    even though doing so may give them an opportunity to differentiate
    their services from the incumbent cable monopoly, and respond to strong
    consumer demand for greater channel choice. The entrance of the ILECs
    into the video market is an excellent opportunity to expand the
    diversity of channels offered to consumers--but only if the gatekeepers
    are eliminated.

    Public Broadband Providers Should Face No Prohibitive Barriers to
            Market Entry--Title V--Municipal Broadband
        The provisions in S. 2686 regarding municipal broadband have been
    greatly improved in this revised draft. We applaud these changes. We
    strongly support S. 1294, the Community Broadband Act, sponsored by
    Senators Lautenberg and McCain. The new language in S. 2686 approaches
    the spirit of S. 1294 and looks to accomplish the same goals. We look
    forward to working with the Committee on this important Title.
        We are pleased that S. 2686 now prohibits state pre-emption of
    municipal broadband networks--a critical component of any legislation
    that seeks to foster competition in data, video, and voice services,
    and expand affordable high-speed Internet access to all Americans. The
    bill encourages public-private partnerships in broadband networks, and
    opens the door for local governments to serve their constituents. This
    type of network has been among the fastest-growing sectors of the
    communications industry. In the past few years, more than 300 towns and
    cities have built public and public-private broadband networks to bring
    low-cost services to consumers.
        These community Internet networks are a critical part of reaching
    President Bush's stated goal of achieving universal, affordable access
    to broadband technology by 2007. These networks have a proven track
    record of promoting economic development, especially in rural and
    underserved urban areas. They offer many consumers and businesses an
    affordable broadband connection, bringing economic and social
    opportunities to communities in need. In a larger frame, these networks
    are a critical part of the effort to improve global competitiveness in
    broadband. These networks will provide an essential catalyst for market
    competition, economic development and universal, affordable Internet
    access for all Americans.

    Congress Should Open Empty Broadcast Channels for Unlicensed Wireless
            Innovation--Title VI--Wireless Innovation Networks
        We strongly support Title VI of S. 2686, and we applaud the
    continued efforts of Senators Stevens, Allen, Kerry, and other
    supporters of opening unused spectrum for innovative, unlicensed use.
    Congress has a crucial opportunity to foster universal, affordable
    broadband Internet services by tapping an underutilized, but valuable,
    public resource--the empty broadcast channels, known as ``white
    spaces.'' Unlocking the public airwaves would allow entrepreneurs to
    provide affordable, competitive, high-speed wireless Internet services
    to consumers that lack access completely, or have access only to
    services so expensive they remain out of reach.
        The digital divide in the United States is severe in rural areas.
    Prices are often higher and the quality of service is lower in rural
    states. More disturbingly, the rural digital divide has not been
    closing. According to the latest data from the Pew Research Center, 39
    percent of urban households have broadband, compared to only 24 percent
    in rural areas. This gap of 15 percent has remained constant for
    several years. Also worrying, according to Pew, is that 32 percent of
    the adult population does not use the Internet--a figure that held
    steady for the first half of 2005.\18\
        These trends must be addressed immediately, and spectrum reform is
    an important part of the solution. Rural areas typically have very few
    broadcast stations and a large number of empty broadcast channels--that
    is, a lot of ``white spaces.'' The logic is simple: The places that
    need broadband the most also have the largest amount of unused airwaves
    available to provide it.
        Even after the digital television (DTV) transition ends in early
    2009 (when the number of broadcast channel allocations will be
    reduced), every one of the Nation's 210 TV markets will have unassigned
    and vacant channels reserved for broadcasting but not being used. Many
    markets will have dozens of open channels. Vacant TV channels are
    perfectly suited for WiFi and other unlicensed wireless Internet
    services. Access to vacant TV channels would facilitate a market for
    low-cost, high-capacity, mobile wireless broadband networks. Using
    these white spaces, the wireless broadband industry could deliver low-
    cost, high-quality Internet access to every American household.

                              Summary Analysis--White Space in Sample of U.S. Media Markets
              (The fall analysis of each market with channel data is available at www.spectrumpolicy.org.)
    ----------------------------------------------------------------------------------------------------------------
                                                            No. of Vacant Channels
                          Market                         Between Chs. 2-51 After DTV    Percent of TV Band Spectrum
                                                                  Transition            Vacant After DTV Transition
    ----------------------------------------------------------------------------------------------------------------
    Juneau, Alaska                                                                37                             74
    Honolulu, Hawaii                                                              31                             62
    Phoenix, Arizona                                                              22                             44
    Charleston, West Virginia                                                     36                             72
    Helena, Montana                                                               31                             62
    Boston, Massachusetts                                                         19                             38
    Jackson, Mississippi                                                          30                             60
    Fargo, North Dakota                                                           41                             82
    Dallas-Ft. Worth, Texas                                                       20                             40
    San Francisco, California                                                     19                             37
    Portland, Maine                                                               33                             66
    Tallahassee, Florida                                                          31                             62
    Portland, Oregon                                                              29                             58
    Seattle, Washington                                                           26                             52
    Las Vegas, Nevada                                                             26                             52
    Trenton, New Jersey                                                           15                             30
    Richmond, Virginia                                                            32                             64
    Omaha, Nebraska                                                               26                             52
    Manchester, New Hampshire                                                     23                             46
    Little Rock, Arkansas                                                         30                             60
    Columbia, South Carolina                                                      35                             70
    Baton Rouge, Louisiana                                                        22                             44
    ----------------------------------------------------------------------------------------------------------------

    Enforceable Network Neutrality Protections Are Essential to Any Reform
            Package--Title IX--Internet Neutrality
        The most significant shortcoming in S. 2686 is its failure to
    preserve Network Neutrality. The consequences of this mistake will be
    irreversible, and we urge the Committee to give the issue the attention
    and remedy it requires. As drafted, S. 2686 appears to recognize that
    their may well be a problem if network operators follow through on
    their promises to create discriminatory tiers of service. The bill
    orders a study of the issue, but it provides no remedy until years
    after the problem has been documented. By then, it will be far too
    late. Once discrimination has been introduced into the architecture of
    the Internet, there is no going back. The genie will not go back in the
    bottle.
        The history is clear. The Internet was born in a regulatory
    environment that guaranteed strict nondiscrimination. The physical
    wires were regulated separately from the content flowing over them. The
    reason was simple: to keep monopoly or duopoly owners of infrastructure
    from using market power to distort the free market of services on the
    Internet. This simple protection worked brilliantly. For two decades,
    the Internet has thrived with low barriers to entry and equal
    opportunity. It is the greatest engine of economic growth and
    democratic communication in modern times.
        About a year ago, the FCC yanked the rug out from under the
    Internet, removing the nondiscrimination protections. Soon afterward,
    the network operators inevitably announced that--free of limitations on
    abuse of their market power--they would change the Internet forever and
    begin offering discriminatory tiers of service. The owners of the
    Internet's wires would become the gatekeepers of the Internet's
    content. Is this wild speculation? Far from it. The CEOs of major
    telephone companies have publicly announced their intentions.\19\
        This is a disaster for consumers and producers of Internet content.
    The egalitarian Internet is far too valuable, and far too successful,
    to be sacrificed for the benefit of creating an extra stream of revenue
    for cable and telephone giants. As they have indicated, if and when
    Congress ratifies the FCC's decision, the network owners will use their
    market power to discriminate against Internet content and services.
    Tiers of service will establish first- and second-class citizens
    online. For the first time, the equal opportunity network will be a
    thing of the past. Barriers to entry will rise up and stifle
    innovation. End-user costs will increase as tollbooth fees are passed
    along to consumers.
        Some argue that it is not in the interest of the network operator
    to offer exclusive and discriminatory deals, or to block and degrade
    access to certain websites and services. They say consumers would
    simply drop them and move to another network. But this argument assumes
    that there is competition in the broadband market. There is not, and
    there won't be any in the foreseeable future. According to the latest
    data from the FCC, cable providers and telephone companies currently
    dominate more than 98 percent of the residential broadband market--a
    slight increase in total market share from last year.\20\ Cable and
    telephone companies operate in regional fiefdoms, virtually assuring
    that every community has a maximum of two viable providers. The GAO
    confirmed this reality, reporting that the median number of available
    broadband providers for American households is just two.\21\ We have
    attached, as an appendix to this testimony, a study on the question of
    Network Neutrality by Dr. Trevor Roycroft that addresses the central
    economic issues at stake in this policy debate.\22\

        The principles of nondiscrimination and competitive-neutrality are
    present throughout S. 2686. They are applied throughout this bill to
    protect consumers and promote free competition--except with respect to
    the Internet. Under the bill, local franchising authorities must treat
    competitive video providers in a nondiscriminatory manner in the use of
    the public rights-of-way.\23\ Local governments that propose to build
    broadband networks must not use city ordinances to discriminate.\24\
    Under the new program access rules for sports programming, cable
    operators may not use their market power to make exclusive or
    discriminatory deals for programming that is denied to other
    operators.\25\ Telecommunications providers must treat facilities-based
    VoIP providers in a nondiscriminatory manner.\26\ USF support must be
    distributed according to principles of competitive-neutrality.\27\ Even
    copyright control technologies under the broadcast flag must be
    licensed in a reasonable and nondiscriminatory manner.\28\
        The only sector that does not enjoy this protection against
    discrimination is Internet content, applications and services--the most
    dynamic marketplace in our economy. We should apply the principles of
    nondiscrimination everywhere in an even-handed fashion. This is the
    only means to guarantee pro-competitive policies across the
    communications sector that do not favor one technology or industry over
    another.
        Without anti-discrimination legislation, or the threat of
    meaningful competition, cable and telephone companies that own and
    control broadband networks now have both the incentive and the ability
    to discriminate against other content, services and applications
    transmitted over the wires. We strongly encourage the adoption of
    amendments to S. 2686 that will guarantee meaningful and enforceable
    Network Neutrality. The Internet Freedom Preservation Act (S. 2917),
    sponsored by Senators Snowe and Dorgan, provides an admirable solution
    to the problem. Its exclusion from the bill is a glaring liability.

    Conclusion
        The goals of this bill are admirable. Consumer organizations
    support the introduction of new competition into the video and
    broadband markets. We support the expansion of USF programs and their
    transition to broadband technologies. We support nondiscrimination
    rules for cable television programming and protections for public-
    access cable channels. We support municipal broadband networks and
    opening unused spectrum for unlicensed use. We believe all of these
    policies will move us toward our overall goal--universally affordable
    broadband technologies.
        However, we must not give away fundamental consumer protections and
    pro-competitive policies in one arena to bring the prospect of
    competition in another. Similarly, we must not sacrifice lower prices
    and service quality for some consumers to bring them to others. There
    are major problems in this bill which must be remedied to ensure that
    all consumers benefit from the new policies. The uniform application of
    nondiscrimination principles and a commitment to universal availability
    of new technologies must be central to new legislation.
        We strongly urge the Committee to incorporate the following key
    components that are currently absent from S. 2686: (1) meaningful and
    enforceable Network Neutrality that will preserve the free, open, and
    nondiscriminatory Internet; (2) reasonable but mandatory build-out
    requirements for all holders of franchises under the Federal framework;
    (3) consumer protection structures in which local and state authorities
    can strengthen and enforce Federal minimum standards; (4) reforms to
    cable programming rules that break open the programming bundle and
    reform retransmission consent; and (5) application of USF programs to
    broadband. Without these changes, consumers will end up worse off than
    where they started, with high prices for television and broadband and
    fewer choices between content and services.

    ENDNOTES
        \1\ Free Press is a national, nonpartisan, nonprofit organization
    with more than 300,000 members working to increase informed public
    participation in crucial media and communications policy debates.
        \2\ Consumers Union is a nonprofit membership organization
    chartered in 1936 under the laws of the State of New York to provide
    consumers with information, education and counsel about goods,
    services, health and personal finance, and to initiate and cooperate
    with individual and group efforts to maintain and enhance the quality-
    of-life for consumers. Consumers Union's income is solely derived from
    the sale of Consumer Reports, its other publications and from
    noncommercial contributions, grants, and fees. In addition to reports
    on Consumers Union's own product testing, Consumer Reports with more
    than 5 million paid circulation, regularly carries articles on health,
    product safety, marketplace economics, and legislative, judicial and
    regulatory actions which affect consumer welfare. Consumers Union's
    publications carry no advertising and receive no commercial support.
        \3\ The Consumer Federation of America is the Nation's largest
    consumer advocacy group, composed of over 280 state and local
    affiliates representing consumer, senior, citizen, low-income, labor,
    farm, public power, and cooperative organizations, with more than 50
    million individual members.
        \4\ Testimony of Consumers Union, Free Press, Consumer Federation
    of America, Senate Committee on Commerce, Science, and Transportation,
    May 18, 2006, http://commerce.senate.gov/public/_files/
    kimmelman051806.pdf.
        \5\ National Cable & Telecommunications Association, 2006, ``The
    Bell Monopolies Want a Special Break to Enter the Video Business,''
    http://www.ncta.com/pdf_files/Bell_Myths_FINAL_03.06.06.pdf.
        \6\ Comments of NCTA, Hearing on Committee Print of the
    Communications Opportunity, Promotion, and Enhancement Act of 2006,
    Subcommittee on Telecommunications and the Internet, U.S. House of
    Representatives, March 31, 2006.
        \7\ ``Cable, Phone Companies duke it out for customers,'' USA
    Today, June 22, 2005.
        \8\ U.S. Census Bureau. Median Family Income; Counties within the
    U.S., 2004 American Community Survey.
        \9\ S. 2686, Section 628(4)(D), (page 98).
        \10\ ``How we pay for cable may be about to change; `A la carte'
    programming picking up support over expanded-basic bundle,'' USA Today,
    March 2, 2006.
        \11\ ``FCC Top Economist Trumpets a la Carte,'' Multi-Channel News,
    May 10, 2006.
        \12\ Mark Cooper, Time to Give Consumers Real Cable Choices,
    Consumer Federation of America & Consumers Union, July 2004, (p. 5).
        \13\ MM Docket No. 92-264, Comments of CFA, CU, Free Press, In the
    Matter of The Commission's Cable Horizontal and Vertical Ownership
    Limits and Attributions Rules, August 8, 2005.
        \14\ ``Issues Related to Competition and Subscriber Rates in the
    Cable Television Industry,'' October 2003, GAO-04-8 http://www.gao.gov/
    new.items/d048.pdf, p. 27.
        \15\ Id. at 29.
        \16\ ``Verizon Seeks FCC Intervention to Free Cablevision's
    Stranglehold on Sports Programming,'' March 21, 2006, http://
    newscenter.verizon.com/proactive/newsroom/release.vtml?id=93328.
        \17\ EchoStar Communications Corporation, Testimony of Charles
    Ergen, Chairman & CEO, EchoStar Communications Corporation before the
    Senate Committee on Commerce, Science, and Transportation, January 19,
    2006; Testimony of Bennett Hooks, Chief Executive Officer, Buford Media
    Group on behalf of the American Cable Association, before the
    Subcommittee on Telecommunications and the Internet, July 14, 2004.
        \18\ See John Horrigan, ``Rural Broadband Internet Use,'' Pew
    Internet and American Life Project, February 2006, http://
    www.pewinternet.org/pdfs/PIP_Rural
    _Broadband.pdf; and John Horrigan, ``Broadband in the United States:
    Growing but Slowing,'' Pew Internet and American Life Project,
    September 21, 2005, http://www.pewinternet.org/PPF/r/164/
    report_display.asp.
        \19\ See for example: ``At SBC, It's All About `Scale and Scope',''
    BusinessWeek Online, November 7, 2005; Jonathan Krim, ``Executive Wants
    to Charge for Web Speed,'' Washington Post, December 1, 2005; Dionne
    Searcey and Amy Schatz, ``Phone Companies Set Off a Battle Over
    Internet Fees,'' Wall Street Journal, January 6, 2006.
        \20\ ``High-Speed Services for Internet Access: Status as of June
    30, 2005,'' FCC, Wireline Competition Bureau, http://hraunfoss.fcc.gov/
    edocs_public/attachmatch/DOC-264744A1.pdf (Chart depicted, p. 8).
        \21\ ``Broadband Deployment is Extensive Throughout the United
    States, but it is Difficult to Assess the Extent of Deployment Gaps in
    Rural Areas,'' GAO, May 2006, http://www.gao.gov/new.items/d06426.pdf.
        \22\ See Appendix: Trevor Roycroft, ``Economic Analysis and Network
    Neutrality,'' June 2006.
        \23\ S. 2686, Section 331(a)(2)(B): ``A State or local government
    shall apply its laws or regulations in a manner that is reasonable,
    competitively neutral, nondiscriminatory, and consistent with State
    statutory police powers . . .'' (p. 60); Section 331 (b)(a): ``A
    franchising authority may not discriminate among video service
    providers in imposing or collecting any fee assessed under this
    section.'' (p. 61-62).
        \24\ S. 2686, Section 502(d)(1): A public provider of broadband
    must apply its ordinances and rules ``without discrimination in favor
    of itself or any other advanced telecommunications capability provider
    that such public provider owns . . .'' (page 115-116).
        \25\ S. 2686, Section 628(b), ``It is unlawful for an MVPD, an MVPD
    programming vendor in which an MVPD has an attributable interest, or a
    satellite broadcast programming vendor to engage in unfair methods of
    competition . . .'' (page 92); Section 628(c)(2)(B), ``The regulations
    required under paragraph (1) shall--prohibit discrimination by an MVPD
    programming vendor in which an MVPD has an attributable interest . .
    .'' (page 93-94).
        \26\ S. 2686, Section 715 (a): ``A telecommunications carrier may
    not refuse to transport or terminate IP-enabled voice traffic solely on
    the basis that it is IP-enabled.'' (page 26).
        \27\ S. 2686, Section 253: ``Competitive Neutrality Principle'';
    (7) ``Universal service support mechanisms and rules should be
    competitively neutral.'' (page 34-35).
        \28\ S. 2686, Section 452 (d) (3).

        The Chairman. Well, thank you very much, Mr. Scott.
        Our next witness is Dave McCurdy, the President and Chief
    Executive Officer of the Electronic Industries Alliance.
        Mr. McCurdy? Dave?

             STATEMENT OF HON. DAVE McCURDY, PRESIDENT/CEO,

           ELECTRONIC INDUSTRIES ALLIANCE (EIA); ON BEHALF OF

             TELECOMMUNICATIONS INDUSTRY ASSOCIATION (TIA)

        Mr. McCurdy. Mr. Chairman, thank you very much. I'm pleased
    to accept your invitation to testify today on behalf of both
    the Electronic Industries Alliance and the Telecommunications
    Industry Association, and my good colleague and friend, Matt
    Flanagan.
        I'd like to first applaud your leadership in drafting a
    pro-competition bill that will remove barriers, and provide
    incentives for all providers to deploy next-generation
    broadband capability, a 20-fold increase in capacity. We
    believe that the Stevens-Inouye bill will significantly
    accelerate broadband deployment and capture the consumer
    welfare benefits of competition in the cable television space.
    We're also pleased your bill makes the streamlined franchise
    process available to existing cable TV providers, as we think
    this step is important to encourage investment by all providers
    and to spur healthy competition. Both urban and rural
    communities will reap the benefits.
        Next-generation broadband enables voice, data, video, and
    other multimedia services to be offered over single and
    multiple infrastructures. Technology integration, expanded
    broadband technology communications infrastructure, and
    seamless mobility of communications and computing are expected
    to bring enormous economic and societal benefits, and improve
    the quality of life of all consumers.
        Video service is the application driver for the deployment
    of next-generation broadband, because video uses an enormous
    amount of bandwidth. The telephone companies want to deploy
    video over new broadband networks as a new business model in a
    changing market. However, the local franchise process is a
    regulatory barrier to entry that impedes timely investment in
    new facilities and capabilities and slows delivery of
    competitive and innovative services to consumers.
        We are supportive of Title III, the video franchise portion
    of your draft, because it replaces the local franchising
    process with a uniform Federal system that will be managed by
    the FCC with limited input by existing local franchise
    authorities. We have spent a significant amount of time
    analyzing the effects of various local franchise requirements
    on next-generation broadband deployment, and we conclude that
    three impediments exist: delay in granting franchises, buildout
    requirements, and extraneous costs imposed on providers. Your
    bill reduces these barriers.
        Mr. Chairman, with regard to the municipal broadband
    provision in your draft, EIA and TIA support, as a longstanding
    principle, legislation that allows municipalities to deploy
    broadband and provide video services on a transparent and
    nondiscriminatory basis, thereby removing barriers for yet
    another competitor's entry into this marketplace.
        Mr. Chairman, I want to commend Senators McCain,
    Lautenberg, and Ensign for their agreement on removing the
    right-of-first-refusal provision that was in the original
    draft, and I thank you for that leadership.
        We'd also like to express our support for a provision
    included in the minority draft allocating a specific sum to
    basic telecom research and interoperability. We hope to see
    this provision included in the final bill, as it will
    contribute to U.S. competitiveness and innovation.
        With regard to the debate over net neutrality, we fully
    understand the concerns that have been expressed over the
    possibility of abuses in the marketplace; however, we are not
    aware of any significant evidence of abuses that require
    preemptive legislation. Accordingly, we believe this issue is
    speculative and premature; and, thus, support the study
    approach taken in this bill to answer a number of important
    questions before legislating.
        I'd like to refer you to TIA's broadband Internet access
    connectivity principles, which state that subscribers should be
    able to get the capacity for which they pay to connect to the
    Internet, access any content on the Internet, as long as such
    content is lawful, use any applications they choose, as long as
    such use does not hurt the network or other users, and attach
    to the network any device they choose, as long as it does not
    harm the network.
        We believe that the FCC has jurisdiction to vigilantly
    monitor the broadband Internet access service market and
    expeditiously review any complaint of anticompetitive activity.
        Let me emphasize that we believe unaffiliated content
    providers, as consumers of bandwidth, should benefit from
    connectivity principles just like retail subscribers.
        Mr. Chairman, you have a wonderful opportunity to achieve
    real success this year that will accelerate deployment of next-
    generation networks, and benefit consumers through lower prices
    and improved services. Franchise reform, for example, is long
    overdue, and is an area in which there is great consensus. Net
    neutrality, on the other hand, is an issue on which there is
    little clarity and even less consensus. I'd propose that
    Congress continue to examine the net neutrality issue until
    it's clear what the problem is, if, in fact, there is a
    problem, and what the solution should be.
        On behalf of both EIA and TIA, I respectfully urge the
    Committee to act quickly on video franchise reform and other
    issues on which there is a consensus, so we can enact them this
    year. With such action, we can capture the benefits of
    accelerated broadband deployment and the consumer welfare
    benefits of competition now.
        Thank you very much.
        [The prepared statement of Mr. McCurdy follows:]

      Prepared Statement of Hon. Dave McCurdy, President/CEO, Electronic
      Industries Alliance (EIA); on Behalf of Telecommunications Industry
                               Association (TIA)

        Mr. Chairman, I am pleased to accept your invitation to testify
    today on behalf of both the Electronic Industries Alliance (EIA) and
    the Telecommunications Industry Association (TIA).
        As you know, EIA is an alliance of several trade associations
    representing nearly 1,300 companies from the full spectrum of U.S.
    technology manufacturers. Our member companies' products and services
    range from the smallest electronic components to the most complex
    systems used by government and industry. Among our Alliance
    associations, TIA represents the communications sector, providing a
    forum for over 600 member companies, the manufacturers and suppliers of
    products and services used in global communications. Many TIA members
    manufacture and supply products and services used in the deployment of
    the broadband infrastructure that enables the distribution of
    information in all its forms including video programming.
        We believe that the objective of the legislation before you should
    be to ensure that broadband networks and services operate in a minimal
    regulatory environment, which is critical for the continued deployment
    of broadband, and innovation in both next-generation network facilities
    and the services they empower. Currently, there is a consensus among
    legislators and regulators that competition in the video services
    market is a good thing. We are in support of this consensus view, and
    would like to see the momentum continued so that we achieve facilities-
    based competition in the interest of both producers and consumers.

    Benefits of Competition
        The ability to offer voice, data, video, and other increasingly
    intermingled multimedia services over single or multiple
    infrastructures is becoming more prevalent. This means that competing
    infrastructure platforms will be able to provide essentially similar
    multimedia experiences. The question that Congress can help answer is:
    how long will it take to make these converged and competing services
    available to consumers at lower prices?
        Integration, broadband technology communications infrastructure,
    and seamless mobility of communications and computing are expected to
    bring enormous economic and societal benefits to the U.S. and the
    world, and improve the quality of life for all consumers. With that in
    mind, I think it is helpful to review the recent history of broadband
    technology.

    The Evolution of Technology
        The first evolution of broadband technology is from dial-up
    Internet access to current-generation broadband access. This is
    characterized as a shift from 56 kilobit-per-second narrowband
    capability to around 1.5 megabit-per-second (Mbps) broadband
    capability--roughly a 20-fold capacity expansion.
        Current-generation broadband technology has been deployed as the
    result of market-driven, deregulatory actions taken by Congress and the
    FCC. The Federal Government played a positive and significant role in
    promoting competition through deregulation. House passage of the
    Tauzin-Dingell bill,\1\ in February 2002 spurred three major decisions
    by the FCC that created a favorable environment for broadband
    investment: the cable modem decision of 2002,\2\ the Triennial Review
    Order of 2003,\3\ and, most recently, the DSL decision of 2005.\4\
    Thus, the pro-competitive, deregulatory actions taken by this body and
    by the Commission, have worked to encourage the first evolution of
    broadband technology.
    ---------------------------------------------------------------------------
        \1\ See United States. Cong. House of Representatives. Internet
    Freedom and Broadband Deployment Act of 2001. 107th Cong. H.R. 1542.
    Washington: GPO, 2001.
        \2\ See FCC GN Docket No. 00-185, CS Docket No. 02-52, (rel. March
    15, 2002).
        \3\ See FCC CC Docket No. 01-338, (rel. Aug. 21, 2003).
        \4\ See FCC CC Docket No. 02-33. (rel. Sept. 23, 2005).
    ---------------------------------------------------------------------------
        The next growth spurt from current-generation to next-generation
    broadband access is characterized by yet another 20-fold increase in
    capacity, from 1.5 Mbps to as much as 25-30 Mbps. Both are massive
    expansions, but the second evolution to next-generation broadband is
    what allows for future growth. Among developed nations worldwide, the
    U.S. is behind in broadband deployment, and a second evolution is
    necessary to offer new and competing services to consumers.
        Thanks to many technology drivers, current-generation broadband
    access is well on its way. Progress in technology deployment is often
    measured by the substitution of the new for the old. By this
    measurement, tremendous progress has been made in the deployment of
    current generation broadband, where U.S. subscribership increased by
    more than 700 percent from 5.1 million in 2000 to 39.1 million in 2005,
    while dial-up subscribership peaked at 47.3 million in 2002, and has
    since declined to about 35.2 million subscribers in 2006, the level
    that existed in 2000.\5\
    ---------------------------------------------------------------------------
        \5\ See Telecommunications Industry Association ,
    Telecommunications Market Review and Forecast, 2005.
    ---------------------------------------------------------------------------
        The second broadband technology shift has just begun and involves a
    number of different technologies, including fiber-to-the-premises
    (FTTP), fiber-to-the-node (FTTN), fiber-to-the-curb (FTTC), very high-
    speed digital subscriber line (VDSL) for increasing broadband rates
    over telco platforms, high speed data interfaces for cable systems such
    as DOCSIS 2x and DOCSIS 3.0, and satellite and wireless broadband
    technologies, such as WiFi and WiMax. All of these technologies hold
    great promise and are in various stages of development and deployment.
        To best promote widespread deployment of next-generation
    technology, Congress should continue its pro-competitive, deregulatory
    stance. And indeed, you have already taken steps in this direction.
    Most recently, with leadership from this Committee, Congress adopted a
    ``hard date'' for the DTV transition,\6\ which will release prime
    spectrum for the development of new wireless solutions. Congress has
    also encouraged the FCC to facilitate competition in the wireline voice
    market by applying the light hand of regulation for VoIP, which will
    enable cable companies and new entrants to compete with incumbent
    telephone companies.\7\
    ---------------------------------------------------------------------------
        \6\ See Deficit Reduction Act of 2005, Pub. L. 109-171, Title III
    Digital Television Transition and Public Safety.
        \7\ See FCC CC Docket No. 04-267. (adopted Nov. 9, 2004).
    ---------------------------------------------------------------------------
        Deregulation in the video realm is the next logical step. Video is
    the application driver for the deployment of next-generation broadband
    because video uses an enormous amount of bandwidth. The telephone
    companies want to deploy video over new broadband networks to gain
    additional revenue as their core markets rapidly change. The local
    franchise process is a regulatory barrier to entry that impedes timely
    investment in new facilities and capabilities, slowing delivery of
    competitive and innovative services to consumers. This process requires
    service providers to negotiate and obtain individual and unique
    authorizations in thousands of jurisdictions. Federal legislation
    facilitating entry of new video providers will result in the deployment
    of more robust infrastructure, increased competition, and consequent
    consumer benefit.

    Problems With the Video Franchise Process
        The local franchise process should be replaced with a uniform,
    Federal system that will be managed by the FCC with limited input by
    existing local franchise authorities. We have spent a significant
    amount of time analyzing the effects of various local franchise
    requirements on next-generation broadband deployment, and I will
    summarize our thoughts in that regard here and provide a more detailed
    discussion in an annex to this testimony.
        The first problem is delay by local franchise authorities in
    awarding franchises, as it adversely affects broadband deployment and
    video competition. Prompt entry into the video market is a key
    predicate to justifying construction of new broadband facilities,
    regardless of the network architecture, because the extra revenue
    potential of video (as well as ancillary offerings such as video-on-
    demand, HDTV, and personal video recording capability) is necessary to
    justify the multi-billion dollar investment such networks require.
        The delayed entry of these competitive video providers results in
    less competition, less consumer welfare benefit, and delay in the
    second evolution of broadband technology. The solution is to
    automatically issue a franchise within a set period of time.
        The second major problem with the current video franchise process
    is the practice of requiring new entrants to build out facilities
    beyond the area they find economical. In the case of a telephone
    company entering the video market, video deployment logically follows
    the existing wire center footprint, which typically does not follow
    franchise area boundaries. As a result, build-out requirements present
    entrants with a choice between building out an entire service area and
    incurring losses associated with providing service where it is not
    economic to do so, or not building out at all and instead choosing to
    use limited resources as a competitor in communities that do not have
    build-out requirements. The solution, we believe, is to establish a
    franchise process that does not require such counterproductive build-
    out requirements.
        The third problem is the prevalence of extraneous obligations.
    Congress has already indicated its intent to limit payments for
    franchises by establishing in Title VI of the Communications Act that
    the 5 percent statutory franchise fee is a ceiling for payments ``of
    any kind.'' \8\ Yet, franchise authorities often seek payments that far
    exceed the 5 percent fee. These extraneous requirements increase costs,
    and discourage the investment in next-generation broadband capability,
    thereby delaying the second evolution of broadband technology. The
    solution, we believe, is to prohibit the imposition of extraneous cost
    beyond 1 percent of gross revenues.
    ---------------------------------------------------------------------------
        \8\ See U.S.C. Sec. 542(g)(1).
    ---------------------------------------------------------------------------
        If a bill is enacted this year that adequately addresses these
    issues, as the Stevens-Inouye bill appears to do, we believe it will
    significantly accelerate deployment of next-generation broadband
    capability and capture the consumer welfare benefits of competition in
    the cable TV space.
        We are also pleased that the Stevens-Inouye bill would make its
    streamlined franchise process available to existing cable TV providers,
    as we think this step is important to encourage investment by all
    providers and to spur healthy competition.

    Municipal Broadband
        As a long-standing principle, EIA and TIA support legislation that
    allows municipalities to deploy broadband, and provide video services
    on a transparent and nondiscriminatory basis, thereby removing barriers
    for another competitor's entry into the marketplace. Particularly in
    fiber-to-the-premises municipalities were among the early leaders,
    although recent court decisions have slowed deployment in a number of
    states. Although we believe municipalities should consider all options
    before entering the telecom field, if municipal leaders feel that they
    must build their own networks in order to provide satisfactory
    broadband services to their constituents, they should have the freedom
    to make those decisions.
        The draft bill before the Committee includes a statutory
    clarification to allow municipal entry, subject to a right of first
    refusal provision requiring consideration of private sector offers to
    provide desired services. While we encourage private sector deployment
    where possible, we are concerned that the right of first refusal
    requirement could create uncertainty and opportunities for litigation
    that delay broadband deployment for protracted periods.

    Net Neutrality
        Mr. Chairman, the issue of net neutrality has become a central
    focus of telecom reform in this Congress. Last week, the House
    overwhelmingly passed video franchise reform legislation that included
    an appropriate, cautious response to net neutrality concerns. EIA and
    TIA support the study element of the approach taken in the Stevens-
    Inouye bill to answer a number of important questions on this issue
    before legislating. However, if you determine the net neutrality study
    presently included in S. 2868 is insufficient, we urge this Committee
    to adopt the approach taken by the House. When no two stakeholders can
    agree on a definition of net neutrality, and no stakeholder can point
    to a tangible problem, policymaking with respect to the Internet must
    begin with the principle of ``first, do no harm.'' The net neutrality
    provision in H.R. 5252 establishes appropriate safeguards against
    problems that may arise, while doing no harm.
        The value of a network is determined by its adoption by consumers.
    As leading manufacturers of network equipment, TIA and EIA member
    companies share an interest in ensuring that broadband networks are
    both deployed and used. If consumers are unsatisfied with the service
    they are receiving, the incentive to build new networks is lost.
    Network equipment generally goes unnoticed by the consumer, but it is
    clearly the consumer that drives its demand.
        Accordingly, EIA, TIA and other members of the High-Tech Broadband
    Coalition (HTBC) created the network Connectivity Principles several
    years ago, and urged the adoption of the principles by Federal
    policymakers. The FCC did so in 2004, under Chairman Michael Powell as
    principles of ``Network Freedom,'' and again in the Summer of 2005,
    under Chairman Kevin Martin as the Commission's ``Policy Statement.''
        This spring, TIA determined that additional principles were
    necessary to support the interests of not only consumers, but also
    unaffiliated content providers, and therefore, released new Broadband
    Internet Access Connectivity Principles. We attach a copy hereto for
    your use.
        In short, TIA's Broadband Internet Access Connectivity Principles
    state that subscribers should be able to get the capacity for which
    they pay to connect to the Internet, access any content on the Internet
    as long as such content is lawful, use any applications they chose as
    long as such use does not hurt the network or other users, and attach
    to the network any device they choose as long as it does not harm the
    network. TIA believes that the FCC has jurisdiction to vigilantly
    monitor the broadband Internet access service market and expeditiously
    review any complaint of anticompetitive activity. Let me emphasize that
    we believe unaffiliated content providers, as consumers of bandwidth,
    should benefit from the Connectivity Principles just like retail
    subscribers.
        It is the interest of some to go beyond these principles in an
    effort to safeguard against a problem that, at this point and in the
    foreseeable future, is nonexistent. Advocates of stronger net
    neutrality language are clearly concerned about what they view as
    potential violations of net neutrality, as opposed to legitimate
    violations of net neutrality.
        We find this troubling because legislating against potential
    misdeeds can have unfortunate, unintended consequences, as we
    experienced after the 1996 Telecom Act, when the FCC's use of an
    unbundling regime discouraged investment in local broadband access by
    incumbent local exchange carriers. This was an unintended negative
    consequence, and we are loathe to see similar outcomes from net
    neutrality legislation, however well-meaning the intent.
        The lesson of unbundling is instructive. If policymakers take
    actions that disturb the business models of the companies deploying
    next-generation networks, the result may well be to delay or stop
    deployment. Then we all will suffer--the carriers, equipment vendors,
    content providers, and consumers.
        To understand the thought process of a service provider building a
    new network to offer new advanced services and how its business model
    may be affected by strong net neutrality regulations, one would have to
    determine what specifically the unaffiliated application providers
    want, what it will cost, and who will ultimately pay.
        It may be that unaffiliated application providers want carriers to
    offer them the same bandwidth, speed, and additional capabilities that
    carriers offer retail subscribers. This could force the carriers to
    internalize the revenue lost to provisioning the networks to meet their
    demands, and ultimately force the consumer to make up for lost revenue.
        While this is clearly a hypothetical, the net neutrality debate
    lives in the realm of hypothetical, and this is one possibility that
    does not bode well for consumers, service providers, or equipment
    providers. The system described above would surely weaken the incentive
    for service providers to deploy new advanced networks, thereby slowing
    investment in network equipment, and the process through which
    consumers will be offered lower prices and more choices for digital
    services.
        For Congress, the question of who will pay is undoubtedly the most
    important. Certainly, Congress does not want to require carriers to
    build excess capacity into their networks and pass the cost on to
    retail consumers. If this were to occur, most Americans who use
    Internet access for simple applications such as e-mail would carry an
    enormous, unfair burden. Clearly, if unaffiliated applications
    providers want network capability--bandwidth, speed, quality of
    service, and content--it is in the interest of the consumer that the
    unaffiliated application providers must pay for it.
        We are unaware of any analysis that answers the questions of what
    the unaffiliated application providers want, what it will cost, and who
    will ultimately pay. Because of this lack of analysis, we support the
    study element of the approach taken in the Stevens-Inouye bill. If the
    Committee finds this approach insufficient, we suggest that the
    approach taken in the House bill is the appropriate alternative.

    Conclusion
        In conclusion, we feel that it is crucial for Congress to continue
    the momentum towards legislation that has been driven by consensus
    support for competition in the video services market. We believe that
    legislation consistent with the foregoing positions will increase
    investment and competition, create jobs, and enhance American
    competitiveness.
        Regarding net neutrality, let me stress to this committee how
    important it is that Congress should proceed only where there is
    consensus and continue to work on issues where consensus does not
    exist. You have an opportunity to achieve real success this year that
    will accelerate deployment of next-generation networks, and benefit
    consumers through lower prices and improved services. Franchise reform,
    for example, is long overdue and is an area in which there is great
    consensus. Net neutrality, on the other hand, is an issue on which
    there is little consensus and even less clarity. I would propose that
    Congress continue to examine the net neutrality issue until it is clear
    what the problem is--if there in fact is a problem--and what the
    solution should be.
        On behalf of both EIA and TIA, I urge the Committee to act quickly
    on video franchise reform and other issues on which there is a
    consensus, so we can enact them this year. With such action, we can
    capture the benefits of accelerated broadband deployment and the
    consumer welfare benefits of competition now.

    Annex 1: Detailed Discussion of Specific Problems With the Current
            Video Franchise Process

    Problem 1: Delay
        Unfortunately, the current video franchise process does not
    facilitate the entry of new video providers in a timely fashion. The
    franchise-by-franchise negotiation process established under the old
    monopoly framework is simply too slow and unwieldy to encourage the
    speedy entry of new providers. Verizon has filed documents with the FCC
    establishing that, to serve its entire target area with video service,
    it must negotiate between 2,000 and 3,500 franchises, excluding those
    in Texas.\9\ Verizon began negotiations with 320 franchise authorities
    in November 2004, and, as of February 2005, had only 26 franchises
    other than those that were automatically issued in Texas.\10\ For those
    franchises that have been successfully negotiated, negotiation time has
    ranged between two months and 17 months, with an average of 7.65
    months.\11\ The more important focus, however, is the negotiations in
    which Verizon has not been successful: in over 80 percent of the
    franchise negotiations Verizon initiated in November 2004, a franchise
    still has not been granted.\12\
    ---------------------------------------------------------------------------
        \9\ See FCC MB Docket No. 05-311, Comments of Verizon on Video
    Franchising, Feb. 13, 2006, Attachment A at 5.
        \10\ See FCC MB Docket No. 05-311, Comments of Verizon on Video
    Franchising, Feb. 13, 2006, Attachment A at 4.
        \11\ See FCC MB Docket No. 05-311, Comments of Verizon on Video
    Franchising, Feb. 13, 2006, Attachment A, Exhibit 1.
        \12\ See supra footnote 11.
    ---------------------------------------------------------------------------
        BellSouth faces a similar situation, which may need to negotiate
    1,000 franchises. As of last month, BellSouth had 20 franchises,
    requiring between 1.5 months and 32 months of negotiation time for
    each, at an average of 10 months.\13\
    ---------------------------------------------------------------------------
        \13\ See FCC MB Docket No. 05-311, Comments of BellSouth
    Corporation and BellSouth Entertainment, LLC, Feb. 13, 2006, at 10, 11.
    ---------------------------------------------------------------------------
        Moreover, this is not just a problem for the Regional Bell
    Operating Companies. Smaller companies such as Knology, Grande
    Communications, Guadeloupe Valley Telecommunications Cooperative, and
    the Merton Group have all reported a similarly protracted period of
    franchise negotiations, ranging between 9 months and 30 months.\14\
    ---------------------------------------------------------------------------
        \14\ See FCC MB Docket No. 05-311, Comments of the Fiber-to-the-
    Home Council, Declarations of Felix Boccucci, Andy Sarwal, Jeff Mnick,
    Terrence McGarty.
    ---------------------------------------------------------------------------
        The delayed entry of these competitive video providers results in
    less competition, less consumer welfare benefit, and delay in the
    second evolution of broadband technology.

    Problem 2: Build-Out
        The second major problem with the current video franchise process
    is the practice of requiring new entrants to build out facilities
    beyond the area they find economical. For example, in the case of a
    telephone company entering the video market, video deployment logically
    follows the existing wire center footprint, which typically does not
    follow franchise area boundaries.\15\ If a telephone company wants to
    offer video service throughout a wire center which covers 30 percent of
    a local franchise area, for example, the requirement to build out to
    the entire franchise area might well make it economically infeasible to
    provide video service at all within that franchise area.
    ---------------------------------------------------------------------------
        \15\ See FCC MB Docket No. 05-311, Comments of Verizon on Video
    Franchising, Feb. 13, 2006, at 40.
    ---------------------------------------------------------------------------
        This is not merely a whimsical example. We recently analyzed
    telephone company wire centers in Texas--where the characteristics of
    wire center deployment are typical of the Nation on average--and found
    that only 3 percent of the wire centers completely overlap the
    geographic area of franchise areas.
        Therefore, the requirement that new entrants build out to an entire
    franchise area will result, in many instances, in potential competitors
    delaying or even abandoning plans to enter new video markets.
        Again, this is not just a Bell Company problem. The National
    Telecommunications Cooperative Association has reported that many of
    its members, which tend to be small rural telephone companies, want to
    get into the cable business but have reported problems with local
    franchising authorities--particularly unreasonably short build-out
    periods or requirements to build outside the carrier's own service
    territory.\16\
    ---------------------------------------------------------------------------
        \16\ See FCC MB Docket No. 05-311, Comments of the National
    Telecommunications Cooperative Association, Feb. 13, 2006, at 4, 5.
    ---------------------------------------------------------------------------
        The solution, we believe, is to establish a franchise process that
    does not require such counterproductive build out requirements.

    Problem 3: Extraneous Obligations
        The third major problem with the current video franchise process is
    the imposition of extraneous obligations that exceed 1 percent of
    revenues.
        Congress has already indicated its intent to limit payments for
    franchises by establishing in Title VI of the Communications Act that
    the 5 percent statutory franchise fee is a ceiling for payments ``of
    any kind.'' \17\ Yet, franchise authorities often seek payments that
    far exceed the 5 percent fee by imposing requirements such as the
    assumption of all Public, Education, and Government (PEG) costs
    incurred by the incumbent cable operator over the entire span of its
    service, the installation of institutional networks (I-Nets), the
    requirement to bury aerial plant, the assumption of applications and
    acceptance fees, etc.\18\ These extraneous requirements increase costs
    and discourage the investment in next-generation broadband capability,
    thereby delaying the second evolution of broadband technology. The
    solution, we believe, is to prohibit the imposition of extraneous cost
    beyond 1 percent of gross revenues.
    ---------------------------------------------------------------------------
        \17\ See U.S.C. Sec. 542(g)(1).
        \18\ See FCC MB Docket No. 05-311, Comments of Verizon on Video
    Franchising, Feb. 13, 2006, at 57-75.
    ---------------------------------------------------------------------------
                                    Appendix
    Broadband Internet Access Connectivity Principles

        TIA has long supported the rights of broadband Internet access
    service consumers to connect to and utilize their choice of legal
    Internet content, applications and devices, while also recognizing the
    needs of service providers in a competitive market to manage the
    security and functionality of their networks. TIA reaffirms its pro-
    consumer principles, as outlined below, while continuing to observe
    that currently no significant evidence exists of these principles being
    abused in the marketplace. As such, it is not now necessary for the
    Federal Communications Commission to promulgate detailed rules in this
    area. Rather, the FCC should address any such problems on a case-by-
    case basis in the event they arise.
        1. A competitive broadband Internet access market offers consumers
    choices with respect to ``connectivity''--that is, the ability to
    access any lawful Internet content, and use any device, application, or
    service over the public Internet--so long as they do not harm the
    network. In particular:

            1.1 Consumers should receive meaningful information regarding
            their broadband Internet access service plans.

            1.2 Broadband Internet access consumers should have access to
            their choice of legal Internet content within the bandwidth
            limits and quality of service of their service plan.

            1.3 Broadband Internet access consumers should be able to run
            applications of their choice, within the bandwidth limits and
            quality of service of their service plans, as long as they do
            not harm the provider's network.

            1.4 Consumers should be permitted to attach any devices they
            choose to their broadband Internet access connection, so long
            as they operate within the bandwidth limits and quality of
            service of their service plans, and do not harm the provider's
            network or enable theft of services.

        2. A competitive broadband Internet access market also gives
    facilities-based broadband Internet access providers competitive
    incentives to undertake risky, new investments, while precluding
    anticompetitive behavior against unaffiliated businesses. In
    particular:

            2.1 Broadband Internet access service providers should remain
            free to engage in pro-competitive network management techniques
            to alleviate congestion, ameliorate capacity constraints, and
            enable new services, consistent with the technical
            characteristics and requirements of the particular broadband
            platform.

            2.2 Broadband Internet access service providers should remain
            free to offer additional services to supplement broadband
            Internet access, including speed tiers, quality of service
            tiers, security and spam services, network management services,
            as well as to enter into commercially negotiated agreements
            with unaffiliated parties for the provision of such additional
            services.

            2.3 Such network management tools would enable operators to
            continue to optimize network efficiency, enable new services,
            and create incentives for continued build-out to meet
            increasing capacity demands.

            2.4 Broadband service providers should also remain free to
            innovate in the deployment of managed services, such as
            packaged video programming, which utilize the same networks but
            are distinct from public Internet access services.

        TIA believes that the FCC has jurisdiction to vigilantly monitor
    the broadband Internet access service market and expeditiously review
    any complaint of anticompetitive activity. However, as no significant
    evidence of a problem exists at this time, it is not now necessary for
    the FCC to promulgate detailed rules in this area. Rather, the FCC
    should address any such problems on a case-by-case basis in the event
    they arise.

        The Chairman. Thank you very much, Mr. McCurdy.
        Our next witness is Robert LeGrande, the Deputy Chief
    Technology Officer for the Office of the Chief Technology
    Officer, in the District of Columbia, here in Washington.
        Mr. LeGrande. That's a mouthful. I took it out of my speech
    just because of that.
        [Laughter.]

                     STATEMENT OF ROBERT LeGRANDE,

                    DEPUTY CHIEF TECHNOLOGY OFFICER,

                    DISTRICT OF COLUMBIA GOVERNMENT

        Mr. LeGrande. Good morning, Mr. Chairman.
        The Chairman. Pull that mike up a little, will you, please?
        Mr. LeGrande. Good morning, Mr. Chairman, members of the
    Committee. Again, my name is Robert LeGrande, and I'm the
    Deputy Chief Technology Officer with the District of Columbia
    Government and the National Capital Region's Interoperability
    Program Manager. Additionally, I'm the founder and Chairperson
    of the National Coalition for Public Safety. Today, I will
    comment on your Communications, Consumer's Choice, and
    Broadband Deployment Act of 2006--specifically, Section 151,
    Interoperable Emergency Communications.
        First, I would like to take a moment and thank this
    committee, your staff, and the Congress for the continued
    efforts to address our national public safety communication
    needs. This Act further demonstrates this committee's
    commitment to public safety, and we appreciate the opportunity
    to speak in support of the legislation.
        The 700 megahertz spectrum-clearing legislation process was
    very painful for all of us, but well worth it. We can now
    leverage that accomplishment to deploy interoperable public
    safety solutions across the Nation. The questions before us
    today are: When and how? My immediate answers to these
    questions are: now and strategically.
        As most of you know, we have many areas in the Nation that
    lack interoperable voice communications. Catastrophic events
    such as 9/11, Hurricanes Isabel and Katrina, and future
    national threats require us to expeditiously provide funding to
    address public safety's critical communications needs.
        While we have many needs, we must all agree on one eventual
    public safety communications outcome: seamless, interoperable,
    redundant national network of networks that transmit voice,
    video, and data. We must also agree that there is an impending
    multifaceted data communications problem. The vast majority of
    our current public safety mobile data solutions rely on
    commercial networks that are shared with the public. In a major
    event, these networks will likely fail, due to the excessive
    public and private communication demands, leaving our first
    responders without mission-critical data. Many jurisdictions
    throughout the country are attempting to address this problem
    by deploying noninteroperable private networks using disparate
    frequencies and differing technologies. If this trend
    continues, we'll be here 5 years from now trying to solve a
    data interoperability crisis.
        Section 151(d)(1) and Section 151(d)(4), stated below, are
    essential to preventing this trend, because they establish
    funding criteria for standardized, commercially-available IP-
    based technologies being deployed in the 700 megahertz
    spectrum.
        The National Capital Region's Interoperability Program is
    in its second year of a 5-year plan to deploy a seamlessly
    interoperable wireless broadband network of networks throughout
    its 19-member jurisdictions.
        I'd like to draw your attention to attachment 1 in your
    packet.
        Our plan leverages the recently cleared 700 megahertz
    public safety wideband spectrum. The program has already
    established a successful prototype in use daily by Federal,
    regional, and local first responders across the District of
    Columbia. The National Capital Region Interoperability Program
    recently partnered with Silicon Valley, San Diego, and Phoenix
    to create a national network of networks for wireless broadband
    communications. That's also a diagram in your attachment--
    attached in your book. All regions have agreed to deploy the
    same technologies in the same frequencies at the same time.
        Recent UASI grant cuts severely threaten our region's
    ability to deploy these proven national wireless broadband
    solutions. It is our collective hope that this Act will
    initiate full funding of the four regional programs no later
    than the end of the calendar year 2006. This investment will
    provide a model that can be leveraged across the Nation.
        In summary, it is our strong belief that a percentage of
    the dollars should go toward public safety voice communications
    problems in high-risk areas. Further, a percentage should go
    toward investing in solutions that will solve data
    interoperability communications needs. These investments would
    patch critical voice communications holes, while investing in a
    scalable platform that will provide integrated voice, video,
    and data. The funds for these solutions should be available and
    disbursed without delay.
        In attendance with me today--and I'll ask them to stand--
    are Chief Demetrios Vlassopoulos, of the District of Columbia
    Fire Department, and Private Scott Robinson, of the U.S. Park
    Police. Both are here in support of our national program and
    are users of the District's citywide public-safety wireless
    broadband pilot network. This network is used daily to provide
    mobile video surveillance, high-resolution images, and access
    to applications, such as CapWIN and WebEOC.
        We need your help to continue our efforts to meet our first
    responders' communication needs, and we thank you for this
    time, and are happy to answer any of your questions.
        [The prepared statement of Mr. LeGrande follows:]

    Prepared Statement of Robert LeGrande, Deputy Chief Technology Officer,
                        District of Columbia Government

        Good afternoon, Mr. Chairman and members of the Committee. My name
    is Robert LeGrande. I am a Deputy Chief Technology Officer in the
    Office of the Chief Technology Officer (OCTO), the central information
    technology and telecommunications agency of the District of Columbia
    government. I am responsible for the wireless communications
    infrastructure for the District government and the National Capital
    Region's Interoperability Communications Program. Additionally, I am
    the Founder and Chairperson of the National Spectrum Coalition for
    Public Safety.
        As the leader of the District of Columbia's wireless public safety
    voice and data communications programs, I have partnered with officials
    and field personnel of the District's Metropolitan Police and Fire &
    Emergency Management Service Departments to upgrade our public safety
    voice network and install public safety wireless broadband network.
    During this process, I gained a deep appreciation of the demands our
    first responders face every day, and the urgency of their
    communications needs. Today, I will comment on the Communications,
    Consumer's Choice, and Broadband Deployment Act of 2006, specifically
    section 151; Interoperable Emergency Communications.
        First, I would like to take a moment and thank this Committee, your
    staff and the Congress, for their continued efforts to address our
    national public safety communications needs. The 700 MHz spectrum-
    clearing legislation process was painful for all of us, but worth it.
    We can now leverage that accomplishment and deploy interoperable
    solutions across the Nation.
        The questions before us today are when and how. My immediate
    answers to these questions are now and strategically. As most of you
    know, we have many areas in the Nation that lack interoperable
    communications. Catastrophic events such as 9/11, Hurricanes Isabel and
    Katrina, and future national threats require us to expeditiously
    provide funding to address public safety's critical communications
    needs.
        While we have many needs, we must agree on one eventual public
    safety communications outcome; seamlessly interoperable, redundant,
    national network of networks that transmits video, data, and voice.
        We must also agree that there is a national public safety voice
    communications crisis, as well as an impending data communications
    crisis. I'll spend a few minutes describing these major problems and
    then the remaining time on a recommended solution.
        First, the voice communications crisis, please reference the Voice
    Interoperability Matrix diagram (Attachment I). I will spare you the
    full description of this diagram, and state that the multiple colors
    represent the various frequencies used by first responders in The
    National Capital Region (NCR). The cost to implement the voice
    interoperability illustrated in this diagram for the District of
    Columbia was $40 million. Due to disparate frequencies and limitations
    in legacy voice communications systems, there are approximately 25 of
    these diagrams in the NCR. The good news is that first responders in
    the NCR have interoperable voice communications; the bad news is that
    this is not the case for many jurisdictions in the country.
        Second, the impending data communications crisis is multi-faceted.
    The vast majority of our current public safety mobile data solutions
    rely on commercial networks that are shared with the public. In a major
    event, these networks will likely fail, and our first responders will
    be without mission critical data. Many jurisdictions throughout the
    country are attempting to address this problem by deploying non-
    interoperable, private networks using disparate frequencies and
    differing technologies. If this trend continues, we will ``cube''
    ourselves for data communications, before we have even resolved the
    voice communications crisis.
        Different approaches can be taken to address our public safety
    voice and data communications problems. It is important to invest in
    repairing/upgrading voice communications systems in high-risk areas,
    while also investing in a new public safety communications platform
    that solves the impending data interoperability crisis, and has the
    capacity to later provide a Voice Over IP (VoIP) solution that
    addresses our long-term voice interoperability communications need.
        The NCR is in its second year of a five year plan to deploy a
    seamlessly interoperable network of networks throughout our 19
    jurisdictions. Please reference the NCR Interoperability Program
    Cornerstone Chart (Attachment II) and the Regional Wireless Broadband
    Network Deployment Map (Attachment III). Our plan leverages the
    recently cleared 700 MHz public safety wideband data spectrum and all
    members of the NCR have agreed to deploy in the same frequencies using
    the same standardized, commercially available technology at the same
    time. This Urban Area Security Initiative (UASI) funded program will be
    competitively bid and select a spectrally efficient technology that
    provides seamless interoperable mobile data communications while
    maintaining jurisdictional control. VoIP technology will also be tested
    and later deployed on this infrastructure.
        Recently, the National Capital Region partnered with the Silicon
    Valley, San Diego, and Phoenix regions. All plan to deploy the same
    technology, in the same frequencies, at the same time. Please reference
    the Public Safety National Broadband Network of Networks diagram
    (Attachment IV).
        Unfortunately, recent UASI funding cuts severely threaten our
    region's ability to deploy our national broadband network of networks
    solution. It is our collective hope that the Communications, Consumer's
    Choice, and Broadband Deployment Act of 2006 will fully fund the
    deployment of the four regional programs (National Capital Region,
    Silicon Valley, San Diego, and Phoenix) and that these funds are
    available to start the deployment process no later than the end of
    calendar year 2006.
        In summary, it is our strong belief that a percentage of the
    dollars should go towards solving the voice communication issues in
    high-risk areas, a percentage should go towards investing in solutions
    that will solve our long-term voice and data interoperable
    communications needs, and that these funds should be available and
    dispersed without delay.
        In attendance with me today is Chief Demetrios Vlassopoulos of the
    District of Columbia Fire Department, Chief Pam Datcher of the U.S.
    Park Police, and Captain Hassan Aden of the City of Alexandria Police
    Department. Each is here in support of our national program and are
    users of the District's city-wide public safety wireless broadband
    network. With the Chairperson's permission, I would like to provide you
    with a two-minute video demonstration of our network.
        [Video Demo.]
        This is a real network . . . used daily by our Federal, regional
    and local first responders, We need your help to continue our efforts
    to meet all our first responder's communications needs. Thank you for
    your time and we are happy to answer any of your questions.

        The Chairman. Thank you very much, Mr. LeGrande.
        Our next witness is Dan Glickman, Chairman and Chief
    Executive Officer of the Motion Picture Association of America.

             STATEMENT OF HON. DAN GLICKMAN, CHAIRMAN/CEO,
                 MOTION PICTURE ASSOCIATION OF AMERICA

        Mr. Glickman. Thank you, Mr. Chairman, Senator Inouye, and
    Members of the Committee. On behalf of the member companies of
    the MPAA, I thank you for the opportunity to talk about S.
    2686, which we support.
        Protecting intellectual property will become a recurring
    and increasingly important theme for our economy in the decades
    to come. Piracy is a dagger in the heart of all the industries
    that rely on intellectual property protection, and we believe
    that your bill will help us in our battle against piracy,
    particularly as it relates to the broadcast flag provisions.
        The broadcast flag is targeted and narrowly focused on a
    single problem: the indiscriminate redistribution of digital
    broadcast television content over the Internet. The broadcast
    flag rule was adopted by the FCC some years back, and it was,
    by no means, perfect. Not everyone who participated in the
    process got everything they hoped for, and there was probably
    no one, including people in the motion picture industry, that
    wouldn't change something, if given the chance. But, in the
    end, the rule that was approved by the FCC reflected an open
    and thorough process that took into account the concerns
    expressed by all who participated, and the result was a
    compromise that was fair and workable.
        As you are aware, a court of appeals struck down the
    broadcast flag rule that the FCC promulgated, on jurisdiction
    grounds, not on substantive grounds. And that is why we so much
    appreciate your including this language in this bill.
        The provision, which we support, is not perfect, and no one
    is likely to be entirely satisfied. But, on the whole, the
    Committee has done a commendable job of crafting a compromise
    provision that is fair and workable, and we hope that the bill,
    and this provision, will ultimately be enacted into law.
        There are three reasons to include this broadcast flag
    provision:
        First, it will protect the quality of three over-the-air
    broadcasts in the digital age. Cable and satellite systems
    already have systems in place to protect content so that it
    cannot be indiscriminately distributed over the Internet. If
    broadcast television is not similarly protected, content
    providers will choose to send their high-value content to where
    it can be best protected, and that would particularly affect,
    adversely, areas not currently served by cable and satellite:
    broadcast television.
        Second, by including this provision, the Committee brings
    certainty to the consumer electronics marketplace. The
    marketplace has already anticipated that the broadcast flag
    will be required, and many manufacturers of digital television
    devices are now producing equipment in compliance with the FCC
    broadcast flag regulations.
        Third, the provision promotes an important free market
    principle: by protecting intellectual property protection, you
    promote job creation. According to a new study conducted by a
    respected market research firm, our industry loses
    approximately $6.1 billion a year to piracy. Without this
    broadcast flag provision, those numbers could grow
    exponentially once we make the full transition to digital
    television.
        So, Senator Stevens and members of the Committee, we thank
    you for hosting this hearing. We support the bill and the
    broadcast flag provisions. And I look forward to answering your
    questions.
        [The prepared statement of Mr. Glickman follows:]

            Prepared Statement of Hon. Dan Glickman, Chairman/CEO,
                     Motion Picture Association of America

        Chairman Stevens, Co-Chairman Inouye, members of the Committee:
        On behalf of the member companies of the Motion Picture Association
    of America, I thank you for the opportunity to talk to you about S.
    2686, the Communications, Consumer's Choice, and Broadband Deployment
    Act of 2006.
        Chairman Stevens, this hearing comes at a time not only critical to
    our industry, but also at a critical time for this Nation.
        Protecting intellectual property will become a recurring and
    increasingly important theme for our economy in the decades to come.
    This Nation will prosper or it will fail, in large part, based on how
    we protect our Nation's greatest assets . . . the skill, ingenuity, and
    creativity of our people.
        This is why the MPAA strongly supports including a broadcast flag
    provision in S. 2686. The broadcast flag rule adopted by the FCC was by
    no means perfect. No one who participated in the FCC process got
    everything they hoped for, and there is probably no one, including the
    motion picture industry, that wouldn't change something if given the
    chance.
        But in the end the FCC rule reflected an open and thorough process
    that took into account the concerns expressed by all who participated,
    and the result was a compromise that was fair and workable. The same
    can be said of the latest provision included in S. 2686. It is not
    perfect, and no one is likely to be satisfied entirely. The motion
    picture industry certainly has its own concerns with some of its
    provisions. But on the whole the Committee has done a commendable job
    of crafting a compromise provision that is fair and workable. We
    appreciate your hard work in including this provision in S. 2686, and
    we hope that it will pass the Senate and eventually be enacted into
    law.
        This provision works to protect video content by giving the Federal
    Communications Commission (FCC) authority to implement the broadcast
    flag regulations which it adopted over two years ago, and that were to
    become effective last July.
        There are three reasons to include this broadcast flag provision.
        First, it will protect the quality of free over-the-air broadcasts
    in the digital age. Cable and satellite systems already have systems in
    place to protect content so that it can not be indiscriminately
    distributed over the Internet. If broadcast television is not similarly
    protected, content providers will choose to send their high-value
    content to where it can best be protected. By including the broadcast
    flag, this Committee takes a stand to protect free over-the-air
    television for consumers.
        Second, by including this provision, the Committee brings certainty
    to the consumer electronics marketplace. The marketplace has already
    anticipated that the broadcast flag will be required, and many
    manufacturers of digital television devices are now producing equipment
    in compliance with the FCC broadcast flag regulations. Reinstatement of
    the FCC rule will provide uniformity and certainty for consumers who
    rely on digital over-the-air broadcasts.
        Third, the provision promotes an important free market principle:
    By protecting intellectual property you promote job creation.
        The American film industry, like all of the creative industries,
    combines capital and talent to produce intellectual property. It is not
    easy to create a movie. It requires lots of money, lots of skilled
    workers, and lots of hard work. In fact, four out of ten movies don't
    make back their investment. So the movie industry is fraught with risk.
        Despite these hurdles, the American film industry is the most
    successful in the world. It is one of our most important exports. It is
    one of our best job creators.
        But according to a new study conducted by a respected market
    research firm, our industry loses approximately $6.1 billion a year.
    Without this broadcast flag provision, those numbers could grow
    exponentially once we make the full transition to digital television.
        The broadcast flag rule is targeted and narrowly focused on a
    single problem, the indiscriminate redistribution of digital broadcast
    television content over the Internet. As long as one is not trying to
    redistribute flagged content over the Internet, a typical consumer will
    not know the broadcast flag exists.
        I want to emphasize that the broadcast flag has been the subject of
    intense scrutiny by technology and content communities, as well as
    other interested parties, in open forums consuming literally thousands
    of man-hours of discussion. There is broad consensus that this is an
    issue that needs to be addressed. There is also broad consensus on the
    nature of the solution considered. I believe the discussion draft
    legislation released last week is fully consistent with that consensus
    and should be swiftly enacted.
        Let me add one cautionary note. While we strongly support
    legislation that will implement the broadcast flag, we cannot support
    legislation that will do that at the expense of the anti-circumvention
    provisions of the DMCA. Legislation similar to that offered by the
    House of Representatives in the form of H.R. 1201, would, as a
    practical matter, repeal Section 1201 of the DMCA, and do much more
    harm than good.
        Chairman Stevens, Co-Chairman Inouye, members of the Committee, I
    appreciate this opportunity to discuss this matter of great concern to
    our industry and I look forward to answering any questions you may have
    regarding what I have just discussed.

        The Chairman. Thank you very much.
        The last witness of this panel is John Rose, the President
    of OPASTCO, here in Washington.
        Mr. Rose?

          STATEMENT OF JOHN ROSE, PRESIDENT, ORGANIZATION FOR

                 THE PROMOTION AND ADVANCEMENT OF SMALL

           TELECOMMUNICATIONS COMPANIES (OPASTCO); ON BEHALF

               OF THE COALITION TO KEEP AMERICA CONNECTED

        Mr. Rose. Good morning. I'm John Rose, President of
    OPASTCO. Today, I'm here testifying on behalf of the Coalition
    to Keep America Connected, a coalition of rural communications
    providers, consumers, and small businesses. We appreciate both
    the opportunity to testify and the leadership this committee,
    and Chairman Stevens, has shown on these important issues.
        The Coalition to Keep America Connected is organized by
    ITTA, NTCA, OPASTCO, and WTA, all representing telephone
    companies. Collectively, our memberships include more than 700
    small- and mid-sized companies and cooperatives that serve
    millions of consumers that reside throughout more than 40
    percent of the land mass of the United States. We serve rural
    communities.
        S. 2686 contains many positive aspects for rural America. I
    will comment today on the portions dealing with the Universal
    Service Fund.
        First of all, I want to thank you, Mr. Chairman and others
    on the Committee, for the strong leadership and support for the
    Universal Service Fund that is reflected in this legislation.
    The staff discussion draft contains many improvements on that
    effort. There are areas that give us some concern, though.
        The bill provides the FCC with the flexibility to assess
    contributions from broadband service providers. The long-term
    sustainability and stability of the Universal Service Fund
    necessitates that broadband service providers should contribute
    to the Fund. Current market data continues to demonstrate
    significant growth in subscribership to broadband services. In
    light of this growth, permitting broadband service to be
    assessed in a combination of ways ensures a sustainable
    contribution base for the long-term.
        Regardless of the methodology the FCC establishes, it's
    important for all broadband providers to contribute to the
    Fund. We include ourselves in that. Rural providers already
    contribute on the revenues they receive on their DSL service.
        We applaud the language in Section 715 of the discussion
    draft stipulating that IP-enabled voice traffic should not be
    excluded from intercarrier compensation. The Coalition has long
    advocated the simple concept that regulatory arbitrage should
    not prevent carriers from being fairly compensated for the use
    of their networks.
        Thank you for including the language that prohibits the
    limitation of Universal Service support to a single connection
    or a primary line. Also, the bill clarifies that intrastate
    services may be assessed for USF contributions. As bundled
    local and long-distance services become more common, the
    problem of distinguishing between intra- and interstate
    services has become increasingly difficult. This provision
    eliminates the unnecessary confusion generated by the current
    requirement to assess only interstate service.
        We're also very grateful for the exemption of the Universal
    Service Fund from the Antideficiency Act, an issue that we
    believe needs to be resolved by the end of this calendar year.
    The Coalition appreciates the leadership shown on this issue by
    many Members of this Committee.
        On another positive note, the legislation addresses the
    issue of phantom traffic and proposes language that would help
    alleviate this growing problem. ``Phantom traffic'' refers to
    communications traffic that cannot be properly tracked or
    billed for. This translates into billions of minutes of
    communications traffic that are being terminated on the
    networks of other carriers without compensation. It's essential
    that all service providers receive reasonable and fair
    compensation for the use of their networks.
        We have three areas of concerns that are not included in
    the introduced legislation or discussion draft:
        First, we would like to see the inclusion of a provision
    that requires support to be based on the carrier's actual cost.
    Currently, new eligible carriers in rural telephone company
    service areas receive support based on the incumbent's cost.
    The incumbents must not only follow more regulations than other
    carriers, they must also serve the least lucrative and the most
    rural consumers.
        Second, the legislation should be recalibrated to the
    current method used to calculate universal growth factor.
        The third would be the so-called ``parent trap.'' In many
    instances, current rules serve as a significant impediment to
    the kind of network investment this bill is designed to
    encourage. By modifying these rules, consumers living in rural
    areas would be able to enjoy the benefits of a broadband-
    capable network.
        Rural areas need the tools to compete. Broadband is one of
    those essential tools. Our country needs rural areas to be
    productive in order for this country to be productive and
    compete on the world market. We believe your bill moves it in
    that direction.
        The Coalition applauds the legislation's move toward a
    sustainable Universal Service Fund which would make our rural
    areas competitive, and we pledge to continue working with this
    Committee on the vitality of this important issue.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Rose follows:]

       Prepared Statement of John Rose, President, Organization for the
        Promotion and Advancement of Small Telecommunications Companies
        (OPASTCO); on Behalf of the Coalition to Keep America Connected

        Good Morning. I am John Rose, President of the Organization for the
    Promotion and Advancement of Small Telecommunications Companies
    (OPASTCO). Today, I am testifying on behalf of the Coalition to Keep
    America Connected, a coalition of rural communications providers,
    consumers and small businesses. We appreciate both the opportunity to
    testify and the leadership this Committee has shown on these important
    issues.
        The Coalition to Keep America Connected is organized by the
    Independent Telephone and Telecommunications Alliance (ITTA), the
    National Telecommunications Cooperative Association (NTCA), the
    Organization for the Promotion and Advancement of Small
    Telecommunications Companies (OPASTCO), and the Western
    Telecommunications Alliance (WTA). Collectively, our memberships
    include more than 700 small and mid-size companies and cooperatives
    that serve millions of consumers that reside throughout more than 40
    percent of the landmass of the United States.
        S. 2686, the ``Communications, Consumer's Choice, and Broadband
    Deployment Act of 2006,'' contains many positive aspects for rural
    America. I will comment today on the new draft of this legislation and
    specifically the portions dealing with the Universal Service Fund
    (USF).
        First of all, I want to thank you, Mr. Chairman, and others on this
    Committee for the strong leadership and support for the Universal
    Service Fund that is reflected in this legislation. The goal of
    Universal Service policy is to ensure that every American, regardless
    of location, has affordable, high-quality access to a variety of modern
    telecommunications and information services. Rural incumbent local
    exchange carriers are the embodiment of the Universal Service concept,
    having built the infrastructure that provides ubiquitous, high-quality
    local telecommunications service to some of the country's most remote
    and difficult to serve areas. The provision of a robust infrastructure
    in these areas would never have been possible were it not for the
    Nation's long-established policy of Universal Service and the Federal
    Universal Service Fund. This is important not only to those living in
    rural areas, but also to those in urban areas who wish to communicate
    with individuals and businesses in less populated communities.
        As introduced, S. 2686 seeks to update America's telecommunications
    laws to meet the current and ever evolving communications market. In
    our view, the Staff Discussion Draft released on June 9th contains
    improvements on that effort, and, in some areas, gives us concern.
        The Coalition is pleased that the bill provides the Federal
    Communications Commission (FCC) with the flexibility to base Universal
    Service contributions on several different factors, including revenues,
    working phone numbers, other identifier protocols, connections, and
    network capacity. This type of flexibility is necessary in a
    continually evolving communications marketplace.
        The bill provides the FCC with the flexibility to assess
    contributions from broadband service providers. The long-term
    sustainability and stability of the USF necessitates that broadband
    service providers should contribute to the Fund. Current market data
    continues to demonstrate significant growth in subscribership to
    broadband services. For example, the FCC recently reported that for the
    twelve month period ending June 30, 2005, the number of broadband
    service connections increased by 32 percent, from 32.5 million to 42.9
    million. In light of this growth, permitting broadband service to be
    assessed in a combination of ways, based on revenues and/or capacity
    ensures a sustainable contribution base for the long-term as consumers
    continue to migrate to broadband platforms. In turn, this enables
    consumers in rural and high-cost areas to continue to have affordable
    access to high-quality telecommunications and information services that
    are comparable to those available to urban and suburban residents, as
    Section 254 of the Telecommunications Act requires. Regardless of the
    methodology the FCC establishes, it is important for broadband
    providers to contribute to the Fund. We include ourselves in that;
    rural providers fully plan to contribute in an equitable manner as
    well.
        We applaud the language in Section 715 of the discussion draft
    stipulating that IP-enabled voice traffic shall not be exempted from
    intercarrier compensation. The Coalition has long advocated the simple
    concept that regulatory arbitrage should not prevent carriers from
    being fairly compensated for the use of their networks.
        Thank you for including language that prohibits the limitation of
    USF support to a single connection or primary line. Limiting support in
    this manner would be devastating to the small businesses that generate
    a large percentage of the jobs in rural areas.
        Also, the bill clarifies that intrastate revenue may be assessed
    for USF contributions. As bundled services become more common, the
    problem of distinguishing between intra- and interstate revenues has
    become increasingly difficult. This provision eliminates the
    unnecessary confusion generated by the current requirement to assess
    only interstate revenue.
        We are also very grateful for the exemption of the USF from the
    Antideficiency Act, an issue that we believe needs to be resolved by
    the end of this calendar year. The Coalition appreciates the leadership
    shown on this issue by many Members of this Committee.
        The Coalition is also pleased with the inclusion of the new
    provisions in this version of the bill that would apply the geographic
    toll rate averaging and integration requirements of the 1996 Act to any
    services that can be used as a substitute for traditional long-distance
    toll services. The geographic averaging of toll rates has long been a
    cornerstone of telecommunications policy in the United States. It is
    critical to rural subscribers, who typically have to make a greater
    number of long-distance calls than their urban counterparts due to
    smaller local calling scopes. For rural subscribers, calls to schools,
    doctors, and government agencies can often times be toll calls. By
    extending the geographic rate averaging and integration requirements to
    successor services, it will help to ensure that consumers in rural and
    insular areas continue to have access to affordable long distance rates
    as communications networks and services evolve. We applaud you for
    extending the rate averaging concept to the IP world.
        Another positive provision in the new draft clarifies that portions
    of study areas may qualify for support from the Broadband for Unserved
    Areas Account. This will be helpful in enabling rural
    telecommunications companies to come closer to achieving full broadband
    coverage throughout their areas. Rural telecommunications companies are
    committed to offering broadband services to their communities, and have
    done a tremendous job thus far in deploying it where it is economically
    feasible. For example, OPASTCO estimates that its members are presently
    capable of offering broadband to nearly 90 percent of their customers.
    However, there are portions of some rural study areas that are so
    prohibitively expensive to serve, that ubiquitous broadband deployment
    throughout the study area is unachievable absent high-cost support. By
    making targeted support for broadband deployment available to rural
    telecommunications companies who have, thus far, been unable to achieve
    full coverage, it will help to bring our country closer to the goal of
    affordable broadband availability for all Americans, no matter where
    they live.
        The Coalition also supports having the Universal Service
    Administrative Company (USAC) serve as the administrator of the
    Broadband for Unserved Areas Account, subject to FCC oversight. It is
    efficient and logical to have the current administrator of all the
    other Universal Service programs administer this new account.
    Furthermore, rural carriers appreciate the consistency of being able to
    interact with the same administrator for all Universal Service programs
    on a long-term basis.
        However, with regard to the new Broadband for Unserved Areas
    Account, we question the collection of these new monies under Section
    254(d) of the Act. We are also concerned that the Fund covers the
    customer premises equipment (CPE) for satellite service. Residential
    CPE is generally not covered in the other programs, and this provision
    risks focusing a disproportionately large segment of the Unserved Areas
    Account on this element.
        We are highly supportive of the language that requires the FCC, if
    it modifies the distribution rules for the high-cost support, to adopt
    transition mechanisms designed to alleviate any harmful effects on
    existing Eligible Telecommunications Carriers (ETCs) and their
    customers. As you may know, the Federal-State Joint Board on Universal
    Service is in the midst of a proceeding that is considering changes to
    the high-cost support distribution mechanism for rural
    telecommunications companies. If the distribution mechanism that is
    ultimately adopted in that proceeding reduces the high-cost support
    that rural carriers receive, it is critical that there is not a flash-
    cut to the new system. Unlike the largest local exchange carriers,
    rural telecommunications companies have limited resources, and rely
    heavily on Universal Service support as a source of cost recovery. As a
    result, they will need ample time to adjust to any negative impacts of
    a new distribution system in order to prevent undue short-term
    hardships, and to enable them to continue providing their customers
    with high-quality service.
        On another positive note, the legislation addresses the issue of
    phantom traffic and proposes language that would help alleviate this
    growing problem. Phantom traffic refers to communications traffic that
    cannot be properly tracked and billed for. It is a growing phenomenon
    that, by Verizon's own estimate, accounts for 20 percent of all traffic
    on its network. This translates into billions of minutes of
    communications traffic that are being terminated on the networks of
    other carriers for free. This is problematic because it places
    increased pressure on consumers--who are ultimately paying for this
    unidentified traffic through higher rates or increased Universal
    Service fees. It is essential that all service providers receive
    reasonable and fair compensation for the use of their networks.
        The Coalition is particularly happy to see new language in the
    latest version of the bill that would require a provider that
    transports, or transits traffic between communications service
    providers, to forward without alteration the call signaling information
    it receives from another carrier. This is very important to rural
    carriers because much of the network traffic they receive comes to them
    through a transiting carrier. Rural carriers must rely upon the
    transiting carrier to receive the necessary call-identifying
    information to properly bill for the call. We are also pleased that the
    legislation would require the FCC to establish rules and enforcement
    provisions for traffic identification, including penalties, fines and
    sanctions for rule breakers. By fixing the problem of phantom traffic,
    Congress will help alleviate pressures on end-user rates and the USF.
        We have concerns about the Group Plan Discount provision that is
    included in the new draft. We believe it is vague and overly broad by
    allowing an unspecified number of ``additional numbers'' to be eligible
    for the discount. It is positive that the discount is limited to
    residential customers only.
        We have three areas of concern that are not included in the
    introduced legislation or discussion draft. First, we would like to see
    the inclusion of a provision that would require support to be based on
    a carrier's actual costs. Currently, competitive ETCs receive support
    based on the incumbent's costs. Incumbents must not only follow more
    regulations than other carriers, they also serve the least lucrative
    consumers. This often results in many ETCs receiving unwarranted
    windfalls of support, which increases costs to consumers nationwide
    with no corresponding benefit. Second, the legislation should
    recalibrate the current method used to calculate the USF growth factor
    to account for access line loss. The current method fails to recognize
    that local exchange carriers are losing customers to other services,
    and, in many rural areas, out-migration. The current mechanism used to
    calculate the inflationary adjustment penalizes carriers due to
    customer loss even as we continue our carrier of last resort
    obligations.
        The third area that we would like to see addressed in the
    legislation is the so-called ``parent trap.'' There is a need to
    reconfigure how Universal Service support is calculated and distributed
    to rural areas in order to align the current disconnect between the
    rural characteristics of purchased properties with the ridged
    regulatory classification of the acquired properties. In many
    instances, current rules serve as a significant impediment to the kind
    of network investment this bill is designed to encourage. By modifying
    these rules, consumers living in rural areas would be able to enjoy the
    benefits of a broadband capable network, because carriers would be
    inclined to purchase and invest in rural areas that need and deserve
    rehabilitation.
        As stated earlier, the Coalition applauds this legislation's move
    towards a sustainable Universal Service Fund, and we pledge to continue
    working with this Committee on this vitally important issue.
        At this point I would like to step away from the Coalition to Keep
    America Connected perspective on USF and comment on other parts of the
    bill on behalf of OPASTCO. OPASTCO supports the inclusion of the
    Section 335 Shared Facilities portion of the bill. This will help rural
    carriers control costs of bundled, innovative new services, and thus
    assist furthering the deployment of broadband to rural areas.
    Similarly, subtitle A of Title IV will help small providers obtain
    content demanded by consumers on an equitable basis, encouraging the
    bundling of video and broadband services. OPASTCO is also pleased with
    the inclusion of the Section 602 language. This so-called ``white
    space'' spectrum can be utilized on an unlicensed basis to provide
    wireless broadband to consumers.
        Once again, thank you for listening and working with us on these
    very important issues.

        The Chairman. Thank you very much.
        We'll now go through a period of questions from Members of
    the Committee. I do hope you'll all keep in mind that we do
    have a second panel.
        The Co-Chairman is recognized.
        Senator Inouye. I thank you very much.
        Mr. Scott, listening to the testimony of this panel, one is
    bound to get the impression that there is no clear definition
    of ``net neutrality.'' What is your definition?
        Mr. Scott. My definition is very simple. It's
    nondiscrimination on the Internet.
        Senator Inouye. Should this be legislated?
        Mr. Scott. I believe it should. I believe it is the
    cornerstone of what gave us the Internet through Title II. And
    I believe that, now that Title II no longer applies to
    broadband, it is incumbent upon us to transfer over
    nondiscrimination into the Internet space to guarantee that we
    continue to have the benefits that we've enjoyed heretofore.
        Senator Inouye. Do you believe the Internet is successful
    today because of legislation?
        Mr. Scott. Yes, sir, I do.
        Senator Inouye. What would the impact be with no
    legislation?
        Mr. Scott. I think the impact of no legislation is a
    structural change in the Internet, which would, for better or
    worse--I believe, for worse--change the way the Internet works,
    change the user experience of the Internet, change the
    relationship between the competitive free market for content
    applications, and the noncompetitive market for broadband
    connectivity.
        Senator Inouye. I thank you very much.
        Mr. Rose, what are your thoughts on out-building?
        Mr. Rose. Thoughts on what, sir?
        Senator Inouye. Out-building. Oh, no, no, I'm--I should be
    asking Mr. McCurdy. I'm sorry.
        Mr. McCurdy. Senator, I'm sorry, I didn't--you asked my
    thoughts on buildout?
        Senator Inouye. Yes.
        Mr. McCurdy. We believe that the legislation today, with
    the changes in the franchise process, incentivizes greater
    competition throughout the country, and that buildout will
    occur, that there will be an economic basis for it. This is a
    way to improve competition, rather than having single
    providers. And, as I think all the witnesses have testified,
    the opportunities for consumers to have access to greater
    broadband capability is more than just use of the Internet, it
    really provides opportunities for other kinds of services to be
    provided, and the ability for consumers to network, from a
    business standpoint, from a personal standpoint. So, I think
    the way the bill is structured, that it really does provide
    incentives.
        I would disagree with my panelist, Mr. Scott, when it comes
    to legislating the Internet. The Internet was not legislated
    before. The 1996 Telecom Act had almost no provisions with
    regard to the Internet. It was really on telecom. The Internet
    has been tremendously successful because of a non- or a light-
    regulatory model emphasized by the Federal Communications
    Commission and the Congress. And we believe that's the best
    approach. And that's the approach that says, ``If you can't
    define what `net neutrality' is, and you can't have two
    stakeholders that really agree on the definition, and you can't
    point to a tangible problem, then why regulate it, why be
    proactive and take that step?''
        Senator Inouye. Dr. Rutledge, is there a middle ground? And
    I'm saying this because there are strong groups saying no to
    net neutrality, and other groups saying yes. Is there such a
    thing as a middle ground?
        Dr. Rutledge. Well, you know, I think there is, and I think
    we are in the middle ground already. As Mr. McCurdy says, there
    have not been regulations before. These are new regulations
    that are being proposed. The entrepreneurial behavior is about
    change. There are existing procedures at the FCC and in
    antitrust law to deal with anticompetitive issues. So, I think
    the issue of access is very important, and that we have laws in
    place to deal with that.
        I think the issue of trying to stop changes or control
    pricing through legislation is a remedy for disaster. It will
    end up in a litigation mess like some parts of the 1996 Telecom
    Act did.
        So, guaranteeing access, nondiscriminatory access, yes, but
    not controls over ability to price, which would deter
    investments.
        Senator Inouye. I notice that my time is up, Mr. Chairman.
        The Chairman. Thank you very much.
        The next Senator is Senator Burns.
        Senator Burns. Thank you, Mr. Chairman.
        I really meant it when I said that nobody really has got a
    definition for ``net neutrality.'' And we will struggle to
    define that, Senator Inouye, before it's all over.
        But I'm interested in the case of video franchising. Have
    we taken the right approach on this? What exists in the bill
    today?
        Mr. McCurdy?
        Mr. McCurdy. Senator Burns, we really believe that the
    Title III provisions on streamlining this franchise process are
    the right step. You know, we've looked at this in-depth, and we
    find that the delays in issuing franchises really impedes
    deployment of broadband capability. And we've seen it in
    several States. A number of States are now trying to revise
    their provisions, but we believe a uniform Federal provision is
    the right approach.
        Senator Burns. Dr. Rutledge?
        Dr. Rutledge. Again, I'm sorry, sir. The question?
        Senator Burns. Do you think that our approach on video
    franchising is where we should be in this piece of legislation?
        Dr. Rutledge. Well, you know, I really do. And I do, partly
    because, in the last 5 years the U.S. share of world production
    of communication equipment has gone from 40 percent to below 20
    percent. Last July, I believe it was, when Senator Ensign
    released a draft of his bill, telecom equipment companies'
    market values increased by $22 billion in the first 48 hours.
    Corning was up 15 percent, after they had closed five out of
    their six U.S. plants. So, I think, the approach of making it
    easy for people to make investments in video quickly is a very
    positive one for the capital stock and for productivity growth.
        Senator Burns. Mr. Scott?
        Mr. Scott. I believe that the framework for franchising
    authority is workable. I think it's less important where the
    authority is located than what that authority delivers to the
    consumer. And I think the biggest issue here that's unresolved
    is, how are we going to bring video competition out into rural
    areas? I grew up in the panhandle of Texas, and I don't mean in
    the great metropolis of Amarillo, I mean out in the country,
    where you've got yourself a town if you've got a stoplight. And
    it took us a long time to get cable TV. And I fear that we'll
    never get video competition out in those areas unless we make a
    public policy that reasonably guides the marketplace to
    incentivize buildout in those areas.
        Senator Burns. Do you have competition in video programming
    now, or video in that small town in the panhandle of Texas?
        Mr. Scott. Well, I mean, you can get cable television if
    you're in town. You can get satellite if you're out of town.
    But over the years, satellite has proven, year after year, to
    be unable to discipline the prices of video. And satellite does
    not bring a high-speed broadband connection with it, like
    another wireline competitor would.
        Senator Burns. Do you have access to DSL?
        Mr. Scott. In some cases. It depends----
        Senator Burns. And what----
        Mr. Scott.--on where you are.
        Senator Burns. Even in your city?
        Mr. Scott. It depends on how far away from the wire center
    you are.
        Senator Burns. But it's there?
        Mr. Scott. It is there.
        Senator Burns. Thank you, Mr. Chairman.
        The Chairman. Senator DeMint?

                     STATEMENT OF HON. JIM DeMINT,
                    U.S. SENATOR FROM SOUTH CAROLINA

        Senator DeMint. Thank you, Mr. Chairman. And I appreciate
    all the testimony today.
        Just one note. Mr. LeGrande, you mentioned--and I
    appreciate that you mentioned--the importance of interoperable
    communication, rural areas, particularly when there is a
    disaster, be it manmade or otherwise. And, actually, this
    Committee had acted on that last year. Senator Ben Nelson, and
    I, introduced the Warren Act, which this whole Committee passed
    unanimously. Unfortunately, one Member of the Committee
    continues to hold it up; so, as hurricane season starts again,
    we're still sitting on our hands with something that could do a
    lot of what you had said. So, I appreciate you bringing that to
    our attention again.
        Mr. Chairman, let me just jump to net neutrality. There
    seems to be a lot of discussion about what's the real
    definition of ``net neutrality.'' I know exactly what it is,
    because I'm an old retail guy. And what this is, is the
    government telling retailers how to run their business.
        Now, if there was just one retailer in town, I think we
    should all be concerned. We obviously have to look out for
    consumers. But when it comes to the Internet now, there are
    many retailers, and there are going to be many more in just a
    relatively short period of time. We've got high-speed phone
    lines, we've got cable, we've got satellite, and I think you're
    going to see, in just a relatively few number of years, every
    community, even distant rural communities, are going to have
    community-wide WiFi networks with high-speed broadband
    services, which are already being developed all around the
    country.
        So, it's really commercial suicide for any network retailer
    to limit something that their customers want. And so, for us to
    be sitting here concerned that somehow we're going to block
    something, that one of these retailers is going to block
    something their consumers want, it just, frankly, won't happen.
        In fact, to use this term ``discrimination,'' we want
    retailers to discriminate. If you've ever seen how the showcase
    of free enterprise works on the retailing side of our economy,
    I mean, producers of products and services fight to get their
    products displayed in stores, and they make better deals and
    better products, and they develop market demand for their
    product, so the retailers are forced to have them. And that's
    what's happening in this marketplace today. So, we actually
    want some discrimination to force better products and better
    prices.
        And, again, if you think any of these retailers are going
    to limit something their customers already want, it just isn't
    going to happen. We need to stop worrying about telling
    retailers what products to stock on their shelves and how many
    facings to give them. We don't need to do that, because the
    market is developed to the point where it's going to take off
    if we just let it.
        But let me just ask one question to Dr. Rutledge and Mr.
    McCurdy, because I think you seem to have a grasp on what's
    really going on here.
        Mr. Scott is arguing that if we let the broadband market
    develop without imposing retailing regulation mandates, that if
    this discrimination begins, that there'll be no way to stop it,
    that it'll just get out of hand. Mr. McCurdy, we'll just start
    with you--what are your thoughts on that? And then, Dr.
    Rutledge, I'd appreciate your point of view, too.
        Mr. McCurdy. Senator DeMint, people often have noble
    intent, but I think there are unintended consequences by some
    of the actions. And regulation often results in that. In the
    1996 bill, there were the unbundling requirements, and we saw
    disincentives really imposed on the deployment of broadband
    capability.
        As I stated in my testimony, I believe the FCC has full
    authority to investigate any abuses, discriminatory practices
    or such, that would really block the use of the Internet. And
    they should have authority to not only investigate, but to
    adjudicate some of those actions.
        And also, if you recall in the House bill, there was an
    amendment that provided that even though the FCC has authority,
    it in no way takes away the antitrust authority within the U.S.
    law. So, there's ample ability to police, and to adjudicate any
    discrimination that would occur--wrongful discrimination, not
    the kind of retail discrimination that I think you were
    alluding to.
        And I'd just like to make one last point. I think Senator
    Burns, has raised that. Senator Dorgan, when he made his intro,
    talked about incentivizing innovation and providing for
    competition. I'm here representing the technology industry.
    Europe and Asia have greater deployment and use of broadband
    than we do, and this is an opportunity to unleash the ability
    of major providers to go to that second generation, that next
    generation of capability, whether it's fiber-to-the-premises,
    network-to-the-curb; VDSL, which is very high-speed DSL; cable
    interfaces, new systems there; WiFi, WiMAX, broadband over
    powerlines. There was an article in the paper yesterday about
    satellite providers now reaching new agreements to provide
    Internet capability. This technology is ready to explode, it's
    ready to take off. And I think you have the ability, this year,
    to really incentivize it and move it forward.
        Senator DeMint. Dr. Rutledge?
        Dr. Rutledge. I think we need to be careful not to try and
    create regulations for a problem that doesn't exist. There's
    plenty of remedies between the FCC and antitrust law to deal
    with anticompetitive behavior. And that's sufficient to deal
    with the problem. If we do regulate it, there may not be a
    problem, because there may not be investment in high-speed
    telecom.
        What we call ``broadband'' is really a misnomer. Broadband
    is not a ``thing.'' ``Broadband'' just means that, of all
    technologies, you're using the one faster than the other guy.
    You know, once upon a time, the imperial highways in China were
    broadband, because they were the fastest transportation in the
    world. They're not any more. Once upon a time, the railroads
    were the fastest. In the rest of the world, they are using
    fiber optics. I've had video conferences from Beijing to
    several thousand people in the U.S., with no delay and perfect
    signal, because every band on my phone is lit up in every city
    I go to in China. That's the battle. The battle is a
    competitive one. And we need to make sure we don't stop change
    before it happens.
        Senator DeMint. Mr. Chairman, I'll yield back, but just one
    last point. I think once we interject this idea of
    discrimination onto the Internet, which is something--really,
    in retailing, it's a good idea and ultimately benefits the
    consumer--once we interject that at all, we're going to create
    another litigation playground for the trial lawyers, and I'm
    afraid we're going to really hurt something that's beginning to
    move in a very fast way in the right direction.
        Thank you, Mr. Chairman.
        The Chairman. Thank you.
        Senator Vitter?
        Senator Vitter. I have nothing at this time, Mr. Chairman,
    thank you.
        The Chairman. Senator Dorgan?
        Senator Dorgan. Mr. Chairman, thank you.
        I think my colleague Senator DeMint has given the most
    robust support for discrimination that I've heard here in the
    Senate for some while. I think it was in this room, as a matter
    of fact, where we saw people on all sides doing their best
    impression of potted plants, while the Federal Government was
    doing nothing with respect to the stealing of about $10
    billion-plus with respect to wholesale electricity rates in
    California, and we were told, ``Don't do anything, nothing's
    happening, this is the free market system.'' We now understand
    it was a massive criminal enterprise, and Congress would have
    been well advised to stand up for the interest of the consumers
    on the West Coast.
        But, Mr. Scott, who created the Internet?
        Mr. Scott. It was a combination of the Defense Department
    and some university researchers.
        Senator Dorgan. So, it was government-created?
        Mr. Scott. Yes, sir.
        Senator Dorgan. Uh-huh. Let me ask you, until last summer,
    when the Supreme Court affirmed an FCC ruling that broadband
    was an information service--prior to that time, broadband was
    considered a telecommunications service, and, therefore,
    subject to the common-carrier rules and nondiscrimination
    provisions of the common-carrier rules, is that accurate?
        Mr. Scott. That's right. DSL and broadband services were
    considered Title II services.
        Senator Dorgan. So, the unbelievable robust growth of the
    Internet occurred while the nondiscrimination rules existed. Is
    that correct?
        Mr. Scott. That's right. And even those cable modems that
    were not technically subject to Title II common-carrier
    regulations de-facto adhered to those regulations because of
    the uncertainty of how that nondiscrimination principle would
    ultimately be applied.
        Senator Dorgan. And we are told that, in the absence of
    those nondiscrimination rules that have always existed, or been
    adhered to, that antitrust laws replace it. My view of
    antitrust laws is, they make glaciers look like they're
    speeding.
        Mr. Scott. That's right. And----
        Senator Dorgan. Antitrust-law enforcement, in this town, is
    almost completely, thoroughly, totally nonexistent.
        Let me ask Dr. Rutledge a question. A CEO of a telecom
    company recently--actually, last November, said--this was
    Business Week--he said, quote, ``They don't have any fiber out
    there. They don't have any wires, they don't have anything, and
    they use my lines for free, and that's bull. For a Google, or a
    Yahoo!, or a Vonage, or anybody to expect us to use these pipes
    for free is nuts.''
        I think, Dr. Rutledge, you and I don't disagree about where
    this would head. I think you indicated, when you testified,
    that access is very important. You don't want people to
    discriminate with respect to the ability of--the people in this
    country to access the Internet. Would that not be true?
        Dr. Rutledge. I didn't hear anything in that quote that
    suggested that no one would have access. I heard----
        Senator Dorgan. Well, the quote was----
        Dr. Rutledge.--I heard in the quote that there would be
    differential pricing based on the intensity of use by different
    customers, just as you have today if you send a letter by
    Federal Express, or Express Mail, or any other way. If you
    regulate against pricing freedom, you are shifting the cost of
    building the infrastructure, if it gets built----
        Senator Dorgan. You didn't hear anything in----
        Dr. Rutledge.--from the intensive users to the small users
    of the Internet, because you're forcing average pricing on the
    market. No, I didn't.
        Senator Dorgan. You heard nothing in this quote that would
    describe a concern about access?
        Mr. Scott, did you hear something in this quote--or let me
    perhaps read another quote. ``Google is enjoying a free lunch
    that should, by any rational account, be the lunch of
    facilities providers.'' Do you read into that quote, maybe, a
    suggestion that those who are controlling access to providers
    would like to charge, for access, a bit more?
        Mr. Scott. I do. I hear, in that quote, an intent to change
    the structure of the Internet. And I think the key point is
    that even though I would love to see numerous competitive
    service providers in the marketplace. I'd love to see BPL take
    off. I'd love to see fiber to the home all over the country.
    I'd love to see wireless ubiquitous access, but the fact of the
    matter is that cable, modem, and DSL service control 98 percent
    of the broadband market. And, actually, over the last year,
    according to the FCC's data, that market share actually
    increased. The market share of all the other technologies
    combined is less than 2 percent. That's not a competitive
    marketplace. And there are incentives for service providers in
    a duopoly market to discriminate against content providers to
    fatten their pockets.
        Senator Dorgan. Let me just say, in North Dakota, for
    example, 49 percent of North Dakotans have one provider, no
    competition. I want competition. I want there to be innovation.
    I believe all that. I, however, am concerned about how mangled
    the description of what the open architecture of the Internet
    proposal has become. This notion of retaining an open
    architecture that has led to the innovation and the growth of
    the Internet, one of the great innovations of our time, or
    perhaps any time, has come as a result, in my judgment, of
    nondiscrimination.
        I believe, Mr. Scott, you said that replete in the
    Chairman's bill--and the bill that's the revision now--are
    nondiscrimination provisions in a range of areas. I support all
    of those. I think they are the right thing to do, and I believe
    the same is true with respect to the restoration of
    nondiscrimination provisions with respect to the Internet,
    because we have very big organizations, behemoth organizations
    that are going to fight over this issue, and I want to make
    sure that the Internet, 2 years, 5 years, and 10 years from
    now, is an Internet with open architecture, accessible to
    anybody. I want--no, I--look, I think it's good that telecom
    companies are deciding to produce video and to provide
    competition. I think all of that is good, because, ultimately,
    that's going to be good for the consumer. But it will also be
    good for the consumer if we have an Internet a couple of years
    from now, or 10 years from now, that has an open architecture
    for the ordinary folks around this country who want to get on
    it and move on it without impediment. And so, that's the
    purpose of our legislation that Senator Snowe and I have
    introduced.
        Mr. Chairman, thank you very much.
        The Chairman. Thank you.
        Senator Dorgan. Let me thank the rest of this panel. I
    didn't ask them questions, but--we're getting a lot of really
    good information, Mr. Chairman. I think you've selected some
    good panelists.
        The Chairman. Senator Pryor?
        Senator Pryor. Thank you, Mr. Chairman.
        Secretary Glickman, I want to thank you for being here
    today, and also want to echo what you said about the importance
    of piracy. It is something that is very critical to the U.S.
    economy, and I'm glad you're vigilant on it, and I'd love to
    help you work on that, on this legislation and others.
        But let me, if I may, start with Mr. LeGrande on--and I
    have a question about the strategic technology reserve, which
    is in the Chairman's bill. Do you like the approach that is
    taken on the strategic technology reserve?
        Mr. LeGrande. I think that, as I mentioned in my testimony,
    it is important that we look to the future, that we look to
    getting on a new platform. I think that our existing voice
    communications platforms don't scale. They won't, right now,
    scale to include high-speed data, in video. So, consequently,
    we really need to look to a new platform so diversification to
    move us to that is important, but, at the same time, we still
    know that there are voice communication systems in various
    areas--that need support, so we really need to look at doing
    that.
        Senator Pryor. OK. I'm really glad that the Chairman added
    the strategic technology reserve in there. I think it's
    something that the Congress needs to weigh in on. I might have
    a little different approach, if I can just alert the Committee
    to this. And that is, I actually like the FEMA approach under
    James Lee Witt, where he went out and negotiated a number of--I
    think what they call ``set-aside contracts,'' where they
    negotiated the contracts, but they didn't execute them until
    they needed them. And certainly, I like what the Chairman's
    trying to do. I certainly agree with his goals, that we need to
    have the communications ability there when we need it. But,
    given the fact that technology changes so rapidly, given the
    fact that, say, for example, in the cellular industry, they
    have mobile units that they can move into areas after
    hurricanes, after terrorist events, et cetera, to get their
    cell phone networks up and running. I just think we need to be
    smart about how we approach this, so I just wanted to alert the
    Committee to that.
        Also, if I may, Dr. Rutledge--let me ask you--the House
    bill just passed last week. Are you happy with what you see in
    the House bill?
        Dr. Rutledge. I think, by and large, the House bill does a
    pretty good job of encouraging capital spending, yes.
        Senator Pryor. And, Mr. Scott, on net neutrality--I know
    that's an issue that's near and dear to your heart--if the
    Senate bill stays as is, and there are no changes to the net
    neutrality provisions, what do you think the consequences are
    of that?
        Mr. Scott. Well, as I noted in my testimony, I think we'll
    see a structural change in the Internet.
        Senator Pryor. So, you feel like we don't have the balance
    in the bill right now that you want to see.
        Mr. Scott. Yes, that's fair.
        Senator Pryor. And, Mr. McCurdy, as I understand it, you
    disagree with that. You think there is the balance there, and
    you think net neutrality, as written in the bill, is workable.
        Mr. McCurdy. Yes, Senator Pryor. As a matter of fact, this
    morning, early, I was at the canteen just down the hall, and
    one of my former House colleagues, now a Democratic Senator,
    came by, and he said, ``You're testifying today?''
        And I said, ``Yes.''
        And he said, ``Are you going to testify on that net
    neutrality?''
        And I said, ``Yes.''
        And he says, ``Well, when you figure out what it is, let me
    know.''
        And that's part of the problem we have. You know, with all
    due respect--and my good friend and former classmate Byron
    Dorgan talked about, you know, the government invented the
    Internet. And it's true, ARPANET was a joint project. But
    that's a different platform, and that platform has been changed
    dramatically over the years. This is not the Internet of that
    generation. This is a worldwide connectivity that blows the
    imagination. You look at the map of what the Internet looks
    like, and it's literally billions of connections and small
    nets.
        We're really talking about differences in platform. This
    new platform that's being described is beyond our imagination,
    even now, with the capabilities it's going to provide to, I
    think, most all Americans. And we want to see it deployed. You
    know, I'm here because we believe in competition. We want the
    competition. We want the competition across technologies, but
    we want it incentivized. We want it in rural Arkansas just as
    much as I want it in rural Oklahoma. And the way you do that is
    not by the European approach of subsidizing a single provider
    and then regulating it. We adopted a different approach in this
    country, and that is to have a market approach where people do
    subscribe to services, but the difference is that, in this net
    neutrality debate, it's the unaffiliated application providers
    who want the carriers to offer them, for free, all the up-
    speed, the new bandwidth, the tremendous new speeds and
    additional capabilities that they're investing billions of
    dollars to deploy. So, to me, that's a fairly simple argument,
    moving forward, that this bill, I think, is really taking the
    right approach, and it has some balance. Will it be perfect?
    That's why you have committees, why you have conferences, and
    why we'll probably revisit this issue in the future. It's also
    why you have to keep, I think, effective oversight of what the
    FCC's doing.
        Senator Pryor. Thank you.
        Mr. Chairman and Members of the Committee, my impression--I
    know that net neutrality is a very controversial piece of this,
    and my impression, after talking with I don't know how many
    dozens of people about net neutrality, there are a set of
    issues that, really, I think, can be agreed upon. I think that
    there is some general agreement on a lot of issues, a few
    issues there's no agreement on, and people just see the world
    differently. But, certainly, I'd like to work with my
    colleagues to find the common ground we can, and get as much as
    we can agreed to and work it into the bill, if that makes
    sense.
        Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator. I, too, think there's an
    area--and I've discussed it with some Members of the
    Committee--where we ought to talk about the FCC having the
    right to deal with net neutrality issues that affect consumers
    and let the basic providers, the large providers, hire the
    attorneys to battle out their concepts of what is there. But
    the protection for consumers, I think, we could handle in net
    neutrality. When it comes to interfering with the marketplace,
    in terms of the major expenditures in capital, I think we
    should stay away.
        Senator Pryor. I'll be glad to work with you on that. Thank
    you.
        The Chairman. Senator Lautenberg?
        Senator Lautenberg. Thanks, Mr. Chairman. And thanks, in
    particular, for giving us a little more time to look at the
    bill, to enter into the debate that we see here today.
        I think the latest draft of the legislation does have good
    language that will grow community broadband efforts. And, as
    you know, I introduced the Community Broadband Act with Senator
    McCain, and I thank Mr. McCurdy for mentioning it. I think
    we're making some progress. We've got an agreement with Senator
    Ensign, and Senator McCain, and myself. And I think that it's
    going to help us clarify whether or not the community has a
    role to play when offering these services.
        As it has been said here, broadband, a 21st-century
    utility, improves communication and education, but many
    Americans are just not able to get broadband service because
    they live in small towns. Now, coming from the most densely
    populated State in the country--people don't think of us as
    having small towns, but we have more than our fair share of
    communities, about 560, and a lot of them are very small. I
    still catch up on the names, and I've lived there all my life.
    But the companies are just not, at this point in time, making
    it available, or people just can't afford it. So communities
    across the country have responded by stepping in to create
    their own municipal networks. And we've got to protect their
    right to do so.
        So, I thought the first draft of this communications bill
    put too many obstacles and hurdles in the way of community
    broadband development.
        Now, based on the agreement that we worked out last week, I
    think that the new title on community broadband is a major
    improvement. The bill requires that, before a town acts on its
    own to provide broadband, it must give notice to the public
    about the kind of project it has planned, and it also must give
    private industry an opportunity to offer proposals to undertake
    the same project. But the town will have a voice, ultimately,
    to decide how to proceed. And the bill encourages public-
    private partnerships like those we're seeing in Philadelphia
    and San Francisco, and smaller cities like Summit, New Jersey.
        Now, on the issue of allowing telephone companies to enter
    the TV market, often called ``franchise reform,'' I appreciate
    the Chairman's efforts to address the concerns of local
    government and consumers, but I still think there's room for
    improvement. And we all want to increase competition in the
    television market, because it would result in expanded services
    and lower prices for consumers; but we've got to ensure, when a
    company enters a new area, it's going to serve all of the
    customers in that jurisdiction, not just the ones who are most
    affluent or easiest to reach. New Jersey is an example of this.
    My home State is close to enacting legislation to create a
    statewide franchise. The New Jersey bill requires new companies
    that want to provide TV service in our State to reach customers
    in the 60 densest cities in the State, beginning in 3 years.
        So, this is a sweeping piece of legislation that we're
    looking at here. And, obviously, there are going to be
    provisions on which we agree, and others on which we disagree.
    And I think we've struck the right policy balance on community
    broadband. And, hopefully, in the next week, and with the help
    of today's witnesses, Mr. Chairman, who provided some very
    interesting observations on where we ought to go, we'll
    continue to work on this bill.
        Now, Dr. Rutledge, you talked about the focus on capital.
    And I heard your views on how structure ought to be developed,
    and have people paid based on productivity. And I come out of
    the business world and ran a pretty good-sized computer
    services company. What has been the capital investment, would
    you say, by the cable industry, by the telcos, in the last,
    perhaps, 10 years?
        Dr. Rutledge. I'd have to go dig in my file drawer to find
    a good answer for you, Senator, but the total capital spending
    peaked in 2001 at about $150 billion a year. It fell, until
    2005, to a round number of $50 billion a year----
        Senator Lautenberg. Well----
        Dr. Rutledge.--and is going back up in this direction.
        Senator Lautenberg. Yes.
        Dr. Rutledge. Cumulative investment would be in the--make
    up a number--$200 billion-ish zone----
        Senator Lautenberg. Well, it----
        Dr. Rutledge.--the cost of building out $200 to $400
    billion from here.
        Senator Lautenberg. Yes. But it doesn't sound like we're
    investment-starved, in my view. The cable industry says that
    they've already put $100 billion, in the last decade, to
    improve and upgrade their services. And certainly the
    competitive factor that looms over all parties is going to
    induce capital investment. I don't see us as capital-starved.
        And, in terms of net neutrality, Mr. Chairman, I think what
    we have to do is revise the description, because net neutrality
    means you're not at war anymore, and that things are going to
    be peaceful from that point on. And I think it gets confused,
    in terms of what we're talking about when it's net neutrality.
    Does it say ``Just tell what kind of services are available and
    what kind of pricing that might include? '' I think the problem
    with net neutrality, is that the term describes something that
    people don't understand. Are we in agreement on that? I think
    the words to define it make it more complicated than the
    situation really is; enough said.
        Thanks very much, Mr. Chairman. Thank all of you at the
    witness table.
        The Chairman. Thank you very much.
        I believe the next person is Senator Boxer.

                   STATEMENT OF HON. BARBARA BOXER,
                      U.S. SENATOR FROM CALIFORNIA

        Senator Boxer. Thanks very much, Mr. Chairman. And thank
    you for moving your bill--on changing your bill in ways that
    are helpful--very helpful. For example, I think that the
    broadcast flag provision now is something that I'm happy with;
    and, for my State of California, I thank you for that. The
    Wireless Innovation Act, that allows unlicensed devices to use
    the unused spectrum, is very important. So, those are parts of
    the bill I strongly support, but I still have some questions on
    other parts.
        I also wanted to welcome the panel. Two of my colleagues
    that I enjoyed working with so much are here.
        I wanted to take this whole issue on about what's pro-
    business, what's not, and to say that, on the net neutrality
    issue, there's no such thing as a pro-business position,
    because business is split. Depends on the business. We had a
    whole hearing where we had businesses in front of us who want
    us to protect net neutrality. And some of those are Amazon,
    Yahoo!, EarthLink, Microsoft, Google--there's a whole site,
    SaveTheInternet.com, that lists many, many small businesses.
    So, there isn't any, you know, pro-business position here. I
    think we've got to get past that. And the whole point that, you
    know, regulation always hurts retailers, as my good friend
    Senator DeMint says, is--you could have these same people here
    from the business community on the opposite side being for
    regulation. Depends on the issue. So, this is something we've
    got to step back from, I think. We've got to do the right thing
    for the majority of the American people.
        So, I want to get to the issue of net neutrality, and--now,
    Mr.--Dr. Rutledge said that there has been no regulation of the
    Internet. Mr. Scott, do you agree with that?
        Mr. Scott. I mean, we can get out the Communications Act.
    There has always been regulation of the Internet. It was in
    Title II from the beginning of the Internet. I'm not quite sure
    why that argument is still around.
        Senator Boxer. OK. And then, I'm just going to go straight
    with this line of questioning here. When you were asked, Mr.
    Scott, ``How would you define `net neutrality'?'' you put it
    simply. Everyone is struggling with definitions. You don't seem
    to have a problem. You said it's nondiscrimination on the
    Internet. Now, what about that is unclear? Could you now
    describe what you mean when you say, ``nondiscrimination on the
    Internet''?
        Mr. Scott. Well, I think, you know, my ideal definition of
    ``net neutrality'' is in Section 202 of the Communications Act.
        Senator Boxer. And you want to summarize that so people
    understand it----
        Mr. Scott. Just----
        Senator Boxer.--in simple terms?
        Mr. Scott.--reasonable, and nondiscriminatory conditions of
    service on the Internet.
        Senator Boxer. OK.
        Mr. Scott. Now----
        Senator Boxer. And yet, do you understand why people are
    struggling with trying to define what does this mean? Do you--
    --
        Mr. Scott. I----
        Senator Boxer.--do you understand why they're having a
    problem?
        Mr. Scott. I think the struggle is not over the definition
    of ``nondiscrimination.'' I think everyone understands that
    quite clearly, clear enough to embrace it when it applies to
    their own business interests, such as in the program access
    rules, which, by the way, back in the 1992 Cable Act, drew the
    same kind of criticisms about regulating an industry in a
    thicket of regulation and a litigation playground. These things
    never happened. Program access rules have worked quite well.
    And, in fact, we're beefing them up in the latest draft of this
    bill, and that's a position we support. I think the struggle
    over net neutrality is not the definition of ``Internet
    freedom,'' it is how to apply it to navigate the politics of
    the issue.
        Senator Boxer. I think I agree with you. Do you--you
    advocate for a buildout requirement. I mean, all the testimony
    is, ``Leave us alone. Let us charge whatever we want. Don't
    have net neutrality language, and you'll see the great things
    that will flow from that.'' Listen, I heard about that in
    California from Enron, and I know what happened, ``Leave us
    alone, prices will go down,'' and we're $11 billion poorer.
    And, thank God, some crooks are in jail. But I really want you
    to tell us why you advocate for a buildout requirement in
    addition to a redlining provision that prohibits
    discrimination.
        Mr. Scott. Well, I think the only real way to guarantee
    that competition and the benefits of competition come to all
    American communities, including rural areas, is to
    intentionally craft public policy that guides the market in
    that direction, because, if we don't, what we're going to have
    is a patchwork, where the most lucrative markets, those local
    franchising areas, whether they're municipalities or counties,
    will get competitive service, and those that aren't lucrative
    will not. I mean, we saw this problem 75 years ago with the
    telephone, and we addressed it. We decided that this was a
    technology that every American household deserved. I would say
    we need to bring competition into every American community. I
    think there's a way we can couple buildout requirements on the
    franchise with a Universal Service policy expanded to broadband
    to make that a reality.
        Senator Boxer. Mr. Glickman, I just want to ask you this,
    because as you--I know that we're happy with the way this all
    turned out, in terms of the broadcast flag, but I just want to
    give you a chance to put on the record here--some people say
    that, given the current state of technology, it isn't possible
    to engage in mass piracy of over-the-air shows. So, how do you
    respond to those who say broadcast flag is a solution in search
    of a problem?
        Mr. Glickman. Well, first of all, you have to realize that
    cable and satellite systems already have systems in place to
    protect content, so that they cannot be indiscriminately
    distributed over the Internet. But free, over-the-air
    broadcasts----
        Senator Boxer. Speak into the mike.
        Mr. Glickman. I'm sorry--free over-the-air broadcast does
    not have that. So, roughly about 15 percent of the people in
    this country, largely in underserved areas, face the fact that
    their content can't be protected. So, unless you provide a
    parity here, unless you provide the same kind of protection for
    free, over-the-air broadcast that you do for cable and
    satellite, it's likely that that content will move to cable and
    satellite, which means an awful lot of people who don't have
    the systems could lose their freedom to see all sorts of shows
    in this country.
        And the fact of the matter is, is that, with the advent of
    digital television, you will have all sorts of opportunities to
    take that and spread it all over the world and not be
    compensated for it. So, it not only provides an opportunity for
    piracy--rampant piracy--but it also means--that other systems,
    other than over-the-air broadcasting, will be preferred in the
    protection, and that means content providers will go where the
    preference is, because that's where the content will be
    protected. So, it is a big problem.
        Senator Boxer. Well, I thank you, because I worry about the
    House language, and I think this is an important debate.
        Mr. Chairman, do I have time for one last question? Do I
    have any time remaining? It's hard for me to see your clock.
    Well, I've lost it.
        Do you agree, Mr. McCurdy, with the four network neutrality
    principles set forth by the FCC?
        Mr. McCurdy. Yes. The FCC has adopted policies that are
    consistent with what the Telecommunications Industry
    Association outlined as principles for Internet usage. And we
    think those should be extended to include pro-competitive
    network management techniques to alleviate congestion,
    ameliorate capacity constraints, enable new services.
        I would say to my good friend, I happen to live in a
    jurisdiction in Virginia. I have satellite for my television, I
    have cable for my Internet, and telephone through one of the
    major providers. What was interesting, when the telephone
    provider announced that it was going to deploy fiber to the
    home in our neighborhood, my Internet bill dropped $20 a month
    without any notice. It just dropped. You know, now I have
    choices, and we want those choices to be available to other
    people.
        And our concern is that by regulation you're going to limit
    those choices and the incentives to make the investments. And
    these are huge investments, and government can't mandate these
    investments, because it's not government money. And so, we want
    this competition to really enable this further deployment.
        Senator Boxer. Well, I'm encouraged that you support the
    FCC's principles. I just don't know why you wouldn't want them
    to have the authority to address the problem.
        Thank you, Mr.----
        Mr. McCurdy. I believe they have the authority to address
    the problem, and that's why we're encouraging this committee to
    authorize----
        Senator Boxer. No, they don't.
        The Chairman. Thank you very much.
        Senator Allen?

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

        Senator Allen. Thank you, Mr. Chairman, for holding this
    hearing. And thank you for your leadership in pushing forward
    on this Consumer's Choice, and Broadband Deployment Act of
    2006. I have a statement I'd like to put into the record.
        [The prepared statement of Senator Allen follows:]

      Prepared Statement of Hon. George Allen, U.S. Senator from Virginia

        Mr. Chairman, I would like to thank you for calling today's hearing
    to discuss your Consumer's Choice, and Broadband Deployment Act of
    2006. All of us here recognize the need for telecommunications reform,
    and we would all like to see a bill pass this year for a variety of
    reasons. Thoughtful telecommunications reform legislation will greatly
    benefit consumers by increasing competition, and, therefore, consumer
    choices for communications services such as video, voice and broadband.
        The primary motivation for this bill is the Internet. As I have
    stated many times, I believe that the Internet is the greatest
    invention since the Gutenberg Press. The Internet and broadband
    revolution is opening up a whole new world of opportunity for consumers
    and businesses. Internet applications are bringing new competition to
    old markets, which means more innovation, lower prices, and higher
    quality of service for customers. For example, in the voice space,
    voice-over-IP technology is providing consumers with an alternative to
    traditional phone service. Entrepreneurs are merely a website away from
    offering phone services. Virtually every consumer with broadband
    Internet access can now choose between several telephone service
    providers.
        Unfortunately, these technological advancements enabled by the
    Internet have outpaced many of the laws and economic regulations
    governing the communications industry. I applaud Senator Stevens for
    his efforts to update many of these regulations including a provision
    to streamline regulations that pertain to another exciting Internet
    application--IPTV. Phone companies are beginning to offer this exciting
    new video service around the country, including a few places in
    Virginia. Government should get out of the way as much as possible and
    allow this competition to flourish.
        A guiding principle I have followed throughout my time in public
    service, is that the Internet, and all of the opportunities it brings,
    should be as accessible as possible to all Americans. Unfortunately
    today, many people from rural areas to big cities either do not have
    access to broadband Internet service or simply cannot afford it. As a
    result, the U.S. is lagging behind much of the world in broadband
    penetration (16th). To encourage the deployment of affordable broadband
    services, I introduced, along with Senator Kerry, and a bipartisan
    group of Senators (Sununu, Boxer, Dorgan), the Wireless Innovation Act
    of 2006 (WINN Act).
        The goal of WINN Act is to unleash the power of advanced
    technological innovation to facilitate the development of wireless
    broadband Internet services. Specifically, our legislation allocates
    certain areas within the broadcast spectrum that are otherwise
    unassigned and unused (known as white spaces) for wireless broadband
    and other innovative services. I thank the Chairman, for including the
    WINN Act in his communications reform bill. Mr. Chairman, I thank you
    again for holding this hearing and I thank all of the witnesses for
    being here. I look forward to hearing their ideas and suggestions. I
    also look forward to working with you on further improvements as we
    work to move this bill through the Committee and the Senate.

        Senator Allen. This measure, it's so important that we get
    this passed, for so many reasons. Listening to Congressman
    McCurdy wisely choosing to move into Virginia----
        [Laughter.]
        Senator Allen.--but, regardless of all that, this is
    exactly what we want to see. With the greater deployment of
    broadband, with increased competition, you get more consumer
    choices and services, whether it's voice, video, or broadband;
    and, with more competition, you get better quality, and you can
    get lower prices. And that's why it's so essential that we find
    a consensus on this net neutrality issue, because there are so
    many other beneficial aspects of this measure.
        Now, the Internet--we're all talking about getting more
    deployment of the Internet. In particular, it may be in inner
    cities, where people don't have access to it as much as, say, a
    suburban area. Or, also, in places such as Virginia and other
    States, small towns and rural areas don't have access to
    broadband. They may have access for video, for satellites, but
    they don't necessarily have broadband access, which, therefore,
    limits their ability for telemedicine, for education, for
    commerce, and for access to information.
        One of the measures you, Mr. Chairman, have been very
    helpful to me on was a measure that I introduced, which was the
    Internet Tax Nondiscrimination Act, which the President signed
    into law in 2004, and it's a moratorium preventing access taxes
    on the Internet. On average, it would be an 18-percent tax. The
    last thing, in my view, we need are these avaricious State and
    local tax commissars imposing an 18-percent tax on Internet
    access.
        I'd like to ask Dr. Rutledge, What effect do you think
    taxing Internet access would have on broadband deployment and
    penetration? My view is, this moratorium, or this prohibition
    on State, Federal, or local taxing of Internet access, ought to
    be permanent. What impact, if it were permanent, would that
    have on broadband deployment and penetration if that were added
    to this bill?
        Dr. Rutledge. Adding a tax to Internet distribution would
    reduce capital spending and shrink access to the Internet, it
    would reduce the return on capital of assets invested in the
    sector, by some 20 percentage points, if that tax were
    deployed. Building-out the infrastructure needed in the next 10
    years or so, is going to cost somewhere between two- and four-
    hundred billion dollars. Every time a company in this sector
    announces new capital-spending plans, their stock price falls,
    so they're being told by the market not to do it. And they're
    being told by the market to move their capital someplace that
    has lower tax rates and where they can get paid.
        Senator Allen. Well, do you see, in rural areas, where my
    friend from Montana, our colleague Senator Burns will say, and
    I say it, as well, is, there's a lot of dirt between light
    bulbs----
        Dr. Rutledge. Yes.
        Senator Allen.--out in the country, and if you have a small
    market, to get that rate-of-return--there's a reason there's
    less cable out in the country: there are fewer customers. If
    you add an 18-percent tax to it, one would logically conclude
    that fewer people could afford it, thereby exacerbating the
    economic digital divide, insofar as access to broadband. Would
    you agree with that?
        Dr. Rutledge. Absolutely. I think adding taxes will make it
    more difficult to bring high-speed Internet into rural areas.
        Senator Allen. The other measure that I thank the Chairman
    for including, is a measure that I introduced, along with
    Senators Sununu, Boxer, Dorgan, and Kerry, and that's the
    Wireless Innovation Act. This is to use the unused, unassigned,
    so-called ``white spaces'' for unlicensed use, for more robust
    and efficient use of that particular spectrum, which I believe
    will lead to rapid innovation and result in numerous benefits.
    You'll actually get some competition using this spectrum. It's
    not like WiFi that shoots out for maybe a few hundred yards;
    it'll shoot out miles and miles, and also not be impeded by
    buildings, or trees, or structures. And I think there are
    numerous benefits to consumers, whether you're in the city or
    whether you're in the country, or whether you're in a suburban
    area, and make wireless broadband more affordable.
        Mr. Scott, I know you touched on it in your opening
    statement. Could you elaborate, for the benefit of the
    Committee and the American people, on some of the benefits
    American consumers will see if this legislation, this Wireless
    Innovation Act, becomes law?
        Mr. Scott. I'd be happy to. And I want to thank you,
    Senator, for your leadership on the issue. It is one of the
    best ideas that I've heard in a while.
        I think you're going to get two things when you open up the
    empty broadcast spectrum that are going to solve the most
    important impediments to our broadband deployment, and those
    are the high cost of delivering service in rural areas and the
    high prices that keep low-income households from buying
    broadband access. Opening up the empty broadcast spectrum
    lowers the cost of infrastructure deployment for wireless
    broadband by a significant factor--by some estimates, an order
    of magnitude. Now, that order of magnitude of cost savings will
    be passed along to the consumer, and, by some estimates, will
    produce a broadband connection down below $10 a month. Now,
    that's a price point that most American families can afford,
    and I think that's the moment when we see our broadband engine
    begin to churn up a bit, and we begin to tick up some places
    above those 15 other nations that are currently ahead of us in
    broadband. I think this is an important measure to take us down
    that path.
        Senator Allen. Thank you, Mr. Scott.
        Dr. Rutledge actually is nodding his head in agreement, so
    it's to see----
        Mr. Scott. Yes.
        Senator Allen.--I assume you're both in agreement on this
    one subject.
        Dr. Rutledge. Absolutely.
        Mr. Scott. All right.
        Dr. Rutledge. Consensus.
        [Laughter.]
        Senator Allen. Good. Let me ask Mr. LeGrande a question.
        The Chairman. Senator, this will have to be your last
    question.
        Senator Allen. Mr. LeGrande, on the CapWIN, are you
    familiar with CapWIN?
        Mr. LeGrande. Yes, sir.
        Senator Allen. Because one thing we saw, Mr. Chairman, when
    the Pentagon was hit, was all sorts of fire and rescue
    personnel coming into the Pentagon, but not communicating,
    between Arlington, Fairfax, Alexandria, Maryland, and D.C. That
    has worked out very well in an operable way, even for the Texas
    Guard, when Hurricane Rita came in. Would you briefly summarize
    for us how that's working in the Capital Region, and if you
    also see that as replicable for interoperability elsewhere in
    the country?
        Mr. LeGrande. OK. It's a core component of what we're
    moving toward in the National Capital Region. CapWIN was
    developed several years ago, and it does provide data access
    and actual direct communications between folks using their
    laptops or other wireless devices. It's a great platform that
    we certainly plan on leveraging within the National Capital
    Region. It's a virtual application or a virtual network. We
    have plans to ride it on our hardwire network, which is a fiber
    optic network that these gentlemen spoke of as so important,
    earlier, but also ride on our wireless broadband network. So,
    together with CapWIN, our infrastructure that we're putting in
    place, and hopefully through our partners in California and
    other places, we'll be able to leverage the CapWIN experience
    throughout the country. So, it's a very important application,
    and we're glad we have it.
        Senator Allen. Thank you.
        Thank you, Mr. Chairman.
        The Chairman. Senator Smith?

                  STATEMENT OF HON. GORDON H. SMITH,
                        U.S. SENATOR FROM OREGON

        Senator Smith. Thank you, Mr. Chairman.
        I think many of us are trying to find the right balance
    here, because we recognize how critical this legislation is to
    the future competitiveness of our country.
        I believe, Mr. Scott, you were in my office recently, and
    you represented to me that the amount of money that would come
    through assuring net neutrality is very small in comparison to
    the enormous additional business opportunity that is out there,
    and that this would not be an impediment to deployment. Is that
    your position?
        Mr. Scott. Yes, sir, that's fair. I think that there's a
    little more to it than that, which is that the sources of
    revenue that will drive the buildout of these next-generation
    networks will come from end-user costs and producer costs,
    which can go up and down at the will of the network operator at
    any time. They can raise the cost on those producers of content
    that interconnect with the Internet, and they can raise the
    cost on consumers to buy next-generation services. That's how
    cable built out their network, and that's how all of the
    nations that are currently ahead of us in broadband, but yet
    retain network neutrality, have built out their networks.
        Senator Smith. So, on the one side of the equation, we're
    talking peanuts, in terms of regulation to assure net
    neutrality; on the other side there are very real dollars.
        Mr. Scott. These economics are a matter of speculation, and
    I would----
        Senator Smith. Can you give us an idea what--you know, what
    are we talking about--$20 billion here, $200 billion there?
        Mr. Scott. You know, I've read several studies, and one of
    them has the numbers on one side, and the other one has the
    numbers on the other side. And I think, you know, for me, the
    primary way that I think about the Internet is, where has the
    innovation been? Where have the dollars been spent over the
    last 10 years as we've seen the Internet take off? And I want
    to make sure that those businesses that have become so
    successful stay here in the United States and don't retreat to
    Asian markets or to European markets because they find a more
    favorable climate to innovate in those areas.
        Senator Smith. Mr. Rutledge, as you see a few billion here,
    in terms of regulation, or a trillion over there, you see the
    equation reversed. Is that correct?
        Dr. Rutledge. What I see is that these innovative companies
    are leaving, and have left. The U.S. has lost more than half of
    its global market share in telecommunications equipment,
    largely to China.
        Senator Smith. But is Mr. Scott right, that these other
    countries have assured net neutrality, and yet the business has
    still gone over there?
        Dr. Rutledge. There are many different regulatory
    structures in the different countries. Largely, it's a question
    of taxes and costs and incentives to move. If you went to
    Chengdu, in western China, you'd see all the names you know up
    on the wall who are there with R&D facilities, doing optical
    physics right now. But I think the issue here isn't whether you
    get one or the other; it's whether you get both or neither.
    Because there won't be any high-end Internet services if there
    is no way to get them to people. And if there's no spending on
    infrastructure, there won't be any way to get people the
    services, at the end of the day.
        It's not surprising to me that the companies that have
    built up huge market caps in the Internet in the recent years
    would like to keep things the way they are, because those
    market caps have turned them into a conservative force. I don't
    know where the next innovation's going to come from, but I'll
    bet you it does not come from those five companies we would all
    say. It's going to come from somebody we don't know yet. But it
    won't happen unless there's capital spending and the
    infrastructure in place.
        Senator Smith. In your testimony, Mr. Rutledge, you say
    that there is no regulation of the Internet. I believe that's
    what I have in front of me. And yet, Mr. Scott says there has
    always been regulation of the Internet. Who's right?
        Dr. Rutledge. Well, we're both wrong, probably. DSL was
    regulated. Capital spending in America in telecommunications
    area, including cable, declined by two-thirds over the 5 years
    up to the decision to deregulate high-speed Internet, and has
    increased since then, but not back to where it started the
    story. Before that, high-speed Internet was largely cable
    modems, which were not as regulated.
        Senator Smith. Well, it just seems to me that--and I said
    this in a hearing, the last one we had on this issue--that
    there is just so much enormous good in this broader bill that
    it would be a tragedy for our Nation if net neutrality is the
    basis upon which it is entirely taken down. And that's a very
    real possibility, the way I see things shaping up. Does anybody
    here have an idea how we can split this baby, how we can
    preserve this broader good that comes from this legislation,
    and deal with this net neutrality issue on some middle course?
        Mr. McCurdy. Senator?
        Senator Smith. Yes.
        Mr. McCurdy. If I could, on that, I think the Chairman is
    trying to do exactly that. I think the Chairman has offered a
    way for you to move the bill, which is going to provide the
    greater good; and at the same time, really get a better
    understanding of what the practices are going to be, understand
    what net neutrality is. Until we saw recent op-eds, it wasn't
    even mentioned. It just kind of came out of nowhere.
        Senator Smith. Right.
        Mr. McCurdy. And we're talking about competing business
    models here. And we're talking about advanced platforms. And I
    think that's what we want to see move. And I don't think
    there's disagreement here. It appears to have almost become a
    partisan issue, and I have yet to really understand what the
    basis of it is.
        So, I think the Chairman is trying to find that. I commend
    him, I commend the Co-Chairman, Senator Inouye, for trying to
    work with this committee. It has worked better than I've seen a
    lot of committees work in the last few years--in trying to
    reach out and build some consensus.
        Now, I--you know----
        Senator Smith. Well, I actually agree with you. I think
    that's where the Chairman is. And that's where I'm inclined to
    go. But I think, Mr. Scott, you disagree with that. And I'd
    love you to elucidate.
        Mr. Scott. Well, I think there are quite a few things that
    we find we actually all agree on, things like: no one wants to
    see blocking and degradation of service on the Internet. A
    couple of weeks ago, I sat on a panel like this with an
    executive from Verizon, and he said as much. So, I think we can
    put that on the table. And I think we can make sure that that
    never happens.
        I think we all agree we want to see Internet freedom, and
    we want to maximize consumer choice. I think if you look at the
    150 pages of this bill, and you see how often nondiscrimination
    principles are applied in order to protect consumers in
    noncompetitive markets, there is a lot of room in that
    principle of nondiscrimination to find a way to both protect
    consumers, and keep the free market for innovation and content
    and applications on the Internet.
        Senator Smith. But isn't your concern that----
        The Chairman. Senator, this will have to be your last
    question.
        Senator Smith. OK--that if we go with the Chairman's bill,
    and then this does become a problem, that Congress simply won't
    be in a place to get it through?
        Mr. Scott. Well, I think if we study the problem, and, in 5
    years, we find that, in fact, the Internet has changed for the
    worse, and we want to go back, all of the network operators who
    are currently building out their networks will have installed
    network discrimination routers in their systems, and they'll
    have to divest and completely change the technologies that are
    in that infrastructure. And I think Congress would have a hard
    time undoing that kind of investment.
        Senator Smith. Thank you, Mr. Chairman.
        The Chairman. That may be true, but the provision calls for
    an annual review by FCC on a continuing basis from day one. And
    when I hear you talk, Mr. Scott, I think you use the word ``net
    neutrality,'' really, to mean put common-carrier provisions
    applying to all communications. Now, we're not going to do
    that. And I don't think anyone here would agree to put common
    carrier on all of it. So, we're dealing with communications
    now, not with the three levels of telecommunication,
    information service, and communication. It's all
    communications, because of the vast ability to compete now.
        And with regard to the problem of charges, if you take a
    search engine, people who have them will charge you more if you
    want your name to come up first. Now, is that net neutrality? I
    think we'd better be careful what we're talking about.
        By the way, the law that you refer to--I mean, the concept
    of video franchising you referred to, we almost copied the law
    of Texas. And the first place that was served after that new
    law went into effect, I'm told, was Keller, Texas, which you
    and I know is pretty rural. So, I don't have the fear you do of
    the provisions we have here. We have a watchdog in the FCC,
    which has got a flag out there, and they're told, annually, to
    report to us. But, more than that, if they see, they really see
    something they can define as a violation of net neutrality, to
    immediately tell us, and we'll tackle it on legislation. Now, I
    don't think it'll be 5 years. If there is something out there
    called net neutrality that develops, we'll know it very
    quickly.
        I hope you'll help us get the bill. I think the bill, in
    itself, represents a major step toward recognizing that
    communications is communications, and it ought not to be
    treated differently if it was telecommunications, or
    information service or communications by any other means. They
    all ought to be on a level playing field, in terms of
    incentives to expand and develop. Everything I've read says
    we're behind the world on broadband. And I think the reason is
    the fear that we're not going to pass this bill.
        So, let's move on to the next panel. I appreciate you all
    coming. We all appreciate it, as a matter of fact, not just me.
        While we're changing, if we may, keep it down a little bit,
    let me urge the witnesses to come forward: Ken Fellman, Kyle
    McSlarrow, Walter McCormick, Christopher Putala, Steve Largent,
    Phil Jones, and Robert Foosaner. Thanks very much.
        Ladies and gentlemen, if we can make this transition
    quickly, I must report to you that there'll be a vote in the
    Senate, about 12:15, and we intend to stay here to listen to
    our witnesses. We do appreciate that you all have waited. This
    has been a long session, I know. And, again, we'll print all of
    the statements in the record as you've presented them to us.
        And let me call on Kenneth Fellman, the Mayor of Arvada,
    Colorado.
        Mr. Mayor? Pull the mike right up to you, if you will.

                 STATEMENT OF HON. KENNETH S. FELLMAN,
                        MAYOR, ARVADA, COLORADO

        Mayor Fellman. Thank you. I don't know whether to say good
    morning or good afternoon. I guess we're close.
        Chairman Stevens, Co-Chairman Inouye, Members of the
    Committee, I'm Ken Fellman, Mayor of Arvada, Colorado, and I am
    honored to be here today on behalf of local governments
    nationwide.
        Before I address specifics, the national and local
    government organizations also want to thank both the majority
    and the minority staffs for their professionalism, courtesy,
    and the time spent with us to hear our concerns and work toward
    resolutions. The revised draft represents a good-faith effort
    to address many of our concerns. There are matters that we
    could not resolve, and we agree to disagree, but that is the
    nature of the legislative process. We look forward to
    continuing this dialogue as we move toward markup.
        Just as my friend, Dearborn's Mayor Guido, testified at
    your last hearing, I want to, again, stress that America's
    local governments embrace technological innovation and
    competition in the video marketplace. Our last testimony
    outlined our well-known and oft-stated principle that video
    franchising process should remain at the local level.
        In our review of the first draft, we raised five specific
    criticisms. First, we testified that the bill failed to
    preserve local franchising authority. The proposed timeframes
    for local action were unrealistic and required a franchising
    authority to act in 15 business days. The new draft imposes a
    timeframe of 90 calendar days within which the franchising
    authority must act. We believe that our original proposal of 90
    business days is more reasonable.
        Second, we testified that the bill would send all rights-
    of-way disputes to the FCC, an agency that lacks the resources
    and the expertise to handle them. The new discussion draft
    changes that model and replaces the FCC with a court of
    competent jurisdiction. We appreciate that change.
        Third, we testified that, while the intent was to keep
    local government financially whole, the prior draft resulted in
    significant revenue loss. The revised draft attempts to address
    this concern over gross revenue, although the language appears
    in brackets, and we strongly urge you to retain this language.
        Regarding PEG financial support, we still believe this
    percentage of support should be higher. We note that an
    additional section was added to provide an alternative of a
    per-subscriber payment basis. This language is also bracketed,
    and we strongly urge that it be retained.
        Fourth, we testified that the bill would permit video
    providers to pick and choose the neighborhoods they serve and
    bypass others completely. While the draft expands the anti-
    redlining section, this section alone falls short. Local
    governments should retain the discretion to impose reasonable,
    competitively neutral, and nondiscriminatory buildout
    requirements.
        Fifth, we testified that it appeared that the original
    draft would undermine taxing authority of State and local
    government in areas wholly unrelated to rights-of-way
    compensation, and we appreciate the corrections that have been
    made in this draft.
        Our other concerns relate to the consumer protection issues
    and the references to certain accounting principles. We are
    pleased with Title I's public safety provisions and the changes
    that we anticipate to Title V regarding municipal broadband.
        Senator Stevens and Senator Inouye, we appreciate the
    progress that has been made so far, and we hope that we can see
    that the reservations in the brackets are removed. We will
    continue to work with your staffs on the remaining issues.
        Thank you very much.
        [The prepared statement of Mr. Fellman follows:]

     Prepared Statement of Hon. Kenneth S. Fellman, Mayor, Arvada, Colorado
    Introduction
        Good morning, Chairman Stevens, Senator Inouye, and members of this
    Committee. I am Ken Fellman, Mayor of Arvada, Colorado. I am honored to
    be here today to testify not only on behalf of the National League of
    Cities (NLC), but also on behalf of local governments across this
    Nation, as represented by the National Association of Counties (NACo),
    the United States Conference of Mayors (USCM), the National Conference
    of Black Mayors, the National Association of Telecommunications
    Officers and Advisors (NATOA), the Government Finance Officers
    Association (GFOA), and TeleCommUnity.\1\
    ---------------------------------------------------------------------------
        \1\ NLC, USCM, NCBM and NACo collectively represent the interests
    of almost every municipal or county government in the United States.
    NATOA's members include elected officials, as well as
    telecommunications and cable officers who are on the front lines of
    communications policy development in cities nationwide. GFOA's members
    represent the finance officers within communities across the country
    who assist their elected officials with sound fiscal policy advice.
    TeleCommUnity is an alliance of local governments and their
    associations that promote the principles of federalism and comity for
    local government interests in telecommunications.
    ---------------------------------------------------------------------------
        Before I address specifics, the national organizations want to
    thank both the majority and minority staffs for their professionalism,
    courtesy, and time spent with us to hear our concerns and work toward
    resolutions. The revised draft represents a good faith effort to
    address many of our concerns. There are matters that we could not
    resolve, and agreed to disagree, but that is the nature of the
    legislative process. We look forward to continuing this dialogue as we
    move towards markup.
        Just as my friend, Dearborn's Mayor Michael A. Guido, testified at
    your last hearing, I want to again stress that America's local
    governments embrace technological innovation and competition in the
    video marketplace. We want and welcome real competition in a
    technologically-neutral manner. Local governments--and our residents--
    support the deployment of new video services in our communities.
        Our last testimony outlined our well-known, and oft-stated,
    principle that the video franchising process should remain at the local
    level. To do so permits each community, based on its unique community
    needs and citizen input, to decide for itself--in a fair, equitable and
    politically accountable manner--the nature of the video service that
    will be provided to its citizens.
        Based on this principle, we put forth our philosophical concerns
    with this legislation--that video franchising authority would be
    stripped away from local governments; that Congress should not attempt
    to speed entry into the marketplace for new video providers through
    subsidies paid for out of local government budgets to private sector
    entities for the use of the public rights-of-way; that no citizen
    should be deprived of video service because of the neighborhood they
    live in; and that public, governmental, and educational (PEG) access
    channels and institutional networks are critical links to our
    communities.

    The Specifics
        In our review of the first draft, we raised five specific
    criticisms that we believed needed to be addressed.
        First, we testified that while ostensibly preserving local
    franchising authority, the net effect of the earlier version of the
    legislation would be to strip authority from local governments, and
    grant that authority to the Federal Communications Commission (FCC).
    The proposed timeframes for local action were wholly unrealistic and
    requiring a franchise authority to act in 15 days--and to approve a
    franchise in 30 days--would, in many instances, violate State and local
    law, deprive elected officials of their statutory rights and authority,
    and leave consumers without a voice in their community.
        The new staff discussion draft imposes a timeframe of 90 calendar
    days within which the franchising authority must act on the video
    provider's application. While this new deadline will require some
    jurisdictions to change their processes, it is a more reasonable time
    for local governments to act than appeared in the first draft. Still,
    we would prefer that the language be revised to accommodate the public
    notice and hearing requirements of State and local law. These
    requirements are the foundation of democracy at the local level, not
    merely for cable franchising, but for all local laws. We see no need to
    give preferential treatment to one industry.
        Second, we testified the bill would send all rights-of-way disputes
    to the FCC, an agency that lacks the resources and expertise to handle
    them. We said the bill would second guess not only the general police
    powers of the community, but the policies and engineering practices of
    public works departments nationwide--and put those decisions within a
    Federal agency with no stake in the outcome other than to speed
    deployment at any or all cost.
        The new discussion draft changes that model and replaces it with a
    court of competent jurisdiction as the sole recourse for dispute
    resolution. This works in today's environment, and should work in the
    future. And we welcome the addition in Section 612 in which new video
    service providers will have to agree to comply with all regulations
    regarding the use and occupation of public rights-of-way, including the
    police powers of local governments. We have some concern, however, that
    the right-of-way language places too many obligations on local rights-
    of-way regulators. We believe that, much like 47 U.S.C. Sec. 253, if a
    right-of-way management requirement is competitively neutral and non-
    discriminatory, no more is required. As drafted, the bill would preempt
    local right-of-way regulations that satisfy the requirements of
    Sec. 253 in certain circumstances.
        Third, we testified that while the stated intent of the original
    draft may have been to keep localities financially whole, the bill
    would result in a significant revenue loss to local governments. The
    exclusion of advertising and home shopping revenues from the definition
    of ``gross revenues'' would significantly diminish the rent paid for
    the use of public property. Further, the reduction in the base of gross
    revenues would undermine local government's ability to provide
    necessary services through the use of public, educational, and
    government access facilities, and deprive public safety and
    governmental use of institutional networks.
        The revised draft attempts to address this concern over gross
    revenue, although we note that there may be some reluctance to accept
    language we have suggested. The language appears in brackets in the
    definitions section--Page 69 ``(2) Gross Revenue (A)(iii), (iv).''
        We strongly urge you to retain this language, which includes both
    home shopping and advertising revenues.
        Regarding PEG financial support, we still believe the percentage of
    support should be higher. While many communities across the country
    already impose a one percent of gross revenue formula for PEG financial
    support, a number of communities have entered into freely negotiated
    franchise agreements with video providers that provide for additional
    support. This draft would strip those communities of the support that
    their video providers agreed to give to support these vital local
    resources.
        We also recommended that in addition to the language providing one
    percent of gross revenues for PEG support, that an additional section
    be added to provide an alternative of a ``per-subscriber'' payment
    basis. We note that this language has been included (Page 63, line 16),
    but it too is bracketed, and may be subject to further consideration.
    We strongly urge that this language be retained as well. We are also
    troubled by the exclusion of one-time or lump-sum PEG support payments
    from the ``per subscriber'' formula. This arbitrarily punishes
    communities which did not have the foresight years ago in anticipating
    what Congress would do now.
        Fourth, we testified that while at first glance the bill appeared
    to prohibit redlining, it would permit video providers to pick and
    choose the neighborhoods they would like to serve and bypass others
    completely. This would not enhance the position of this country in the
    standing of broadband deployment, but will certainly widen the gap
    between those who have access to competitive, affordable services and
    those who do not. Rather than ensure that everyone is served and served
    equitably, the legislation would continue the downward spiral that the
    unregulated market has created thus far.
        While the new staff discussion draft expands the definition of what
    groups are covered by the anti-redlining section, this section alone
    falls far short of the measures we believe will be necessary to enhance
    broadband deployment, and ensure competitive services are offered to
    all segments of our communities. Local governments should retain the
    discretion to impose reasonable, competitively neutral and
    nondiscriminatory buildout requirements.
        The new language does put in place dual, non-duplicative complaint-
    initiated enforcement mechanisms, State commission enforcement, or
    State attorney general enforcement. While some guidance is given to the
    state, absent the discretion on the part of local governments to
    require buildout, we are not convinced this will be sufficient to
    actually address our redlining concerns.
        Fifth, we testified that it appeared that the original draft would
    undermine the taxing authority of State and local governments in areas
    wholly unrelated to rights-of-way compensation.
        The new draft addresses this concern on page 65, line 7, ``(d)
    Other Taxes, Fees, and Assessments Not Affected.--Except as otherwise
    provided in this section, nothing in this section shall be construed to
    modify, impair, supersede, or authorize the modification, impairment,
    or supersession of, any State or local law pertaining to taxation.'' We
    appreciate your resolving this issue in this manner.

    Other Interests and Concerns
        Having addressed the five main points from our earlier testimony,
    we would like to call the Committee's attention to other matters in the
    discussion draft.

    Consumer Issues
        Section 632, as proposed to be amended by this discussion draft,
    would have the FCC, after consultation with a variety of groups,
    promulgate regulations with respect to customer service and consumer
    protection. Local communities would not be able to create different
    standards tailored to meet local needs. Existing standards would be
    preempted if inconsistent with the new FCC standards. The new draft
    would allow local governments to enforce the Federal standards, with
    the video service provider having the opportunity to appeal to the FCC.
    The ability to tailor local standards to meet local needs has served
    consumers well, and this local authority should not be preempted.

    GAAP
        We expressed concern to the Committee staff about utilizing
    Generally Accepted Accounting Principles (GAAP) as a standard for the
    Annual Review of PEG financial support. GAAP are ``principles'' and, as
    such, are guidelines. It is not a clear set of black and white rules.
    The accounting treatment of many issues involving the definition of
    gross revenue can be subject to interpretation, as well as materiality
    standards.
        Utilizing GAAP will present the following issues:

       The categories of revenues will not be clearly and
            consistently defined because GAAP can issue new standards and
            guidelines. GAAP can change based on new accounting standards
            by industry, and/or new interpretations of old standards by
            industry, resulting in variations in the calculation of gross
            revenues from year to year.

       Recognition of revenue under GAAP can hinge on contract
            language making gross revenues subject to the manipulation of
            the Franchisee.

       GAAP is utilized within the accounting industry as a
            guideline and is subject to interpretation. Thus, the
            Franchisor and Franchisee may have differing opinions of what
            revenues to include in franchise and PEG fee calculations.

       Issues such as advertising commissions, launch fees,
            distribution fees, and cooperative advertising may be accounted
            for as ``contra-expenses'' in accordance with GAAP, even when
            the ``third party'' is an affiliated entity. This allows
            manipulation of the recognition of gross revenues by the
            Franchisee, and this presentation of revenues is advantageous
            only to the video service providers.

       There is more than one method to record revenues in
            accordance with GAAP. The video service provider could choose
            the version that lowers fees, resulting in debate as to the
            proper treatment and interpretation.

    Municipal Provisioning
        We believe the new language recently agreed to by Committee Members
    is a marked improvement, and we are grateful to Senators McCain and
    Lautenberg for their leadership in ensuring that communities can
    explore broadband options.
        Having noted a number of concerns, we would like to point out some
    acceptable parts of the revised draft.
        We appreciate the staff's rescission of the ``video source''
    definition to accommodate IPTV and interactive, on-demand services.
        We want to note that the Committee staff accepted our
    recommendation in assuring that PEG channels be available to all
    subscribers in a franchise area by requiring they be in a basic tier of
    service.
        We like Title I of the draft, particularly the section on
    interoperability and SAFECOM. The interoperability section of Title I
    appropriately allocates available funds, and utilizes the expertise of
    the Department of Homeland Security's SAFECOM program.

    Conclusion
        We value the deliberative process, such as today's hearing, to be
    sure that we are making informed decisions. The franchising process
    should be designed to promote fairness for consumers and promote a
    level playing field for all providers, and this draft makes significant
    progress towards ensuring this is the case.
        Collectively, we represent the interests of almost every municipal
    and county government in the United States. We strongly endorse
    promoting competition that will permit new video providers to come into
    our communities on a level playing field, while preserving local
    franchising authority that has proved to be so valuable to our cities
    and counties around the country. We note that there were many areas of
    initial concern within the bill that have been addressed. We look
    forward to continuing our work in assessing the legislation and its
    impact, and believe that the Committee should continue its excellent
    work, and ensure a strong record in support of any decision to change
    existing law.
        Thank you. I look forward to answering any questions you may have.

        The Chairman. Thank you, Mayor.
        Our next witness, Kyle McSlarrow, who is the Chief
    Executive Officer of the National Cable & Telecommunications
    Association.

     STATEMENT OF KYLE McSLARROW, PRESIDENT/CEO, NATIONAL CABLE &
                     TELECOMMUNICATIONS ASSOCIATION

        Mr. McSlarrow. Mr. Chairman, thank you. And thank you, Mr.
    Co-Chairman. And a special thanks, also, to your staffs, who
    have worked so hard to get us to this point.
        I was prepared just to talk a little bit about some of the
    changes in the latest draft, but, like a moth to the flame, I
    can't resist talking a little bit about net neutrality, based
    on the last panel.
        There were two issues that were raised. One was whether or
    not the Internet has ever been regulated. The answer is, no,
    unequivocally. There is an issue as to whether or not the
    Bells, with DSL technology, the on-ramp to the Internet, were
    regulated. And that is true. But cable modem service--and
    cable, remember, is the largest broadband provider in America--
    has never been regulated. There was one court case, I think out
    in the Ninth Circuit, that suggested otherwise, but we have
    always operated in an unregulated environment. And that is
    important, because the proponents of net neutrality would like
    to paint a picture that something changed recently that we need
    to now correct. But, in fact, at least for cable and our
    broadband service, it hasn't been regulated. We invested the
    $100 billion because of the 1996 Communications Act, which
    largely deregulated our industry. We put fiber into the ground.
    We put out cable modem service. That spurred competition from
    the Bells. And we now have robust competition, which is exactly
    the policy result that you want.
        The second issue is this issue of discrimination. Mr.
    Chairman, I think you hit it head-on. You can't--if you cross
    the line into regulation in this space, and you say you're
    doing so on the basis of discrimination, there is no principled
    reason why you have to stop with network providers. You can go
    to Microsoft's operating system or any web-based software. You
    can go to Google's search engine. You can go to Amazon, or eBay
    or any of the other, quote/unquote, ``discriminatory''
    practices that they engage in. Now, I'm not suggesting you do
    so, but I am suggesting that people should think twice before
    going down this road.
        On the new draft, I have to say, it's a little bit of a
    mixed bag for us. At the outset, I think, for us, we're where
    we were at the last hearing on the bill, which is, we think
    this is a fair product, it's a very balanced approach. We'll
    continue to work with you. I'll just point out two things. One,
    the voice competition piece of the bill, we believe, has been
    significantly improved, and we appreciate you listening to the
    concerns that we expressed at the least hearing and in our
    testimony. We think it's vital that, if we're going to look at
    the competitive space, in terms of who the households have as
    providers, both for video and for voice, that we get that
    entire competitive space right. So, we think this draft goes a
    long way toward making the video and voice competition part of
    the market; a good one.
        The second place where I think we've gone a step backward
    is in the program access language. Congress, I guess, in 1992,
    established a policy that, because of the then-fledgling
    satellite industry, they wanted to ensure that the satellite
    industry had access to programming that was then largely owned
    by the cable operators. And so, that was the policy that is in
    current law today. And I have to say, it worked magnificently
    well. The second and third largest multichannel video providers
    in America are DIRECTV and EchoStar, two satellite companies.
    Number 1 is Comcast. So, it worked. And in that timeframe, the
    percentage of cable programming owned by cable operators
    dropped from above 50 percent to about 20 percent in the same
    timeframe. So, you had more competition, and you have less of
    an ownership interest, in terms of the cable industry.
        So, while I think the government has already intruded in
    this space, and I can offer my own views about whether or not
    that made sense, the truth is, in terms of what the policy goal
    was, it has largely been accomplished. What this does is, it
    starts discriminating between satellite and cable operators, in
    terms of whether or not you can offer exclusive programming.
    So, on the one hand, DIRECTV, which has the NFL Sunday Ticket,
    which no one else can get access to, is free to have that kind
    of exclusive arrangement, but cable operators, who are offering
    other types of sports programming, are prohibited from doing
    that.
        And, again, Mr. Chairman, as I said at the last hearing, I
    think the program access requirements are a search of a problem
    that doesn't exist, and I would urge you to delete the entire
    provision.
        And, with that, I'll stop. I'll be happy to answer
    questions. Thank you.
        [The prepared statement of Mr. McSlarrow follows:]

             Prepared Statement of Kyle McSlarrow, President/CEO,
                National Cable & Telecommunications Association

        Chairman Stevens, Co-Chairman Inouye, and members of the Committee,
    thank you for the opportunity to appear today to comment on the June 9
    staff draft revisions to S. 2686.
        In my testimony last month, I explained that NCTA found much to
    commend in the introduced bill, including the elimination of outmoded
    economic regulation of cable services, and movement in the direction of
    a level playing field in video as well as voice competition. In
    addition, we strongly supported the very thoughtful approaches to
    difficult issues like net neutrality and the digital transition in the
    introduced bill, and are pleased to see those approaches preserved in
    the June 9 staff draft. My May 18 statement also included a detailed
    discussion of the provisions in the bill and where those provisions
    have not changed, I respectfully incorporate them there.
        Today, therefore, I would like to focus my testimony on the staff
    draft's proposed changes to the introduced bill.
        In a number of these areas, the staff draft suggests changes that
    we believe improve the bill.

    Voice Competition
        We believe the staff draft significantly improves the provisions on
    voice competition. We agree with the staff draft's proposal to limit
    the rights, duties, and obligations of carriers under sections 251 and
    252 of the Communications Act to facilities-based VoIP providers, which
    have made a commitment to deploying their own networks and
    infrastructure. A non-facilities-based provider should not have the
    right to order facilities-based entities, on whose networks it rides,
    to interconnect at a particular place or manner.
        We are also pleased that the staff draft addresses rural telephone
    carriers' recent refusals to exchange VoIP traffic with
    telecommunications carriers, even though they have existing
    interconnection agreements with those carriers. Rural carriers'
    resistance on this point is depriving rural consumers of competitive
    voice services.

    Universal Service
        As I have testified before, the cable industry supports the
    principles underlying the Universal Service regime. We agree that
    Universal Service reform is needed, but urged you to reform the
    disbursements side of the Universal Service Fund (USF) as well as
    contributions to the USF. Thus, we are pleased that the staff draft
    offers a number of helpful improvements on the disbursement side. For
    instance, it adds competitive-neutrality as a Universal Service
    principle and appropriately proposes to substitute more technology- and
    provider-neutral eligibility requirements in lieu of the ILEC-centric
    obligations in the introduced bill. In particular, the draft would
    require a competitor to offer service throughout its service area
    rather than the ILEC's. It would also not condition a competitor's
    Universal Service eligibility on a commitment to offer local usage
    plans comparable to those offered by ILECs, or to provide equal access
    to long distance carriers. Competitors should not have to mimic ILEC
    service offerings, or network architecture, or geographic coverage to
    qualify for Universal Service support.
        Second, the staff draft would eliminate the requirement that all
    Universal Service Fund recipients deploy broadband. While broadband
    deployment is a goal strongly shared by the cable industry,
    incorporating it into Universal Service eligibility would have appeared
    to validate--even if indirectly--using funds for broadband deployment.
    Cable companies are understandably very reluctant to contribute
    revenues from their own broadband services to subsidize their
    competitors, either directly or even by supplying them with fungible
    resources.
        Finally, we are pleased to see that the draft extends the fiscal
    oversight proposed in S. 2686 for the ``E-Rate'' programs to the rural
    and high-cost programs as well.

    Level Playing Field for Cable Operators and Video Service Providers
        The bill's opt-in opportunities for existing operators are
    essentially unchanged from the introduced bill. As I explained last
    month, these opportunities remain too limited. While the introduced
    bill is a fair start, we again urge you to ensure the availability of
    opt-in for every existing cable provider beginning on the date of
    enactment.

    Role of Local Governments; Prohibition on Discrimination
        The staff draft would give the State public utility commissions the
    responsibility for enforcing the prohibition on the denial of video
    service to potential subscribers on the basis of race or religion, in
    addition to income. While an improvement from the introduced bill,
    under which only the FCC had enforcement authority, we continue to
    believe that local governments are best suited to investigate and
    determine instances of discriminatory conduct.
    Other Issues Related to Franchising and Regulation
        The staff draft does not address many of the franchise- and
    regulatory-related issues I described in my May 18 testimony on S.
    2686, and in some cases even adds provisions that create additional
    concerns. We look forward to continuing to work with you and your staff
    on these issues.
        First, the draft still lacks a definition of franchise area. Such a
    definition is essential to ensure meaningful compliance with the
    antidiscrimination requirement. Second, the draft revises the new
    definitions of ``video service'' and ``video service provider,'' but it
    may preserve a loophole for AT&T's IPTV service by defining video
    service as the ``one-way transmission'' of video, carrying forward the
    language from the current definition of cable service that AT&T and the
    Connecticut DPUC relied on to exclude IPTV from that definition. These
    definitions must be carefully constructed to bring all providers of
    functionally equivalent video services within the same franchising and
    regulatory scheme, regardless of the delivery technology they use.
        Third, the draft would put upward pressure on cable rates by
    increasing government fees on video services. The draft would authorize
    PEG and institutional network (INET) support payments in excess of the
    1 percent of gross revenue proposed in the introduced bill, if the
    incumbent cable operator was contributing more than that in a franchise
    area, while eliminating the proposed offset for INET operating costs
    incurred by an incumbent cable operator that opts in or otherwise
    becomes subject to the new scheme. It would also broaden the definition
    of gross revenues--the base for calculating franchise fees--to include
    home shopping and advertising revenues. Finally, the staff draft lacks
    any requirement for cost-based permitting and rights-of-way management
    fees.

    Program Access
        We are disappointed that the expansion of program access law
    remains in the staff draft, and that it has, on one hand, been further
    broadened. In this regard, the staff draft would bar ``permanent
    foreclosure strategies'' and ``terms or conditions that have the
    effect, in their application, of discriminating against an MVPD based
    on its technology, delivery method, or capacity constraints.'' Both of
    these vague and undefined concepts will lead, inevitably, to disputes
    and litigation over business practices that are lawful today; even
    under the program access law. On the other hand, the staff draft
    narrows the program access provisions of the bill to permit exclusive
    arrangements between DBS and non-vertically integrated national sports
    programming services. As we have previously said, we would urge you to
    drop this entire provision. As currently drafted, the provisions solve
    no existing problem in the marketplace, and are likely to add confusion
    and unfairness.

    Conclusion
        Thank you, again, for this opportunity to testify. We appreciate
    your openness to our perspective and our suggestions, and look forward
    to continuing to work together to craft a framework that promotes
    innovation and consumer choice.

        The Chairman. Thank you very much.
        Our next witness is Walter McCormick.

     STATEMENT OF WALTER B. McCORMICK, JR., PRESIDENT/CEO, UNITED
                 STATES TELECOM ASSOCIATION (USTelecom)

        Mr. McCormick. Mr. Chairman, thank you very much. Co-
    Chairman Inouye, members of the Committee, thank you for the
    opportunity to testify today.
        On behalf of our 1,200 member companies, we want to commend
    you for recognizing the importance of updating our telecom
    laws, to provide consumers with a new choice in video, and to
    stabilize and secure Universal Service for the future. And it
    would be our hope that this debate on net neutrality not slow
    down action on either of these important objectives, providing
    increased video choice and securing Universal Service for the
    future.
        Mr. Chairman, we've been honored to participate in this
    process. We commend you for the outreach and inclusiveness that
    has characterized your deliberations.
        As you have noted, Mr. Chairman, the world has changed
    since the passage of the 1996 Act. Today, you can make a
    telephone call on a landline phone, on a wireless phone, on a
    cable phone, on an Internet phone. You can obtain high-speed
    Internet access from your telephone company, your cable
    company, your wireless company, your satellite company. In
    coffee shops, in airports, on college campuses, and in many
    municipalities, you can access the Internet via WiFi hotspots.
    Electric utilities are beginning to invest in delivering
    broadband over powerline. Others are entering the market using
    unlicensed spectrum. And the government is about to put new
    spectrum out for bid.
        As a result of this world of choice, consumers are
    benefiting. The prices for broadband access are falling, and
    broadband penetration is increasing, particularly among middle-
    income Americans and minorities. Earlier in this hearing, there
    were comments made that this investment, this explosive growth
    in the Internet, was occurring under regulation. The facts tell
    a different story. It has been since there has been unbundling
    relief, it has been since there has been deregulation, that
    broadband Internet investment and access has skyrocketed. So,
    today in this country, just over the course of the last 2
    years, we have seen the number of broadband providers nearly
    triple, and, in the last 5 years, we have seen them grow by
    almost tenfold. In major metropolitan areas--in States like
    California, we see up to 23 providers in cities like San
    Francisco, and Los Angeles, and San Diego; 75 percent of
    Americans have access to up to four high-speed Internet
    providers. So, what we're seeing, Mr. Chairman, is, we're
    seeing explosive growth, and we're seeing a marketplace that's
    working.
        This bill is aimed as expanding choice for video, to give
    consumers an expanded ability to get the services they want
    from the companies they choose. And, in doing so, it preserves
    an appropriate role for government. First, it protects the
    revenues, the franchise authorities currently received from
    franchise fees. It protects PEG channels and iNETs. Second, it
    protects and secures Universal Service for the future by
    expanding the contribution base, by treating all competitors
    fairly, and by exempting USF from the Antideficiency Act. And
    by assuring both intrastate and interstate services are
    assessed, this bill advances important reforms.
        With regard to access to sports programming, Mr. Chairman,
    we do support the provision that's in your bill. We think it is
    an important competitive provision.
        And finally, Mr. Chairman, this bill does take a measured
    and reasoned approach to net neutrality. It is a compromise
    position. It is a reasoned position to instruct the FCC to
    report annually about impacts on the free flow of information.
    There is, as everyone has noted, no problem today. The Chairman
    of the FCC says that he has the sufficient authority to address
    any problem that might arise. The approach of this bill, to
    monitor and then to act, should be the approach of the
    Committee.
        Finally, Mr. Chairman, we're pleased that you're moving.
    The House of Representatives acted, just this week, on its own
    measure to give consumers new TV choice. We look forward to
    working with you, and the members of the Committee, to see S.
    2686 proceed expeditiously through the Senate.
        [The prepared statement of Mr. McCormick follows:]

        Prepared Statement of Walter B. McCormick, Jr., President/CEO,
                 United States Telecom Association (USTelecom)

    Introduction
        Mr. Chairman, Co-Chairman Inouye, Members of the Committee: Thank
    you for this opportunity to appear before you today. I am Walter
    McCormick, President and CEO of the USTelecom Association. On behalf of
    our more than 1,200 member companies, I thank you for the work that
    this Committee has put into updating the Nation's communications laws
    to expand consumer choice, encourage robust broadband investment, and
    stabilize the future of Universal Service.
        Last week the U.S. House of Representatives delivered an historic
    vote . . . an overwhelmingly bipartisan vote to deliver the many
    benefits of video choice to American consumers . . . to continue down a
    path of vigorous investment in the Nation's broadband future . . . and
    to ensure a broader funding base for Universal Service. These
    principles are embraced and advanced as well by . . . S. 2686, the
    ``Communications, Consumers' Choice and Broadband Deployment Act of
    2006.'' So I thank you for your leadership, and for this opportunity to
    appear before you today to talk about the broadband future . . . video
    choice . . . Universal Service . . . and this important effort to
    advance these national priorities.
        It has been 10 years since this body last revisited the issue of
    U.S. communications policy. How much has changed. Broadband investment
    and adoption are surging ahead at an unprecedented rate today.
    According to the Pew Internet and American Life Project, the number of
    Americans with broadband at home has risen 40 percent over the past
    year. This rapid adoption is being driven by intensely competitive
    prices, with some introductory rates now below $15 a month. Consumer
    choices--across a variety of platforms and services--continue to expand
    seemingly every day. This legislation--and the growing momentum for
    delivering reform this year in both the House and the Senate--
    represents an historic opportunity to continue that progress for
    consumers, and for our Nation's information economy.
        USTelecom's membership ranges from the smallest rural telecom
    companies in the United States to some of the largest investors in
    America's broadband infrastructure today. We are united in our
    commitment to a modern communications policy, in which all companies
    are encouraged to invest and compete head-to-head in the marketplace .
    . . with consumers determining the market winners based on who provides
    the most innovative, attractive packages of voice, video and Internet
    services to meet their needs.
        We believe this market-based model--rather than a government-
    managed regulatory model--is best capable of encouraging significant
    investment in next-generation broadband infrastructure . . . in
    encouraging the arrival of new innovations . . . and the availability
    and numerous benefits of diverse market choices for consumers.

    Video Choice
        The companies I represent are particularly eager to bring new
    consumer choices to the video marketplace. No one in this room--or
    across America, I'd gather--needs a lecture in the many benefits that
    would be derived from enhanced consumer choice in the video
    marketplace. A recent study by the Phoenix Center indicates that
    consumers would save as much as $8 billion on their cable bill in the
    first year alone with TV freedom. In Keller, TX, the local cable
    company reduced the rates on its most popular bundled service package
    by nearly 50 percent in response to Verizon's announcement of a voice,
    video and Internet triple play.
        Our companies would like to bring this innovation and competition
    to communities across the country. Standing in the way, as you know,
    are outdated regulations that were designed, in a bygone era, to
    protect consumers from cable monopolies. Unfortunately, today they
    frequently have the exact opposite effect--protecting cable companies
    from the market disciplines--on price, on quality of service, on
    innovation--of vigorous competition.
        Removing barriers to our competitive entry into the video
    marketplace would deliver this much-needed consumer choice. Your
    legislation takes the right approach . . . maintaining local revenue
    streams and control over public rights-of-way . . . safeguarding local,
    education, and government programming . . . and advancing video choice
    and competition.
        Another critical byproduct of this updated policy would be a
    bright, green light to the marketplace to continue investing in the
    Nation's broadband infrastructure . . . creating jobs, increasing
    broadband penetration and fueling a continued revival of our high-tech
    economy.

    Universal Service
        Mr. Chairman, I also want to thank you for your long-standing
    leadership on Universal Service. There is nothing I can tell you about
    the value of this national commitment, nor the challenges it faces
    today that you do not already fully understand. Representing a state
    with one-fifth of the land mass of the continental U.S., and only one-
    fifth of 1 percent of the Nation's population, you require no lecture
    on the cost of providing essential services to a dispersed population .
    . . nor the importance of ensuring the Nation remains connected through
    affordable, reliable communications. Our member companies, too, know
    the importance of Universal Service to rural and low-income communities
    across the country, so we welcome the reforms proposed in this
    legislation.
        This legislation would stabilize Universal Service amid a rapidly
    evolving technology environment . . . ensuring new technologies
    contribute alongside established technologies . . . so Universal
    Service is a shared responsibility and one that receives adequate
    funding. Universal service reform, too, is a time-sensitive priority
    that should spur action in this Congress.

    Net Neutrality
        Mr. Chairman, I also want to thank you for the reasoned, measured
    approach taken in this legislation to the ``net neutrality'' debate.
    This is a very complex technology debate that, I believe, has been
    unfortunately and inaccurately oversimplified in recent weeks. As I
    have stated before this Committee many times, the companies I represent
    have been managing networks in this country for over 100 years.
    Consumers today have--and will continue to have--the freedom to call or
    e-mail whomever they choose . . . and to visit any legal website . . .
    without being blocked, without their service being impaired or
    degraded. It's the right thing to do in a country that values and
    cherishes the First Amendment. It's smart business . . .offering the
    greatest customer satisfaction, and driving demand for broadband.
        And, the FCC has demonstrated both the will and the capacity to
    safeguard Internet freedom. We are well aware that Congress and the FCC
    are watching our companies closely.
        The measured approach of the watchful eye that your legislation
    proposes is reasonable and pragmatic. The notion that Congress should
    rush to regulate the Internet--in anticipation of a problem that may
    never manifest--is dangerous. This extreme position would not preserve
    the free and open Internet we enjoy today, it would most certainly
    stifle its future development and growth. And, to hold the consumer
    benefits of video choice hostage to this extraneous debate over
    Internet regulation, makes no sense.
        Mr. Chairman, we applaud your giving the marketplace the
    opportunity to continue demonstrating its capacity to be a responsible,
    innovative driver of the Internet's evolution; before resorting to
    regulation and government-managed competition. This bill delivers to
    consumers long overdue video choice and stability for Universal
    Service. It ensures, vigilance and accountability on the issue of
    Internet freedom. But it wisely continues the hands-off policy that has
    driven unprecedented Internet investment, innovation, and economic
    growth.
        Mr. Chairman, it is time to update the Nation's communications laws
    . . . to stabilize Universal Service . . . and to share with American
    consumers the many benefits of video choice . . . not next year or the
    year after that, but right now--this year--in this Congress.
        If we streamline the video franchising process, the net result will
    be accelerated broadband deployment, more competition for voice, video,
    and Internet services, and lower prices for consumers. I look forward
    to continuing to work closely with you, Mr. Chairman, with this
    committee, and with leaders on both sides of the aisle who are eager to
    bring the many benefits of video choice and Universal Service to
    consumers and to the Nation's economy. Thank you again for the
    invitation to be here today . . . and for your leadership in driving
    these vital issues to resolution this year. I would be happy to answer
    any questions you may have.

        The Chairman. Thank you very much.
        Our next witness is Chris Putala. Am I saying that right?
        Mr. Putala. You are, sir.
        The Chairman. Putala--thank you--Vice President for Public
    Policy of EarthLink, in Washington, D.C.

      STATEMENT OF CHRISTOPHER PUTALA, EXECUTIVE VICE PRESIDENT,
                     PUBLIC POLICY, EarthLink, INC.

        Mr. Putala. Thank you, Mr. Chairman, Co-Chairman Inouye,
    and members of the Committee. As the Chairman stated, my name
    is Chris Putala. I'm Executive Vice President for Public Policy
    at EarthLink.
        EarthLink is the Nation's largest independent Internet
    service provider. We are a publicly-traded company
    headquartered in Atlanta. We are proud to provide Internet
    access, and services to more than 5.4 million consumers
    throughout the country.
        Thank you for the opportunity to testify today. I ask that
    my full statement be made a part of the record, and I will
    summarize.
        Today, we will hear one common argument from this panel. In
    short, where the other team has market power, this Committee
    should enforce against discrimination. Bell companies argue
    that cable has too much power, and not enough competition in
    television services; and so, they seek nondiscriminatory
    program access rules. Cable argues that Bells have too much
    power, and not enough competition over telephone networks; and
    so, they ask this Committee to require nondiscriminatory
    interconnection rules for VoIP. And, by the way, EarthLink
    agrees. The independent wireless company, Sprint Nextel, argues
    that the Bells have too much power and not enough competition
    in the high-capacity pipes that connect cell towers to the
    network; and so, they ask this Committee to reduce special
    access charges to prevent discrimination from the Bell
    companies. Again, EarthLink agrees.
        I respectfully suggest that this same nondiscrimination
    principle guide the Committee as it continues to consider the
    important issue of network neutrality. The fundamental points
    are the same that the Bells make about television, that cable
    makes about telephone. In the face of market power, there is a
    need for protections against discrimination--in this case,
    nondiscriminatory equal access to the Internet. The rules that
    have governed the Internet from the start required equal and
    open access over the last mile, precisely because consumers
    lacked robust choices. And, under these rules, under the same
    rules, different speeds and different bandwidth offerings have
    always been permitted, and they should continue to be so, in
    our view. The legislation offered by Senators Snowe, Dorgan,
    and others offer both key ingredients, nondiscriminatory equal
    access, and the ability to offer consumers a variety of
    different speed options.
        The Snowe-Dorgan legislation protects consumer freedoms in
    another important respect, by ending the anticompetitive
    practice of requiring customers to buy regular voice phone
    service when they buy broadband service. Why should a customer,
    who wants to use VoIP, or their wireless phone instead of
    traditional phone service, be required to spend 25 to 50 bucks
    every month for this phone service she doesn't want, in order
    to get broadband? We urge all members of the Committee to
    support this standalone broadband provision.
        EarthLink also urges all members to support the modified
    municipal broadband language included in the new staff draft.
    We are pleased that this legislation takes an important step to
    encourage a new broadband facility by eliminating current and
    future prohibitions on local broadband initiatives. EarthLink
    is proud to be leading the effort to un-wire America's cities
    with WiFi technology, delivering the Internet wirelessly and
    affordably. EarthLink has already partnered with Philadelphia,
    Anaheim, San Francisco, and New Orleans to build, own, and
    manage, at our cost, a wireless network to provide these new
    broadband services. EarthLink's WiFi networks will also
    practice what we preach, we will offer fair, reasonable, and
    nondiscriminatory wholesale rates to others who seek to bring
    customers to these new networks.
        The interconnection policies in the staff draft are not as
    well crafted as those originally in S. 2686, in our view. The
    interconnection rights included in the original legislation
    better follow the successful lesson offered by the early days
    of wireless to ensure that all providers will be able to
    exchange VoIP traffic. Ten years ago, wireless faced the same
    situation Internet voice traffic does today. Wireless networks
    had relatively few customers; and so, little negotiating power
    with the Bells when it comes to the terms and conditions of
    connecting to the Bells' customers. Fortunately, this Committee
    took significant steps in 1993 and 1996 to require
    nondiscriminatory interconnection rights in the face of such
    disproportionate market power. The original draft of S. 2686
    better incorporated this core lesson from wireless, and
    nondiscriminatory interconnection rights should be granted to
    all VoIP providers, not just facilities-based providers.
        To close with one last comment, EarthLink recognizes the
    importance of Universal Service, and stands ready, as a VoIP
    provider, to continue to contribute to the Federal Universal
    Service mechanisms. We respectfully ask, however, that whatever
    mechanisms you authorize the FCC to adopt be competitively
    neutral, and not require us to engage in complex legal
    exercises to determine whether a particular dollar of customer
    revenue is subject to, or outside of, Universal Service
    assessment.
        Thank you very much for the opportunity to testify. I look
    forward to your questions.
        [The prepared statement of Mr. Putala follows:]

      Prepared Statement of Christopher Putala, Executive Vice President,
                         Public Policy, EarthLink, Inc.

        Mr. Chairman, Senator Inouye, members of the Committee, thank you
    for inviting me to speak to you as you consider S. 2686, and how best
    to update our communications laws in light of change in technologies
    and marketplace conditions, to preserve the competition, innovation,
    and freedom that characterize the Internet, and to ensure that all
    Americans--including low-income Americans and those in the most rural
    parts of our country--receive the benefits of the broadband revolution.
        For ten years, EarthLink has been on the cutting edge of delivering
    the Internet to American consumers and business, first through dial-up,
    then broadband, and now VoIP, wireless voice and municipal wireless
    Internet services. Over the past ten years, we've seen the Internet
    grow from the specialized province of a few tech-savvy early adopters
    to an integral part of American work and family life. And we've seen--
    and helped--millions of Americans move toward broadband services and
    capabilities that were not possible with dial-up services.
        Our approach has been to deliver our customers the services they
    want: Our motto is ``we revolve around you.'' And we've been
    successful. Over the past three years, EarthLink has won numerous
    awards for customer satisfaction in both broadband and dial-up
    services. We now deliver to our customers a full-range of broadband
    services and applications, including Internet access, Voice-over-IP,
    and wireless services. We offer our customers a wide range of enhanced
    offerings, including pop-up, spam and spyware blockers, anti-virus
    protection, and parental controls. We are excited to work with the
    Cities of New Orleans, Philadelphia, San Francisco and Anaheim--and we
    hope many more--to deploy a new WiFi network providing the residents of
    those cities an alternative to the cable--telephone company high-speed
    wireline access duopoly.
        At the outset, I'd like to commend the Committee, and particularly
    its staff, for all the hard work you have put in so far. S. 2686 takes
    some key steps towards an appropriate regulatory framework for
    broadband communications. In particular, we commend the provisions
    making clear that local governments may seek creative solutions to
    bring broadband--or more broadband--to their communities, and the
    bill's recognition that VoIP providers--like wireless carriers and
    CLECs--need to be able to interconnect and exchange traffic with
    traditional telephone networks. But there are also areas where the
    draft could be improved, particularly with respect to what has come to
    be known as net neutrality. We are also concerned that the current
    draft cuts back on the interconnection, numbering, and number
    portability rights for VoIP providers, and that the bill does not yet
    contain a stand-alone broadband requirement, as proposed by Senators
    Snowe, Dorgan and Inouye. These are all elements that are critical to
    delivering the ``consumers' choice'' promise of the bill's title.
        As you consider further how to shape the legislation that has moved
    forward, I would like to leave you with five key thoughts:

            1. A local facilities-based access duopoly does not provide
            sufficient choice to drive innovation, and preserve consumer
            freedom to use the services and applications of their choosing.
            The bill's municipal broadband provisions, therefore,
            appropriately ensure that consumers have as much choice as is
            possible, without fear of taxpayer funding or financing.

            2. Remember that the Internet (like the market) has become a
            dominant economic force, because it lets a thousand economic
            flowers bloom, and does not let the network operators (or any
            other centralized authority) determine which flowers take root.
            Net neutrality protections are therefore critical to
            maintaining consumer choice and innovation.

            3. Protect consumer freedom by requiring that broadband be
            available on a standalone basis.

            4. Promote competition by ensuring that all VoIP providers can
            obtain numbers, utilize number portability, and interconnect
            and exchange traffic with the legacy telephone network. In that
            context, while providers should be entitled to and pay fair
            interprovider compensation, recognize that the current
            intercarrier compensation system on the legacy telephone
            network is hopelessly fractured, and thus both empower and
            require the FCC to reform that system quickly.

            5. In ensuring that all communications service providers
            contribute to Universal Service, ensure that any mechanism is
            competitively neutral.

    I. Municipal Broadband Is Critical To Broadband Deployment and
            Consumer Choice
    A. Facilities-Based Duopoly Is not Sufficient to Protect Consumers and
            Drive
            Innovation
        This Committee has long recognized that while duopoly is better
    than monopoly, a duopoly by itself does not necessarily serve consumers
    well, nor lead to maximum innovation. The history of wireless services,
    for example, cautions strongly against relying on a facilities-based
    duopoly to deliver strong competitive choices and marketplace
    innovation to consumers. From 1984 until the first broadband PCS
    services began to be offered in 1995, wireless services were a legally-
    sanctioned duopoly. Not surprisingly, prices rose until 1993, when
    Congress voted to authorize new wireless entry through spectrum
    auctions--of which Chairman Stevens was an early and leading
    champion.\1\ Duopoly created wireless services that were priced for
    only a few, relegating wireless to a niche market.
    ---------------------------------------------------------------------------
        \1\ See http://wireless.fcc.gov/statements/Sugrue_slides3.ppt.
    ---------------------------------------------------------------------------
        On the other hand, since the third and fourth (and more) wireless
    competitors entered the market in 1995-96, competition in the wireless
    market has exploded. As stated above, wireless subscribers have soared
    from only 20 million in 1994 to nearly 200 million as of June 2005. In
    1993, wireless service averaged 58 cents per minute,\2\ but by the end
    of 2004 was averaging 9 cents per minute--a nearly 85 percent drop.\3\
    ---------------------------------------------------------------------------
        \2\ Id.
        \3\ Implementation of Section 6002(b) of the Omnibus Budget
    Reconcilliation Act of 1993; Annual Report and Analysis of Competitive
    Market Conditions with Respect to Commercial Mobile Services, Tenth
    Report, 20 FCC Rcd 15908, 15966 (para. 158) (2005).
    ---------------------------------------------------------------------------
        The same market performance can be expected in broadband as well.
    If there are only two facilities-based broadband providers, competition
    will stagnate, and consumers will not reap the full benefits of the
    broadband revolution. Broadband today is characterized by a cable-telco
    duopoly, with cable modem service and ILEC-provided DSL together
    accounting for 95 percent of all residential and small business
    broadband connections nationwide.\4\
    ---------------------------------------------------------------------------
        \4\ See Federal Communications Commission, Wireline Competition
    Bureau, Industry Analysis and Technology Division, High-Speed Services
    for Internet Access: Status as of June 30, 2005, at Table 6 (April
    2006), available at http://www.fcc.gov/Daily_Releases/Daily_Business/
    2006/db0407/DOC-264744A1.pdf.
    ---------------------------------------------------------------------------
        However, if a stable duopoly is not permitted to develop, the
    market will keep competitive pressure on all providers and force the
    two dominant facilities-based providers, cable and ILEC DSL telephone
    companies, along with all other market participants, to continue to
    innovate to the benefit of consumers. Unfortunately, the FCC's
    decisions have moved to shore up, rather than challenge, the existing
    access duopoly. In its Wireline Broadband Order, for example, the FCC
    allowed incumbent telcos to stop providing last-mile broadband
    transmission as wholesalers. As a result, in mid-May, for example, AT&T
    notified its wholesale broadband customers that it had stopped
    accepting new orders for wholesale DSL two weeks earlier, as of May 1,
    2006. The minority draft legislation notably--and properly--would
    reverse that change, and treat these services with market power as
    telecommunications services. As another example of a regulatory action
    that buttresses duopoly, the FCC's curtailed CLEC access to unbundled
    loops in Omaha, Nebraska--including loops used for competitive DSL
    service--because of cable voice competition, effectively raising the
    price for a CLEC to use UNE copper loops combined with its own
    electronics to deliver alternative broadband services in competition
    with the cable company and incumbent telco.
        Moreover, the nationwide stability of that duopoly also keeps
    growing as the telcos and cable companies each, respectively, merge,
    with the proposed AT&T/BellSouth; potentially reaching half the homes
    in the country. This will no doubt put pressure on both Verizon and the
    cable companies to strive for similar scale. Time Warner and Comcast
    are already dividing up Adelphia between them.
        Shoring up the existing duopoly has real consequences. For one
    thing, it makes net neutrality a more significant issue. As analyst
    Blair Levin wrote earlier this year, the net neutrality debate is
    fundamentally about the market power of the current broadband telco/
    cable duopoly. It is much easier to have an Internet ``gatekeeper''
    when there are only two gates. I'll return to net neutrality later.
        In addition, we should remember the lessons of both 9/11 and New
    Orleans. Having more communications networks--rather than just a
    duopoly--means we have more ways to keep communications up and running
    in a crisis. In particular, on both 9/11, and in New Orleans, and the
    Gulf Coast after Hurricanes Katrina and Rita, the Internet proved to be
    an important means for keeping communications flowing, both among first
    responders and among victims and their families.
    B. Municipal Broadband--Antidote to Duopoly
        As S. 2686 recognizes, the best way to address problems with
    duopoly is to expand the number of unaffiliated alternatives--just as
    Congress did with wireless in requiring that new spectrum be
    distributed for broadband PCS. At EarthLink, we are actively exploring
    alternatives to telco and cable. We are not limiting our efforts to
    municipal broadband. For example, we are an investor in a broadband-
    over-powerline project with Current Communications.
        EarthLink's municipal deployments illustrate the promise of
    municipal broadband. We are very proud to assist the City of New
    Orleans rebuild its infrastructure as it recovers from the devastation
    of Hurricane Katrina. Underscoring the public safety advantages of
    having a third broadband network, our wireless network will give New
    Orleans' city officials and first responders another way to keep
    communications networks operating in the event of another, unthinkable
    tragedy.
        Our path-breaking New Orleans and Philadelphia deployments shows
    how much can be accomplished with no risk to taxpayers:

       EarthLink will build, own, and manage the wireless network,
            at no cost to the cities, while providing the cities a revenue
            share to fund its operation. And, EarthLink has guaranteed
            network upgrades on an ongoing basis. This is not a case of
            ``taxpayer funded'' competition, and will not lead to taxpayer
            funded bailouts. Nor is it funded by tax-free bonds. EarthLink
            is bearing the risk of constructing this network.

       This network will serve all the citizens of New Orleans and
            Philadelphia by providing a competitive alternative to current
            broadband and dial-up Internet services--at retail rates at, or
            below, the common price of premium dial-up Internet access.

       The initial service offering will be a symmetric One Megabit
            per second (1 Mbps) service, which is about fifty times as fast
            as a dial-up connection. It's nearly as fast as a typical DSL
            line for downloads, and is actually faster than most of today's
            broadband services when uploading data. Once we have the
            initial service deployed, we expect to offer higher-tiered
            services up to several times that fast, and we will upgrade the
            network over time so that ever higher speeds are enabled as new
            technology becomes available.

       EarthLink supports Open Access to third-party Internet
            service retailers and ``net neutrality.'' So, the project will
            provide opportunities for many local companies to resell
            broadband access service that they purchase at competitive
            wholesale rates. As the third broadband entrant in this market,
            we embrace competition as a way to make the use of our network
            more attractive. And the same is true for ``net neutrality.''
            We view this as the best way to serve the consumer and embrace
            innovation and competition.

       In Philadelphia, EarthLink's partnership with Wireless
            Philadelphia will help bridge the Digital Divide, subsidizing
            affordable high speed Internet access to low-income households
            in overlooked neighborhoods.

        These deployments will catapult New Orleans and Philadelphia into a
    worldwide leadership position in technology, and will enable officials
    to meet the needs of their residents as well as enhance the visitor,
    tourism, and business climate of those great cities. But, EarthLink is
    already taking this story on the road! In Anaheim, San Francisco, and
    Milpitas, California, EarthLink has been selected as the
    municipalities' private-sector partner. And EarthLink has (or soon
    will) propose that we unwire other municipalities--at our cost--across
    America, including:

            Honolulu, Hawaii;
            Houston, Texas;
            Boston, Massachusetts;
            Long Beach and Orange County, California;
            Milwaukee, Wisconsin;
            Arlington, Virginia; and
            Minneapolis, Minnesota.

        We also believe, however, that the EarthLink approach of partnering
    private sector expertise and capital with municipalities can also be
    harnessed to expand broadband options in small cities and rural areas
    across America. EarthLink is developing a ``Network Alliance'' program
    with just this goal in mind.
        Local entrepreneurs know best the local consumer and business needs
    for broadband access and services. EarthLink's Network Alliance program
    will aid these local businesses in partnerships providing:

       EarthLink's technical expertise in network design,
            deployment, and specifications;

       EarthLink's volume pricing for equipment and services--so
            even the smallest companies will get the best prices; and

       EarthLink's ordering, billing and other back-office
            services--so these local businesses can put full focus on
            building out networks and signing on customers.

        Our New Orleans and Philadelphia projects are great examples of
    what local governments and the private sector can accomplish together,
    as the bill envisions. And so thier record is clear, Philadelphia and
    other cities across the country solicit competitive bids for their
    projects. EarthLink has participated in other competitive bids around
    the country--with a recent successful example being San Francisco.
        S. 2686 takes the most necessary step with respect to municipal
    broadband, and that is to preempt State and local laws that prohibit,
    or have the effect of prohibiting locality-driven broadband. It also
    appropriately requires municipalities that provide broadband act
    nondiscriminatorily when applying its ordinances and rules,
    particularly those involving rights-of-way, permitting, performance
    bonding, and reporting.
        We also believe that many of the changes made in the June 9 staff
    draft improve this section of the bill, and we commend the staff for
    making these changes. First, the June 9 draft eliminates a provision
    that would have required a public provider to grant a requesting non-
    governmental entity the right to place similar facilities in the same
    conduit, trenches, and locations, subject to a public safety exception.
    While well-intentioned, this requirement would have been difficult to
    implement. For example, antenna locations can have limited capacity,
    depending on load and other engineering factors, as well as the need to
    space facilities to prevent them from interfering with one another. As
    originally drafted, the bill would have made it difficult to execute
    construction schedules.
        Second, the June 9 draft more appropriately makes clear that the
    municipal broadband provisions of this law do not preempt generally
    applicable telecommunications laws, rather than making the application
    of all generally applicable laws a condition precedent to providing
    service. One suggestion we offer here is that the June 9 draft states
    that this bill does not displace telecommunications laws that are
    generally applicable to public providers. Given the nondiscrimination
    goals, as well as the goal of enabling public providers to offer
    broadband service, what should be preserved is the application of
    telecommunications laws that apply to all providers, not just public
    providers.\5\
    ---------------------------------------------------------------------------
        \5\ Accordingly, in proposed Section 706(d)(2), on page 116, line
    9, of the June 9, 2006 Staff Draft, the words ``such public'' should be
    deleted.
    ---------------------------------------------------------------------------
        Third, the June 9 staff draft appropriately encourages public-
    private partnerships, without creating difficult line-drawing issues
    that the original bill created with respect to what constitutes a
    public-private partnership. The original bill could have been
    interpreted to include the mere lease of tower sites or other rights-
    of-way does not create a public-private partnership, and then imposed
    various competitive bidding requirements. The provisions of the staff
    draft are better, particularly given the fact that States and local
    governments have their own competitive bidding requirements.
        Fourth, the staff draft appropriately deletes the mandated ``right-
    of-first-refusal'' for local projects that are not competitively bid
    public-private partnerships, along with what could have been unduly
    costly and burdensome neutral evaluation requirements. This will
    particularly help small localities that might lack the resources to
    carry out all the previous requirements.
        Finally, we note that the general public safety exemption (new
    subsection 706(g) of the Telecommunications Act of 1996) in the
    original bill, while again well-intentioned, raised questions as to
    what rules apply to network deployments that are dual use, i.e., with a
    portion for public safety and a portion for the general public.
    Experience has shown that, particularly in smaller towns and rural
    areas, it is important to aggregate communications demand, and to make
    common use of facilities where possible. Having two sets of
    requirements, one for public safety and one for other uses, limits the
    ability to obtain the economies of scale and scope that will make these
    deployments affordable in smaller and rural communities, and which
    otherwise promote important public interest objectives such as public
    safety. The June 9 staff draft appropriately eliminated that provision.

    II. Net Neutrality--Keeping the Internet Working Through Freedom and
            Innovation
        It is undisputable that the reason the Internet has been a
    transformative engine for economic growth and innovation is that the
    Internet is an open communications platform. As Vint Cerf, the father
    of the Internet, previously told this Committee, the open Internet
    allowed companies like EarthLink, Google, Yahoo!, eBay, and Amazon to
    grow from an entrepreneur's dream to successful Internet businesses.
    Small companies and entrepreneurs can use the Internet to prove the
    worth of their ideas without having to convince a bureaucrat at a cable
    or telephone company of their economic merit--or having to pay a
    ``success'' fee to those network duopolists. The Internet drives growth
    because--like the market as a whole--it allows a thousand flowers to
    bloom without central planning or management.
        At EarthLink, we lived this history. If the telephone companies had
    had their way, our pioneering dial-up Internet access business would
    have been shut down by imposing per-minute access charges. Instead,
    because the FCC did not allow the telephone companies to become
    Internet toll collectors, millions of Americans were able to gain
    familiarity with the Internet, building the critical customer awareness
    and interest in the Internet that enabled broadband products to be
    successful when launched. Moreover, because the consumer connected to
    the Internet with an ordinary telephone call, the telephone companies
    were not permitted to try to favor some Internet services over others.
        Going back to our days battling AOL in the Internet services
    marketplace, EarthLink has long recognized that consumers are not best
    served by exclusive-access Internet networks. We believe that consumers
    are best served by an Open Access model--where network owners offer
    fair, reasonable, and nondiscriminatory wholesale rates to others who
    seek to bring customers to that network. And we don't just pay lip
    service to this model--as a network operator, we live up to the vision.
    EarthLink's municipal networks are open networks. Any qualifying ISP
    will get the same low, wholesale rate, and we welcome them to bring
    consumers to our network. And, we welcome the competition that ensues--
    it will ultimately deliver the best service and experience to
    consumers.
        As a network investor and operator, EarthLink rejects the argument
    by the telephone and cable duopolists that networks must be closed and
    applications subject to a ``success tax'' in order to promote network
    investment. We embrace ``net neutrality'' because it is both consumer
    friendly and economically right. We will succeed by adding users and by
    providing our (and our wholesale customers') users better service, not
    by throttling web-based innovation and business models. When EarthLink
    and our local government partners expand the number of facilities-based
    networks providing Internet access, the marketplace can better police
    and ensure ``net neutrality.'' This model of competition obviating the
    need for regulation is exactly what happened with wireless resale
    requirements, after this committee ended the wireless duopoly through
    spectrum auctions.
        So how can this Committee address net neutrality in the time until
    there is sufficient competition to eliminate any concerns even without
    regulation? I offer a few thoughts.
        First, recognize, as analyst Blair Levin has commented, that net
    neutrality is about market power in the local portion of the broadband
    network, and not about the Internet ``cloud'' or backbone. Accordingly,
    as Mr. Levin has put it, the more networks, the less the concern--
    provided those networks are not affiliated (as some wireless and telco
    networks are). A gatekeeper can discriminate and exercise market power
    only when there are a very small number of gates.
        Second, discrimination is particularly significant when bandwidth
    in the last mile is scarce. Put another way, a network can meaningfully
    discriminate through the last mile best if the last mile can't handle
    all the bits the consumer wants.
        Third, the Committee, and policymakers in general, should be
    particularly skeptical of network operator claims for a need to
    discriminate with respect to low-bandwidth (e.g. VoIP and e-mail) or
    high latency (e.g., streaming video for storage on a TiVo) services and
    applications.
        What this leads to is that, in order to preserve the open,
    innovative nature of the Internet and consumers' freedom to choose
    their applications and services until there is sufficient competition--
    and at least until consumers are so awash in broadband capacity that
    network neutrality that discrimination cannot be executed--EarthLink
    supports adoption of some clear rules, building on the FCC's broadband
    policy principles. In this regard, we believe that the bill recently
    introduced by Senators Snowe, Dorgan, and Inouye would provide a
    strong, interim assurance that the Internet will remain a vibrant
    driver of and tool for innovation.

    III. Empower Consumers Through Stand-Alone Broadband
        Another provision of the Snowe-Dorgan-Inouye bill that I commend
    for inclusion in S. 2686 is the provision on stand-alone broadband. As
    the Committee is well aware, in many instances, consumers who want to
    purchase DSL service must also purchase voice telephone service. Those
    types of requirements frustrate consumer choice by precluding consumers
    from buying DSL service from a BITS provider, while using another
    provider's VoIP service in lieu of the BITS provider's traditional
    circuit-switched (or VoIP) voice service.
        There is no reason to permit this type of gamesmanship that blocks
    consumer freedom to choose. Cable companies, by and large, already
    permit their customers to buy broadband Internet access without buying
    video services. As conditions of their mega-mergers, the Nation's two
    largest ILEC BITS providers, Verizon and SBC, have committed--for two
    years--to offer such stand-alone or ``naked'' DSL services to 80
    percent of their customers. Qwest has said that it will offer stand-
    alone Internet access services.
        This consumer freedom should not be temporary, and should extend
    beyond the two years pledged by AT&T and Verizon as part of their
    recent merger approvals. All consumers should be given the freedom to
    choose the service that best meets their needs, unfettered by tying
    arrangements designed to protect legacy businesses.

    IV. Interconnection and a Rationalized Interprovider Compensation
            System Are Critical for VoIP and Universal Service
        One other set of provisions that are critical to delivering on the
    bill's promise of consumer choice are its provisions regarding the
    interconnection rights of VoIP providers, and the attendant Universal
    Service, and intercarrier compensation obligations of VoIP providers.
    Today's system doesn't serve competition or Universal Service well,
    with regulatory uncertainty plaguing all industry participants.
        This Committee is well aware how critical interconnection, as well
    as access to numbers, number portability, and fair interprovider
    compensation arrangements, are to allowing consumers to have real
    choice and benefits from VoIP competition. Again, for evidence of why
    this is necessary we need look no further than our collective
    experience with wireless. Over the past ten years, we have seen an
    explosive growth in wireless services. In 1994, there were fewer than
    20 million wireless subscribers; today, there are over 200 million--a
    more than ten-fold increase.
        Prior to the 1996 Act, wireless faced extremely unbalanced terms
    when it exchanged traffic with incumbent local telephone companies. In
    some cases, wireless carriers paid the incumbent telephone company for
    every minute of traffic that the wireless carrier received from the
    incumbent LEC, and it also paid the incumbent LEC for every minute of
    traffic that originated from a wireless customer but terminated to a
    telephone number on the traditional public-switched network.\6\ These
    arrangements were hardly surprising. In 1996, wireless carriers were
    much smaller than the incumbent LECs, and had many fewer subscribers.
    Few incumbent LEC subscribers would therefore be inconvenienced if they
    were unable to call out to, or receive calls from, a wireless customer.
    However, the wireless carriers were dependent upon the incumbent LECs
    to handle all but the then very small fraction of calls placed between
    wireless consumers. The incumbent LECs were thereby able to use their
    market power over interconnection to extract fees from wireless
    carriers, regardless of whether traffic originated from the incumbent
    LEC's wireline customer, or from the wireless carrier's customer. From
    the ILEC's perspective, it was able to insist on ``heads I win, tails
    you lose'' compensation for traffic exchange. This allowed the
    incumbent LECs to raise wireless carriers' costs, thus inflating the
    prices that wireless carriers had to charge to their customers, and,
    thereby, limiting wireless carriers' competition with landline
    services.
    ---------------------------------------------------------------------------
        \6\ Implementation of the Local Competition Provisions in the
    Telecommunications Act of 1996; Interconnection between Local Exchange
    Carriers and Commercial Mobile Radio Service Providers, First Report
    and Order, 11 FCC Rcd. 15499, 16037, 16044 (1996) (``Local Competition
    Order'') (CMRS carriers complain ``that they are unable to negotiate
    interconnection arrangements based on mutual or reciprocal compensation
    because of incumbent LEC bargaining power;'' ``the problem of achieving
    mutual compensation is further compounded because incumbent LECs not
    only charge rates that bear no relationship to their costs, but also
    refuse to compensate CMRS providers for termination of landline-
    originated calls;'' ``incumbent LECs even charge CMRS providers for
    terminating incumbent LEC-originated calls;'' ``we conclude that, in
    many cases, incumbent LECs appear to have imposed arrangements that
    provide little or no compensation for calls terminated on wireless
    networks, and in some cases imposed charges for traffic originated on
    CMRS providers' networks.'')
    ---------------------------------------------------------------------------
        The 1996 Act changed all of that. Under the 1996 Act, for all local
    calls, an incumbent LEC could charge a wireless carrier (or, for that
    matter, a CLEC) for traffic that the wireless carrier originated, but
    could no longer charge a wireless carrier for traffic that originated
    from an incumbent LEC's own customer.\7\ Moreover, under the 1996 Act,
    the wireless carrier is entitled to compensation for all local traffic
    that originates on the ILEC's network and terminates on the wireless
    carrier's network: the rate the ILEC pays the wireless carrier mirrors
    the rate that it charges the wireless carrier. Furthermore, the FCC
    ruled that reciprocal compensation rules, and not intrastate and
    interstate access charges, would apply to all CMRS traffic that
    originated or terminated within a ``Major Trading Area,'' a large
    region used for PCS licensing that was much larger than traditional
    ILEC local calling areas.
    ---------------------------------------------------------------------------
        \7\ Technically, the 1996 Act's reciprocal compensation rules apply
    to all traffic that is not interstate or intrastate exchange access,
    information access or exchange services for such access. See 47 CFR
    51.701.
    ---------------------------------------------------------------------------
        There were two significant results from these changes with respect
    to wireless intercarrier compensation. First, incumbent local telephone
    companies could no longer use traffic exchange fees to increase a
    wireless carrier's costs, and thus prevent a wireless carrier from
    offering prices that would compete with the incumbent local telephone
    company's core services. By making these charges cost-based and
    symmetrical, all carriers were required to compete. Second, because the
    traffic exchange fees that wireless carriers paid were no longer
    strictly tied to ILEC traditional wireline local calling areas,
    wireless carriers were able to offer regionwide and national calling
    plans. This led directly to the emergence of today's popular wireless
    one-rate bucket pricing plans.
        We urge that S. 2686 fully incorporate the core teachings of the
    wireless experience and applies those lessons to broadband and VoIP.
    Like pre-1996 wireless carriers, VoIP providers will be very small
    relative to the incumbent LECs, and will have a much greater need both
    to receive calls from, and terminate calls to the ILEC's customers than
    the ILEC will need to do with respect to the VoIP provider's customers.
    This asymmetric market power is exactly what led to the asymmetric
    charges between incumbent LECs and wireless carriers prior to 1996.
    Should the large incumbent telephone companies be able to impose those
    unbalanced, asymmetric charges far above cost-based levels, the
    incumbents will be able to squeeze VoIP out of competition for
    mainstream consumers, and relegate VoIP to a niche--much as wireless
    occupied only a niche prior to 1996.
        Accordingly, S. 2686 should, as the original draft did, give all
    VoIP providers, not just ``facilities-based'' VoIP providers the rights
    to obtain telephone numbers, to port numbers, and to interconnect with
    the local telephone network. If ``facilities-based'' is defined too
    narrowly, a provider such as EarthLink, which purchases wholesale DSL
    from both CLECs and ILECs to offer its services, could be denied
    interconnection, telephone numbers and number portability simply
    because it doesn't physically own, or provision, its last-mile
    transmission facilities. Provisioning the ``last-mile'' shouldn't be
    the test for interconnection, number portability, or access to numbers,
    so long as the VoIP provider is operationally present--itself or
    through an agent--in the area in which it wants to exchange traffic
    with the legacy telephone network. In our view, the changes made by the
    June 9 staff draft, head in the wrong direction.
        Second, EarthLink recognizes the critical importance of Universal
    Service, and stands ready, as a VoIP provider, to contribute to the
    Federal Universal Service mechanisms. As an ISP, CLEC, and VoIP
    provider, EarthLink today pays both directly and indirectly to support
    Universal Service. The Committee is properly considering how that
    Universal Service payment mechanism can be improved and broadened.
        We embrace our duty to support Universal Service: Universal Service
    ties our country together, and brings economic and educational
    opportunity to all corners of our country. As the staff draft correctly
    recognizes, a cornerstone of any mechanism must be that whatever
    mechanisms it authorizes the FCC to adopt are competitively neutral,
    and do not require us to engage in complex legal exercises to determine
    whether a particular dollar of customer revenue is subject to, or
    outside of, Universal Service assessment. Today's mechanisms are flawed
    in both respects. We also urge that if the bill is going to permit
    states to assess Universal Service fees, as the staff draft does, that
    those fees not extend more broadly than to the services covered by the
    Federal mechanism, and that there be some limits on the magnitude of
    those State fees.
        Third, while we do not object to the idea, as the staff draft
    contemplates, that providers should pay each other fair interprovider
    compensation, we are concerned that neither S. 2686, nor the staff
    draft empower or direct the FCC to make sure the interprovider
    compensation system is fair, rational, and economically sustainable as
    a precondition of those obligations. The current intercarrier
    compensation system on the public-switched network is universally
    recognized to be Byzantine, economically irrational, and broken.
    Today's system imposes different charges for the same use of the
    network depending of whether a call is ``local,'' interstate ``long
    distance,'' or intrastate ``long distance,'' whether it is a wireline
    call or a wireless call, and whether it is an information service or a
    telecommunications service. Unless S. 2686 addresses this issue head-
    on, it will leave a gaping hole that will ultimately defeat all of the
    bill's goals, including consumer choice, broadband deployment, and the
    preservation of Universal Service. Accordingly, the Committee should
    adopt the provisions of the minority staff draft that both give the FCC
    the authority to address interprovider compensation issues, and require
    the FCC to take action to reform the current system within 180 days.
        Before I close, I leave you with a note of caution on a topic not
    addressed by the S. 2686 or the staff draft--forbearance under Section
    10 of the Communication Act. The FCC has taken an extremely expansive
    view of its forbearance authority, and without necessarily requiring
    that a competitive marketplace be supplying what regulation was
    assuring. So, for example, the FCC has consistently cut back on the
    scope of Section 251(c)'s unbundling requirements, going so far as to
    forbear from Section 251(c) entirely with respect to unbundled loops in
    Omaha, Nebraska. The FCC did so because a competitive, wholesale market
    for loops had developed (in which case forbearance would make sense),
    but because the cable company--which didn't use unbundled loops--was
    able to serve residential customers over its cable plant. And perhaps
    even more troubling, the FCC recently allowed a forbearance petition to
    be granted by inaction. In other words, the FCC simply let a private
    party assume the FCC's delegated rulemaking authority by refusing to
    act. This raises very troubling and serious constitutional issues--most
    notably whether an administrative agency can, through inaction, allow a
    private party to rewrite the laws without any affirmative governmental
    action, let alone action by the Congress and a signature of the
    President.
        On behalf of EarthLink, I thank the Committee for the opportunity
    to present these views. The staff has done yeoman's work, and presented
    you with a thoughtful starting point for further legislative efforts.
    By continuing to promote additional broadband competition, and by
    preserving the Internet's essential character as a place that fosters
    economic innovation without duopoly control, the Committee can craft a
    truly pro-consumer, pro-innovation legislative framework for broadband
    services.

        The Chairman. Thank you very much.
        The next witness is Steve Largent, the President and Chief
    Executive Officer of CTIA--The Wireless Association, in
    Washington.

      STATEMENT OF HON. STEVE LARGENT, PRESIDENT/CHIEF EXECUTIVE
           OFFICER, CTIA--THE WIRELESS ASSOCIATION

        Mr. Largent. Chairman Stevens and Co-Chairman Inouye, and
    members of this Committee--thank you for, yet again, another
    opportunity to testify before the Committee, to offer the
    wireless industry's views on the Communications, Consumer's
    Choice, and Broadband Deployment Act of 2006.
        Over the course of the last year, I have closely followed
    the debate and rationale as to why Congress needs to update our
    national communications laws, which has led us to this point
    today. The purpose is simple: create a national deregulatory
    framework, induce competition, spur innovation, and lower
    customer prices. Ironically, while Congress is working to
    increase competition and innovation in other telecom sectors,
    vis-a-vis a national framework, State legislatures and PUCs
    throughout this country are working hard to impose disparate
    and conflicting State-by-State regulations on the industry I
    represent. I have listed just a few of these proposed State
    regulations in my written testimony.
        I guess it would be somewhat understandable if there were
    only one or two carriers to choose from, or prices had gone up,
    or consumer complaints were on the rise, or there was a lack of
    handsets that were offered, or a lack of innovation. But none
    of those things I've just mentioned are the case. In point of
    fact, the opposite is true. Americans have come to rely on, and
    enjoy, the ability to communicate anyplace, anytime that
    wireless affords. CTIA and our member companies have been
    working with this Committee to reinforce the national
    deregulatory framework Congress created in 1993. I would hope
    that Members of this Committee would carefully consider and
    support the merits of such a proposal.
        Regarding the issue of net neutrality, the wireless
    industry has seen no evidence that there is a problem that
    needs to be resolved, or would be solved, by prescriptive
    regulations. CTIA believes the Internet has derived its
    strength by virtue of its freedom from regulation; and,
    therefore, believes the net neutrality provisions contained in
    this legislation are the appropriate approach to take.
        Finally, as I stated at a hearing a couple of weeks ago,
    when it comes to USF reform, the promotion of wireless voice
    and broadband service is a solution, not the problem. Since
    1997, of the $22 billion spent on high-cost Universal Service
    subsidies, $20.9 billion has gone to incumbent LECs, while only
    $1.1 billion has gone to wireless ETCs. This year, wireless
    carriers--more accurately, wireless customers--will pay over 2-
    and-a-half billion dollars into the Universal Service Fund. It
    is CTIA's belief that if wireless customers are going to chip
    in, to the tune of 2-and-a-half billion dollars, they deserve a
    better return on their investment than what they are currently
    receiving.
        In summary, I would ask the Committee to support
    strengthening the wireless industry's national framework,
    refrain from imposing anticipatory and prescriptive net
    neutrality regulations, and take into account that the current
    Universal Service system does not reflect current market
    realities. Consumers never benefit from regulations that
    distort the competitive market. CTIA's USF reform proposals
    demand accountability and results from all fund recipients.
        Again, thank you, Mr. Chairman, for the opportunity to
    offer some additional views, and I'll be happy to elaborate
    further on any questions you may have.
        [The prepared statement of Mr. Largent follows:]

      Prepared Statement of Hon. Steve Largent, President/Chief Executive
              Officer, CTIA--The Wireless Association'

        Chairman Stevens, Co-Chairman Inouye, and members of the Committee,
    thank you for the opportunity to appear before you this morning to
    discuss issues relating to the future of U.S. telecommunications law.
    As you determine the most appropriate ways to spur competition and
    innovation in the telecom sectors while simultaneously protecting
    consumers, I encourage you to take steps to further the positive impact
    that the wireless industry has had on the U.S. economy, and on the
    level of competition for voice and data services. The wireless sector
    is repeatedly touted as the model of an industry that has flourished in
    a national deregulatory framework, and it is becoming apparent that
    this Congress is attempting to deliver a similar national framework to
    other telecom sectors. Ironically, while Congress is working to
    increase competition and innovation for other sectors via a national
    framework, regulatory bodies at the State level are attempting to take
    wireless far back into the 20th century by imposing disparate and
    burdensome State-by-State restrictions. The innovative national
    approach applied to the wireless industry in the 1993 Budget Act has
    proven its incredible value and is one which recognizes that the
    consumer is the best regulator.

    The Consumer is the Best Regulator in a Competitive Market
        In 1993, Congress passed The Omnibus Budget Reconciliation Act of
    1993 (OBRA 1993), which added a new section 332(c) to the
    Communications Act preempting state rate and entry regulation. Congress
    recognized that pre-OBRA state regulations actually operated to slow
    down competition, delay entry, and minimize or prevent carriers from
    developing new and innovative rate plans. Section 332(c)(3) preempted
    State and local rate and entry regulation of wireless carriers, but
    preserved State authority over undefined ``other terms and conditions''
    of commercial mobile radio services. State commissions have asserted
    this ``other terms and conditions'' authority as the basis for an
    increasingly broad range of regulation.
        State legislatures and commissions are increasingly introducing and
    passing an array of conflicting laws and regulations. Just last week, a
    bill was introduced in the Michigan Senate that requires a mandatory
    trial period extending well beyond the time the customer receives his
    first bill that limits early termination fees to $20, and requires the
    Michigan Public Service Commission to establish service quality
    standards for wireless service. Simultaneously, the New York Assembly
    is currently considering a bill that would require its Consumer
    Protection Board to adopt a different set of new rules and regulations
    on wireless carriers requiring a different trial period. In addition,
    the New York Assembly is considering what written materials have to be
    provided to customers when, as well as at what time within a contract
    period, carriers can make changes to their rates. Surely, Congress did
    not intend for Michigan wireless subscribers to have service under one
    set of rules while New Yorkers have service under a completely
    different set.
        A review of the results of this ground-breaking deregulatory
    framework have been astounding and altogether unique as compared to
    other telecom sectors. In 1993, states were preempted from regulating
    entry. As a result, the wireless industry has gone from two wireless
    carriers per market to an average of five per market. States were
    preempted from regulating rates. Competition and market forces have
    caused the average price per minute to fall about 84 percent. There
    were 11 million wireless customers in the United States when OBRA was
    passed, now there are 219 million customers. These customers have the
    ability to pick among carriers for better service quality, different
    plans, and unique offerings. The lightly regulated wireless industry
    has invested $187.8 billion in capital expenditure since the OBRA was
    passed--not including the billions of dollars spent purchasing
    spectrum. Where once a limited number of people had an expensive voice
    only option, consumers now have access to voice, text messages, office
    systems, e-mail access, mobile television, web access, games, and other
    entertainment options.
        Opponents to the continued, national, light-touch regulation
    Congress put in place in 1993 claim they are trying to protect wireless
    consumers. Here is the pivotal question you need to be asking--protect
    wireless consumers from what? Lower prices? More providers to choose
    from? More choices among rate plans? Innovative new devices with
    features like camera phones or that are sleekly designed? Multiple
    billing options, from rollover minutes to text message billing? Clarity
    on bills about what the charges are for? Cheaper devices?
        Let me be clear, the wireless industry supports consumer
    protection: protections against confusion about what consumers can
    expect from their provider and how their service operates; protection
    from a decline in the variety of services and devices they can choose
    from; protection from the reduction in their ability to obtain the
    exact device and service plan they want; and the lack of ability to
    receive the best services and devices.
        State-by-State, wireless specific laws and regulations over issues
    such as the size of the font of marketing materials, and how long of a
    trial period consumers have to test their phone undermine the national,
    deregulatory framework Congress instituted in 1993 and that produced
    the enormous consumer benefits I outlined earlier. I respectfully ask
    you again--what is the problem more laws and regulations would solve
    for the wireless consumer? We often hear that State-by-State laws and
    regulations are necessary so that wireless consumers have somewhere to
    go, close to home, to have their concerns addressed. We agree that
    wireless consumers need recourse to address whatever issues they have.
    And they do! State attorneys general have and will continue to have
    authority to prosecute fraudulent business practices--and they exercise
    their authority.
        There are many forums for wireless consumers to address and resolve
    their concerns at both the State and Federal levels. The FCC's tracking
    of quarterly complaints shows that wireless complaints have fallen 37
    percent over the last year, and now stand at 22 complaints per million
    wireless customers--that's an incredibly low complaint ratio that
    continues to improve as carriers expend significant resources to
    address consumer issues. But what about those wireless consumer
    concerns. The wireless industry does not turn a deaf ear to them. It is
    the foundation of our business model to attract and keep customers.
    Some industry critics would have you believe that we actually try to
    annoy our customers and drive them away. Nothing could be further from
    the truth. Wireless companies take customer service very seriously,
    spending millions of dollars a year on training personnel and upgrading
    their call center capabilities.
        Wireless carriers are also spending millions of dollars a year on
    behalf of wireless consumers by opposing excessive and discriminatory
    taxes imposed by State and local governments. Wireless consumers are
    bearing the brunt of budget shortfalls as cities and localities view
    the telecom consumer as the golden goose for revenue enhancement.
    Ironically, some of the states that are the most aggressive in pushing
    for regulation on wireless carriers in the name of the consumer, are
    also the states with the highest rates of taxes and fees on their
    constituents.
        As we enter our third decade, the wireless industry is poised to
    enter a wireless renaissance, bringing advanced services like wireless
    Internet, to more than 200 million mobile Americans. We are at a
    critical juncture in our evolution, and need your leadership to make
    this renaissance a reality for consumers at prices they can afford.
    Shoring up the national, deregulatory framework you created in 1993, is
    the best way to empower consumers and protect their rights and access
    to innovative, convenient, and affordable wireless devices and
    services. How to do this? Reaffirm the national framework for wireless
    carrier practices, and allow the FCC to regulate only in instances
    necessary for public health and safety, or demonstrated market failure.

    Wireless Perspective on Regulating the Internet
        Recently, a concept called ``net neutrality'' has generated intense
    debate within the context of broader reforms of our telecommunications
    laws. The issues are complex and confusing. It appears the only thing
    everyone agrees on is that no one can agree on what net neutrality
    means. The wireless industry has seen zero evidence that there is a
    problem that needs to be, or would be, solved through the variety of
    net neutrality legislative proposals currently circulating. The
    industry agrees with FCC Chairman Martin that the Commission already
    has the jurisdiction and ability to address any problems in this area,
    and urges you to carefully consider the unintended, negative
    consequences that could befall the U.S. wireless consumer if
    anticipatory regulations are enacted. The Internet, like the wireless
    industry, has never stopped growing and evolving. There is no reason to
    restrict the growth or evolution of either, unless, or until, a real
    marketplace failure is identified.
        In particular, the wireless industry is quite concerned that many
    of the unintended consequences that would flow from some of the net
    neutrality regulations being considered would have a particularly
    negative impact on wireless consumers. The industry is also troubled
    that the proposed net neutrality regulations being contemplated will
    discourage investment the industry needs to continue building the
    infrastructure, design the devices and operate the evolving networks
    needed to make a wireless renaissance a reality, and sustain consumer
    demand for more advanced mobile services. CTIA believes the Internet
    has derived its strength, and contributed to the economy, by virtue of
    its freedom from regulation, and, therefore, believes the net
    neutrality provisions of the Communications, Consumer's Choice, and
    Broadband Deployment Act of 2006, which calls for a review of the
    current system, in lieu of regulation, is the appropriate approach to
    take.

    Universal Service Reform for the Wireless Consumer
        Let me turn now to the urgent need for Universal Service reform.
    Over the last decade, wireless industry contributions to Universal
    Service have been steadily rising, while Universal Service
    distributions remain primarily directed to wireline carriers. Wireless
    carriers and their customers are responsible for about one-third of
    contributions to Universal Service. The wireless industry's payment
    into the Federal Universal Service programs will likely exceed $2.5
    billion this year. Meanwhile, the vast majority of Universal Service
    subsidies are directed to our competitors--wireline carriers. Wireless
    carriers receive only about 13 percent of Universal Service support
    overall and less than 20 percent of high-cost Universal Service
    support. Since 1997, of the $22 billion spent on high-cost Universal
    Service subsidies, $20.9 billion has gone to incumbent LECs, and only
    $1.1 billion has gone to wireless carriers. This inequity exists even
    as consumers--the only intended beneficiaries of Universal Service--are
    demanding more and more wireless services. In fact, there are now more
    mobile wireless subscribers than wireline switched-access lines.
        The wireless industry shares Congress's commitment to the goals of
    Universal Service and its concerns about growth in the size of the
    Universal Service Fund. Wireless carriers are committed to the
    efficient deployment of networks in rural America, and Universal
    Service can play an important part in making that happen. Because of
    our net payer position, the wireless industry has strong incentives to
    ensure that Universal Service contributions are collected from as wide
    a base of contributors as possible, while ensuring that both incumbent
    and competitive eligible telecommunications carriers (ETCs) receive no
    more support than is necessary to achieve the goals of Universal
    Service. On the contribution side, CTIA supports adoption of a numbers-
    or connections-based contribution methodology. On the distribution
    side, CTIA supports market-driven reforms to curb demand for Universal
    Service subsidies. The current Universal Service system does not
    reflect current market realities. It favors incumbent wireline networks
    and that does not help consumers. Consumers never benefit from
    regulations that distort the competitive market. In contrast to the
    current Universal Service mechanisms, CTIA's reform proposals would
    demand accountability and results from all Fund recipients, and would
    encourage and reward efficiency. Under CTIA's proposals, both
    incumbents and competitors would receive less support.
        As this Committee works to update our Nation's telecommunications
    laws, please consider the tremendous positive impact that the wireless
    industry has had on the ability of consumers to communicate, on the
    U.S. economy, and on the competitive landscape.

        The Chairman. Thank you.
        The next witness is Philip Jones, Commissioner of
    Washington Utilities and Transportation Commission, the WUTC,
    of Olympia, Washington.

             STATEMENT OF HON. PHILIP JONES, COMMISSIONER,

           WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION

              (WUTC); ON BEHALF OF NATIONAL ASSOCIATION OF

                REGULATORY UTILITY COMMISSIONERS (NARUC)

        Mr. Jones. Thank you, Mr. Chairman, and Co-Chairman Inouye.
        I am Philip Jones, Commissioner with the Washington
    Utilities and Transportation Commission, a resident of Seattle,
    Washington, and a member of the National Association of
    Regulatory Utility Commissioners, which you know as NARUC. I
    serve as Chairman of NARUC's Federal Legislative Subcommittee
    on Telecommunications in our efforts in this bill, and I'm also
    a member of the Intercarrier Compensation Task Force, Chairman
    Stevens, which we have visited with you before.
        We commend you and your staff on the great efforts you've
    made in the manager's amendment that was released last Friday
    night. We've scrambled hard to develop testimony to respond to
    it. And just let me offer a few comments today, especially
    after Mr. Largent addressed some of the comments on the role of
    State PUCs for wireless communication.
        NARUC's approach changed quite a bit when we released our
    white paper in July 2005, what we call ``Cooperative
    Federalism.'' We undertook a dialogue with the stakeholders in
    the communications industry to ensure that as the industry
    changes--wireless, VoIP, triple-play broadband bundles, and
    also the mega-mergers--that we have a better paradigm at the
    State level for dealing with regulation.
        The first principle is technology, neutrality. We are
    trying to come up with a regulatory approach that establishes
    that any regulations that we developed are technology-neutral.
    The other is the concept, instead of end-to-end point,
    interstate-intrastate--what is inter and what is intra? What is
    long distance, what is local?--develop a ``functional
    federalism'' approach. In that model, we believe that the
    States excel in areas like consumer protection, efficiently
    resolving intercarrier disputes, ensuring public safety, such
    as E-911, and assessing the level of competition in local
    markets, and tailoring national Universal Service to those
    goals, specific to the State.
        This is actually not a new model. For the past several
    years, wireless carriers have been governed by Section 332--
    specifically, 332(c) of the Act, which does not--I emphasize
    ``not''--declare wireless to be interstate or intrastate, but,
    rather, assigns appropriate functions to State and Federal
    authorities. It assigns spectrum management functions to the
    FCC, includes a rebuttable presumption of competitiveness for
    wireless carriers, and allows States to handle--States to
    handle--consumer protection and other terms and conditions of
    service. Wireless carriers are also able to avail themselves of
    State arbitration procedures for interconnection to the
    wireline phone network, what Mr. Putala, of EarthLink,
    mentioned. We think this is a model of successful federalism
    that shouldn't be tampered with.
        Three areas I'd like to address: the first is consumer
    protection. We are pleased to see that the manager's amendment
    and the Inouye staff draft--neither of those seek to pare back
    the role of State commissions in consumer protection. We think
    this is appropriate. Under current law, State commissions
    handle--hundreds of thousands of complaints every year. And we
    generally provide individual relief to each complaint, often
    resolving complaints in a matter of weeks, or even days, as
    opposed to the FCC complaint process.
        We are concerned, and raise the issue today, because the
    wireless industry, in particular--and my colleague to the
    right, my good friend, Steve Largent--has launched an
    aggressive lobbying effort to create a technology-specific
    preemption standard for their telecommunication services. From
    our point of view, it makes little sense to eliminate scores of
    consumer protections at the State level on the basis of that
    technology. And I should add that States are actively involved
    in issues like ETC designations, in which the wireless
    companies receive a good deal of Federal revenue to provide
    service to high-cost areas, and we deal with the wireless
    carriers in a positive way, generally.
        Interconnection, Section 213 of your manager's amendment,
    is a good step forward in applying the rights and obligations
    of interconnection to VoIP providers. We support that
    provision. Going forward, it is our hope that stakeholders
    participating in NARUC's ICC--our Intercarrier Compensation
    Task force--will make a recommendation to the FCC soon,
    probably in the month of July, about particular ways to
    rationalize the intercarrier compensation payment structure--
    not the provisions in your bill, but the payment structure.
        On Universal Service, we appreciate the effort to broaden
    the base. Mr. Chairman, you consistently use the word
    ``communications services.'' We appreciate that you have
    broadened the base on USF to all communications services,
    including broadband. In particular, we appreciate your focus in
    the manager's amendment on allowing States to assess on either
    revenues or bandwidth or on working telephone numbers for the
    State USF programs that do exist. It's important to note that
    22 State programs exist today. These States are providing
    useful functions in service to high-cost areas, and we would
    like to ensure, as the process moves forward, that these
    provisions are protected.
        On video franchising, I--NARUC has not taken a formal
    position on video franchising, and I would just note that
    several States--South Carolina, New Jersey, California, Indiana
    and others have acted in the past few months to adopt State
    legislative approaches to video franchising, and that is
    something that we would urge the Committee to address in the
    deliberations ahead. We have noted, with pleasure, in the
    latest staff draft, that the State PUCs are no longer being
    asked to referee or arbitrate on definition of gross receipts.
    However, you have given us some new obligations on redlining
    and enforcing redlining provisions. These are so new to us, and
    based on the fact that so many States have so many different
    approaches, we are caucusing our States on an urgent basis now
    to see what they think of that provision, and will get back to
    you and your staff as soon as possible.
        Thank you.
        [The prepared statement of Mr. Jones follows:]

       Prepared Statement of Hon. Philip Jones, Commissioner, Washington
        Utilities and Transportation Commission; on Behalf of National
            Association of Regulatory Utility Commissioners (NARUC)

        Mr. Chairman, Co-Chairman Inouye, and members of the Committee,
    thank you for the opportunity to testify today on S. 2686, the
    Communications, Consumer's Choice, and Broadband Deployment Act of
    2006.
        I am Philip Jones, Commissioner with the Washington Utilities and
    Transportation Commission (WUTC) and a member of the National
    Association of Regulatory Utility Commissioners (NARUC). I serve as
    Chairman of NARUC's Federal Legislative Subcommittee on
    Telecommunications and as a member of the Association's Intercarrier
    Compensation Task Force. NARUC represents State public utility
    commissions in all 50 states, the District of Columbia, and U.S.
    territories, with jurisdiction over telecommunications, electricity,
    natural gas, water and other utilities.
        We commend you and your staff, as well as Co-Chairman Inouye, and
    other Committee Members, for getting us to where we are today. While
    there is still much to be done, we appreciate your hard work and
    especially your responsiveness to the specific concerns we have raised
    along the way.

    NARUC's Approach to Federalism
        NARUC's analysis of the recently released manager's amendment to S.
    2686 and the other bills before this Committee is guided by our
    ``Federalism and Telecom'' white paper that we approved in July 2005,
    after an extensive dialogue among ourselves and with stakeholders,
    examining every Federal policy position we had taken since the passage
    of the Telecommunications Act of 1996.
        We undertook this dialogue to be sure that, as Congress reexamined
    the Act, our policy positions reflected the impact of all the new
    technologies and market developments in recent years, including the
    emergence of Voice-Over-Internet-Protocol (VoIP), triple-play broadband
    bundles, mega-mergers, and the tremendous growth of wireless
    telephony--and all the associated challenges to traditional Federal and
    State oversight roles. In the end, we came to two important
    conclusions.
        The first was that, with the pace of innovation accelerating, any
    major bill must strive to be as technology neutral as possible.
    Whenever technological change and restructuring sweeps through an
    industry, there is pressure to give new technologies special status
    under the law because they don't appear to fit the ``old'' regulations.
    The problem with this approach is that the new services compete
    directly with traditional services, and by creating brand new
    regulatory silos, you distort the market, encouraging regulatory
    arbitrage instead of true innovation. The better approach, in our view,
    is to ask how these new technologies change the environment for all
    players, and reexamine the first principles behind the regulations that
    are on the books for everyone.
        The second conclusion was the development of our ``functional
    federalism'' concept, which is the idea that if Congress is going to
    rewrite the Telecommunications Act, it doesn't have to be bound by
    traditional distinctions of ``interstate'' and ``intrastate,'' or
    figure out a way to isolate the intrastate components of each service.
    Instead, a Federal framework should look to the core competencies of
    agencies at each level of government--State, Federal and local--and
    allow for regulatory functions on the basis of who is properly situated
    to perform each function most effectively.
        In that model, States excel at responsive consumer protection,
    efficiently resolving intercarrier disputes, ensuring public safety,
    assessing the level of competition in local markets, and tailoring
    national Universal Service and other goals to the fact-specific
    circumstances of each State.
        This is not actually a new model. For the past several years,
    wireless carriers have been governed under Section 332 of the Act,
    which does not declare wireless to be interstate or intrastate, but
    rather assigns appropriate functions to State and Federal authorities.
    It assigns spectrum management functions to Federal authorities,
    includes a rebuttable presumption of competitiveness for wireless
    carriers, and allows States to handle consumer protection and other
    terms and conditions of service. Wireless carriers are also able to
    avail themselves of State arbitration procedures for interconnection to
    the wireline phone network. Under this model, the wireless industry has
    already eclipsed the traditional phone business in total number of
    subscribers and now has over 200 million subscribers and $118 billion
    in annual revenues--a model of successful federalism at work.

    Consumer Protection
        Neither the manager's amendment, nor the Inouye draft seeks to pare
    back the role of State commissions in consumer protection, and we think
    this is appropriate. Under current law, State commissions handle
    hundreds of thousands of consumer complaints every year, and generally
    provide individual relief to each complaint, often resolving complaints
    in a matter of weeks, or even days, through informal processes. In
    addition, we are able to address new and novel concerns as they arise,
    whether they are the result of new fraudulent schemes or unfair terms
    in boilerplate service contracts.
        We are concerned, and raise the issue today because the wireless
    industry in particular has launched an aggressive lobbying effort to
    create a technology-specific preemption standard for their
    telecommunications services. From our point of view, it makes little
    sense to eliminate scores of consumer protections at the State level
    solely on the basis of the particular technology used. In the case of
    wireless, it makes even less sense because the industry has prospered
    so well under the division of authority that now exists. And while some
    have argued that wireless is ``too interstate'' to face telecom-based
    State consumer protections, our experience is that the carriers have
    little trouble finding their way to Olympia, or Sacramento, or
    Anchorage when they are asking for something, such as certification to
    receive Universal Service dollars or interconnection to the wireline
    networks.
        Most importantly for an industry that is quickly replacing
    traditional landline phone service in many people's lives, there are
    legitimate consumer protection issues, often associated with selling
    service via long boilerplate contracts with terms of a year or more.
    Now is probably a good time to let those concerns shake out instead of
    cutting off avenues of relief for consumers.

    Interconnection
        We appreciate the specific recognition in both the manager's
    amendment, and the Inouye draft of State commission expertise and
    effectiveness when it comes to mediating, arbitrating, and enforcing
    interconnection agreements between carriers. In a networked industry
    like telecom, fierce competitors will always have to cooperate to
    operate a seamless network of networks, but there are frequent
    incentives for one carrier or another to frustrate interconnection for
    anti-competitive reasons. State commissions are generally recognized as
    the fastest, most effective forum for resolving interconnection
    disputes.
        It makes particular sense to extend the right of interconnection to
    VoIP providers, so long as they are willing to undertake the
    responsibilities of providing a telecommunications service, such as
    paying appropriate intercarrier compensation, and making equitable
    contributions to Universal Service. By the same token, we support the
    provisions in the Inouye staff draft clarifying that deployment of IP
    infrastructure does not free a provider of the duty to interconnect.
        Going forward, it is our hope that the stakeholders participating
    in NARUC's Intercarrier Compensation Task Force will make a
    recommendation to the FCC soon about particular ways to rationalize the
    intercarrier compensation payment structure, and clarify the
    obligations of all providers in a way that eliminates distortions and
    incentives for arbitrage.

    Universal Service
        One of the most important things the new legislation would do is
    stabilize the contribution base for the Federal Universal Service Fund.
    Spreading the base broadly to all those services that utilize and
    benefit from a ubiquitous communications infrastructure is a simple
    question of fairness, and will reduce the opportunities for regulatory
    arbitrage that distort the market.
        We are also pleased that both the Stevens bill and the Inouye staff
    draft recognize the importance of State Universal Service programs.
    Universal service is a jointly shared responsibility between the States
    and the Federal Government, with 26 State programs distributing over
    $1.3 billion--nearly 20 percent of the overall national commitment to
    Universal Service. This joint approach benefits both ``net donor'' and
    ``net recipient'' states because it lessens the burden on an already
    sizable Federal program and permits another option when Federal
    disbursement formulas do not adequately serve a particular state or
    community.
        State Universal Service funds face the same structural funding
    challenges as the Federal program, with many new services that rely on
    a ubiquitous network (and exchange traffic with the PSTN) failing to
    contribute equitably to either one. That's why it is good that both
    manager's amendment and the Inouye staff draft would allow State funds
    to broaden their contribution bases to include total revenues and
    Voice-Over-Internet-Protocol (VoIP) services. Ultimately, we'd
    encourage you to make the assessment authority for both State and
    Federal programs co-extensive.
        Committee Members should also know that the NARUC Intercarrier
    Compensation Task Force, on which I serve, is close to winding up its
    work. At a previous hearing before this Committee, my colleague Ray
    Baum of the Oregon Public Utilities Commission testified that the
    impact of intercarrier compensation on the revenue streams of carriers
    is more than $10 billion. I would only caution you that every previous
    plan to substantially lower access charges, including both the
    ``CALLS'' plans and the ``MAG'' plan, has involved a combination of
    retail rate changes and increased Universal Service support. So as
    difficult as it is to address funding and distribution issues with USF
    today, we need to remember that there are additional implicit subsidies
    in the system that will turn into additional stresses on the Fund if
    and when they are made explicit.

    Video Franchising
        While NARUC does not take a formal position on the video
    franchising provisions in the manager's amendment and other proposals
    before the Committee, a number of State legislatures and commissions
    have acted under current law to reform and streamline their processes.
    In Texas, Indiana, South Carolina, and Kansas, this has meant the
    creation of statewide franchises awarded by the State commission or
    another agency. In Virginia and Arizona, it meant a streamlining of the
    local franchise process.
        As a general matter, we want to encourage vigorous competition in
    the video market and also recognize the important roles that State and
    local governments should play in any framework. To that end, we are
    currently engaged in a dialogue with a number of stakeholders through a
    Working Group chaired by Commissioner Daryl Bassett of Arkansas, and
    will soon issue a white paper detailing the particular roles that
    NARUC's members are playing in this area.
        While the manager's amendment no longer delegates a specific role
    to State commissions for consumer complaints and calculations of gross
    revenues, it does designate both State commissions and attorneys
    general to handle income-based redlining complaints. We are surveying
    the NARUC members to find out which State enabling statutes would allow
    their commissions to play this role, although at first blush it appears
    that role would be most feasible in the 12 or so States that have
    already vested some level of franchising authority in the State
    commission.

    E-911 and Emergency Communications
        While it is not addressed in S. 2686, another important component
    of a technology neutral policy is ensuring that VoIP providers are
    meeting their duty to provide 911 and E-911 functionality to consumers.
    States were first to raise this issue back in 2004 when the New York
    and Minnesota commissions ordered Vonage Holdings to provide emergency
    dialing services to its customers. While both orders were the subjects
    of legal challenge, we are pleased to see that in the intervening two
    years, the FCC has acted to require the same functionality, and
    Congress is not far behind.
        This is also an area where the same State commissions have worked
    through informal avenues to help VoIP companies gain access to the 911
    call center infrastructure, so they could make those capabilities
    available as early as possible. We are continuing to refine our Federal
    policy positions under the guidance of a Working Group chaired by
    Commissioner Connie Hughes of New Jersey.

    Conclusion
        We look forward to working with Chairman Stevens, Co-Chairman
    Inouye, and all the members of the Committee as you consider additional
    refinements and amendments to S. 2686, and move toward consideration by
    the full Senate and final enactment. Our goal at all times has been to
    offer ourselves not as traditional advocates with a bottom line to
    defend, but as resources in each State and partners in seeking the best
    deal for our mutual constituents.

        The Chairman. Thank you very much, Mr. Jones.
        Our last witness, Robert Foosaner--right?
        Mr. Foosaner. Foosaner, sir.
        The Chairman.--Foosaner, Vice President of Government
    Affairs and Chief Regulatory Officer for Sprint Nextel, of
    Reston, Virginia.

              STATEMENT OF ROBERT S. FOOSANER, SENIOR VICE

           PRESIDENT, GOVERNMENT AFFAIRS AND CHIEF REGULATORY

                   OFFICER, SPRINT NEXTEL CORPORATION

        Mr. Foosaner. Chairman Stevens, Co-Chairman Inouye, and
    members of the Committee, my name is Bob Foosaner, and I'm the
    Senior Vice President of Government Affairs, as the Chairman
    has said, at Sprint Nextel. I appreciate being given the
    opportunity to be part of today's hearing, and I commend you
    for taking on the complex task of reforming communications law.
        Nextel supports the goals of the bill before you today--
    namely, encouraging competition and focusing on the deployment
    of broadband nationwide. We believe the bill would be enhanced
    by addressing the critical need to correct the market failure
    for special access.
        Sprint Nextel is heavily dependent upon the Bell Operating
    Companies (BOCs) to provide the last-mile connections. In fact,
    special access lines connect all of our sites to our mobile
    switching centers and link our network to the network of other
    carriers. I believe you might be surprised to know that, at 99
    percent of our cell sites in BOC territories, we find that BOC
    is our only choice. Sprint Nextel is not alone in its
    dependency on the BOC's provision of the last mile. These other
    companies include ISPs, cable companies, long-distance
    carriers, other wireless providers, and nearly every major U.S.
    business. In fact, the Ad Hoc Telecommunications User
    Committee, an organization of major U.S. businesses, has filed
    data with the FCC showing that the BOCs, in 2005, remain the
    sole source of dedicated access at roughly 95 percent of all
    business premises nationwide, even for the largest
    corporations.
        Sprint Nextel would very much prefer to have the option of
    obtaining these dedicated circuits from someone other than the
    parents of our largest competitors, Cingular and Verizon
    Wireless. Prior to its merger with Sprint, Nextel made a
    concentrated effort to reduce its dependence on wireless in the
    most competitive market in the Nation--New York City. And we
    failed. When Nextel sought bids for special-access services in
    the New York metropolitan area, competitors bid to serve fewer
    than 3 percent of our locations.
        Others have previously raised this issue with you. AT&T and
    MCI, prior to their absorption into the Nation's two largest
    BOCs, had repeatedly demonstrated there's a special-access
    market failure. In 2004, MCI informed the FCC, quote, ``The
    ILEC's market power over the market for DS1 and DS3 facilities,
    coupled with the Commission's decision to largely deregulate
    the pricing of these facilities, has resulted in prices far in
    excess of the cost. The result is that special access has
    become the ILEC's ``most profitable line of business,'' from
    MCI. For example, just last year, AT&T/SBC earned a rate-of-
    return of 92 percent on its special-access charges. Bell South
    earned nearly 98 percent. These returns are not a 1-year
    aberration. Special-access rates-of-return--namely, their
    after-tax profits--have grown steadily over 5 years. Indeed,
    SBC's rate-of-return rose by more than 120 percent from 2001 to
    2005, and the rates-of-return increased by more than 167
    percent for Bell South and 175 percent for Verizon. Without
    effective rules or meaningful competition, the BOC's special-
    access profits are likely to grow at an even faster pace--a
    future in which special access will become even more critical,
    and more capacity will be required to support the burgeoning
    mobile broadband marketplace that this Committee is committed
    to encouraging.
        Congress needs to mandate that the FCC impose the pricing
    discipline that the marketplace has failed to provide. Let me
    be clear: failure to do so will thwart mobile broadband
    deployment and competition that we all seek.
        Thank you. I'd appreciate any questions you have to ask.
        [The prepared statement of Mr. Foosaner follows:]

       Prepared Statement of Robert S. Foosaner, Senior Vice President,
         Government Affairs and Chief Regulatory Officer,Sprint Nextel
                                  Corporation

        Good Morning Chairman Stevens, Co-Chairman Inouye, and Members of
    the Committee. I am Bob Foosaner, Senior Vice President of Government
    Affairs for Sprint Nextel Corporation. Thank you for the opportunity to
    appear before you today to discuss S. 2686, the Communications,
    Consumers' Choice and Broadband Deployment Act of 2006. I appreciate
    this opportunity, and I commend you for taking on the complex task of
    reforming our Nation's communications law.
        In my view, the goals of the bill before you today--encourage
    competition, the deployment of broadband nationwide and, most
    importantly, bringing the benefits of telecommunications advances to
    all consumers--would be enhanced if your bill addressed the serious
    market failure for special access services--a market that is a lynchpin
    to the success of a vibrant, competitive broadband marketplace.
        Today, Sprint Nextel, like many of our Nation's businesses
    (including Internet service providers, cable companies, long distance
    carriers, competitive local exchange carriers, and other wireless
    companies), remains heavily dependent on the Bell Operating Companies
    (BOCs) to provide ``last mile'' connections known as ``special access
    services.'' In fact, Sprint Nextel has identified alternative providers
    of special access services at less than one percent of its cell sites
    nationwide. In other words, in nearly every case the BOC is the only
    choice for service in their respective service territories. Sprint
    Nextel needs these dedicated circuits to link together different parts
    of its own network (for example, from our cell sites to our switches)
    and to link its network to the networks of other carriers. Sprint
    Nextel and other businesses' reliance on special access services,
    moreover, will only increase as we need more and more capacity between
    our cell sites and our networks to support the transmission of voice,
    video, and other data over broadband networks.
        Sprint Nextel would very much prefer to have the option of
    obtaining these dedicated circuits from someone other than the BOCs
    who, after all, are the parents of our largest competitors Cingular and
    Verizon Wireless. The reality, however, is that even ten years after
    passage of the Telecommunications Act of 1996, the competitive
    availability of special access services, such as DS1 and DS3 services,
    is woefully limited. In the Boston, Massachusetts metropolitan area,
    for example, Sprint Nextel provides service to its subscribers through
    a sophisticated wireless network with more than 1,500 cellular radio
    towers and five mobile switching offices. To move our traffic from the
    cell site to our switches, and then ultimately to the public switched
    telephone network, we purchase dedicated DS1 and DS3 circuits that
    interconnect the towers and switches, and link our Boston customers to
    Sprint Nextel's national and international telecommunications network.
    Ninety-eight percent of Sprint Nextel's expense for the hundreds of
    dedicated circuits Sprint Nextel uses in the Boston area is paid to
    Verizon.
        Several other critical markets tell the same story. In Portland,
    Maine, Sprint Nextel has over 100 cell sites, one mobile switching
    center and approximately 150 special access pipes connecting those
    network components. One hundred percent of those special access
    circuits are purchased from Verizon. In Miami, there appears to be a
    little more competition with 88 percent of Sprint Nextel's expense for
    2,800 special access pipes, connecting over 1,200 cell sites to four
    mobile switching centers, paid to BellSouth. In Richmond, Virginia, our
    network of over 400 cell sites and one mobile switching center is
    connected by approximately 900 special access connections, with 85
    percent of the cost of those connections going to Verizon. The
    Charleston, South Carolina, network is reliant on Bellsouth for 86
    percent of its special access, and in San Francisco, we purchase 98
    percent of our special access from AT&T to connect our 2,000-plus cell
    sites to six mobile switching centers.
        To provide just one more example that demonstrates the monopoly
    market Sprint Nextel and numerous other businesses face for special
    access services, look to the New York City metropolitan area--an area
    generally regarded as one of the most competitive areas in the Nation.
    Prior to its merger with Sprint, Nextel made a concerted effort to
    reduce its dependence on Verizon special access service, and it failed
    utterly. When Nextel sought bids for special access services in the New
    York metropolitan area, competitors bid to serve fewer than 3 percent
    of the required locations in one of the most competitive geographic
    markets in the Nation. On a nationwide basis, according to an FCC
    report, wholesale revenues from the sale of special access by the BOCs
    and other incumbent local exchange carriers to Sprint Nextel and other
    carriers amounted to $10.5 billion, while the wholesale revenues
    generated by competing providers amounted to $664 million.\1\
    ---------------------------------------------------------------------------
        \1\ See the Federal Communications Commission, 2004
    Telecommunications Industry Revenues, released March 2006, at Table 5.
    ---------------------------------------------------------------------------
        Sprint Nextel is also heavily reliant on the BOCs' special access
    services to serve wireline large business customers with sophisticated
    telecommunications requirements, especially high-capacity data
    networks. Although many of these customers are located in and around
    the center of urban areas, Sprint Nextel nonetheless has had very
    limited success in securing service from competing providers of
    dedicated circuits, especially in the wake of the BOC acquisitions of
    AT&T and MCI last year, the two companies that had been the leading
    competitive providers of special access service. In Boston, for
    example, Sprint Nextel currently obtains 90 percent of the special
    access it needs to reach large business customers through Verizon. In
    Portland, Maine, and Miami, Florida, Sprint Nextel's special access for
    wireline service is obtained from the BOC 98 percent and 91 percent of
    the time, respectively. In Richmond, Charleston, and San Francisco,
    those numbers for Sprint Nextel's special access services are 81
    percent, 86 percent, and 87 percent, respectively. All of these markets
    are overwhelmingly dominated by the BOC.
        Sprint Nextel is not the only company captive to the BOCs' special
    access market dominance.\2\ Other companies--including, notably, AT&T
    and MCI prior to their absorption into the Nation's two largest BOCs--
    have demonstrated repeatedly that there is a special access market
    failure. In 2004, MCI (now Verizon) informed the FCC that ``[t]he
    ILECs' market power over the market for DS1 and DS3 facilities, coupled
    with the Commission's decision largely to deregulate the pricing of
    those facilities, has resulted in prices that are far in excess of
    cost. The result is that special access has become the ILECs' most
    profitable line of business,'' \3\ Pre-BOC merger AT&T similarly argued
    for correction of the special access market failure by promoting the
    very action that many of us have asked be included in your bill. That
    is, AT&T recognized the need for ``reimposing an annual productivity
    offset (X-Factor) . . . [to] ensure that ratepayers share in the
    benefits of special access productivity gains, as the Commission
    originally intended.'' \4\ Finally, the Ad Hoc Telecommunications Users
    Committee, an organization of major U.S. businesses, also has filed
    data with the FCC showing that the BOCs, in 2005, remained the sole
    source of dedicated access at roughly 98 percent of all business
    premises nationwide, even for the largest corporate users.\5\
    ---------------------------------------------------------------------------
        \2\ Other carriers appear to have been similarly unsuccessful in
    obtaining competitively provided dedicated circuits. (See AT&T Reply
    Comments, RM-10593 at 12-16 (Jan. 23, 2003); Ad Hoc Telecommunications
    Users Committee Reply Comments, WC Docket No. 05-65, Attachment A, ETI
    Report at pp. 16-22 (May 10, 2005).) In addition, Ad Hoc's analysis
    shows that intermodal technologies do not offer competitive
    alternatives to high- speed special access services. Declaration of
    Susan M. Gately, attached to Ad Hoc Telecommunications Users Committee
    Reply Comments, at para.para. 19-25. In fact, it appears to be
    undisputed that competitive alternatives are available only at a ``tiny
    percentage'' of commercial buildings. AT&T Reply at p. 13 (stating that
    the BOCs do not dispute the conclusion that competitive alternatives
    are available only in a small number of buildings).
        \3\ MCI Comments, WC Docket 04-313, at p. 156 (Oct. 4, 2004).
        \4\ AT&T Comments, WC Docket 05-25, at p. 5 (June 13, 2005).
        \5\ Ad Hoc Telecommunications Users Committee Reply Comments,
    Attachment B, Declaration of Susan M. Gately, para. 18 (May 10, 2005).
    ---------------------------------------------------------------------------
        Will competition develop and correct this market failure?
    Unfortunately, that is not likely. As the FCC itself has noted, the
    competitive deployment of stand-alone DS1 circuits connecting two
    points--for just one carrier's traffic--is rarely if ever an economic
    possibility.\6\ Competitive carriers simply cannot establish a business
    case to lay a DS1 circuit out to a Sprint Nextel cell site, given the
    high- fixed, sunk costs incurred to construct that circuit. Prior to
    its merger with SBC, AT&T echoed this predicament, stating that it and
    other special access purchasers ``generally have no alternative
    suppliers for the bread and butter DS-level services.'' \7\ Thus, for
    carriers like Sprint Nextel that rely heavily on those circuits, the
    prospects for obtaining service from competing providers are
    practically non-existent. In the case of wireless carriers in
    particular, the possibility of a competitive market for these circuits
    is even more doubtful, because, for zoning and other reasons, cell
    sites frequently are located in out-of-the way locations, such as along
    roadsides or atop surrounding hills. In the Boston metropolitan area,
    for example, 75 percent of Sprint Nextel's cellular radio towers are
    located outside of the core urban area, in the areas least likely to
    attract competitive offerings. Furthermore, alternative technologies,
    such as fixed wireless or a cable-provided circuit, rarely meet Sprint
    Nextel's service requirements.\8\
    ---------------------------------------------------------------------------
        \6\ Such circuits require high-fixed, sunk costs to serve an
    individual customer location. No firm can match the scale economies
    that the BOCs enjoy in furnishing DS1 special access service, since
    they alone had the opportunity to construct a ubiquitous local network
    over a period of decades, while protected against competition. In the
    Matter of Unbundled Access to Network Elements Review of the Section
    251 Unbundling Obligations of Incumbent Local Exchange Carriers, WC
    Docket No. 04-313, CC Docket No. 01-338, Order on Remand, at para. 166
    (rel. Feb. 4, 2005).
        \7\ AT&T Reply Comments, RM-10593 at 11 (Jan. 23, 2003) (emphasis
    in original).
        \8\ See, e.g., Competition in Access Markets: Reality or Illusion,
    A Proposal for Regulating Uncertain Markets at pp. 22-24 (ETI Aug.
    2004) (``ETI Report''), attached to Ex Parte Letter from Colleen
    Boothby, counsel for Ad Hoc Telecommunications Users Committee, to
    Marlene H. Dortch, FCC, RM No. 10593 (Aug. 26, 2004).

        Despite the lack of competition for special access, even in places
    like metropolitan New York, the FCC deregulated the rates for these
    last mile special access circuits in many metropolitan areas around the
    ---------------------------------------------------------------------------
    country.

        The result of deregulation in the face of a market failure has been
    predictable (and, frankly, perfectly rational from the BOC's point of
    view): astounding rates of return and, as a result, harm to the promise
    of wireless, mobile broadband. Pre-merger MCI noted to the FCC that
    between 1996 and 2003, the BOCs, ``as a group enjoyed an almost six-
    fold increase in the rate-of-return for interstate special access (from
    7.6 percent to 43.7 percent), with three BOCs reaping returns in excess
    of 60 percent in 2003.'' \9\ The most recent data that the BOCs
    themselves have filed with the FCC show that they have continued to
    earn exorbitant profits from special access. For example, just last
    year AT&T/SBC earned a rate-of-return of 92 percent on its special
    access services; BellSouth earned nearly 98 percent.\10\ Even Verizon,
    which historically has lagged behind the other BOCs, reported a return
    of 42 percent.\11\
    ---------------------------------------------------------------------------
        \9\ MCI Comments, WC Docket 04-313, at p. 157-58 (Oct. 4, 2004).
        \10\ These returns are computed from data the BOCs filed with the
    FCC in their annual ARMIS 43-01 reports.
        \11\ Id.
    ---------------------------------------------------------------------------
        These returns are not a one-year aberration--special access rates
    of return (or, their after-tax profits) have grown steadily over the
    past five years. Indeed, SBC's rate-of-return rose by more than 120
    percent from 2001 to 2005, and the rates of return for the rest of the
    BOCs increased by more than 167 percent for BellSouth and 175 percent
    for Verizon.\12\ Moreover, one study has suggested that even these
    astronomical returns may understate the BOCs' earnings; the costs of
    other services may have been misallocated to the special access
    category, thereby overstating the BOCs' special access costs and
    understating their rates of return.\13\ These high BOC returns are
    evidence of a market failure: the lack of competition for special
    access has allowed the BOCs to charge exorbitant prices without
    restraint.
    ---------------------------------------------------------------------------
        \12\ Id.
        \13\ See ETI Report at 33-34 (noting that the net investment
    allocated to the special access category is ``completely
    disproportionate'' to the number of special access loops as a
    percentage of loops in service, raising ``suspicions that costs are
    being over-allocated to the special access category.'') (emphasis in
    the original); Gately Declaration para. 12.

        Without effective rules or meaningful competition, the BOCs'
    special access earnings are likely to grow at an even faster pace in
    the future--a future in which special access will become even more
    critical to the telecom marketplace as more and more capacity will be
    required to support the burgeoning broadband marketplace that this
    ---------------------------------------------------------------------------
    committee is committed to encouraging.

        It is noteworthy that the largest providers of special access
    services are also the parents of our wireless competitors. These
    integrated firms, therefore, have the incentive and ability to raise
    the special access costs of, and thereby disadvantage, Sprint Nextel
    and other competing providers of retail wireline and wireless services.
        What is the solution to the special access market failure and rate
    gouging? Congress needs to mandate that the FCC rollback its premature
    deregulation of special access services, and implement the pricing
    discipline that the marketplace has failed to provide. Let me be clear:
    failure to do so will thwart broadband deployment and competition.

        The Chairman. Thank you very much.
        There is a vote on. And, as a matter of fact, it's almost
    over. We--if you don't object, we'd prefer to ask you to
    respond to written questions that Members may submit to you
    pertaining to your testimony. And try to respond, if you can,
    in a week.
        The Chairman. This completes 29 hearings now, six listening
    sessions. We had three full legislative sessions like this on
    specific drafts. I think we're now ready to start working on
    the final draft, and we will have an announcement soon of the
    markup date. We are going to change the markup date, and
    postpone it, I think, a few days, but we will go into markup
    soon.
        We do thank you. This is not your first time, for many of
    you, to come and give us your views. We do review these views,
    and we thank you very much for them. I thank you for your
    cooperation and your contributions. Thank you very much,
    gentlemen.
        [Whereupon, at 12:35 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                                      USTelecom
                                          Washington, DC, June 15, 2006
    Hon. Ted Stevens,
    Chairman,
    Senate Committee on Commerce, Science, and Transportation,
    Washington, DC.

    Dear Mr. Chairman:

        Thank you again for the opportunity to provide the views of
    USTelecom's 1,200 members at yesterday's hearing. S. 2686 is a
    significant step forward in delivering video choice to consumers, and
    fulfilling your commitment to stabilizing the future of Universal
    Service.JLW
        This letter and the accompanying Discussion Paper respond to
    questions about special access competition arising from yesterday's
    hearing. At the hearing, Robert Foosaner, Senior Vice President of
    Government Affairs for Sprint Nextel Corporation devoted his testimony
    to calling for dramatic re-regulation of the special access services
    \1\ offered by incumbent local exchange carriers (ILECs). One would not
    know from the Sprint Nextel testimony that only two years ago the
    United States Court of Appeals for the District of Columbia Circuit
    found that ``wireless carriers' reliance on special access has not
    posed a barrier that makes entry uneconomic,'' \2\ and the Federal
    Communications Commission (FCC) thereafter declined to order unbundling
    of special access circuits for wireless carriers. Now, despite the
    findings of the D.C. Circuit and the FCC, Sprint Nextel is asking
    Congress to force ILECs to subsidize the construction of its wireless
    networks rather than making the investment itself.
    ---------------------------------------------------------------------------
        \1\ Special access services are high-capacity telecommunications
    circuits dedicated to individual customers (usually telecommunications
    service providers or large businesses) to deliver large volumes of
    traffic between two points in a network.
        \2\ United States Telecom Assoc. v. FCC, 359 F.3d 554, 575 (D.C.
    Cir. 2004) (USTA II).
    ---------------------------------------------------------------------------
        The staff working draft released May 24, 2006, by the Committee's
    minority staff would go even further by extending special access
    regulation to all ILEC broadband services, and entangling the United
    States Congress in setting specific prices for special access services.
    This proposal, like Sprint Nextel's appeal for regulation, is
    completely unnecessary because: (1) special access markets are
    competitive today; (2) special access customers, particularly large
    telecommunications carriers, are capable of deploying their own
    circuits; and (3) the FCC still has the responsibility and all the
    tools it needs to ensure that special access rates are just and
    reasonable. Moreover, the proposed re-regulation of ILEC special access
    services, and extension of this regulation to broadband services would
    thwart competition, innovation, investment, and network deployment.
        Should you or any Members of the Committee, or its staff, wish to
    discuss these important matters further, we stand ready to respond.
    Once again, Mr. Chairman, we thank you for your efforts to promote
    video competition and a sustainable Universal Service program.
            Sincerely,
                                       Walter B. McCormick, Jr.
                                                         President/CEO.
            Attachment--USTelecom Discussion Paper on Special Access

    I. Special Access Markets Are Competitive, With Many Alternative
            Providers
        Sprint Nextel and Minority Staff Would Substantially Reverse Many
    Decisions by the FCC--the Expert Agency--Determining that Special
    Access Markets are Competitive. The Federal Communications Commission
    (FCC) has jurisdiction over special access services. Over the past two
    decades, the FCC has followed a policy of removing barriers to entry,
    allowing competition to develop and flourish, and deregulating ILEC
    special access services. In particular, the Commission established a
    framework for granting ILECs special access pricing flexibility when
    there is strong evidence of competition in the relevant geographic
    area.\3\ Based on these criteria, which were specifically affirmed by
    the United States Court of Appeals for the District of Columbia Circuit
    (D.C. Circuit),\4\ ILECs have made the requisite competitive showings
    and obtained pricing flexibility in much of the country. Sprint Nextel
    and minority staff would reverse this pricing flexibility, which is
    essential for competitive markets to function efficiently.
    ---------------------------------------------------------------------------
        \3\ Access Charge Reform, CC Docket No. 96-262, Fifth Report &
    Order and Further Notice of Proposed Rulemaking, 14 FCC Rcd 14221
    (1999) (Pricing Flexibility Order). The FCC's pricing flexibility
    triggers are based on competitive collocation within metropolitan
    statistical areas (MSAs).
        \4\ WorldCom v. FCC, 238 F.3d 441 (D.C. Cir. 2001).
    ---------------------------------------------------------------------------
        The FCC has also looked at special access prices in a number of
    other proceedings over the past decade. Most recently, the FCC
    evaluated competition in most of our country's special access markets
    in the SBC-AT&T and Verizon-MCI merger review proceedings. \5\ The FCC
    determined that only limited merger conditions \6\ were warranted to
    address potential harms to competition in special access markets.
    Sprint Nextel and minority staff would reverse all of those findings,
    without any evidence to the contrary.
    ---------------------------------------------------------------------------
        \5\ SBC Communications, Inc. and AT&T Corp. Applications for
    Transfer of Control, WC Docket 05-65, Memorandum Opinion and Order, 20
    FCC Rcd 18,290 (2005); Verizon Communications, Inc. and MCI, Inc.
    Applications for Transfer of Control, WC Docket 05-75, Memorandum
    Opinion and Order, 20 FCC Rcd 18,433 (2005).
        \6\ The principal FCC merger conditions related to special access
    are (1) a 30-month rate freeze for existing customers, and (2) somewhat
    greater availability of unbundled network elements (UNEs). Id.
    ---------------------------------------------------------------------------
        Special Access Markets Today Exhibit Extensive Competition. There
    are many competitors in special access markets today, particularly
    fiber-based competitors (an average of 19 competitive networks in each
    of the top 50 MSAs) providing high-capacity circuits purchased by
    telecommunications carriers and large business customers. \7\ Moreover,
    these entrants are winning many contracts and establishing meaningful
    and growing market shares. In addition to actual competition evidenced
    by market offerings, the record in other recent proceedings shows great
    amounts of collocation, and other entry and investment. \8\ This is not
    surprising because special access demand is highly concentrated in
    relatively few geographical locations--most special access circuits are
    sold in areas where large businesses are located, such as urban areas.
    This concentration of demand allows for greater ease of entry and exit.
    ---------------------------------------------------------------------------
        \7\ See, e.g., Letter dated October 4, 2004 from Evan T. Leo,
    Counsel for BellSouth Corporation, SBC Communications, Inc., Qwest
    Communications International, Inc., & the Verizon telephone companies,
    to Marlene Dortch, Secretary of the Federal Communications Commission,
    submitting UNE Fact Report 2004, Unbundled Access to Network Elements,
    WC Docket No. 04-313 (October 2004) (UNE Fact Report).
        \8\ Id.
    ---------------------------------------------------------------------------
        Special access competition is occurring throughout the country via
    traditional wireline alternatives and intermodal competitors, and,
    increasingly, most special access customers are able to choose from
    among several providers' offerings when entering into new contracts or
    buying new circuits out of tariffs. Moreover, both competitors and
    customers often are able to build, and many routinely do build, their
    own special access circuits. These competitors can serve many other
    customers in each area where they have deployed networks, once
    presented with requests for service. Therefore, the relevant area in
    which competitors discipline market prices is far greater than the
    individual routes on which they have won customers and installed
    circuits.
        In many ways, it is easier to enter and compete in special access
    markets than in many other telecommunications markets. In particular,
    demand for special access services is highly concentrated,\9\ as the
    FCC has recognized many times.\10\ This makes special access markets
    more competitive than many other telecommunications markets, as
    competitors do not require as substantial scale and scope economies in
    order to compete effectively.
    ---------------------------------------------------------------------------
        \9\ Concentrated demand means that the market is characterized by
    relatively few buyers who purchase substantial network capacity,
    particularly within narrow geographic areas.
        \10\ E.g., Pricing Flexibility Order, 14 FCC Rcd at 14,276 para.
    97; Access Charge Reform, CC Docket No. 96-262, First Report & Order,
    12 FCC Rcd 15,982 (1997).
    ---------------------------------------------------------------------------
        Increased competition has led to substantial changes in special
    access markets. Special access prices increasingly are responsive to
    competition, actual cost of service, and customer preference, rather
    than being set at average prices for the whole market. For example,
    USTelecom members offer substantial volume and term discounts and,
    where permitted by FCC pricing flexibility rules, they use contract
    tariffs to reach commercial arrangements to suit customers'
    individualized needs.

    II. There is No Credible Evidence That Special Access Prices Are
            Unreasonable
        Regulatory Accounting Cannot Be Used To Measure Rates Of Return On
    Individual Services. Sprint Nextel points to data filed in the
    Automated Reporting Management Information System (ARMIS) to claim that
    ILEC special access prices are unreasonably high. ARMIS was created,
    however, to provide a generalized overview of the industry before price
    cap regulation, not to measure service-specific rates of return under
    price cap regulation. For this reason, the FCC has repeatedly
    recognized that these ARMIS rates of return cannot be used to evaluate
    rates and ``do not serve a rate-making purpose.'' \11\
    ---------------------------------------------------------------------------
        \11\ See, e.g., Policy and Rules Concerning Rates for Dominant
    Carriers, CC Docket 87-313, Order on Reconsideration, 6 FCC Rcd 2,637
    para. 194 (1991).
    ---------------------------------------------------------------------------
        The Same ARMIS Data Shows Implausible Switched Access Losses Over
    the Same Time Period. When one looks at ARMIS data more closely, it
    becomes apparent that it offers no meaningful data about special access
    profits. During the same time, and in the same places, where ILECs are
    alleged to have made excessive special access margins, ARMIS also shows
    switched access margin declines and even losses. This is an improbable
    result, and the only natural interpretation of these two events is that
    ARMIS is not accurately assigning costs to the various services
    provided over the network, particularly after the separations freeze.
    This conclusion is bolstered by the fact that ARMIS data shows negative
    costs for some special access service elements, which is economically
    impossible. \12\
    ---------------------------------------------------------------------------
        \12\ See USTelecom Reply Comments, Special Access Rates for
    Incumbent Local Exchange Carriers, WC Docket 05-25 (filed Jul. 29,
    2005).
    ---------------------------------------------------------------------------
        Market Performance is Good. Even as reported in ARMIS, special
    access prices taken together measured as revenue per line have declined
    significantly over the past five years. \13\ This is even more
    impressive when considered together with the fact that special access
    demand has increased substantially over the same time period, which
    generally puts upward pressure on prices. These declines have been
    greater than would have been mandated under the productivity factor
    calculation required by the minority staff draft. Moreover, competitors
    offer similar prices and terms, and there do not appear to be any clear
    distinctions between prices in markets that have multiple competitors
    and those with fewer competitors. This is particularly significant for
    one would expect to see lower prices in markets with multiple
    competitors if Sprint Nextel and the minority staff were right about
    their claim that special access markets are not competitive, and that
    prices are not just and reasonable.
    ---------------------------------------------------------------------------
        \13\ Declaration of Alfred E. Kahn and William E. Taylor, AT&T
    Corp. Petition for Rulemaking to Reform Regulation of Incumbent Local
    Exchange Carrier Rates for Interstate Special Access Services, RM-10593
    (filed Dec. 2004).
    ---------------------------------------------------------------------------
        In reality, therefore, prices are declining more rapidly than
    prescribed by regulation; supply and demand are increasing rapidly;
    competitors offer similar prices and terms; there do not appear to be
    clear distinctions between prices in markets that have multiple
    competitors and those with fewer competitors; and customers are
    increasingly putting special access services to new and different uses.

    III. Special Access Customers, Particularly Wireless Carriers, Could
            and Should Build Their Own Network Circuits If Prices Were
            Unreasonable
        Special Access Customers Can Build Their Own Circuits. Special
    access circuits are generally sold to large, well-financed, facilities-
    based telecommunications providers. These customers can, and do, build
    their own network connections. This provides a formidable check on
    special access prices--if prices are too high, then the customers will
    buy from competitors or deploy their own facilities.
        The D.C. Circuit Court of Appeals Determined that Wireless Carriers
    Are Not Impaired in Their Ability to Compete When Buying Special Access
    Services. Wireless carriers, such as Sprint Nextel, are not impaired in
    their ability to compete by their purchases of special access services.
    Indeed, the D.C. Circuit noted:

            that wireless providers have traditionally purchased such
            access from ILECs at wholesale rates (a transaction classified,
            since adoption of the Act, under Sec. 251(c)(4)). And the data
            above clearly show that wireless carriers' reliance on special
            access has not posed a barrier that makes entry uneconomic.
            Indeed, the multi-million dollar sums that the Commission
            regularly collects in its auctions of such spectrum, see, e.g.,
            *576 **224 Annual Report and Analysis of Competitive Market
            Conditions With Respect to Commercial Mobile Services, Seventh
            Report, FCC 02-179 (July 3, 2002), Table 1B, and that firms pay
            to buy already-issued licenses, see, e.g., Annual Report and
            Analysis of Competitive Market Conditions With Respect to
            Commercial Mobile Services, Eighth Report, FCC 03-150 (July 14,
            2003), para. para. 42-44, seem to indicate that wireless firms
            currently expect that net revenues will, by a large margin,
            more than recover all their non-spectrum costs (including
            return on capital). \14\
    ---------------------------------------------------------------------------
        \14\ USTA II, 359 F.3d, at 575-76.

        On remand, the FCC analyzed whether wireless carriers needed access
    to discounted (below cost in many cases) unbundled network elements,
    including the dedicated transport links that are currently offered as
    special access circuits. The FCC concluded that they do not need such
    access.\15\ Indeed, the FCC found that wireless carriers are competing
    vigorously, growing rapidly, winning customers from ILECs and CLECs,
    and generating impressive cash flows.\16\ Now, Sprint Nextel is here
    before the Senate Commerce Committee asking for unprecedented
    regulatory intervention from Congress that, in effect, would give it
    the discounted network facilities that the D.C. Circuit and FCC decided
    it does not need. In sum, wireless carriers do very well today using
    special access circuits, and there is no reason to believe that they
    need legislative intervention to give them cheaper network facilities.
    ---------------------------------------------------------------------------
        \15\ Unbundled Access to Network Elements, WC Docket 04-313, Order
    on Remand, 20 FCC Rcd 2533, 2553 para. 36 (2005) (TRRO).
        \16\ Id. at fn. 106.
    ---------------------------------------------------------------------------
        Wireless Companies, in Particular, Should Build Their Own Circuits
    If They Feel that ILECs Are Charging Too Much. Not only are wireless
    carriers thriving with current special access prices, but they are
    entirely capable of building such circuits themselves. In fact, there
    is little reason to think that wireless carriers would be substantially
    less efficient than ILECs at building components of the wireless
    carriers' own networks. In particular, wireless companies have been
    experiencing rapid growth, and they have impressive cash flows. They
    also have ample telecommunications network expertise. In fact, wireless
    companies are uniquely able to determine the appropriate cost for the
    special access circuits they purchase rather than build because they
    are the sole customers at their tower sites. If wireless carriers were
    being charged too much, they would build their own circuits. This
    approach is consistent with Congressional policy favoring facilities-
    based competition rather than imposing outdated price regulation.

    IV. There Is No Need for Special Access Legislation In Any Event as the
            FCC Closely Scrutinizes Special Access Markets and Applies Any
            Regulation It Deems Necessary
        The FCC Regulates Special Access Today Where There Isn't
    Competition. Under FCC rules, special access pricing flexibility is
    only granted where there is competition. In the Pricing Flexibility
    Order, the FCC established competitive triggers for ILEC pricing
    flexibility. If those triggers have not been met, ILEC special access
    services remain subject to the FCC's full range of price regulation.
    The triggers measure the development of facilities-based competition,
    specifically collocation arrangements, and pricing flexibility is
    available in two phases depending on the development of competition.

            Phase I Relief: ILECs can begin offering contract tariffs and
            volume and term discounts, and they may file new tariffs on
            one-day's notice, where ``competitors have made irreversible
            investments in the facilities needed to provide the services at
            issue, thus discouraging incumbent LECs from successfully
            pursuing exclusionary strategies.'' \17\
    ---------------------------------------------------------------------------
        \17\ Pricing Flexibility Order, 14 FCC Rcd at 14,258 para. 69.

            Phase II Relief: ILECs may offer services outside of price cap
            regulation, although they must still file generally available
            tariffs and remain subject to FCC enforcement actions for
            anticompetitive behavior. Phase II relief is available where
            ``competitors have established a significant market presence in
            the provision of the services at issue.'' \18\ To the extent
            customers feel aggrieved by special access contract conditions,
            therefore, they may file complaints at the FCC.
    ---------------------------------------------------------------------------
        \18\ Id.

        Under these rules, special access customers either have reasonably-
    available competitive alternatives, or they continue to receive
    services at regulated, ``just and reasonable'' prices. There simply is
    no substance to an allegation that special access customers lack
    alternatives and must pay unreasonable rates.\19\
    ---------------------------------------------------------------------------
        \19\ In the case of a wireless carrier, it may often be the case
    that there is only one wire going to any given cell tower because a
    competitor is not going to build a second circuit without first winning
    a contract that will pay for the construction. This does not mean that
    the wireless provider lacks for competitive alternatives. To the
    contrary, this is precisely how a competitive market works when the
    service at issue is tailor-made for a specific customer, particularly
    where it involves a substantial sunk-cost investment.
    ---------------------------------------------------------------------------
        The FCC Is Looking at Its Rules in an Open Proceeding. New special
    access legislation is unnecessary for the additional reason that the
    FCC is considering special access prices and market performance in an
    active rulemaking proceeding.\20\ Legislation would not give the FCC
    any new authority; instead it would prevent the FCC from acting in
    response to the full record that is developing at the agency in the
    open rulemaking proceeding.
    ---------------------------------------------------------------------------
        \20\ Special Access Rates for Price Cap Local Exchange Carriers, WC
    Docket No. 05-25, Order and Notice of Proposed Rulemaking, 20 FCC Rcd
    1994 (2005).
    ---------------------------------------------------------------------------
    V. The Minority Staff Draft, If Enacted, Would Be Even More Harmful
            Because It Would Extend Special Access Regulation to Broadband
            and Have Congress Set Prices
        The Minority Staff Draft Would Impose Harsh Price Regulation on
    ILEC Broadband Services. The minority staff draft defines special
    access so as to include ILEC broadband services (which must be offered
    on a stand-alone basis). This would subject ILEC broadband (e.g., DSL,
    FiOS, Lightspeed, etc.) services to rate regulation despite the fact
    that they face vigorous competition. Competing broadband services would
    not be regulated, however, creating regulatory asymmetry and harming
    competition by favoring one technology and class of providers over
    another. Price regulation of ILEC residential broadband services would
    also be illogical because competing cable modem services often have
    much larger market shares, yet they would remain free from price
    regulation.
        The Minority Staff Draft Would Have Congress Micro-Manage Prices.
    Congress rarely (if ever) sets specific prices because that is
    something for which agencies are better suited, yet the minority staff
    draft would establish specific prices (based on June 2004 prices)
    without regard to actual market conditions (very competitive).
    Specifically, Congress would be establishing separate rates for AT&T
    and Verizon, on the one hand, and all other ILECs, on the other hand.
    AT&T and Verizon would be required to reduce their prices if they have
    not already done so (because of competition) to the levels at which
    they would be if the FCC had imposed a productivity factor for the past
    two years (since June 2004), and they would be further required to
    reduce prices in the future by an estimate of their improved
    productivity. Moreover, all ILECs would be prevented from raising
    prices other than inflation adjustments. Finally, the minority staff
    draft would set future special access prices in a vacuum, without
    considering how shortfalls in special access revenue may force ILECs to
    seek increased Universal Service funding (USF), which would further
    destabilize that vital program. In all of these ways, the Minority
    Staff Draft would be dragging Congress into the details of common
    carrier rate regulation for the first time, which seems unwise.
                                     ______

                                                  Sprint Nextel
                                              Reston, VA, June 20, 2006
    Hon. Daniel K. Inouye,
    Co-Chairman,
    Senate Committee on Commerce, Science, and Transportation,
    Washington, DC.

    Dear Senator Inouye:

        Thank you for the opportunity to testify on June 13, 2006, before
    the Senate Committee on Commerce, Science, and Transportation. Sprint
    Nextel continues to believe that to spur innovation, encourage
    competition, and provide better service for consumers, special access
    needs to be addressed in legislation.
        USTelecom was critical of my testimony on special access. Please
    find a rebuttal to USTelecom's claims, and I respectfully request you
    put the attached in the record.
            Sincerely,
                                            Robert S. Foosaner,
        Senior Vice President, Government Affairs and Chief Regulatory
                                                               Officer.
    Sprint Nextel Response to USTA Letter--June 16, 2006
        USTA argues (at 1) that ``the United States Court of Appeals for
    the District of Columbia found that `wireless carriers' reliance on
    special access has not posed a barrier that makes entry uneconomic' and
    the Federal Communications Commission (FCC) thereafter declined to
    order the unbundling of special access circuits for wireless
    carriers.''

       The quoted language was taken from a paragraph in the D.C.
            Circuit's decision in which the court clearly was setting forth
            the ILECs' arguments, and in no way can be considered a
            ``finding'' of the court.

       In light of the D.C. Circuit's decision, the FCC declined to
            order the unbundling of UNEs ``to provide service in the mobile
            wireless services market and the long distance services
            market,'' 20 FCC Rcd 2533, 2555 (2005), in part because
            ``competition'' in these markets ``has evolved without access
            to UNEs'' Id. at 2554. The ``unbundling of special access
            circuits for wireless carriers'' was not at issue in the FCC's
            decision and indeed makes no sense since special access are
            dedicated circuits provided on an ``unbundled'' basis. In fact,
            relying on UNEs to rebut arguments concerning special access
            are nothing more than red herrings because UNEs have long been
            off-limits to wireless carriers. USTA is throwing apples at a
            problem involving oranges.

            Stated differently, special access is not a leased component of
            the BOC network--i.e., it is not a UNE; it is a service sold by
            the BOC. Moreover, the rates for special access are not subject
            to UNE rules or pricing at economic costs. Indeed, unlike UNEs,
            special access prices are not subject to pricing rules set by
            the FCC and utilized by the states in setting rates. Rather,
            special access is purchased under take it or leave it contracts
            that are virtually unregulated in most parts of the country.
            Sprint Nextel and other carriers are not asking Congress for
            the UNE economic cost-based rates. We want only to pay rates
            that would exist if the market were genuinely competitive.

       For these reasons, USTA's UNE arguments fall of their own
            weight, and demonstrate, by way of comparison, the intellectual
            bankruptcy of USTA's challenge to special access legislation.

        USTA claims that the FCC's criteria to determine whether to grant
    special access pricing flexibility ``were specifically affirmed by the
    [D.C. Circuit].''

       The court did not affirm the FCC's criteria themselves. The
            court instead affirmed the FCC's decision based on the
            ``deferential standard'' under which the court presumes that
            the agency action is valid. Id. at 457. The court noted that
            the FCC is acknowledged to have expertise in ratemaking matters
            and it is not the court's role to ``second guess the FCC's
            policy judgment as long as it comports with established
            standards of administrative practice.'' Id. at 458. In short,
            the court did not ``endorse'' the criteria used by the FCC.

        USTA argues that Sprint's reliance on ARMIS data to demonstrate
    that RBOCs are earning extraordinary rates of return on special access
    services is inapposite since ``ARMIS was created . . . to provide a
    generalized overview of the industry before price cap regulation, not
    to measure service-specific rates of return under price cap
    regulation.'' In fact USTA states that ``the FCC repeatedly has
    recognized that these ARMIS rates of returns cannot be used to evaluate
    rates and `do not serve a rate making purpose' '' citing 6 FCC Rcd 2937
    para. 197 (1991).

       The language quoted from the FCC's decision cannot be found
            in para. 197. Rather it appears in para. 199 and in footnote
            (279). That language appears in a paragraph where the FCC was
            rejecting the argument by the LECs that ARMIS reporting
            amounted to ``double regulation.'' The FCC at para.para. 198-
            199 discussed the importance of ARMIS data to a ``performance
            review'' of price cap regulation and to ``the implementation of
            the sharing and adjustment mechanisms'' adopted under price cap
            regulation.\1\
    ---------------------------------------------------------------------------
        \1\ These mechanisms were adopted ``[i]n recognition of the
    difficulty of determining a single, industry-wide productivity offset
    that will be accurate for all LECs'' and enables the Commission to
    adjust rates in the event of unanticipated errors in the price cap
    formula.'' Id. at para. 86. Under sharing, the LECs earning above the
    prescribed industry rate-of-return must share their profits with
    customers in the form of price decreases. The adjustment mechanism
    allows for correcting of unusually low earnings. Id.

       Of equal, if not more, importance, USTA's argument that
            ARMIS cannot be used for ratemaking is a diversion and misses
            the point entirely. Even if ARMIS data are not used for
            ratemaking purposes, the fact is that such data show that the
            BOCs are earning extraordinary rates of return in their
            provision of special access. Such returns would not be possible
            if the special access market was truly competitive. USTA's
            letter and attachment completely ignore this fact. Indeed, if
            as USTA suggests the rates of return for special access
            reported by the BOCs to the FCC in their ARMIS filings are
            inaccurate, USTA should have supplied the rates of return the
            BOCs are actually earning from their provision of special
            access. That USTA does not, speaks volumes.\2\
    ---------------------------------------------------------------------------
        \2\ If USTA believes that ARMIS does not accurately measure the
    rates of return they are earning on their special access services, it
    should seek to have its member BOCs provide data showing their rates of
    return for this service. However, if the past behavior is any guide,
    the BOCs will be reluctant to reveal such information. In the Notice of
    Proposed Rulemaking in the Special Access Rulemaking, the FCC invited
    parties to ``comment on the relevance of [ARMIS] data . . .'' To the
    extent that parties questioned ARMIS data, they were invited to comment
    on whether accounting rates of return were ``meaningful statistics for
    evaluating the reasonableness of price cap rates'' and ``what factors
    may affect the relevance of ARMIS data.'' The RBOCs did not supply
    special studies.

        USTA argues that the market for special access is robustly
    competitive, and that prices for special access ``increasingly are
    ---------------------------------------------------------------------------
    responsive to competition.''

       USTA fails to support its argument here with any data
            presumably because the data simply do not support its claims.
            Twenty two years after divestiture, and ten years after the
            Telecom Act of 1996, the BOCs retain effective control over
            special access. In the BOC service territories, 95 percent of
            large business locations are served only by the BOCs; and 99
            percent of Sprint Nextel cell sites are served only by the BOC.
            Moreover, the BOCs are usually the only provider of special
            access in non-urban areas.

       USTA is correct that the competitive providers are highly
            concentrated. Such providers are located in certain core urban
            areas, and their offerings often are limited to a few city
            blocks. For most other areas, Sprint Nextel has no other option
            than the BOCs.

       Sprint also agrees with USTA that prices for special access
            services being demanded by the BOCs are reflective of the state
            of competition, and the pricing flexibility the BOCs have
            received from the FCC. But the data do not support what USTA
            would have the Committee Members, and their staffs, believe. As
            data submitted in the Commission's long-stalled Special Access
            Rulemaking proceeding demonstrates, BOC special access prices
            in areas in which they have been granted pricing flexibility--
            because those areas are allegedly competitive--are higher than
            the rates in areas that remain regulated. Basic economic
            teachings would suggest the opposite result. Competitive
            markets pressure entities to constantly look for ways to reduce
            their costs in order to maintain, or even gain market share,
            since market shares of inefficient carriers are subject to
            attack by more efficient competitors. If the special access
            market were competitive, the BOCs prices would have been
            falling in line with their cost reductions.

       In all events, and as stated, the rates of return being
            realized by the BOCs in their provision of special access are
            simply not sustainable in a competitive market.

        USTA cites the FCC's decisions granting SBC's acquisition of AT&T
    and Verizon's acquisition of MCI, as further ``proof'' that the FCC
    regards the special access market as competitive. It points out that
    the FCC found that only ``limited merger conditions were warranted to
    address potential harms to competition in special access markets.''

       One of these ``limited conditions'' imposed by the
            Commission was a 30-month freeze on special access rates to be
            charged by the merged entities in their territories. If the
            special access market were as competitive as USTA says it is,
            the merged entities would not be able to raise their rivals'
            costs by increasing special access rates. That the FCC found it
            necessary to insist upon such a freeze provides additional
            evidence, as if more were needed, that the market for special
            access services in BOC territories is simply not competitive.

        USTA argues that ``special access prices taken together measured as
    revenue per line have declined significantly over the past five
    decades.''

       The revenues per line measurement--and presumably the
            ``line'' is a DS1 equivalent--being touted by USTA again
            demonstrates the weakness of USTA's argument. USTA is not
            saying that actual prices of the actual pipes being purchased
            have declined. In fact, USTA simply cannot make that claim.
            Carriers need for bandwidth has been increasing over time, and,
            as such, they have been switching to higher bandwidth special
            access services, such as DS3 and OCn. These services are both
            multiples of DS1s. For example, a DS3 is equal to 28 DS1. Thus,
            by spreading the revenues received for a DS-3 pipe across 28
            DS1 lines, USTA can provide the illusion of rate decline when
            the price of the DS3 pipe has actually increased. The only way
            to get an accurate picture of the BOCs special access prices is
            to examine the prices for each capacity type being offered
            individually, e.g., DS1s, DS3s OCns, and not as USTA has done
            to added the prices for the various types of capacity together
            and divide that number by the total capacity measured in DS1
            equivalents.

        USTA accuses Sprint Nextel of ``asking Congress to force ILECs to
    subsidize the construction of its wireless networks rather than making
    the investment itself.''

       The only thing that Sprint Nextel is seeking is to pay for
            special access services at levels that would exist if the
            special access market was competitive. In such a market, no
            entity would be able to realize the exorbitant rates of return
            being achieved by the BOCs.

       Of course, if the BOCs were ``forced'' to charge competitive
            rates for special access, they would lose the ``monopoly
            rents'' for such services that they have been receiving, and
            that they, presumably, have been using to subsidize their
            broadband expansion. Loss of such subsidy from their
            competitors would necessarily ``force'' the BOCs to self-
            finance their broadband expansion. But this is what firms in
            truly competitive industries have to do. Such firms have no
            market power to exploit, so they cannot charge above cost
            prices for their products and services. Thus, Sprint Nextel is
            ``making the investment itself'' in a wireless broadband
            network; unlike the BOCs it cannot rely on monopoly rents to
            pay for such network.
                                     ______

                                                Tropos Networks
                                           Sunnyvale, CA, June 13, 2006
    Hon. Ted Stevens,
    Chairman,

    Hon. Daniel K. Inouye,
    Co-Chairman,

    Senate Committee on Commerce, Science, and Transportation,
    Washington, DC.

    Dear Mr. Chairman and Mr. Co-Chairman:

        We write to express our appreciation for your recognition of the
    importance of community broadband networks in the Communications,
    Consumers' Choice, and Broadband Deployment Act of 2006. As the proven
    leader in delivering ubiquitous, metro-scale WiFi mesh network systems
    throughout the world, Tropos appreciates the opportunity to submit this
    letter for the hearing record in support of the Community Broadband
    Act, as proposed in Title V of the staff discussion draft circulated on
    June 9, 2006. In addition, we support your efforts to free up
    unlicensed ``white spaces'' spectrum for use by wireless community
    broadband networks.
        Community broadband networks offer the promise of increased
    economic development and jobs, enhanced market competition, improved
    delivery of e-government services, and accelerated universal,
    affordable Internet access for all Americans. Moreover, these networks
    will help promote our homeland security. In the wake of Hurricanes
    Katrina, Rita, and Wilma, new technologies demonstrated the resiliency
    and reliability of communications systems that can be used by police,
    fire, and EMS departments every day. In the future, these locally
    deployed technologies can help first responders, volunteers, and local
    governments react quickly to disasters, particularly when old ways of
    communicating no longer work.
        Nothing better illustrates how these public-private partnerships
    can serve America than the decision by the City of New Orleans to
    construct a wireless mesh network ``cloud'' available to the public.
    This network is helping bring back businesses, residents, students, and
    tourists. It will improve public safety and access to needed public
    services and information. And perhaps most importantly, it shows the
    world the ``can do'' spirit of America. Hurricane Katrina may have
    washed away the old copper lines and coax cables, but the City of New
    Orleans is now embarked on an effort to rebuild itself stronger than
    before.
        Beyond New Orleans, communities across America are ready and eager
    to bring the economic and social benefits of broadband access to their
    citizens. Today, over 300 cities have chosen to build competitive
    broadband access networks, and hundreds more are now in the planning
    stages. They should be encouraged to move forward, and should have the
    freedom to choose what makes the most sense for their citizens. The
    revised staff draft will ensure that they can do so.
        In closing, we want to thank Senators Lautenberg, McCain, and
    Ensign and their staffs for working so hard to achieve a compromise
    that will help promote the roll-out of community broadband networks
    throughout the country, will encourage public-private partnerships, and
    will give the private sector an opportunity to bid on public projects.
    By freeing up ``white spaces'' spectrum for use by wireless community
    broadband networks, the draft bill will help promote universal access
    for all Americans.
            Sincerely yours,
                                                      Ron Sege,
                                     President/Chief Executive Officer.

            cc: Hon. Frank Lautenberg, Hon. John McCain, and Hon. John
            Ensign.