[Congressional Record Volume 144, Number 42 (Friday, April 3, 1998)]
[Senate]
[Pages S3209-S3212]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            INTERNET SERVICE PROVIDERS AND UNIVERSAL SERVICE

  Mr. ROCKEFELLER. Mr. President, I want to talk today about a subject 
called universal service, and the threat it faces because of the 
Federal Communication Commission's--the FCC's-- policy regarding 
Internet service providers. When we passed the Telecommunications Act 
of 1996, a number of us--a bipartisan group called the Farm Team--
fought hard to include Section 254, the section that ensures our 
nation's continued commitment to universal service. This section is the 
heart and soul of this new law, because without this fundamental 
commitment, telecommunications service in rural areas would not be 
affordable. Without it, we will watch a new world of haves and have-
nots when it comes to telecommunications and access to the Information 
Age.
  When I deal with this issue, I am painfully reminded of another 
example of deregulation: the airlines. West Virginia and other rural 
states got the short end of the stick on airline deregulation, and we 
continue to pay the price for it. That's what made me and others so 
determined not to let this happen under the Telecommunications Act. We 
knew we had to make sure that the idea of universal service was not 
simply expressed as a goal or listed in some weak section--we made sure 
it was a statutory obligation explicitly stated in the Act.
  Maintaining universal service involves a number of issues. Senator 
Stevens took on most of these by demanding a major report from the FCC 
on their progress regarding universal service, in a provision in last 
year's appropriations bill that funded the FCC. That report is due 
April 10, and many of us are looking for serious answers from the FCC 
to the many questions we have about the direction they are heading with 
regard to universal service funding.
  Two big concerns are, (1) the FCC's ill-advised decision to provide 
only 25 percent of the costs of universal service, leaving the 
remaining 75 percent to the states; and (2) their decision to only fund 
the FCC's portion of the high-cost fund from interstate revenues. I do 
not believe that rural states can live with either of these proposals, 
because what we'll get are higher rates and dwindling investment in our 
local telecommunications networks. This simply does not square with the 
Act's promise of delivering comparable services at comparable rates. 
Section 254 was designed to ensure a national standard of affordability 
for telecommunications services, and that is a standard we simply must 
live up to.
  In the 1996 law, we recognized that the maintenance of the nation's 
telecommunications network is a shared responsibility--and one that 
provides shared benefits. It is in our national interest that everyone 
be able to affordably make calls from anywhere and to anywhere in the 
United States.
  This isn't a radical concept. As a nation we share responsibility in 
many areas. My colleague Senator Dorgan points out that land-locked 
states like West Virginia, North Dakota and Montana all help pay for 
the Coast Guard,

[[Page S3210]]

even though our citizens use those services far less than others. I 
certainly wouldn't advocate that we stop supporting the Coast Guard, 
and the same principle applies here. Shared Responsibility.
  I will have more to say on these subjects as the FCC moves forward on 
implementing universal service. Today I want to focus on the subject of 
internet telephony, and how the FCC's current regulatory policy 
threatens the promise of universal service.
  The problem is that the FCC's current policy is basically a policy of 
letting so-called information service providers avoid paying for their 
fair share of universal service, even though these companies are 
delivering services that are clearly telecommunications services and 
which burden the local network. Senator Stevens has been the most vocal 
leader on this issue, and I want to praise him. We both come from high-
cost states, and we both know the importance of changing the FCC policy 
so that their mission to maintain universal service can be fulfilled.
  Where this problem is most clear is in the current offerings of long 
distance telephone service over the Internet. It's a very real trend 
and a rapidly rising trend. In fact, I will submit two articles for the 
Record that tell this part of the story, one from Businessweek and one 
from the New York Times. I ask unanimous consent they be printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                       [From the New York Times]

                          The Newest Phone War

                            (By Noelle Knox)

       Consumers looking for the cheapest long-distance telephone 
     rates need only log onto the Internet, the newest arena of 
     intense competition, where companies are offering special 
     prices from 5 to 10 cents a minute.
       Thsi week, the AT&T Corporation is expected to start 
     offering its Internet customers long-distance calls at just 9 
     cents a minute, matching new rates introduced recently by MCI 
     Communications.
       Both giants are scrambling to respond to the initiative of 
     a little player that had a big idea: Tel-Save Holdings, a 
     long-distance provider in New Hope, Pa., that caters 
     primarily to small and medium-sized businesses. Since Dec. 
     18, it has contracted with America Online to offer the 9-
     cent-a-minute rate to the on-line service's 11 million 
     subscribers. With promotions on its main screen and in full-
     page newspaper ads, America Online has signed up almost 
     400,000 customers so far, and expects to have a million by 
     the end of June.
       Many industry experts call such programs the start of a 
     revolution that will lower all long-distance rates, a result 
     of making a connection in consumers' minds between the 
     Internet and phone service. Eventually, the experts say, the 
     Internet will become a major transmission vehicle for the 
     calls themselves and the line will blur between telephone and 
     Internet.
       ``It's going to change the industry,'' said Jeffrey Kagan, 
     a telecommunications consultant and author of ``Winning 
     Communications Strategies'' (Aegis Publishing Group). The new 
     rates are just the beginning, he said, adding, ``The question 
     is: How low can they go?''
       A long-distance company can offer a lower rate to Internet 
     customers because the company saves money. The customers 
     enter their own billing data when they sign up, and in most 
     cases must pay with a credit card, receiving their bill 
     through their computers. For the companies, that means no 
     paper bills and no postage costs, while the reliance on 
     credit cards also reduces the companies' exposure to bad 
     debt.
       Not all the long-distance carriers are joining the Internet 
     price war. The Sprint Corporation, which offered the first 
     10-cent-a-minute plan, does not offer internet customers a 
     better rate. ``We think it's restrictive to say one kind of 
     customer can get one kind or rate and another customer can 
     get another kind of rate,'' said Robin Pence, a spokeswoman 
     for Sprint.
       She also criticized the Internet-based marketing plans 
     because they usually provide customer service only on line.
       Still, many telecommunications executives and analysts say 
     that this is only the beginning of a shift toward new kinds 
     of communication via the Internet. The current Internet plans 
     offer new rates for long-distance calls carried by 
     traditional phone lines, but AT&T plans to start a cheaper 
     service in May that will carry long-distance calls over an 
     Internet-style network.
       That service, called AT&T World Net Voice, will start in 
     three cities, still to be announced, and expand to 16 by the 
     end of the year. AT&T will charge 7.5 to 9 cents a minute for 
     calls using Internet protocol.
       Internet protocol, or Internet telephony, as it is also 
     known, uses a regular phone. But a separate transmission 
     switch digitizes and compresses the caller's voice into 
     packets of data that are moved through the Internet and 
     reassembled at the phone on the other end.
       ``From AT&T's point of view, Internet protocol is critical 
     to our future success and growth,'' said Daniel H. Schulman, 
     a vice president at AT&T's World Net Service. ``In fact, we 
     think the Internet protocol is to the communications industry 
     what the personal computer was to the computing industry; 
     it's that fundamental a change.''
       The technology, though, which is just two years old, is 
     still slow and cumbersome. Many people who use Internet 
     protocol for long-distance calls report frustrating time lags 
     between the speaker and the listener. AT&T says it has 
     reduced the delays, but callers must still dial a local 
     access number, wait for a prompt, enter an authorization code 
     and then dial the number they want.
       But with improvements in quality in the next five years, 
     the Internet telephony business is expected to grow from less 
     than $1 billion a year today to $24 billion--about 17 percent 
     of the projected United States long-distance market, 
     according to the International Data Corporation.
       About 25 million American homes are connected to the 
     Internet. And their occupants tend to be more affluent and 
     make more long-distance calls. In a survey last year, 
     International Data found that in homes with a personal 
     computer connected to the Internet, the average respondent 
     was 41 years old, had a household income of $70,400 a year 
     and spent an average of $58 a month on long-distance calls. 
     Among households without a computer, the average respondent 
     was 47 years old, had a household income of $38,700 and spent 
     an average of $30.50 a month on long-distance calls.
       While it may make good business sense for long-distance 
     carriers to focus on the most profitable market segment, some 
     consumer advocates are not impressed.
       ``What we've constantly seen here is benefits for volume 
     users at the high end of the market, while rates have 
     actually risen for consumers at the low end of the market, 
     unless government has intervened to put a lid on rates, or 
     forced them down,'' said Gene Kimmelman, co-director for 
     Consumers Union.
       But Mr. Kagan, the telecommunications consultant, predicted 
     that as Internet telephony improved, it would push down all 
     long-distance rates. ``Within a year's time, we're going to 
     see traditional long distance down to the 5-cent mark,'' he 
     said.
       As the long-distance industry changes, the line separating 
     telephone and Internet services may start to break down. 
     Customers might buy telephones with a screen, for example, 
     and dial into the Internet to place a call. Long-distance 
     companies may start focusing on other, more profitable 
     businesses, like cellular phone service, pagers, call 
     forwarding and electronic mail.
       ``Long-distance companies will still make plenty of money, 
     but they will make it from these higher-margin services,'' 
     Mr. Kagan said.


                   LONG-DISTANCE savings a click away

       Long-distance phone deals are proliferating on line. Most 
     programs provide billing and customer service over the 
     Internet: payments must be made by credit card.

------------------------------------------------------------------------
                 Rate                             Restrictions          
------------------------------------------------------------------------
                          TEL-SAVE--WWW.AOL.COM                         
                                                                        
9 cents a minute......................  Available only through America  
                                         Online. Service will be offered
                                         through Compuserve in 2 to 4   
                                         months.                        
                                                                        
                    MCI ONE NET SAVINGS--WWW.MCI.COM                    
                                                                        
Mon.-Sat.: 9 cents a minute; Sun.: 5    State-to-state calls. Also      
 cents a minute.                         offers telephone subscribers a 
                                         monthly $5 discount on Internet
                                         access.                        
                                                                        
                            AT&T--WWW.ATT.COM                           
                                                                        
AT&T World Net: 9 cents a minute......  State-to-state calls. Rate is   
                                         only for customers who pay     
                                         $19.95 a month for Internet    
                                         access through AT&T's World Net
                                         service.                       
AT&T One Rate Online: 10 cents a        State-to-state calls. $1 monthly
 minute.                                 fee. This plan saves $3.95 a   
                                         month off AT&T's non-Internet  
                                         plans.                         
AT&T World Net Voice: 7.5 to 9 cents a  State-to-state calls carried    
 minute.                                 over the Internet. Must pre-pay
                                         a set amount with a credit     
                                         card. Not available until May. 
                                                                        
                  SPRINT SENSE ANYTIME--WWW.SPRINT.COM                  
                                                                        
10 cents a minute.....................  $4.95 monthly fee, which is     
                                         waived for bills of more than  
                                         $30 a month. This produce is   
                                         offered to all customers, not  
                                         just Internet users.           
------------------------------------------------------------------------
Source: The companies.                                                  


                                                                    ____
                  [From Business Week, Dec. 29, 1997]

   At 7\1/2\ Cents A Minute, Who Cares If You Can't Hear a Pin Drop?


        why long-distance internet calling is about to take off

  (By Steven V. Brull in Los Angeles, with Peter Elstrom in New York)

       How can Qwest Communications Corp. get away with charging 
     just 7\1/2\ cents a minute any time for long-distance 
     calling--the ultra-aggressive pricing it announced on Dec. 
     15? For one thing, according to President and Chief Executive 
     Officer Joseph P. Nacchio, ``Long distance is still the most 
     profitable business in America, next to importing illegal 
     cocaine.'' As head of long-distance marketing for AT&T until 
     last year, he should know.
       Actually, Qwest can make its audacious offer--and still 
     match AT&T's 17% to 20% net margins--because it sends its 
     traffic over a private fiber-optic network using Internet 
     technology. That method, says Nacchio, is far more efficient 
     than that of the conventional carriers. Indeed, if Qwest 
     makes its mark in long distance, it won't be for undercutting 
     AT&T's best all-day rate by 50%--it will be for proving that 
     Internet-based calling can steal significant amounts of 
     traffic from ordinary long-distance circuits.
       Easy to use. Qwest's offer heralds the coming of age of 
     Internet telephony. Just a couple of years ago, making phone 
     calls over the

[[Page S3211]]

     Internet was a challenge reserved for computer whizzes. 
     Consumers still will have to dial a few extra digits to make 
     cheap calls. But now, improved PC-based software and routers 
     make it possible for Internet service providers to accept 
     standard telephone and fax calls and send them over the 
     Internet or private data networks and then back to the 
     conventional phone network.
       As a mass market develops, companies such as AT&T could 
     lose millions of customers and billions in revenue to 
     Internet calling. ``In the next 24 months, we'll see a rapid 
     migration,'' predicts Nacchio. Between 1998 and 2001, as much 
     as $8 billion could be lost to Internet telephony, says Sim 
     Hall, vice-president of research at Action Information 
     Services of Falls Church, VA. ``Internet telephony is going 
     from novelty to mainstream next year,'' agrees Jeffrey Kagan 
     of consultants Kagan Telecom Associates.
       Besides being more efficient than standard voice networks, 
     which consume bandwidth even when there is silence during a 
     call, the new networks also bypass conventional long-distance 
     carriers, who must pay local-access charges and taxes. Such 
     fees make up 40% of the typical long-distance charge, Hall 
     notes.
       Unlike the pioneers of Internet telephony, bigger companies 
     like Qwest mostly route traffic over their own networks. That 
     lets them manage capacity to avoid the scratchy sound and 
     half-second delays of some Internet phone setups.
       Qwest isn't the only company with big ambitions in Net 
     calling. WorldCom Inc.'s Internet division, UUNet, is taking 
     aim at the $92 billion fax market. Early next year, it will 
     offer nationwide faxing for 10 cents a minute, compared with 
     the typical business rate of 15 cents a minute. International 
     faxes to Britain will cost 19 cents a minute, half the 
     average rate now.
       Denver-based Qwest, which is building a $2 billion 
     nationwide fiber-optic network, will offer its 7.5 cents rate 
     on calls anywhere in the continental U.S. starting in late 
     January in nine western cities. The network will expand to 
     125 markets in early 1999, when Qwest's national network is 
     scheduled to be completed. Qwest also plans fax, video-
     conferencing, and other services.
       Established long-distance providers are making their own 
     forays with the new technology. In August, AT&T began 
     offering domestic and long-distance calls from Japan at 40% 
     off normal rates. Japan's Kokusai Denshin Denwa Co. created a 
     subsidiary offering similar services worldwide on Dec. 16.
       MCI Communications Corp. and Deutsche Telekom are running 
     trials.
       While the data networks will help cut domestic long-
     distance rates, the big impact will be on international 
     calls. The average long-distance call in the U.S. costs about 
     13 cents a minute, but the average international price is 
     89 cents, Hall says. The gap has little to do with the extra 
     cost of an international call, which is marginal. Rather, it 
     reflects the pricing power of a small group of suppliers.
       Hall predicts that phone company revenues per minute on 
     international calls will fall more than 20% annually through 
     2001 and continue to decline. ``The wheel has been set into 
     motion,'' says Hall. Nobody knows how far it will spin, but 
     at this point, it looks as if consumers will be the winners.

  Mr. ROCKEFFELLER. These new long distance calls are offered at rates 
far below that of ``traditional'' long distance calls, with some at 7 
cents per minute. While cheaper service is a good thing, the problem is 
that FCC policy has created a giant loophole that threatens universal 
service. Because of this policy, service can be offered over the 
Internet more cheaply because Internet-based providers can avoid paying 
access charges and universal service contributions. This is all because 
they offer their service using packet-switched technology through an 
Internet Service Provider, which allows them to escape the FCC's 
current definition of telecommunications carrier. The problem is that 
access charges and universal service contributions are what help 
maintain the local network, which is the most expensive part of the 
phone system. Without adequate support--and by allowing these companies 
to duck paying their fair share--we will let the local network wither 
on the vine.
  It is important to remember that, aside from their regulatory 
treatment, the nature of both types of long distance calls are exactly 
the same. They are both spoken voice calls that occur over regular 
phones. There is no quality distinction between them for the consumer. 
It is also important to remember that both calls burden the local phone 
network in essentially the same manner. The only difference is that the 
FCC has chosen to define one as a telecommunications service and the 
other as an information service-- even though any review of these calls 
in the real world would conclude that they are the same.
  Further, we are already seeing evidence that this regulatory loophole 
is a multi-billion dollar incentive for all long distance carriers to 
move their traffic from the traditional circuit switched network to the 
Internet. The March 8 New York Times article that I mentioned earlier 
points out that the Internet will increasingly become a major 
transmission vehicle for phone service, and that in the near future 
``the line will blur between telephone and Internet.''
  It also points out plans by a number of companies to move more and 
more traffic to the Internet, including AT&T, and that in the next five 
years Internet telephony alone will grow from less than $1 billion a 
year today to $24 billion annually. John Sidgemore, the CEO of UUNet, 
goes further, and recently predicted that by 2008 traditional voice 
transmissions will represent less than one percent of total 
communications traffic--and under the current policy that one percent 
will be left to support universal service.
  Senator Burns chaired a hearing in the Commerce Committee a week ago 
that shed a lot of light on this important issue. We heard from Wall 
Street analysts who were giving us their opinions about the 
implementation of the Telecommunications Act. I asked them what they 
thought about this issue and the FCC's current policy regarding these 
so-called information service providers. The verdict was unanimous. The 
entire panel agreed that the FCC's current policy is flawed.
  Tod Jacobs of Bernstein Research said, ``it is certainly our opinion 
that the ISPs have been getting a free ride, and that there is no 
question that access charges, particularly once they get down to more 
cost-based rates, should be applied to those calls.''
  Scott Cleland, managing director of the Precurser Group of Legg Mason 
Wood Walker, said that ``people should know that the Internet and data 
right now is by far the most subsidized entity in the business, even 
more so than the local monopoly.'' He added that, ``Congress should 
realize that right now whether the Internet or whether data pays access 
charges or pay into universal service is the most massively distorting 
issue facing Congress in telecommunications; that we are at a fulcrum 
point.''
  But the key point made by Mr. Cleland was when he discussed the 
perverse effect the FCC's current policy will certainly have--that the 
FCC's policy actively encourages companies to game the system so that 
they do not have to pay access charges or contribute to universal 
service. This is the real bottom line, and Mr. Cleland got it exactly 
right when he said: ``we are all just going to morph ourselves into a 
new definition and leave universal service to anybody who is not smart 
enough to take advantage of the new definitions.''
  Let me repeat that. The industry will ``leave universal service to 
anybody who is not smart enough to take advantage of the new 
definitions.''
  That is a clear warning to all of us that care about keeping 
telecommunications service affordable in rural areas. And it should be 
a clear signal to the FCC. Many of us are looking to the April 10th 
report from the FCC for serious answers on this issue. I urge Chairman 
Kennard in the strongest possible terms not to try to defend the 
regulatory status quo with regard to Internet Service Providers. The 
Telecommunications Act includes specific language stressing that 
``universal service is an evolving level of telecommunications 
services. . . .'' I believe the FCC's policy needs to evolve with it, 
particularly since all forms of telecommunications will increasingly 
rely on packet-switching and other types of advanced technology. I am 
not going to keep quiet about this issue. We fought too long and hard 
for the universal service provisions of the act, and universal service 
itself is far too important to the country for us to ignore this very 
serious problem.
  Let me also be clear that I am not advocating any kind of extensive 
regulation of the Internet in connection with this issue. I think the 
growth of the Internet would not have occurred as rapidly as it has if 
it were subject to extensive regulation. But those who argue against 
regulation ought to be equally in favor of eliminating the unfair 
advantage the industry receives today as it avoids its universal 
service obligations at the expense of rural America.

[[Page S3212]]

  Universal service is a fundamental principle. It is a statutory 
promise that Congress and the President made to Americans. It is worth 
fighting to preserve and protect. And I urge everyone in this body to 
take it very, very seriously.
  Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER (Mr. Smith of Oregon). The clerk call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. ENZI. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. ENZI. Mr. President, I ask unanimous consent to speak for up to 
15 minutes as in morning business.
  The PRESIDING OFFICER. Without objection, it is so ordered.

                          ____________________