[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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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\
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\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\
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\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.
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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\
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\1\ See the Federal Communications Commission, 2004
Telecommunications Industry Revenues, released March 2006, at Table 5.
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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\
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\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).
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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\
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\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).
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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\
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\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\
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\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.