[Senate Hearing 110-1143]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 110-1143
 
                            PHANTOM TRAFFIC 

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 23, 2008

                               __________

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

                               __________

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            GORDON H. SMITH, Oregon
BILL NELSON, Florida                 JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey      JIM DeMINT, South Carolina
MARK PRYOR, Arkansas                 DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri           ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 23, 2008...................................     1
Statement of Senator Inouye......................................     1
    Prepared statement...........................................     1
Statement of Senator Stevens.....................................     2

                               Witnesses

Henagan, Raymond, General Manager, Rock Port Telephone Company; 
  on Behalf of the National Telecommunications Cooperative 
  Association....................................................    16
    Prepared statement...........................................    17
McKee, Charles W., Director, Government Affairs, Sprint Nextel 
  Corporation....................................................     3
    Prepared statement...........................................     4
Sarjeant, Lawrence E., Vice President, Federal Legislative and 
  Regulatory Affairs, Qwest Communications International, Inc....     6
    Prepared statement...........................................     8
Simpson, Angela, Director, Government Affairs, Covad 
  Communications and President, Voice on The Net (VON Coalition).    10
    Prepared statement...........................................    12

                                Appendix

McCaskill, Hon. Claire, U.S. Senator from Missouri, prepared 
  statement......................................................    31


                            PHANTOM TRAFFIC

                              ----------                              


                       WEDNESDAY, APRIL 23, 2008

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:30 p.m., in 
room SR-253, Russell Senate Office Building, Hon. Daniel K. 
Inouye, Chairman of the Committee, presiding.

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

    The Chairman. This afternoon we deal with a matter that is 
rather complicated, and I would like to commend the Vice 
Chairman of the Committee for bringing this matter up, and he 
is in the process of drafting a measure which I will be 
cosponsoring. I will, without objection, yield the floor, yield 
the chair to the Vice Chairman because he is the expert on 
phantoms.
    [Laughter.]
    The Chairman. I have very little expertise on phantoms.
    [The prepared statement of Senator Inouye follows:]

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
    It is easy to forget the small miracle of science that takes place 
every time you pick up a phone and make a call. No matter where you are 
in the country and no matter who you are calling, you are connected in 
a fraction of a second. This is possible because all telephone 
companies are required to interconnect with each other, to complete a 
phone call even if the carrier has no relationship with the calling 
party.
    Historically, for the system to work, phone companies have sought 
compensation for the services they provided to other carriers. Today, 
many telephone companies complain that too many of the calls to their 
customers arrive lacking signaling information necessary for billing 
purposes. This so called ``phantom traffic'' financially burdens small 
carriers in particular.
    I applaud Vice Chairman Stevens' desire to shine a light on this 
issue. Today's hearing allows us to explore the scope of the problem 
caused by phantom traffic. It also allows us to discuss legislation 
Vice Chairman Stevens intends to introduce that would direct the 
Federal Communications Commission to improve its signaling rules with 
respect to the transmission of information necessary for billing 
purposes.
    I welcome the opportunity for the Committee to consider possible 
solutions to phantom traffic. As communications networks and consumer 
services have evolved over the past decade, the problem has grown more, 
not less, complex. Ultimately, we should strive for rules that ensure 
fair compensation for all service providers while encouraging continued 
innovation and greater network efficiency.
    I look forward to hearing the testimony from today's witnesses on 
this issue.

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

    Senator Stevens. That is just because he never listened to 
that old radio program. Remember The Phantom? That is the 
problem.
    I do thank you, Mr. Chairman. I thank you for scheduling 
the hearing. I am delighted that we have this series of 
witnesses.
    Phantom traffic is a definite problem for rural carriers in 
our home State of Alaska and throughout rural America. Alaska 
providers face unique geographic challenges and depend on the 
ability to accurately bill other carriers for delivering 
traffic. However, phantom traffic prevents carriers from 
collecting funds that are rightfully owed to them by other 
carriers. This in turn impacts Universal Service and ultimately 
the telephone rates for customers in rural America.
    During today's discussion, we will hear from a diverse 
cross section of the industry representatives. I am hopeful 
that this discussion will lead to an agreement that carriers 
should not disguise the origination of traffic.
    Some will try to suggest that phantom traffic must be tied 
up in a broader discussion about reforming intercarrier 
compensation. In my opinion, that is not necessary. I think 
resolving this issue will make it easier to address those 
broader issues, but until this issue is settled, it will be 
almost impossible to attempt to solve the other problems that 
we have.
    We have heard about the problems of phantom traffic for 
many years, and I have encouraged the Federal Communications 
Commission to actively analyze this issue. It is time now to 
try to find a solution and it is time for the FCC to pull back 
the mask and see who or what is behind phantom traffic.
    I look forward to working with my colleagues here on this 
committee to address the problem, and I thank Senator Inouye, 
Senator Dorgan, Senator Smith, and Pryor, Thune, and Snowe for 
agreeing to cosponsor legislation that I hope to introduce 
today. This legislation would very simply require the FCC to 
establish rules within 12 months imposing a duty on originating 
carriers, including Voice over Internet Protocol providers, as 
well as intermediate carriers to ensure that all traffic has 
sufficient signaling data to enable accurate billing. It is 
unfair to the system to have some people disguise their traffic 
and not pay for it as others do. In establishing these rules, 
the FCC should consider at a minimum industry standards for 
signaling, technical implications of signaling equipment 
currently being used in industry, and costs incurred in 
modifying equipment to accommodate any changes that may be 
necessary to accurately reflect the origination of any signal.
    And I do thank you as witnesses for participating. I look 
forward to your testimony.
    I am sorry to be a little bit late, Mr. Chairman. I had 
about 70 young people from Alaska over there on the steps of 
the Capitol. If they had been from New York, there would have 
been 700. You understand. That is a large group for us.
    In any event, I would welcome Charles McKee, Director of 
Government Affairs, Sprint Nextel; and Mr. Lawrence Sarjeant, 
Vice President, Federal Legislative and Regulatory Affairs of 
Qwest; Ms. Angela Simpson, Director for Government and 
Regulatory Affairs of Covad Communications and President of the 
VON Coalition; and Mr. Raymond Henagan, General Manager of the 
Rock Port Telephone Company. Gentlemen and lady, if it is all 
right with you, we will proceed in that order and call on Mr. 
McKee first.

 STATEMENT OF CHARLES W. McKEE, DIRECTOR, GOVERNMENT AFFAIRS, 
                   SPRINT NEXTEL CORPORATION

    Mr. McKee. Good afternoon, Chairman Inouye, and Vice 
Chairman Stevens, and members of the Committee. My name is 
Charles McKee and it is my privilege to be here today.
    On behalf of Sprint, I would like to take this opportunity 
to thank Vice Chairman Stevens and Chairman Inouye for your 
leadership and commitment to fostering the growth of the 
competitive telecommunications industry and for this 
opportunity to discuss Sprint Nextel Corporation's perspective 
on the issue of phantom traffic.
    Sprint does not condone fraudulent activities of any kind, 
nor does it support activities designed to avoid legitimate 
compensation obligations between telecommunications carriers. 
Sprint does not believe, however, that there is a significant 
volume of telecommunications traffic that is being manipulated 
for fraudulent purposes and, accordingly, does not believe 
legislation in this area is necessary at this time.
    On the contrary, Sprint believes that most disputes 
characterized as phantom traffic are a result of the inherent 
limitations of the existing public switched telephone network 
and ambiguity regarding the legal status of various types of 
telecommunications traffic.
    The rates applied for the termination of traffic vary 
widely, even though the actual service provided, completion of 
a call to an end-user, is largely identical in all 
circumstances. These varying rate levels result in many 
disputes between the billing and billed companies over whether 
the correct rate level was applied on a particular call and 
what amount is actually due. Accordingly, it is not surprising 
that what one carrier characterizes as fraud another carrier 
would consider entirely appropriate under existing rules.
    The testimony of all the witnesses here today acknowledges 
that there are many different means of exchanging billing 
information and that the existing network infrastructure is 
inherently limited in its ability to provide billing data even 
with the best signaling information. The lack of signaling data 
can result from many limitations in the network, such as the 
existence of multiple tandems or the limited signaling 
capability of a particular route, and likewise, given that 
carriers do not agree on what rate should apply to certain 
types of traffic, such as Voice over Internet Protocol traffic, 
the receipt of signaling information will not resolve those 
disputes.
    Accordingly, while Sprint does not object to an obligation 
that all telecommunications providers populate appropriate 
signaling information, Sprint does not believe this change 
alone will address the core causes of today's billing disputes.
    Given the complex questions that surround these payments, 
it is important that any legislation in this area be carefully 
crafted to avoid unintended consequences. We, therefore, 
applaud the narrow and focused approach of this proposed bill. 
Indeed, Sprint would encourage the Committee to expressly state 
that it is not attempting to modify existing intercarrier 
compensation obligations, for example, the manner in which the 
jurisdiction of traffic is to be determined or the type of 
network architecture required for the exchange of traffic.
    Specifically, any legislation should expressly acknowledge 
that it is not establishing a new rule that called and calling 
party numbers should always be used to determine the 
jurisdiction or rate applicable to a call for billing purposes. 
In this increasingly mobile world, the use of phone numbers to 
determine a caller's location for intercarrier compensation 
purposes does not reflect the growth of wireless and Voice over 
Internet Protocol technology.
    Similarly, Sprint urges the Committee to ensure that the 
legislation does not require carriers to reengineer their 
network architecture in an inefficient and costly manner. 
Specifically, the legislation should make explicit that these 
call identification obligations should not require carriers to 
segregate different types of traffic onto separate facilities 
or require direct connection between carriers. Such measures 
are not necessary to address the issue of billing and could 
increase the cost of service to consumers.
    Ultimately, Congress or the FCC must come to terms with 
these broader issues of intercarrier compensation that are not 
being addressed here. The existing system is inherently 
irrational and is suppressing investment particularly in rural 
areas. Reform of this broken system is critical to sustaining 
robust competition in the telecommunications industry.
    Thank you for your time, and I would be happy to take any 
questions you may have.
    [The prepared statement of Mr. McKee follows:]

 Prepared Statement of Charles W. McKee, Director, Government Affairs, 
                       Sprint Nextel Corporation
    Good afternoon Chairman Inouye and members of the Committee. It is 
a privilege to be here today. Thank you for this opportunity to discuss 
Sprint Nextel Corporation's perspective on proposed legislation 
addressing the question of network traffic identification or ``Phantom 
Traffic.''
    In my testimony today, I will outline Sprint's understanding of the 
term Phantom Traffic, the significance of this issue to Sprint and the 
potential consequences of this legislation. Sprint does not condone 
fraudulent activities of any kind, nor does it support activities 
designed to avoid legitimate compensation obligations. Sprint does not 
believe, however, that there is a significant volume of 
telecommunications traffic that falls within these categories and does 
not believe legislation in this area is necessary at this time. On the 
contrary, Sprint believes that most disputes regarding ``Phantom 
Traffic'' are a result of inherit limitations of the existing Public 
Switched Telephone Network and ambiguity regarding the legal status of 
various types of telecommunications traffic.
    While Sprint questions whether this specific issue warrants 
legislative action, it applauds the narrow and focused nature of this 
proposed bill. Given the complex questions that surround the payments 
exchanged between telephone companies, it is important that any 
legislation in this area be carefully crafted to avoid unintended 
consequences. This legislation is appropriately limited and appears 
designed to avoid these unintended consequences. Ultimately, however, 
Congress or the FCC must come to terms with the broader issues of 
intercarrier compensation that are not addressed here. Reform of this 
broken system is critical to sustaining robust competition in the 
telecommunications industry.
The Meaning of Phantom Traffic
    Under current FCC rules, telecommunications carriers can impose 
charges on one another when they exchange telecommunications traffic. 
These charges vary based upon the type of carrier, the location of the 
callers, the manner in which the traffic is exchanged and the format or 
protocol of the traffic. There are at least nine different 
classifications of rates between carriers. The rules governing these 
charges are now very complex, and I will not attempt to outline or 
explain them in this testimony. For purposes of this proceeding, it is 
sufficient to state that these charges can only be assessed if the 
carrier receiving a call from the Public Switched Telephone Network is 
able to identify the carrier responsible for payment and the 
appropriate rate to be applied.
    Phantom Traffic is not a term defined within the Communications Act 
or the FCC's rules and has been used by different parties to refer to 
different issues. Accordingly, the term itself is somewhat ambiguous in 
nature. As Sprint understands the issue, however, ``Phantom Traffic'' 
describes telecommunications traffic that either lacks sufficient 
information to identify the carrier responsible for payment or which 
lacks sufficient information to determine the rate to be applied to the 
traffic. This lack of information can be the result of many different 
causes, from the type of network used to transmit traffic, to disputes 
over the legal status of the traffic exchanged.
The Significance of the Issue
    While there are significant disputes over which rates apply and 
which carriers are responsible for payment in various scenarios, almost 
all carriers recognize that traffic must be identified so that a 
billing carrier knows where to send its invoices and the rate to apply. 
This identification can occur in different ways. Most commonly, 
carriers use information provided during the transmission of the call 
using a special signaling protocol. This signaling information 
provides, among other things, the calling party number, the called 
party number and, depending on the type of call, the charge number 
(``CN''). (It is this network that enabled caller ID, for example). 
Information for billing can also be provided after the call is 
completed through the exchange of records between companies. These 
records frequently identify the responsible party based upon the trunk 
group originating the traffic. In yet other situations, companies may 
negotiate payment factors based on traffic studies that are used to 
generate invoices based on the total volume of traffic (as opposed to 
call-by-call records).
    Despite the sinister label, the vast majority of ``phantom 
traffic'' is not the result of intentionally wrongful or nefarious 
conduct. Rather the lack of identifying information or the lack of 
sufficient information to determine a call's jurisdiction (or rate) is 
most frequently the result of the current architecture of the Public 
Switched Telephone Network, regulatory ambiguity regarding the 
appropriate rating and routing of particular types of traffic, and the 
creation of new services, such as Voice over Internet Protocol (VoIP), 
that do not fit neatly within the current rules.
    For example, under current rules, the jurisdiction or rate to be 
applied to a call depends, in part, on the location of the calling and 
called party. In the traditional wireline network, the location of a 
party was generally determined by their phone number, which was 
associated with a fixed address. With the advent of mobile phones, 
however, the location of a caller can no longer be determined merely on 
the phone number used. A call from a New York mobile telephone to a 
traditional Kansas City telephone will appear identical from the 
perspective of the landline network, whether the caller was in either 
New York or Kansas City. Likewise, new voice applications using 
Internet protocol can be initiated on any broadband connection and may 
not have a single fixed location.
    In Sprint's experience, however, the amount of traffic that cannot 
be identified through any of the means I previously mentioned is 
relatively small. Wireless carriers, for example, frequently negotiate 
traffic factors to account for the issue of mobility. These factors 
require wireless carriers to pay higher rates on a proportion of the 
traffic exchanged with other carriers on the assumption that some 
percentage of the calls exchanged were in a different jurisdiction and 
thus subject to a different rate. These factors are established based 
upon traffic studies that review data over a period of days or months 
rather than call-by-call signaling information. Although it is not 
always reliable to determine the location of a wireless caller based 
only on the called and calling numbers, the reality is that most 
carriers have found appropriate means to measure and identify this 
traffic, and are meeting their payment obligations.
Consequences of the Legislation
    Sprint currently identifies all traffic it originates on the Public 
Switched Telephone Network and accordingly does not object to the 
imposition of such an obligation on other providers of voice 
communications. Indeed, Sprint agrees that providers of voice 
communication should not be permitted to affirmatively disguise their 
voice traffic or otherwise take steps to avoid a legal obligation to 
compensate the carriers with whom they exchange traffic.
    Sprint notes, however, that the issue of traffic identification is 
closely related to the broader issue of intercarrier compensation. 
Indeed, the only reason to measure traffic in this way is in order to 
impose charges. Given the complexity of that subject, this legislation 
appropriately avoids attempting to restructure the current rules. The 
issue of intercarrier compensation reform has been the subject of 
thousands of pleadings and years of debate. Legislation which purports 
to address the relatively narrow issue of ``Phantom Traffic'' or 
traffic identification should appropriately avoid addressing these 
larger questions. Indeed, Sprint would encourage the Senate to clarify 
that this legislation is not intended to modify the current 
intercarrier compensation rules.
    Specifically, the legislation should expressly acknowledge that it 
is not establishing a new rule that called and calling party numbers 
should always be used to determine the jurisdiction or rate applicable 
to a call for billing purposes. In this increasingly mobile world, the 
use of phone numbers to determine a caller's location for intercarrier 
compensation is backward-looking and ignores the trends of wireless and 
Voice over Internet Protocol (``VoIP'') technology. Until Congress or 
the FCC are prepared to address all of the ramifications associated 
with changes in the manner in which calls are rated and routed, it 
should avoid any action that would further distort the current broken 
system.
    Similarly, Sprint urges the Senate to ensure that the legislation 
does not require carriers to re-engineer their network architecture in 
an inefficient and costly manner. Specifically, the legislation should 
make explicit that these call identification obligations do not require 
carriers to segregate different ``types'' of traffic onto separate 
facilities or require direct connectivity between carriers. Such 
measures are not necessary to address the issue of billing and could 
increase the cost of service to consumers. Sprint is concerned, 
however, that this legislation could be read to require inefficient 
trunking arrangements that would disrupt the existing network 
architecture, which currently allows carriers to combine traffic of 
different types or jurisdictions on the same facilities. While Sprint 
does not believe this is the intent of the legislation, we urge the 
Senate to carefully review the language in this context.
Future Reform
    Once again, Sprint commends the Senate staff for crafting such 
narrow legislation. Sprint does not condone fraudulent efforts to mask 
a carrier's identity or to avoid compensation obligations. Sprint, 
however, does not believe the specific issue of Phantom Traffic 
currently warrants legislation. While Sprint can support narrow 
legislation addressing traffic identification, we urge the Senate to 
avoid unintended changes to the already complex and dysfunctional 
intercarrier compensation regime.
    Unfortunately, the issue of intercarrier compensation, including 
both switched and special access, is not one that can be avoided much 
longer if viable competition is to remain in the telecommunications 
marketplace. The distortions in the current system that heavily favor 
incumbent carriers and outdated technologies threaten to undermine the 
successes of the 1993 and 1996 revisions to the Telecommunications Act. 
Sprint strongly urges Congress to address these broader issues as soon 
as possible.

    Senator Stevens. Thank you, Mr. McKee.
    Mr. Sarjeant, who is the Vice President of Legislative 
Affairs for Qwest, please.

  STATEMENT OF LAWRENCE E. SARJEANT, VICE PRESIDENT, FEDERAL 
   LEGISLATIVE AND REGULATORY AFFAIRS, QWEST COMMUNICATIONS 
                      INTERNATIONAL, INC.

    Mr. Sarjeant. Good afternoon, Mr. Chairman and Mr. Vice Mr. 
Chairman. My name is Lawrence Sarjeant, and I am Vice 
President, Federal Legislative and Regulatory Affairs for 
Qwest. Qwest thanks the Committee for focusing attention on the 
phantom traffic issue by holding this hearing, and I appreciate 
the opportunity to share Qwest's views on phantom traffic with 
you.
    Qwest provides local telephone service, broadband Internet 
access service, and VoIP service in 14 states that cross three 
U.S. time zones. Qwest also operates a long distance network 
and one of the world's largest Internet backbones. Qwest 
provides a variety of other telecommunications and information 
services on a nationwide basis for businesses and state and 
Federal Government agencies. In providing these services, Qwest 
utilizes a network that consists of both traditional public 
switched telephone network, PSTN, facilities and state-of-the-
art broadband and other IP-based facilities.
    Qwest commits considerable investment capital and other 
resources on an annual basis to operate and maintain its 
facilities. For example, Qwest invested $800 million in 2007 to 
augment the broadband capabilities of its network, including 
delivering higher speeds to all of its sales channels. This was 
a part of the approximately $1.67 billion in total Qwest 
capital investment for 2007. Further, Qwest recently announced 
a planned 2008 capital investment of $300 million to extend 
fiber optics deeper into its local network supporting Internet 
access services.
    Given the breadth and diversity of its services and the 
size of its capital investment, Qwest cares deeply about 
ensuring that the public policy environment in which it 
operates is one that is investment-friendly. This is certainly 
a primary focus of the 1996 Telecommunications Act as evidenced 
by the specific requirement in section 157 that the Federal 
Communications Commission, the FCC, encourage the deployment on 
a reasonable and timely basis of advanced telecommunications 
capability to all Americans by utilizing regulating methods 
that remove barriers to infrastructure investment. It is this 
goal of bringing advanced telecommunications capability to all 
Americans that should guide our communications policy 
deliberations and actions.
    Unfortunately, the communications industry is experiencing 
a serious problem with certain industry participants avoiding 
their intercarrier compensation obligations to those carriers 
that own and operate the PSTN. If legitimate intercarrier 
compensation costs cannot be recovered because of such 
arbitrage, less capital is available for future network 
investments and consumers lose.
    The term ``phantom traffic'' describes a number of 
different situations in which traffic is not adequately 
identified, making appropriate billing for the traffic 
difficult or impossible. This happens for a variety of reasons, 
but generally it occurs because the current intercarrier 
compensation regime has not kept pace with technological and 
competitive changes in the communications market and, as a 
result, has made certain arbitrage opportunities possible.
    In today's communications world, both traditional 
telecommunications carriers and service providers utilizing 
more recent technologies depend upon the ability to 
interconnect with one another and exchange traffic. Because the 
exchange of traffic sometimes involves different types of 
services that are accorded different regulatory treatment, 
intercarrier compensation is accomplished through a variety of 
arrangements.
    In any arrangement where service providers must compensate 
each other, it is essential that they negotiate agreements that 
spell out the terms and conditions by which they exchange 
traffic and that they also exchange adequate call data to 
enable accurate billing. Phantom traffic occurs in part because 
not all service providers obtain adequate agreements that 
ensure that other carriers receive the call data necessary for 
billing.
    Qwest and others have asked that the FCC address phantom 
traffic on an interim basis, one, by reinforcing that the 1996 
Telecom Act requires and enables all types of service providers 
to enter into agreements for the exchange of traffic, and two, 
by expanding the scope of the FCC's rules that require the 
passage of information necessary for accurate billing.
    Call records. The exchange of call records pursuant to an 
agreement provides information to facilitate billing and is in 
fact the industry standard and the most common way in which 
information is exchanged for billing purposes. While service 
providers are already able to negotiate commercial terms for 
the exchange of call records as a part of their agreements, 
they all too often fail to obtain agreements in the first place 
and, when they do obtain agreements, sometimes fail to 
negotiate for the necessary call records.
    Signaling rules. Signaling is just one method of passing 
some of the information necessary for accurate billing, and the 
existing call signaling rules were targeted to a narrow subset 
of traffic, interstate traffic using the most common, 
traditional public switched telephone network signaling 
protocol. As the communications marketplace becomes 
increasingly diverse and PSTN-based services become a 
complement to a variety of non-PSTN-based services, it is 
necessary to expand the FCC's signaling rules.
    Qwest believes that comprehensive intercarrier compensation 
reform that creates a holistic bill-and-keep-at-the-edge regime 
for all traffic is the only true and complete solution to the 
phantom traffic problem. Nonetheless, expeditious adoption of 
an interim solution addressing agreements and signaling rules 
is an important step in mitigating the phantom traffic problem.
    Thank you.
    [The prepared statement of Mr. Sarjeant follows:]

  Prepared Statement of Lawrence E. Sarjeant, Vice President, Federal 
Legislative and Regulatory Affairs, Qwest Communications International, 
                                  Inc.
    Good morning Mr. Chairman and Members of the Committee. My name is 
Lawrence Sarjeant, and I am Vice President for Federal Legislative and 
Regulatory Affairs for Qwest Communications International, Inc. 
(Qwest). I appreciate the opportunity to share Qwest's views with you 
at today's hearing on the issue of phantom traffic.
    Before I address the phantom traffic issue directly, I just want to 
give a little background about who Qwest is and why we care so much 
about this issue. As you may know, Qwest provides local telephone 
service, broadband Internet access service, and VoIP (voice services 
using an IP protocol) service in fourteen states across the Central, 
Mountain and Pacific time zones. Qwest also operates a long-haul long 
distance network and operates one of the world's largest Internet 
backbones. Qwest also provides a variety of other telecommunications 
and information services on a nation-wide basis (i.e., both inside and 
outside of its local service area). These services include VoIP service 
and a broad variety of other innovative telecommunications solutions 
provided to businesses and state and Federal Government agencies. In 
providing these services, Qwest utilizes a network that consists of 
both traditional Public Switched Telephone Network (PSTN) facilities 
and state-of-the-art broadband and other IP-based facilities. Qwest 
commits considerable investment capital and other resources on an 
annual basis to operate and maintain these facilities. By way of 
example, Qwest invested approximately $800 million in 2007 to augment 
the broadband capabilities of its network, including delivering higher 
speeds to all of its sales channels.\1\ This was a part of the 
approximately $1.67 billion in total Qwest capital investment for 
2007.\2\ On top of that, Qwest recently announced a planned 2008 
capital investment of $300 million to extend fiber optics deeper into 
its local network supporting state-of-the-art Internet services.\3\
---------------------------------------------------------------------------
    \1\ As stated in the Earnings Release for Qwest's 4th Quarter and 
Full-Year 2007 results.
    \2\ Id.
    \3\ As stated in the Earnings Release for Qwest's 3rd Quarter of 
2007 results.
---------------------------------------------------------------------------
Promoting an Investment-friendly, Consumer-friendly, Market-based 
        Environment
    Given the breadth and scope of its services and the size of its 
capital investment, Qwest cares deeply about ensuring that the public 
policy environment in which it operates is one that is investment 
friendly. This is certainly a primary focus of the 1996 
Telecommunications Act, as evidenced by the specific requirement in 
Section 157 that the Federal Communications Commission (the ``FCC'') 
``encourage the deployment on a reasonable and timely basis of advanced 
telecommunications capability to all Americans . . . by utilizing . . . 
regulating measures that remove barriers to infrastructure 
investment.'' It is this goal of bringing advanced telecommunications 
capability to all Americans that should guide our communications policy 
deliberations and actions. Policies that discourage investment in 
communications infrastructure by making such investment uneconomic 
operate at cross-purposes with the goal of encouraging the timely and 
ubiquitous deployment of advanced communications capability to all 
Americans. Phantom traffic bears on a carrier's ability to make 
investments in advanced telecommunications capabilities by depriving it 
of the compensation it is due for handling the traffic of other 
communications providers. We are experiencing a serious problem with 
certain industry participants avoiding their intercarrier compensation 
obligations to those carriers that own and operate the PSTN. 
Facilities-based providers of communications services such as Qwest 
have high fixed costs. If we cannot recover our legitimate costs 
because of such arbitrage, less capital is available to us for future 
network investments to achieve the Congress's goal of bringing advanced 
telecommunications capability to all Americans. If this happens, 
consumers lose. Qwest commends the Committee for its interest in this 
issue and shining a spotlight on it by holding this hearing.
The Phantom Traffic Problem
    The term ``phantom traffic'' describes a number of different 
situations in which traffic is not adequately identified, making 
appropriate billing for the traffic difficult or impossible. This 
happens for a variety of reasons, but generally occurs because the 
current intercarrier compensation regime has not kept pace with 
technological and competitive changes in the communications market, and 
as a result, has made certain arbitrage opportunities possible. In 
today's telecommunications world, both traditional telecommunications 
carriers and service providers utilizing more recent technologies all 
depend upon the ability to interconnect with one another. The 
intercarrier compensation regime, in turn, governs the manner in which 
interconnecting communications service providers give or receive 
compensation when these service providers exchange traffic. Because the 
exchange of traffic sometimes involves different types of services that 
are accorded different regulatory treatment, intercarrier compensation 
is accomplished through a variety of arrangements. In some 
circumstances, service providers agree to exchange no compensation 
while accepting each other's traffic. This is called ``bill and keep.'' 
In other cases, local exchange carriers exchange or carry traffic 
pursuant to tariffs or carrier agreements that define the terms and 
conditions for the provision of compensation. For long distance 
services, there are both interstate and intrastate tariffed access 
charge regimes that are regulated by the FCC and state public service 
commissions, respectively. Under these regimes, long distance carriers 
typically pay local exchange carriers to deliver and receive long 
distance calls to and from local customers. Among competing local 
exchange carriers, there are the reciprocal compensation rules, which 
allow a local exchange carrier to be compensated by another local 
exchange carrier for the termination of local traffic. When wireless 
carriers exchange traffic with wireline carriers, there are yet 
additional rules. In some cases, traffic merely transits an 
intermediate carrier's network, but the transit provider neither 
originates nor terminates the call. In any compensation arrangement 
where service providers must compensate each other, it is essential 
that they not only negotiate agreements that spell out the terms and 
conditions by which they exchange traffic, but that they also exchange 
adequate call data to enable accurate billing.
    Phantom traffic occurs, in part, because not all service providers 
obtain adequate agreements that ensure that other carriers receive the 
call data necessary for billing, particularly in those circumstances 
where the call signaling data is not adequate. Moreover, because 
intercarrier compensation treatment varies by jurisdiction, some 
service providers have the incentive to engage in arbitrage when they 
exchange traffic. For example, because interstate access rates are 
typically lower than intrastate access rates, access traffic is 
sometimes erroneously designated as interstate when in fact it is 
jurisdictionally intrastate. Similarly, access traffic is sometimes 
erroneously designated as local traffic because intercarrier 
compensation rates for local traffic are lower and/or because such a 
designation improperly seeks to shift the compensation burden to 
another carrier (e.g., an originating carrier may be due compensation 
for access traffic but owe compensation for local traffic). In other 
words, phantom traffic occurs because certain service providers seek to 
pay less than they should, seek to avoid their compensation obligations 
altogether, or seek to receive compensation when they should be paying. 
Regardless of how it happens, phantom traffic is a large problem. 
Estimates as to the amount of revenue lost annually to phantom traffic 
have varied in filings in the FCC's intercarrier compensation 
proceeding (Docket WC No. 01-92) from $600M to $2B. The FCC is 
currently studying potential intercarrier compensation reform proposals 
that would largely address this problem by eliminating differences in 
intercarrier compensation treatment based on the type of traffic. 
However, it may be some time before comprehensive intercarrier 
compensation reform occurs. Because of this, Qwest and numerous other 
industry representatives are encouraging the FCC to at least adopt 
interim measures that would provide significant relief from the phantom 
traffic problem.
Qwest's Phantom Traffic Position
    Qwest and a diverse group of industry representatives have asked 
that the FCC address phantom traffic on an interim basis by: (1) 
reinforcing that the 1996 Act requires and enables all types of service 
providers to enter into agreements for the exchange of traffic; and (2) 
expanding the scope of FCC rules requiring the passage of information 
necessary for accurate billing. The first principle is important 
because signaling is just one method of passing some of the information 
necessary for accurate billing. The exchange of call records pursuant 
to agreement also provides information to facilitate billing and is, in 
fact, the industry standard and the most common way in which 
information is exchanged for billing purposes. While service providers 
are already able to negotiate commercial terms for the exchange of 
these call records as part of their agreements, they all too often fail 
to obtain agreements in the first place and, when they do, fail to 
negotiate for the necessary call records. The second principle is 
important because the FCC's existing call signaling rules were targeted 
to a narrow subset of traffic--i.e., interstate traffic using the most 
common traditional PSTN signaling protocol. The rules do not cover, for 
example, voice calls originated in IP protocol which terminate on the 
PSTN. As the communications marketplace becomes increasing diverse and 
PSTN-based services become a complement to a variety of non-PSTN-based 
services, it is necessary to expand the FCC's signaling rules.
    Again, Qwest believes that the best interim solution to phantom 
traffic is to merely expand the scope of current rules as discussed 
above. To be clear, given the nature of the arbitrage problem 
underlying phantom traffic, Qwest believes that comprehensive 
intercarrier compensation reform that creates a holistic bill-and-keep-
at-the edge regime for all traffic is the only true and complete 
solution to the phantom traffic problem. The solution described above, 
addressing agreements and signaling rules, is only an interim step. 
But, it is an important step, and Qwest hopes it can be taken 
expeditiously.
            Thank you.

    Senator Stevens. Thank you very much.
    The next witness is Ms. Angela Simpson, Director for 
Government and Regulatory Affairs of Covad Communications and 
President of the VON Coalition. Ms. Simpson?

       STATEMENT OF ANGELA SIMPSON, DIRECTOR, GOVERNMENT

         AFFAIRS, COVAD COMMUNICATIONS; AND PRESIDENT,

                VOICE ON THE NET (VON COALITION)

    Ms. Simpson. Thank you, Chairman Inouye, Vice Chairman 
Stevens. My name is Angela Simpson. I am Director of Government 
Affairs at Covad Communications and the President of the VON 
Coalition.
    I am proud to be here representing a group of high-tech 
innovators who are ushering in a new world of communication 
opportunity. We believe VoIP can be a force for increased 
competition and innovation and a driver for broadband 
deployment and economic growth. With the right policies, VoIP 
competition can save consumers billions of dollars over the 
next several years, and as the Nation faces economic 
challenges, VoIP is now projected to be the number one job 
creator of any industry in the country. But this promise and 
potential are at risk if rules of the last century's telephone 
network are arbitrarily imposed onto the Internet.
    Phantom traffic is a somewhat sinister sounding phrase 
coined by some incumbent phone companies to refer to traffic 
that may not conform to the billing methods used by those 
carriers. In essence, such traffic confuses the terminating 
carrier because the traffic may not contain information that 
the legacy system can easily handle. Some attribute fraudulent 
motives to phantom traffic, but it is inaccurate to view all 
phantom traffic as fraud or theft. There are other innocent and 
valid reasons for this phenomenon.
    Namely, the current compensation scheme does not reflect 
the technological realities of today's communications market. 
Many new technologies like some VoIP services have no business 
reason to track information in the traditional way, and to do 
so would require extensive and costly network modifications 
simply to generate artificial information.
    While VoIP technologies may not be the primary cause of the 
so-called phantom traffic problem, some of the proposed 
solutions put forth have very real potential to stall emerging 
VoIP benefits and limit consumer choices. For these reasons, 
the VON Coalition respectfully urges policymakers to carefully 
consider two key principles before acting on phantom traffic.
    First, to help accelerate the transition to a nationwide 
broadband network, we believe regulators should create 
technologically neutral incentives rather than disincentives 
for exchanging traffic between Internet networks and the legacy 
phone network.
    And second, rather than reflexively applying yesterday's 
rules to tomorrow's technologies, we encourage the Committee to 
take a practical, forward-looking approach that extends VoIP-
driven benefits throughout the economy.
    Those who seek quick action on the narrow issue of phantom 
traffic might create the short-term appearance of solving a 
problem, but the related fallout is likely to have significant, 
unintended negative consequences. The best approach is for 
policy experts at the FCC and stakeholders to eliminate the 
phantom traffic issue by enforcing existing rules and 
establishing a new compensation regime that fosters fair 
competition.
    Many proposed solutions to the phantom traffic phenomenon 
tend to tie together the signaling issue, the identification of 
the IP voice packet, and the compensation issue. This is 
neither necessary nor advisable. A combination of FCC 
enforcement of its current rules, minor changes in the current 
call signaling requirements, and completion of the broader FCC 
policymaking provides a far more rational solution.
    It is also important to note that some legacy carriers 
themselves bear a part of the blame for the phantom traffic 
issue where they have not updated their networks to accommodate 
SS7 technology. Before imposing burdensome, new technical and 
regulatory requirements on the entire VoIP industry, those 
carriers should be required to make the necessary updates to 
their networks to be able to handle the existing signaling 
information.
    We are concerned that proponents of new traffic signaling 
regulation have not adequately demonstrated a quantifiable 
problem that cannot be addressed through better enforcement of 
existing rules. This is a necessary precondition for any 
additional actions. Any fix should also consider impacts on 
other laws, broadband deployment, and the regulation of the 
Internet in general. There is no need to conduct open heart 
surgery to fix a paper cut.
    Regardless of the path taken, however, the VON Coalition 
believes that no one should have the right to block allegedly 
improperly labeled traffic. Because such action is blatantly 
discriminatory, policymakers should never tolerate or permit 
blocking of IP traffic under any circumstances.
    The VON Coalition believes that acting on an ad hoc basis 
at this stage is unwarranted. However, to the extent that this 
committee does act, it should focus its initial efforts on 
quantifying the scope of the phantom traffic problem. This is a 
legitimate debate. The risks associated with retrofitting 
outdated technological and compensation regimes onto bold, new 
communications tools vastly outweigh the temporary financial 
rewards some of these ILEC's seek.
    VoIP technology has benefited people across America from 
cities to suburbs to exurbs, and it has been especially 
important for consumers living in rural America who are just 
now beginning to enjoy the benefits of broadband and voice 
competition. Facilitating Internet- based voice communication 
can help all consumers to benefit from voice competition and 
innovation. It can also help communities connect to a new world 
of remote job opportunities, resulting in rural economies 
becoming an engine for higher paying information age jobs.
    However, imposing rules meant for yesterday's phone network 
on tomorrow's digital age would adversely affect these vast 
consumer benefits. We urge the Committee to take extreme 
caution in how it proceeds with this phantom problem.
    Thank you.
    [The prepared statement of Ms. Simpson follows:]

  Prepared Statement of Angela Simpson, Director, Government Affairs, 
 Covad Communications; and President, Voice on The Net (VON Coalition)
    Thank you, Chairman Inouye, Vice Chairman Stevens, and 
distinguished members of the Committee. My name is Angela Simpson. I am 
Director of Government Affairs at Covad Communications and President of 
the Voice on The Net or VON Coalition \1\--the voice for the VoIP 
industry. On behalf of the VON Coalition, I thank the Committee for the 
opportunity to appear before you today to discuss the so-called phantom 
traffic issue.
---------------------------------------------------------------------------
    \1\ The Voice on the Net or VON Coalition consists of leading VoIP 
companies, on the cutting edge of developing and delivering voice 
innovations over Internet. The coalition, which includes AT&T, BT 
Americas, CallSmart, Cisco, CommPartners, Covad, EarthLink, Google, 
iBasis, i3 Voice and Data, Intel, Microsoft, New Global Telecom, 
PointOne, Pulver.com, Skype, T-Mobile USA, USA Datanet, and Yahoo! 
works to advance regulatory policies that enable Americans to take 
advantage of the full promise and potential of VoIP. The Coalition 
believes that with the right public policies, Internet-based voice 
advances can make talking more affordable, businesses more productive, 
jobs more plentiful, the Internet more valuable, and Americans more 
safe and secure. For more information, see http://www.von.org.
---------------------------------------------------------------------------
    I am proud to be here representing a group of high-tech innovators 
who are helping to usher in a new world of communications opportunity. 
We believe VoIP can be a force for increased competition, a platform 
for innovation, a driver for broadband deployment, and a vehicle for 
continued economic growth. In fact, with the right policies, VoIP 
competition can save consumers an astounding $111 billion over the next 
5 years--putting real money back into consumers' pockets through the 
power of competition at a time when families really need it.\2\ And by 
harnessing VoIP as a broadband driver, just a 7 percent increase in 
broadband adoption could create an estimated 2.4 million new jobs.\3\ 
Indeed, as the Nation faces economic challenges, VoIP is now projected 
to be the number one job creator of any industry in the country.\4\
---------------------------------------------------------------------------
    \2\ Micra report (available online at http://www.micradc.com/news/
publications/pdfs/Updated_MiCRA_Report_FINAL.pdf) found that VoIP 
competition can save consumers $111 billion over the next 5 years.
    \3\ Just a 7 percent increase in broadband adoption could result in 
an additional 2.4 million jobs per year created.  See http://
www.connectednation.com/documents/2008_02_21_TheEco
nomicImpactofStimulatingBroadbandNationally_AConnected Nation 
Report_001.pdf.
    \4\ The industry leading the way in terms of employment growth over 
the next few years will be Voice over Internet Protocol providers 
(VoIP), according to economic research firm IBISWorld, with average 
annualized jobs growth of around 19.4 percent through 2012. See http://
www.ibisworld.com/pressrelease/pressrelease.aspx?prid=116.
---------------------------------------------------------------------------
    But the promise and potential that I outlined above are at risk if 
rules meant for the last century's telephone network are arbitrarily 
imposed on to the Internet. This would not only stall and stifle these 
vast consumer and small business benefits, but it runs counter to the 
course the Committee has charted over the years to promote competition, 
investment, and innovation.
    ``Phantom traffic'' is a somewhat sinister-sounding phrase used by 
some incumbent phone companies to refer to communications traffic that 
does not conform to the billing methodologies used by those terminating 
LECs. In essence, such traffic ``confuses'' the terminating carrier's 
systems because, in some instances, the traffic does not contain 
information that the legacy carrier's system utilizes to determine the 
traffic's regulatory classification for compensation purposes. Some 
read fraudulent motives into phantom traffic by suggesting that the 
originators affirmatively alter or remove the information necessary for 
intercarrier compensation billing purposes in order to make traffic 
appear to be the type of traffic that is assessed lower termination 
fees. But it is inaccurate and simplistic to view ``phantom traffic'' 
as fraud or theft. There are other, innocent and valid reasons for the 
``phantom traffic'' phenomenon.
    Namely, the current compensation scheme does not reflect the 
technological realities of today's communications market. Many new 
technologies, like some VoIP services, have no business reason to track 
such information in the traditional way that the ILECs would prefer. 
And to do so would require extensive network modifications simply to 
generate artificial information. For example, many innovative Internet-
based communication services and technologies are not tied inextricably 
to North American Numbering Plan (``NANP'') numbers, which are the 
foundation of many intercarrier compensation calculations. In other 
instances, the consumer is simply utilizing the full range of features 
of a technology, whether IP-enabled or wireless, such as using a 
communications device to originate calls from locations unrelated to 
the calling party number.
    While VoIP technologies may not be the primary cause of so-called 
phantom traffic problems, some of the proposed ``solutions'' put forth 
have the very real potential to stall the vast emerging benefits and 
limit consumer choices in the future. For these reasons, the VON 
Coalition respectfully urges the Committee to carefully consider two 
key principles before it advances any legislation related to phantom 
traffic that might forestall these vast consumer benefits:

   First, to help accelerate the transition to a nationwide 
        broadband network, we believe regulators should adopt rules 
        that create technologically neutral incentives rather than 
        disincentives for exchanging traffic between Internet networks 
        and the legacy phone network. This means strengthening and 
        reforming interconnection and intercarrier compensation 
        policies as a whole.

   Second, rather than automatically applying yesterday's rules 
        to tomorrow's technologies, we encourage the Committee to 
        support a practical, forward-looking approach that empowers 
        consumers, extends VoIP driven benefits, and boosts 
        productivity in the economy. Extreme caution should be taken to 
        not unduly impede the FCC's comprehensive intercarrier 
        compensation reform efforts currently underway and to avoid the 
        serious unintended negative consequences that could arise by 
        virtue of a reflexive ``band-aid'' fix to the ``phantom 
        traffic'' issue.

    We are concerned that a ``shoot then aim'' approach to solving the 
so-called phantom traffic issue could have the unintended effect of 
stifling innovation and stalling investment in this still nascent IP-
enabled communications industry. Those who advocate for quick action on 
the narrow issue of phantom traffic might create the appearance of 
solving a problem, but the related fallout is likely to have 
significant and unintended negative repercussions. For example, a band-
aid fix imposed on VoIP services is likely not to adequately solve the 
problem experienced by the LECs, and will disproportionately harm VoIP 
providers and their consumers. A better approach is for policy experts 
at the FCC and industry stakeholders to eliminate this phantom traffic 
issue once and for all by establishing a new intercarrier compensation 
regime that fosters fair competition and innovation to the benefit of 
consumers and small businesses nationwide. The FCC has the tools and 
the appropriate authority to develop the balanced, pro-competitive, and 
forward-looking policies that are needed here. Indeed, the FCC opened 
such proceeding in 2001, but has yet to act partly because they are 
overwhelmed by a tidal wave of petitions seeking to eliminate statutory 
interconnection obligations.
I. Proposed Phantom Traffic ``Solutions'' Confirm the Failures of the 
        Current Compensation Structure
    Many proposed solutions to the ``phantom traffic'' phenomenon tend 
to inextricably tie together the signaling issue and the compensation 
issue. This is neither necessary nor advisable, especially if Congress 
or the FCC is contemplating an interim solution. A combination of 
vigilant FCC enforcement of its current rules, potentially minor 
changes in signaling requirements, and completion of broader FCC 
policymaking provide far more rational solutions.\5\
---------------------------------------------------------------------------
    \5\ The Commission has taken a strong view against piecemeal 
decisions that might ``stymie comprehensive reform.'' For example, in 
rejecting a recent forbearance petition, the Commission was concerned 
that ``such relief would . . . require us to prejudge important issues 
pending in broader rulemakings and otherwise distort the Commission's 
deliberative process.'' Petition of SBC Communications Inc. for 
Forbearance from the Application of Title II Common Carrier Regulation 
to IP Platform Services, Memorandum Opinion and Order, 20 FCC Rcd 9361 
(2005).
---------------------------------------------------------------------------
    There are two distinct issues that proponents of phantom traffic 
solutions seek to resolve. The first issue involves the information 
about a call that is generated and exchanged. The FCC's rules already 
address this concern, but they need to be enforced.\6\ Vigorous FCC 
enforcement of its existing rules can go a long way toward solving the 
phantom traffic problem. It is also important to note that certain 
ILECs themselves bear part of the blame for the phantom traffic issue 
where they have not updated their networks to accommodate Signaling 
System 7 (``SS7'') technology. But before such ILECs seek to impose 
burdensome new technical and regulatory requirements on the entire VoIP 
industry, they should be required to make the necessary upgrades to 
their own networks to be able to handle ``necessary'' signaling 
information prior to suggesting that other intermediate carriers assume 
any additional burdens.
---------------------------------------------------------------------------
    \6\ Specifically, carriers that utilize SS7 signaling already are 
required to transmit the calling party number associated with an 
interstate call to interconnecting carriers. 47 C.F.R.  64.1601(a).
---------------------------------------------------------------------------
    Current signaling requirements could potentially be fine-tuned to 
further address the situation to the extent such actions are 
technically, operationally, and economically feasible for all, to the 
extent that they are necessary for an interim solution to be effective, 
and in a manner that spreads the burden equitably between all entities 
in the transmission chain. To this end, the VON Coalition could support 
a requirement that, where technically and operationally feasible with 
the network technology deployed at the time the call was originated, 
the originating providers transmit the telephone number received from 
or assigned to the calling party. For PSTN connected services, all 
providers in the communications stream pass currently generated call 
identifying information without modification. This requirement would 
not apply where no telephone number is assigned to the calling party. 
Importantly, however, the VON Coalition does not support any new 
obligations to generate call identifying information where such 
information does not generate organically.
    The second issue involves the compensation structure for traffic 
that does not meet the billing requirements of legacy terminating phone 
companies. Proponents of additional regulatory burdens seek to impose 
backward-looking obligations and high access rates on new entrants and 
new technologies in the guise of ``phantom traffic'' solutions for two 
underlying reasons. First, the current compensation structure does not 
reflect current technological and market realities and 
disproportionately benefits legacy terminating LECs. And second, some 
are seeking to remedy deficiencies in their own networks and billing 
systems at the expense of others. Comprehensive intercarrier 
compensation reform is one of the fundamental policy issues currently 
being considered by the FCC.
    The so-called phantom traffic ``solutions'' not only won't solve 
these fundamental policy challenges, but worse, they will delay the 
reform that is necessary to put all carriers on a level playing field. 
A rush to judgment on the phantom traffic issue, without proper 
consideration of the broader interests of consumers and small 
businesses would be a dramatic departure from the Federal goals on 
compensation reform which include encouraging network efficiency and 
investment, and the development of efficient competition.\7\
---------------------------------------------------------------------------
    \7\ See Developing a Unified Intercarrier Compensation Regime, 
Notice of Proposed Rulemaking, 16 FCC Rcd 9610, 9612 (2001).
---------------------------------------------------------------------------
II. Congress Should Proceed Cautiously to Avoid Negative Unintended 
        Consequences of New Phantom Traffic Regulation
    The VON Coalition cannot over-emphasize the need to proceed 
cautiously. There is a significant danger of negative unintended 
consequences of going too far to fast here. As an initial matter, we 
are concerned that proponents of one-off phantom traffic regulation 
have not adequately demonstrated a quantifiable problem that cannot be 
adequately addressed through vigilant enforcement of existing rules. 
Information regarding the true size and scope of the so-called phantom 
traffic problem, and tending to show that it is a significant problem 
that cannot be addressed by FCC enforcement, is a reasonable and 
necessary precondition for any additional regulatory requirements. 
There is also insufficient evidence that the long-term costs to 
consumers, service providers, and our economy from a new Internet 
regulatory scheme imposed to address any quantifiable phantom traffic 
problem--are outweighed by any short term benefit to incumbents. In 
addition to this fundamental cost-benefit analysis, the Committee 
should refrain from acting until the impacts of any such action on 
existing law (such as the Call Home Act), broadband deployment, and the 
Internet generally, are understood. There's no need to conduct open-
heart surgery to fix a paper cut.
    IP networks and the gateways that enable the transition between 
broadband communications and the PSTN are critical links for empowering 
consumers and driving economic benefits related to IP-enabled 
communications. That's why it's critical to consider the technical 
variations of networks and not try to retrofit new technologies into 
legacy network solutions. By avoiding rules that create new and onerous 
obligations to generate call identifying information where such 
information does not generate organically, policymakers can help ensure 
continued investment in IP-enabled networks, and avoid backward-looking 
decisions that can stifle innovation, impede technology investment, and 
slow the transition to broadband communications.
    Regardless of the path taken, the FCC should never permit 
terminating carriers to resort to ``self-help.'' Some ILECs have 
suggested that both intermediate and terminating carriers should have 
the right to block ``improperly labeled traffic.'' Because such action 
blatantly gives competitors the ability to discriminate and is customer 
affecting, policymakers should never tolerate or permit blocking of any 
IP traffic under any circumstances.
III. Getting to the Right Intercarrier Compensation Regime
    Only a few years ago, five rural ILECs and U.S. Telecom wrote to 
this Committee arguing that the FCC should not take interim steps to 
clarify the correct compensation regime for VoIP because ``[t]hese 
issues should be addressed comprehensively and not in a piecemeal 
fashion, as the FCC has previously recognized.'' \8\ They argued that 
to ``act on an ad hoc basis on only one aspect of a much larger problem 
at this stage is totally unwarranted.'' And they asked for help in 
preventing the ``FCC from taking any hasty, ill-timed, and ill-
conceived action.'' \9\
---------------------------------------------------------------------------
    \8\ Eastern Rural Telecom Association, Independent Telephone and 
Telecommunications Alliance, National Telecommunications Cooperative 
Association, Organization for the Promotion and Advancement of Small 
Telecommunications Companies, United States Telecom Association, 
Western Telecommunications Alliance Letter to Senator Daniel K. Inouye 
(Feb. 3, 2005).
    \9\ Id.
---------------------------------------------------------------------------
    The VON Coalition likewise agrees that acting on an ad hoc basis on 
only one aspect of a much larger problem at this stage is totally 
unwarranted, especially when the ad hoc solution being proposed by the 
ILECs is likely to impose high per-minute access charges on VoIP 
providers. Such access charges would overcompensate ILECs because they 
do not remotely reflect the true costs of traffic exchange, while at 
the same time stifling consumer benefits of IP-enabled communications 
and slowing broadband adoption in the United States. Instead, we urge 
the Committee to encourage regulators to continue to focus attention on 
completing action on its omnibus intercarrier compensation reform 
proceeding. Such an approach avoids imposing costly but temporary 
``band-aid'' requirements on broadband communication, protects VoIP 
consumers from arbitrary price increases, and ensures that new 
investment in IP-enabled networks, applications, and services is not 
unnecessarily deterred.
    The current regime is, in a word, broken and the apparent catalyst 
behind the request for new phantom traffic solutions is the very issue 
that should be driving the FCC to adopt comprehensive compensation 
reform: rapid technological changes in the communications industry have 
made virtually all current compensation and billing mechanisms 
obsolete. Thus, to the extent this Committee acts, it should focus its 
initial efforts on quantifying the scope of the ``phantom traffic'' 
problem. The existence of a problem is a gating issue, and estimates as 
to the size and scope of the problem vary greatly. Congress should 
focus on doing no harm prior to mandating new regulatory constructs. 
The risks associated with retrofitting outdated technological and 
compensation regimes onto bold new communications tools vastly outweigh 
the financial rewards these ILECs seek.
IV. Conclusion
    VoIP technology has benefited people all across America from cities 
to suburbs to exurbs. And it has been especially important for 
consumers living in rural America who are just now beginning to enjoy 
the benefits of broadband and voice competition. Enabling Internet-
based voice communication can help consumers (particularly rural 
consumers) to benefit from voice competition, encourage rural telecom 
companies to extend broadband infrastructure more affordably, allow 
remote businesses to transform the way they operate, and help rural 
communities to connect to a new world of remote job opportunities, 
resulting in rural economies becoming an engine for higher paying 
information age jobs.
    However, imposing rules meant for yesterday's phone network on to 
tomorrow's digital age would adversely affect these vast consumer 
benefits. The VON Coalition in no way endorses fraudulent removal of 
call signaling information. Many legacy telephone companies, however, 
would use this fear as a means to burdensomely regulate the balance of 
innocent VoIP actors. We urge the Committee to take extreme caution in 
how it proceeds with this ``phantom'' problem.
    Thank you very much. I am happy to answer questions.

    Senator Stevens. Thank you very much.
    Our last witness is Mr. Raymond Henagan, General Manager of 
Rock Port Telephone Company. Mr. Henagan?

         STATEMENT OF RAYMOND HENAGAN, GENERAL MANAGER,

         ROCK PORT TELEPHONE COMPANY; ON BEHALF OF THE

      NATIONAL TELECOMMUNICATIONS COOPERATIVE ASSOCIATION

    Mr. Henagan. Good afternoon, Senators. Thank you for 
inviting me here today.
    Before I outline the problems, please understand that small 
rural carriers get about 29 percent of their revenues from 
carrier payments. Schemes to avoid these payments make it 
difficult to afford service to rural consumers.
    The first key problem is carriers are not sending all the 
detailed information required for proper billing. Recent 
analysis of our records show that 11 percent of the calls sent 
for termination on Rock Port's network lack of calling party's 
number. Sherburne Telephone Company in Minnesota also 
discovered that 30 percent of their terminating calls arrive 
without valid CPN.
    Second, Rock Port and most other small carriers are not 
receiving all the detailed call records from the tandem carrier 
who provides us with connections to the outside world. To give 
you an idea of the size of the problem, in 2007 we saw over 18 
percent of our minutes being sent over Rock Port's network were 
traveling for free because they are not receiving the call 
records needed to bill for these calls.
    Third, many rural carriers cannot send an accurate bill out 
to certain wireless carriers because we are not privy to the 
necessary traffic information. Wireless carriers insist on 
using traffic factors to bill access charges for nonlocal 
calls. However, this factor is not based on real traffic. Not 
surprising, these percentages range from 0 to 3 percent. We 
need actual traffic information to be able to negotiate 
agreements with wireless carriers on an equal playing field.
    Fourth, rural carriers are receiving letters from carriers 
refusing to pay access bills claiming the FCC has given them 
permission to use their networks for free because they are IP. 
Now, you and I both know these are regular voice calls, people 
talking to people. Because these companies have sprinkled IP 
fairy dust on them, they think they get a free ride. IP 
technology has never been magic. Everyone has it. I have it. 
AT&T has it. IP is a technology. It is not a service. It is not 
a network. It is not the Internet. These are regular voice 
calls.
    Senators we need your action at the Federal level. Present 
policy is failing to get me critical billing information and is 
giving these carriers excuses for not paying for calls they 
sent to our network. Additionally, the FCC is not allowing us 
to block the non-pay carriers, and this is like an 
unconstitutional taking. What other business is required to 
give away its product or services free due to government 
action?
    NECA has filed a petition asking the FCC to extend its call 
signaling rules to all voice service providers who use the PSTN 
regardless of the technology that is used. NECA has asked the 
FCC to allow carriers to use phone numbers as a default proxy 
for billing purposes when wireless carriers do not provide real 
traffic data or when you cannot mutually agree upon a traffic 
factor. Granting NECA's petition would be a good first step.
    We also need the FCC to confirm all users of the network. 
The network must pay for its use. FCC has stated this is a 
policy and has implemented rules and has said voice services 
are the same as telephone services in the customer's eyes, but 
has not confirmed that voice calls are subject to its access 
rules like all other calls. If FCC lets this continue, 
Americans who live in rural areas will likely see their phone 
bills escalate, their quality of services will be decreased, a 
large reduction in investment in broadband, and an increase in 
Universal Service contributions.
    Senators Missouri is the ``Show Me State.'' So I am asking 
you to please show us some action on this critical issue. Thank 
you.
    [The prepared statement of Mr. Henagan follows:]

   Prepared Statement of Raymond Henagan, General Manager, Rock Port 
    Telephone Company; on Behalf of the National Telecommunications 
                        Cooperative Association
Introduction
    Good afternoon Senators, and thank you for this opportunity to 
share with you today the serious financial problems that phantom or 
unbillable traffic is presenting for America's small rural 
telecommunications carriers. For the past 10 years I have served as the 
General Manager of the Rock Port Telephone Company in Rock Port, 
Missouri, and my professional career in the telecommunications industry 
spans more than 38 years.
    In addition to Rock Port and the National Telecommunications 
Cooperative Association (NTCA), I am also appearing on behalf of the 
Organization for the Promotion and Advancement of Small 
Telecommunications Companies (OPASTCO), and the Western 
Telecommunications Alliance (WTA).
Specific Company Dynamics
    Organized as a cooperative, Rock Port's top priority has always 
been to provide every one of its consumers, who are also its owners, 
with the very best telecommunications and customer service possible. 
Rock Port serves 1,695 access lines across its 187 square mile rural 
service area. This is about 9 lines per square mile. The population 
throughout our service area is aging, and the average county wage is 
$21,373. We employ a total of 9 people--yes, 9--and our annual revenue 
is $1.6 million. By comparison, Embarq, which is a Tier 2, or midsize, 
carrier, has 18,000 employees and total revenues for 2007 of $6.37 
billion.\1\ Verizon, which is a Tier 1, or large carrier, has 235,000 
employees and last year generated consolidated operating revenues of 
$93.5 billion.\2\
---------------------------------------------------------------------------
    \1\ See, http://investors.embarq.com/phoenix.zhtml?c=197829&p=irol-
irhome.
    \2\ See http://investor.verizon.com/.
---------------------------------------------------------------------------
    The entrepreneurial spirit of Rock Port is representative of its 
approximately 1,100 small rural counterparts in the industry, who 
together serve 50 percent of the Nation's land mass. We have always 
been early adopters of new technologies, and it's been no different 
with regard to Internet Protocol (IP) capabilities. Presently, Rock 
Port makes high-speed broadband available to 90 percent of its 
customers and we expect that figure to be 100 percent within 3 months. 
Due to this commitment, rural Americans today are enjoying universal 
telephone service, access to broadband Internet services, and enhanced 
emergency preparedness.
    Yet, small rural companies simply do not enjoy the economies of 
scale and scope that would permit them to interconnect with every 
service provider in America who might send a call to one of their 
customers. Most small rural carriers, including Rock Port, interconnect 
with a larger carrier, such as Embarq or Verizon, who in turn provides 
them with access to all other telecom service providers. We call these 
intermediary carriers ``tandem providers.''
Rural Telecom Network Cost Recovery
    Due to the extremely high costs associated with serving rural 
markets, small carriers like Rock Port depend on three primary sources 
of revenue to provide the cost recovery that is necessary to provide 
advanced, high quality services to rural Americans. They are: (1) 
intercarrier compensation payments from other carriers, (2) direct 
payments from our own customers, and (3) support from the Federal 
Universal Service Fund (USF). Using the analogy of a three legged 
stool, if any one of these three legs are missing or shortened, the 
stool is thrown off balance and the company mission is toppled.
    Intercarrier compensation payments are made by one carrier to 
another for the use of its network, for example when one of Carrier A's 
customers calls one of Carrier B's customers. Intercarrier compensation 
takes the form of either interstate access charges, intrastate access 
charges, or reciprocal compensation charges.
    The term ``phantom traffic'' refers to voice communications traffic 
on the public network that lacks sufficient information for billing 
purposes. In other words, carriers do not receive the information 
necessary to know who to bill or what rate to bill for the call--thus 
under today's policy the call remains unbilled. In some cases, because 
rural carriers do not receive the billing information, they cannot 
identify the traffic traversing their networks--thus the term 
``phantom.'' Increasingly, rural carriers are discovering blatant 
schemes intended to avoid the payment of access charges entirely. This 
translates into dramatic losses of legitimate cost recovery revenue for 
telecommunications carriers of all sizes, while the carriers are still 
obligated to provide and maintain the facilities.
    NECA has estimated that small rural carriers across the Nation 
typically receive about 29 percent of their total net telephone company 
operating revenue from intercarrier payments. For some companies, this 
percentage is as high as 49 percent of total net operating revenue. So, 
you can see how important these intercarrier payments are for providing 
affordable service to rural consumers. You can see why we view the 
growth of phantom traffic and other schemes to avoid paying 
intercarrier fees with such concern. And you can see why this is a 
topic critical enough for this Committee and Federal policymakers in 
general to address.
Identification of Phantom Traffic
    Recognizing or identifying phantom, or unbillable, traffic is not 
always automatic or easy. The inherent dilemma with phantom traffic is 
that, by its very definition, it is essentially hidden and thus 
extremely difficult to identify or track. And by extension, it is very 
difficult to quantify its overall negative impact.
    In its most insidious form, phantom traffic is a result of some 
carriers stripping the data completely, manipulating the data into an 
unreadable form, or the outright refusal to pay the intercarrier bill 
for the calls they send to another carrier's network. In other cases, 
phantom traffic materializes as a result of an originating service 
provider's failure to attach appropriate call signaling information to 
its traffic. And in its most subtle form, phantom traffic is merely the 
outcome of flawed policies that allow for false jurisdictional 
classification of calls, which results in the erroneous billing of 
lower charges. All forms distort marketplace competition and force 
carriers inappropriately to seek cost recovery through other means. For 
rural carriers this means higher access charges for those who do pay 
and increased reliance on the Universal Service Fund.
    At Rock Port, the unbillable or phantom traffic traversing our 
network is substantial--over 18 percent of total minutes. 
Unfortunately, Rock Port is not alone. They say misery loves company, 
and we seem to have plenty of it. Industry estimates show between 20 
percent and 30 percent of such intercarrier traffic cannot be billed 
because it lacks sufficient billing information.\3\ This figure is 
growing as service providers find new ways to avoid paying intercarrier 
compensation.
---------------------------------------------------------------------------
    \3\ E.g.,Letter from Donna Epps, Verizon, to Marlene H. Dortch, 
FCC, CC Docket No. 01-92 (Nov. 1, 2006), attachment, at 11. Letter from 
Karen Brinkmann, Latham & Watkins, to Marlene H. Dortch, FCC, CC Docket 
No. 01-92 (July 1, 2005), attaching presentation entitled ``Phantom 
Traffic: Problem and Solutions'', Balhoff & Rowe (May 2005), at 5.
---------------------------------------------------------------------------
    In 2007 alone, Rock Port lost access revenue equal to about $37 per 
access line per year--because we did not have enough information to 
bill for the calls. Over the course of 8 years, say from 2000 to 2008, 
this would amount to about a half million dollars. While this may seem 
like peanuts up here in Washington D.C., where I come from it 
translates into meat and potatoes. I would not like to have to tell my 
customers that their phone bills have to go up to pay for someone 
else's free ride on the network we are obligated to build, maintain and 
support. Unlike the industry's larger carriers, we small rural carriers 
do not have the scale, market alternatives, or customer numbers to make 
up the revenue elsewhere--nor should we have to. And if we do not meet 
our financial targets, our sources of financing for introducing new 
technology and modern, advanced communications services dry up PDQ--
pretty darn quick.
Key Phantom Traffic Problems
    One of the key causes of phantom traffic is the failure of certain 
carriers to send all of the call signaling information (intentionally 
or unintentionally) required for proper billing. The FCC does have a 
rule requiring carriers sending an interstate call to transmit the 
Calling Party's Number (CPN). This information helps carriers establish 
what rate to bill and can help identify what service provider sent the 
call. This information is also required in order for law enforcement 
officers to trace the call, for emergency workers to track the calling 
party, and to provide Caller ID services. Yet, if the number is altered 
or stripped off entirely, as it often is, these statutory and 
regulatory objectives are easily frustrated.
    A case in point involves the Alaska Communications Systems Group 
which in 2005 sent a letter to the FCC describing traffic being 
terminated in Alaska as ``local'' traffic, but which in fact originated 
from out-of-state phones.\4\ In this case, the intermediary carrier had 
replaced the telephone number of the originating caller with a local 
Alaska number in order to disguise the jurisdiction of the call and 
thereby avoid paying the access charge. ACS indicated that in the month 
of October 2005 alone, over 20 percent of minutes to Fairbanks had this 
problem.
---------------------------------------------------------------------------
    \4\ Letter from Karen Brinkmann, Latham & Watkins, LLP, to Marlene 
H. Dortch, FCC, CC Docket No. 01-92 (Dec. 12, 2005).
---------------------------------------------------------------------------
    Recent analysis shows about 11 percent of calls other carriers sent 
Rock Port for termination on our network lacked a CPN. Another Kansas 
company received about 11.7 percent of calls without CPN. Sherburne 
Telephone in Minnesota recently performed a similar analysis only to 
discover, to their surprise, that about 30 percent of their terminating 
traffic arrives without a valid CPN.
    A second key problem faced by Rock Port and most other small rural 
carriers is we don't receive all the detailed call records from the 
intermediate ``tandem'' carrier who provides us with connection to the 
outside world. If we don't receive this information, we cannot bill for 
the traffic.
    In 2000, we at Rock Port discovered that we were not receiving call 
records for about 25 percent of the minutes traveling over our network. 
Because we could not bill for them without these records, they were 
traveling for free. Armed with this information, we negotiated with the 
tandem provider to alter how its network switches were configured so 
that they could send us complete records. We thought the problem was 
essentially solved. In 2007, however, we did a comparison of the 
minutes our own switches recorded with the number of minutes contained 
in the bill records we receive from the tandem provider. We had 
recorded 10.5 million minutes, but received call records for only 8.6 
million minutes. That left 1.9 million minutes that we could not bill 
for. The percent of phantom traffic on our network had climbed from 
14.5 percent in 2006 to 18.2 percent in 2007. There is no logical 
technical reason why we should not be receiving accurate call records 
from the tandem provider that tracks our network's actual traffic 
volume.
    And it is certainly not just Rock Port. Our industry colleagues in 
Montana had a problem big enough to convince state lawmakers to address 
the issue of phantom traffic by adopting a state law in 2003 that 
required carriers to send call signaling information and required 
tandem transit providers such as Qwest to provide complete call 
records. The rural carriers use this data to crosscheck their own 
network data, which has helped reduce phantom traffic loss levels from 
10 percent to less than 5 percent of their volume. A similar initiative 
was enacted in South Dakota in 2004, though it was recently overturned 
on procedural grounds tied to preemption. Likewise, industry colleagues 
in Washington and Oregon took their phantom traffic case to their state 
PUCs, providing data showing as much as 50 percent of the traffic on 
their local interconnection trunks was ``phantom.'' In 2005, however, 
these PUCs decided that it was more appropriate to bring these issues 
to the FCC for consideration. Clearly with this level of state 
activity, it is obvious this is an issue that is crying out for Federal 
action.
    Some industry players argue that when we don't receive call 
signaling or records, we can still bill based on ``traffic factors''. 
These are percentages given to us by the sending carriers that are to 
be used for assigning traffic into the interstate, intrastate or local 
categories--by which we then assign rates. The sending carriers provide 
absolutely no supporting data to back up these unilateral traffic 
factors, and studies have shown that the factors do not represent the 
actual traffic patterns on the network. Therefore, the third ``phantom 
traffic'' problem is that we have no means to verify the accuracy of 
these traffic factors. These carriers will only accept and pay a bill 
reflecting these factors.
    This is particularly critical for traffic from wireless carriers. 
Rural companies in South Dakota ran a study to compare the non-local 
wireless traffic factor (for calls that cross a wireless Major Trading 
Area, i.e., inter-MTA calls) given to them by one wireless carrier with 
the actual percent of non-local wireless (inter-MTA) calls on their 
networks. They found that as much as 30 percent of total wireless 
traffic terminating on their network was inter-MTA, compared to the 3 
percent interMTA factor given to them by this wireless carrier. And 
many of their wireless agreements have a 0 percent inter-MTA factor. 
These South Dakota companies are, therefore, not able to bill the 
correct rate for the 25-30 percent of wireless traffic that is legally 
subject to access charges. In 2004, the amount of access revenue lost 
due to these unrealistic factors represented an astonishing $12 to $39 
per access line per year. In light of this demonstrated lack of ``good 
faith'', it is clear that small rural carriers need the FCC to provide 
them with additional negotiating leverage to be able to negotiate 
inter-MTA traffic factors that are realistic and reflect the actual 
usage on the network.
    The final dilemma associated with phantom traffic that I will 
discuss today involves the outright refusal of so-called VoIP providers 
to pay their access charge bills. Rural carriers across the Nation are 
receiving an increasing number of letters from interconnected carriers 
refusing to pay access charge bills, claiming the calls were ``IP.'' 
Laurel Highlands Tel (PA) has provided the FCC evidence that carriers 
such as ChoiceOne are not only refusing payment of access charges, but 
may also be enticing other carriers to migrate their traffic to its 
``free'' network. Montana Telecom Association provided the FCC with 
similar letters from CommPartners, which admitted that 90-100 percent 
of its terminating traffic to various Montana ILECs is interexchange, 
but stated that ``because this traffic represents VoIP transmissions 
rather than circuit-switched telephone calls, your company is not 
entitled to collect access charges on these calls.'' NECA has also 
provided a number of such letters to the FCC.
    At the end of the day, you and I both know these are nothing more 
than voice calls--people talking to people. But because these companies 
have sprinkled ``IP fairy dust'' on them, they think they should get a 
free ride on our network.
    IP technology has never been magic--controlled by a few magicians 
in their Internet labs. I have IP technology in my network, AT&T has it 
and Verizon has it. Public telephone networks around the world are 
introducing IP technology into their networks. IP is a technology--it 
is not a service, it is not a network, and it is not the same as the 
Internet. IP is today's iteration of communications technology--not 
tomorrow's iteration--and once again, however delivered these calls are 
just voice calls.
    But because the FCC has not yet confirmed that access charges apply 
to interconnected VoIP service, these CLECs are claiming their services 
are ``enhanced'' and, therefore, exempt from access charges. Because 
the FCC has remained silent, more and more rural phone companies are 
receiving letters from service providers who refuse to pay the 
intercarrier bills for calls they agree they sent to rural telecom 
company networks. And current Federal policy requires us to continue 
giving our product away to companies who refuse to pay for it, even 
when we do send them a bill.
    Please tell me why we allow other utilities to stop service when we 
are late in payment, why I could not check into my hotel until my 
credit card company agreed to make payment, and we let banks foreclose 
on homeowners and take their homes from them when they don't pay their 
mortgages, but we do not take service away from these ``high tech'' 
companies who won't pay their bills?
Turning Point
    So, the big question is--what can be done about phantom traffic?
    First, the FCC needs to require all service providers to send all 
the telephone numbers and other traffic identifiers--just like is 
required for an ATM cash transaction to take place. NECA has filed a 
petition for an interim order with the FCC asking it to: (a) Extend 
their existing call signaling rules to all interconnected voice service 
providers; (b) Require accurate CPNs be transmitted with all calls, 
regardless of jurisdiction and regardless of technology used; (c) 
Clarify that the true CPN must be provided, not a number associated 
with intermediate switches, gateways, or platforms; (d) Require all 
intermediate service providers to transmit signaling information 
unaltered; and (e) Clarify that the originating and terminating 
telephone numbers can be used as a default proxy to determine 
jurisdiction of calls for billing purposes, when traffic factors cannot 
be mutually agreed or data on the actual origination or termination 
point is not provided. Almost every segment of the telecom industry in 
America has expressed support for strengthened call signaling rules. 
Yet, we are still awaiting some action on this front.
    Second, I need to be able to bill for all the calls on my network. 
I need to receive call records for all the calls, and when I don't, I 
need the tools to hold the person who sent those calls to me 
accountable. The Montana state law may provide a good model for Federal 
action. It requires the tandem transit providers to provide call 
records to the terminating carriers. However, when I don't receive 
those call records, I need to be able to charge the guy at the other 
end of the trunk who is sending me those calls without the records. 
Just like in the children's game of telephone, I can only see the 
person next to me who is passing me the message. I cannot see the 
person originating the message. The guy at the other end of the trunk 
can then pass the charges down to the next guy who is sending him the 
traffic, and so on down the food chain. I cannot hold some unknown, 
unnamed service provider accountable without such tools.
    Third, we need a federally-approved tool that will provide small 
carriers with the ability to negotiate realistic traffic factors for 
non-local, inter-MTA wireless calls with wireless carriers. The NECA 
petition has proposed the use of the ``telephone numbers rule'' as a 
reasonable proxy for when actual traffic data is not provided or a 
traffic factor cannot be mutually agreed. A 2004 South Dakota study has 
demonstrated that using call records and using telephone numbers 
produces fairly close results. We believe the telephone numbers rule is 
a reasonable proxy, and will give wireless carriers a strong incentive 
to bring real traffic data with them to the negotiating table.
    And finally, we need the FCC to affirm that all users of the 
network must pay for its use. The FCC has stated that this is the 
policy, has implemented rules, has said that VoIP services are the same 
as telephone services in the customer's eyes. But the FCC has not yet 
confirmed that VoIP calls are subject to its access charge rules just 
like all other voice calls. This has allowed service providers to 
sprinkle the ``IP fairy dust'' over their refusals to pay their access 
bills and to claim they should be treated different--that they are 
Internet Service Providers--rather than what they really are, which is 
providers of voice calls used by people to talk to other people.
    If the FCC lets this continue, Americans who live in rural areas 
will likely see their phone bills increase and the quality of their 
services decrease. IP-originated voice services are expected to account 
for more than 20 percent of all voice calls in 2008, 33 percent in 
2010, and 40 percent in 2011. We simply cannot afford to give the use 
of our networks away for free. The Coalition of Telecom Manufacturers 
has said that if this continues, it will result in large reductions in 
telecom infrastructure investment, particularly investment in broadband 
access technologies. I can tell you, Senators, this will certainly be 
true in rural America, and will jeopardize the national objective of 
ubiquitous broadband Internet access.
Conclusion
    Senators, time is of the essence. With each passing day, small 
rural carriers lose millions in intercarrier compensation revenue. We 
are not asking for special treatment. We are only asking for carriers 
that use our network to pay for its use. It is anti-competitive to 
allow some carriers to avoid these fees while others pay, and it is 
affecting the ability of small rural carriers to roll out new 
technology and services to rural America.
    Americans today uniformly rely on communications infrastructure and 
services to satisfy their commerce, safety, security, entertainment, 
and leisure needs. Moving forward, these needs will be met via a 
combination of 2-way voice, video, and data options. Ensuring that 
small rural companies have the financial wherewithal to meet these 
needs is the primary reason to take action to exterminate phantom 
traffic. Lack of action on phantom traffic is putting in jeopardy rural 
carrier's ability to help us achieve our shared national objective--
ubiquitous and robust broadband capable infrastructure.
    Senator Stevens has been hard at work drafting a legislative 
proposal that would go a long way toward helping resolve the phantom 
traffic issue by providing the FCC with specific guidance on actions it 
could take to ensure this practice is stopped. Please support Senator 
Stevens in his efforts to address phantom traffic through this 
legislation. And please urge the FCC to take immediate action by 
granting NECA's Petition. You know--Missouri is the ``Show me'' state, 
and we'd sure be pleased if you could show support for our concerns on 
this crucial matter. Thank you.

    Senator Stevens. Well, thank you very much.
    Mr. Chairman, do you have any questions?
    The Chairman. I wish to say for the record that Senator 
McCaskill of Missouri has asked me to express her regret in not 
being able to attend this afternoon's hearing because at this 
moment she is presiding in the Senate chamber.
    Senator Stevens. Thank you.
    I am perplexed. Ms. Simpson, I would probably come to you 
first because you indicate that you think the FCC is right in 
not imposing any requirement on the originating carrier to 
properly disclose the type of information that would allow 
billing by the final terminating carrier. The rural telephone 
companies are primarily those who receive these calls and must 
deliver them. I take it you take the position that they have no 
right to just turn around and send it back.
    Ms. Simpson. Well----
    Senator Stevens. Why not? Why do we not just say to the 
rural carriers, if you get something that does not have 
identification of where it came from, send it back to whoever 
gave it to you?
    Ms. Simpson.--well, the lack of information about where it 
came from does not prevent it from being terminated onto the 
network.
    Senator Stevens. Well, it does because what you do, as Mr. 
Henagan says, you force the terminating carriers to pay the 
cost of delivery when they have no way of billing anybody.
    Ms. Simpson. Senator Stevens, I would disagree with that 
statement.
    Senator Stevens. Will you tell me how they can bill?
    Ms. Simpson. Well, VoIP providers do pay for the 
termination of traffic. Many VoIP carriers have agreements with 
incumbents for the termination of traffic. So----
    Senator Stevens. They do not apparently have it with rural 
carriers. They have it with the big city carriers. We are 
talking about the tentacles of this communication system. You 
go out to the end. You are dealing with rural areas like our 
area or like the islands in Hawaii. They are going to receive 
these without any information of who to bill.
    Ms. Simpson.--well, yes, sir. I mean, there are instances 
where VoIP providers try to reach agreements with rural 
carriers and rural carriers either refuse to enter into 
agreements or----
    Senator Stevens. You know why, do you not? The legacy 
carriers have more investment, and the other carriers that come 
in on broadband and Voice over the Internet Protocol have very 
little investment in their communications system. Do you 
disagree with that, Mr. Sarjeant?
    Mr. Sarjeant. The rural incumbent carriers have made a lot 
of investments to put in place the public switched network 
which is really the core on which all other networks to some 
extent rely, whether they be wireless or IP-based. So clearly, 
there is a tremendous amount of investment that has been made 
by incumbent local exchange carriers in the public switched 
telephone network.
    Ms. Simpson. Senator Stevens----
    Senator Stevens. Pardon me. My mind goes back to the time 
when Senator Inouye and I used to sit here at this same table 
and talk about the fact that all of the telephone ads and the 
television said these rates do not apply in Alaska and Hawaii. 
We introduced a resolution that called for rate integration, 
and that rate integration required that Alaska and Hawaii 
become part of the Union. We were already a state, but we were 
not in the union of communications.
    That gradually led to what we called rate integration task 
forces, and they finally figured out how to do that. You know 
what it was. It was the interstate rate pool that paid for the 
termination of these calls and allowed us to come into the 
total communications system, but because the cost of getting to 
our states was greater than any other states--at that time, 
there were basically legacy carriers. They were basically 
terrestrial. And we finally came in.
    Now, what you are saying, Ms. Simpson, is those areas like 
ours, which are still operating basically on the systems that 
in many instances you all got rid of 20 years ago, should incur 
the costs of modernization to catch up with VoIP, 
notwithstanding the fact that you are asking them to terminate 
calls that came from VoIP with no compensation. As Mr. Henagan 
says, how can they do that unless they get some compensation 
which will justify the investment in the modernization you 
require?
    Ms. Simpson. Senator Stevens, I would not suggest at all 
that the VON Coalition believes that rural carriers should not 
be compensated for the cost of terminating other folks' 
traffic.
    And I would also just note that the interconnected VoIP 
providers pay into the Universal Service Fund at rates higher 
than traditional wireline carriers or wireless carriers. So, 
indeed, we are helping rural carriers invest in their networks.
    What the issue comes down to is not necessarily the rates 
that would compensate them for the cost of terminating traffic. 
What we are talking about here is sort of the broader issue 
that the FCC is currently investigating, which is bringing the 
whole intercarrier compensation regime to a more modern and 
equalized type of a system.
    Senator Stevens. I do not want to pick on you.
    Mr. McKee, you said something that also made me write it 
down as you were talking. Where does the ultimate carrier get 
its income to really affect the delivery unless there is some 
identification on the message that allows them, in effect, to 
back-charge and collect and get part of the cost of originating 
that call?
    Mr. McKee. Senator, we do not disagree that all calls 
should be identified and that the signaling record should be 
populated.
    Senator Stevens. Well, what should we do with the people 
that do not do it? You pick up VoIP and send it through your 
systems and through your switch, but you do not require the 
identification. You know when it is coming through the switch 
it does not have the information, and yet you send it on.
    Mr. McKee. Well actually, Senator, Sprint--I will not try 
to speak for other telephone companies, but Sprint, when it 
originates VoIP traffic, it does populate CPN when it passes it 
out to the PSTN.
    Now, the lack of information on the other end can be for 
different reasons, not because Sprint did not populate the 
signaling record at the beginning of the transmission of the 
call----
    Senator Stevens. Are you suggesting someone erases it?
    Mr. McKee.--well, not that they erase it, but----
    Senator Stevens. That has been one of the suggestions one 
of my carriers made, that there is someone in this business who 
is automatically erasing the system so that no one can be 
properly billed.
    Mr. McKee.--well, again, we have not seen evidence that 
there is a significant amount of traffic where people are 
erasing it. The nature of a way in which, for example, tandems 
operate frequently do not pass along information, or if two 
tandems are involved in the call, it is not unusual for some of 
that call information to be stripped. That is why that type----
    Senator Stevens. Who strips it?
    Mr. McKee.--well, again, it is not as if it has been 
intentionally removed. It is just not information that 
continues to flow with the call because it is broken when it 
passes through that switch.
    And the way in which traditionally we have handled that 
issue is through billing records so that tandem owner will 
collect the necessary information. It may not flow in the 
signaling protocol. It may not be part of an automated system, 
but instead billing records are passed after the fact. So that 
is one way in which that issue gets addressed.
    So, again, part of my testimony was there are many 
different ways to exchange information that allows these 
carriers to bill. Again, Sprint in no way objects to carriers 
billing for the traffic they receive.
    In fact, one of the issues that wireless carriers have is 
that we also cannot bill for a large portion of the traffic we 
receive. It is not because we do not get sufficient 
information, but because the FCC has set rules up in such a way 
that inter-exchange carriers, for example, are permitted to 
terminate traffic on the wireless networks without compensating 
us.
    It is a part of, again, what I characterize as an 
irrational intercarrier compensation structure, and we are 
hopeful that all of these issues get addressed by the FCC since 
they have had a docket outstanding since 2001.
    Senator Stevens. I tell you, you sort of indicate that the 
bill that I am about ready to introduce is meaningless.
    Mr. McKee. No. I am not suggesting that it is meaningless, 
sir. Again, our concern here is that much of the dispute in 
this area is, again, not because of intentional fraudulent 
acts, but because of either inherent structural problems within 
the network that do not allow signaling to occur not because--
--
    Senator Stevens. Well, if I initiate a call over VoIP, I 
should have within my system--the carrier that I contact with 
my Internet call--something that identifies where the call 
originated. Would you not agree with that?
    Mr. McKee.--we would agree that the CPN, the standard 
fields that are provided for----
    Senator Stevens. That is the first carrier that my VoIP 
message intersects. Right? They would put the identification on 
where it came from, would they not?
    Mr. McKee. Generally, yes. That or else they would have to 
contract with somebody to do that. In other words, when----
    Senator Stevens. You are not suggesting that just because I 
originated on VoIP, I am automatically originating phantom 
calls. None of us believe that.
    Mr. McKee.--no, no, of course, not.
    Senator Stevens. So the first carrier that really received 
that message ought to have some identification on it, do you 
not think? I think that is their responsibility to see that is 
done, and if it is done, then the terminating carrier is going 
to get paid. And the problem is how to figure it out because a 
lot of the carriers are like Mr. Henagan's carrier and those in 
our States which are still legacy carriers. They are using 
lines and using a lot of ground equipment that you all are not 
going to be using any longer. But they have to be compensated 
for it or they are going to go out of business. Thirty percent 
of their business is coming in through VoIP now and not getting 
compensated. Now, how can they survive?
    Mr. McKee. Well, again, Senator, we are not disagreeing 
that calling party number information should be part of the 
populated record. Not at all.
    Senator Stevens. But VoIP users are almost being told that 
it is cheaper to do that, and the only reason it is cheaper is 
no one is sending the information along with the message so 
that they have to pay when it finally is terminated. Would you 
not agree?
    Mr. McKee. I agree that there are certainly carriers that 
are offering discounted services. The services that Sprint 
provides we are careful to ensure that we are compensating the 
carriers we hand that traffic off to. Now, if that means that 
we are at a competitive disadvantage, that may be the case, but 
I cannot speculate on what other carriers are doing.
    Senator Stevens. Mr. Henagan, my people tell me that the 
lack of this compensation for this phantom traffic is putting 
them in the position where they cannot afford to go to 
broadband. Do you think this is a burden on these legacy 
carriers to carry this phantom traffic and puts them in a 
position where they cannot modernize?
    Mr. Henagan. That is correct, Senator. To the future, we 
are not going to be able to modernize to go to broadband if 
this continues on at the pace that it is going. In 2006, 
overall all the phantom traffic that came through was 14.5 
percent. In 2007, it jumped up to over 18 percent. If this 
continues on, it will not be long until it will be over 50 
percent of the traffic that is coming through, and I will not 
have the funds at that time to continue on with broadband 
expansion.
    Senator Stevens. Mr. Sarjeant, does the FCC have a 
sufficient record of phantom traffic to move forward and find a 
solution now in your opinion?
    Mr. Sarjeant. Yes, Qwest believes that it does and Qwest 
believes that it could act forthwith and address at least on an 
interim basis and begin to mitigate the damages associated with 
phantom traffic in very short order. So we believe they have a 
record. As Mr. McKee pointed out, the intercarrier compensation 
proceeding was opened in 2001. So it is a longstanding 
programming, and the issues of phantom traffic have been 
debated for some period of time now.
    Senator Stevens. Mr. McKee, is this going to require that 
we tell the FCC they must adopt new, different switching 
technologies in order to solve this problem?
    Mr. McKee. I hope that is not the case, Senator. Obviously, 
that would create significant expense within the industry.
    Senator Stevens. I hope you will repeat that because 
everyone seems to think that the burden should remain on the 
poorer carriers at the end and the ones in the middle that are 
capable already are making these magnificent, monstrous 
investments. If there is a change, it will place an additional 
burden on them.
    Now, why should they not help us find a solution?
    Mr. McKee. I think we are more than happy to try and help 
you find a solution, Senator.
    Senator Stevens. I hope you will.
    Mr. Chairman, I do not have any other questions. I really 
think if this continues, what the two of us saw when bringing 
our own States into the communications system will fail because 
we are the end of the system. We receive more traffic than we 
originate, and the burden on our people of receiving these 
messages from outside our States really means that these legacy 
carriers cannot continue to operate. They do not have a 17 
percent profit to start with. So if you have a 17 percent 
burden on the average, in terms of this phantom traffic which 
they must deliver under current FCC rules, they are destined 
for failure. Above all, they are destined not be in a position 
to do what we want them to do and that is deploy broadband.
    I hope that we will find some way to get the FCC involved 
in this and get the industry that is going to pay the price 
ultimately because if our people fail, you are still going to 
have to find some way to deliver your messages. Unless you have 
the legacy carriers survive, you have to find some way to 
deliver them, and I do not know you would do it under the 
existing system. And you cannot say that Sprint can deliver 
anywhere in the world or any of the rest of you can deliver 
anywhere in the world if you cannot deliver right here at home 
in terms of these small carriers in rural America.
    Mr. Chairman, do you have any questions?
    The Chairman. Yes. I would like to ask Mr. Henagan a 
question. How many people do you employ?
    Mr. Henagan. On the telephone side, I employ nine people.
    The Chairman. What is your gross income?
    Mr. Henagan. It is $1.6 million.
    The Chairman. And according to your testimony, 11 percent 
of the calls would be phantom traffic. What is the dollar value 
of that?
    Mr. Henagan. On a per access line basis, it is $37 per 
access line.
    The Chairman. $7 per call?
    Mr. Henagan. $37 per an access line. It is about $63,000 a 
year on my company as such for that today as such. And if you 
look at it over a 10-year period--and I have looked back over a 
10-year period--it would be over a half a million dollars for a 
very small company.
    The Chairman. And other small companies have had 20 or 30 
percent of their traffic as being phantom?
    Mr. Henagan. That is correct. As a whole, it is anywhere 
from 10 to 30 percent today that is coming in as phantom 
traffic.
    The Chairman. So this will mean depriving some of your 
fellow workers a pay raise.
    Mr. Henagan. That is correct.
    The Chairman. I thank you very much, sir.
    Senator Stevens. There is a difference here between the 
phantom traffic and those messages that are missing billing 
information my staff tells me. There is a double problem here. 
One is the billing information has been stripped off. The other 
is phantom. Never had it.
    Mr. Henagan. That is correct. Some of them we never get 
records whatsoever, and then some of them we get records in 
that have no billing information so that I have no idea who to 
bill for that call. So out of that, the tandem sends me the 
records and I have nobody to bill for some, and then the other 
is we have no records at all that ever come in.
    Senator Stevens. Ms. Simpson, after we had the original 
hearing in this room on our rate integration concept, the 
industry got together and came up with the interstate rate 
pool. It did not take an action of the Federal Government. It 
did not take an action of the FCC. They started the process 
toward change to accommodate the problems that were faced by 
the fact that we had two new States. Is it possible that 
industry could get together, in your opinion, and try to work 
this out without Federal regulation or without interference of 
Congress?
    Ms. Simpson. I believe that it is possible and that the 
industry should work together. I mean, to be clear, the VON 
Coalition--we do support reasonable call signaling obligations 
for interconnected VoIP providers where it is technically 
feasible and operationally feasible as well.
    Senator Stevens. What about where it is not and you are the 
receiving carrier? Do you have to deliver it anyway?
    Ms. Simpson. Well, that becomes the situation where there 
needs to be a cost-benefit analysis, what is the size of the 
phantom traffic problem versus what is the cost of having VoIP 
providers modify all their networks to be able to provide the 
information the way the rural carriers want it, and then the 
corresponding problems with the economy, broadband deployment, 
and just regulation of the Internet. So I mean, there is 
definitely a cost-benefit analysis that has to be undertaken on 
a broader scope.
    Senator Stevens. I am reading between the lines that you 
think Congress is going to have to solve this problem.
    Ms. Simpson. No. I definitely believe that there are ways 
for the industry to do it on their own and that there are ways 
for the FCC to do it within their current authority and their 
current expertise to help fix the problem.
    Senator Stevens. Well, these terminating carriers want to 
be paid for the phantom traffic at the same rate that they are 
paid for all other traffic that comes through their system. You 
are saying you think that you should be able to enter into some 
agreement where that is not the case. You said handle the 
traffic the way they want it. How should they handle it?
    Ms. Simpson. According to the legacy telecommunications 
industry billing standards. It is difficult to retrofit 
Internet voice products, and when we are talking about voice 
products, there are so many different kinds. It is not 
necessarily the type that Sprint would provide or Covad would 
provide. We are talking about VoIP applications that do not 
even have any need whatsoever for a phone number, which would 
be one of the main parts of information that rural carriers 
would want for billing purposes.
    Senator Stevens. Well, it would seem to me that the FCC 
could require that no system could launch such a message 
without some identifying mark to see who is going to be billed 
for delivering it. Is that wrong?
    Ms. Simpson. It is not necessarily wrong. I think it is one 
of the things that the FCC is currently working on.
    Senator Stevens. Well, that is new technology. That is what 
you have the luxury of in the major cities that they do not 
have the luxury of in Missouri and in some of the rural States 
and places like I live.
    Ms. Simpson. There is also a difference, Senator Stevens, 
between the potential for having interconnected VoIP providers 
have to implement two different solutions, a temporary solution 
based on the existing intercarrier compensation regime, which 
would cost money for the VoIP industry to implement, and then 
presuming that the FCC, since it does have a proceeding open 
and it is working on it right now, does do comprehensive 
intercarrier compensation reform, then the VoIP industry has to 
turn around and implement yet another solution at yet another 
additional expense.
    Senator Stevens. Well, that implies that there is one 
solution for the areas where you have a monstrous number of 
messages and a different solution for the areas where you have 
a smaller number in rural America.
    Mr. McKee, do you agree with that, that there is a 
difference in the system where you are integrating between 
those entities who have already gone to broadband and been 
modernized and those that integrate with the legacy carriers 
that are still on the wirelines?
    Mr. McKee. Let me try to answer your question, and if I do 
not do it right, I am sure you will let me know. But I think 
what you are asking----
    Senator Stevens. I used tubes once, remember?
    [Laughter.]
    Mr. McKee.--well, as I understand your question, you are 
saying, well, should these two systems be treated differently 
and I would say no, absolutely not. In fact, one of the things 
that we really hope the FCC will do is to try and unify the way 
in which all these systems are treated so that there can be one 
uniform set of rules that applies to everyone.
    One of the problems we have right now is that there is not 
just one rate that is applied when you hand traffic to a 
carrier. In fact, there are nine or more different categories 
of rates that apply depending upon whether you are a wireless 
carrier, whether you are a long distance carrier, whether you 
are another CLEC, whether you are an ILEC, you know, the 
distance of the call. So there are a number of different rates 
here.
    And what we would really hope to see is that the FCC 
addresses the thing in such a way that both IP providers, VoIP 
providers, it does not matter what kind of telecommunications 
you provide, you have an obligation to pay and it is some kind 
of straightforward, easily calculated rate that everybody knows 
they are going to have to pay, including pay to rural carriers.
    Senator Stevens. The intercarrier compensation proceeding 
has been pending before the FCC for 7 years now.
    Mr. McKee. That is correct.
    Senator Stevens. How do you think we are going to get an 
answer to this question in time for these rural carriers to 
survive?
    Mr. McKee. Well, I believe, Senator, you can probably bring 
some pressure on the FCC to do what they need to do.
    Senator Stevens. I think I can bring greater pressure on 
you guys who are making all the money to find some way to pass 
some of it on to the people who are failing. Certainly this is 
an industry problem more than it is an FCC problem. The 
industry is carrying messages that it knows will not be 
compensated for because the billing information is not there, 
regardless of whether it was deleted or just not there to begin 
with. They are passing it on. I would put the burden on whoever 
passes on a message that does not have that information, that 
they should pay from there on.
    And I think that the industry ought to find some way to get 
together before that happens because I do believe we cannot 
wait for 7 years for this to be solved.
    Mr. Chairman, I do not have any more questions. Do you have 
any more questions?
    The Chairman. This may sound naive, but Mr. McKee, if Mr. 
Henagan's company goes bankrupt with nine employees and $1.6 
million in income and it gets worse and worse, would your 
company be willing to take over the system?
    Mr. McKee. Well, again, Senator, we have no desire for his 
company to go bankrupt. In fact, we are more than willing to 
pay them for the traffic that we send them.
    Again, Sprint--I can only speak to my company--does 
populate identifying information for all traffic it sends to 
the PSTN, and we stand ready to compensate rural carriers for 
the traffic we send them.
    We also contribute a significant amount of money to the 
Universal Service Fund to also help support those carriers, and 
I think that is certainly useful----
    Senator Stevens. Do not say you contribute. You said that 
before. That is not so. It is the user that pays that. That is 
a charge that the customer pays. It is not paid by the company 
at all. You just transmit the money that has been collected 
under Universal Service charges added to each customer's 
charge. That is not something you pay in the industry at all. 
And I have heard that several times in recent hearings here 
about how the industry is paying those. The consumer is paying 
those and has from the very beginning. It was an addition to 
interstate calls and it was the result of that conference we 
had on rate integration, but it is not something that is paid 
by the company. It does not come out of your top or your bottom 
line. It is something that is paid by the individual into that 
Fund. That is not your money. You did not earn it, and you did 
not pay it. So I hope you do not say to me again. OK?
    Mr. McKee.--absolutely, Senator.
    Senator Stevens. Thank you.
    Anything further, sir?
    The Chairman. No.
    Senator Stevens. Thank you all very much. I am going to 
introduce the bill. I am not sure yet whether it is going to go 
very far after what I have heard from you all, but I do hope we 
will find some solution. Otherwise, rural carriers are going to 
go out of existence. They cannot continue to get these messages 
that they cannot identify, they cannot bill, and yet have the 
duty under the FCC current regulations to deliver without 
regard to being paid by anybody. It just will not work.
    Thank you very much.
    [Whereupon, at 3:35 p.m., the hearing was adjourned.]
                            A P P E N D I X

Prepared Statement of Hon. Claire McCaskill, U.S. Senator from Missouri
    Chairman Inouye, thank you for holding today's hearing on the 
subject of ``phantom traffic.'' I regret that I am not able to attend 
the hearing due to my obligations as presiding officer in the Senate.
    I want to thank you and Vice Chairman Stevens for inviting a 
Missouri witness to testify. Mr. Raymond Henagan, General Manager of 
Rock Port Telephone Company, has presented a compelling case as to why 
the Federal Communications Commission needs to address the problem of 
``phantom traffic'' on our communications networks. I would be remiss 
to not also thank you for inviting Mr. Charles McKee from Sprint Nextel 
Corporation to testify. I often claim Sprint Nextel as a Missouri 
company because its headquarters is located just across the state line 
in Kansas and it is one of the largest private employers in the Kansas 
City metropolitan area.
    Phantom traffic refers to telephone calls which do not contain 
identifying information that can be used for billing purposes between 
voice service providers. As the amount of phantom traffic has grown due 
to new technologies, so has the impact on the bottom line of telephone 
companies. Rural telephone companies have been especially impacted. 
According to one estimate by the National Exchange Carrier Association 
(NECA), phantom traffic has resulted in annual losses of approximately 
$600 million for rural carriers and $2 billion for the industry 
overall.
    I know the Federal Communications Commission is looking closely at 
proposals to address phantom traffic and has received comments on 
various proposals from the wireless, cable, and voice providers. I am 
hopeful today's hearing sends a message to the FCC and industry that 
they must work constructively to come to an agreement. We need clarity 
and fair rules to identify traffic traveling over our Nation's 
telecommunications network.
    Thank you again for holding today's hearing.

                                  
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