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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         STATEMENT OF HON. PHILIP JONES, COMMISSIONER,

       WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION

          (WUTC); ON BEHALF OF NATIONAL ASSOCIATION OF

            REGULATORY UTILITY COMMISSIONERS (NARUC)

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

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

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

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

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

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

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

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

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

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

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

          STATEMENT OF ROBERT S. FOOSANER, SENIOR VICE

       PRESIDENT, GOVERNMENT AFFAIRS AND CHIEF REGULATORY

               OFFICER, SPRINT NEXTEL CORPORATION

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

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

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

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

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

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

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

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


                            A P P E N D I X

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

Dear Mr. Chairman:

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

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

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

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

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

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

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

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

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

    Under these rules, special access customers either have reasonably-
available competitive alternatives, or they continue to receive 
services at regulated, ``just and reasonable'' prices. There simply is 
no substance to an allegation that special access customers lack 
alternatives and must pay unreasonable rates.\19\
---------------------------------------------------------------------------
    \19\ In the case of a wireless carrier, it may often be the case 
that there is only one wire going to any given cell tower because a 
competitor is not going to build a second circuit without first winning 
a contract that will pay for the construction. This does not mean that 
the wireless provider lacks for competitive alternatives. To the 
contrary, this is precisely how a competitive market works when the 
service at issue is tailor-made for a specific customer, particularly 
where it involves a substantial sunk-cost investment.
---------------------------------------------------------------------------
    The FCC Is Looking at Its Rules in an Open Proceeding. New special 
access legislation is unnecessary for the additional reason that the 
FCC is considering special access prices and market performance in an 
active rulemaking proceeding.\20\ Legislation would not give the FCC 
any new authority; instead it would prevent the FCC from acting in 
response to the full record that is developing at the agency in the 
open rulemaking proceeding.
---------------------------------------------------------------------------
    \20\ Special Access Rates for Price Cap Local Exchange Carriers, WC 
Docket No. 05-25, Order and Notice of Proposed Rulemaking, 20 FCC Rcd 
1994 (2005).
---------------------------------------------------------------------------
V. The Minority Staff Draft, If Enacted, Would Be Even More Harmful 
        Because It Would Extend Special Access Regulation to Broadband 
        and Have Congress Set Prices
    The Minority Staff Draft Would Impose Harsh Price Regulation on 
ILEC Broadband Services. The minority staff draft defines special 
access so as to include ILEC broadband services (which must be offered 
on a stand-alone basis). This would subject ILEC broadband (e.g., DSL, 
FiOS, Lightspeed, etc.) services to rate regulation despite the fact 
that they face vigorous competition. Competing broadband services would 
not be regulated, however, creating regulatory asymmetry and harming 
competition by favoring one technology and class of providers over 
another. Price regulation of ILEC residential broadband services would 
also be illogical because competing cable modem services often have 
much larger market shares, yet they would remain free from price 
regulation.
    The Minority Staff Draft Would Have Congress Micro-Manage Prices. 
Congress rarely (if ever) sets specific prices because that is 
something for which agencies are better suited, yet the minority staff 
draft would establish specific prices (based on June 2004 prices) 
without regard to actual market conditions (very competitive). 
Specifically, Congress would be establishing separate rates for AT&T 
and Verizon, on the one hand, and all other ILECs, on the other hand. 
AT&T and Verizon would be required to reduce their prices if they have 
not already done so (because of competition) to the levels at which 
they would be if the FCC had imposed a productivity factor for the past 
two years (since June 2004), and they would be further required to 
reduce prices in the future by an estimate of their improved 
productivity. Moreover, all ILECs would be prevented from raising 
prices other than inflation adjustments. Finally, the minority staff 
draft would set future special access prices in a vacuum, without 
considering how shortfalls in special access revenue may force ILECs to 
seek increased Universal Service funding (USF), which would further 
destabilize that vital program. In all of these ways, the Minority 
Staff Draft would be dragging Congress into the details of common 
carrier rate regulation for the first time, which seems unwise.
                                 ______
                                 
                                              Sprint Nextel
                                          Reston, VA, June 20, 2006
Hon. Daniel K. Inouye,
Co-Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator Inouye:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

   Of course, if the BOCs were ``forced'' to charge competitive 
        rates for special access, they would lose the ``monopoly 
        rents'' for such services that they have been receiving, and 
        that they, presumably, have been using to subsidize their 
        broadband expansion. Loss of such subsidy from their 
        competitors would necessarily ``force'' the BOCs to self-
        finance their broadband expansion. But this is what firms in 
        truly competitive industries have to do. Such firms have no 
        market power to exploit, so they cannot charge above cost 
        prices for their products and services. Thus, Sprint Nextel is 
        ``making the investment itself'' in a wireless broadband 
        network; unlike the BOCs it cannot rely on monopoly rents to 
        pay for such network.
                                 ______
                                 
                                            Tropos Networks
                                       Sunnyvale, CA, June 13, 2006
Hon. Ted Stevens,
Chairman,

Hon. Daniel K. Inouye,
Co-Chairman,

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

Dear Mr. Chairman and Mr. Co-Chairman:

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

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

                                  
