Commercial and Administrative Law Subcommittee of the House Judiciary Committee - Regulatory Aspects of Voice Over Internet Protocol

Federal News Service July 23, 2004 Friday

July 23, 2004 Friday

HEADLINE: HEARING OF THE COMMERCIAL AND ADMINISTRATIVE LAW SUBCOMMITTEE OF THE HOUSE JUDICIARY COMMITTEE

SUBJECT: REGULATORY ASPECTS OF VOICE OVER INTERNET PROTOCOL

CHAIRED BY: REPRESENTATIVE CHRIS CANNON (R-UT)

WITNESSES: ROBERT PEPPER, PH.D., CHIEF, POLICY DEVELOPMENT, OFFICE OF STRATEGIC PLANNING AND POLICY ANALYSIS, FEDERAL COMMUNICATIONS COMMISSION;

JOHN LANGHAUSER, VICE PRESIDENT, LAW & CHIEF COUNSEL, CONSUMER SERVICES GROUP, AT&T CORPORATION;

STEPHEN M. CORDI, C.P.A., DEPUTY COMPTROLLER FOR THE MARYLAND COMPTROLLER OF THE TREASURY, STATE OF MARYLAND;

JAMES KIRKLAND, GENERAL COUNSEL AND SENIOR VICE PRESIDENT, COVAD COMMUNICATIONS GROUP, INC.

LOCATION: 2141 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

BODY:

REP. CHRIS CANNON (R-UT): The subcommittee will please come to order. I want to thank Mr. Chabot for being here with us this morning and helping us get this started. We are out of session and this is an extraordinarily kind thing for him to do. We consider today the regulatory aspects of a technology that's fundamentally changing the communications industry, that's Voice over Internet Protocol, or VoIP, telephony.

As most of us know, VoIP allows the user to make telephone calls using a broadband Internet connection rather than a regular or analog hard-switched telephone line. While VoIP has been available in various forms since about 1995, the creation of new IP services and the increasing penetration of broadband into the residential markets has spread significant growth in the industry. New and established telephony providers alike now offer various forms of VoIP and the service is no longer limited. According to one estimate, the number of VoIP lines will be 4.2 million by 2007, and I suspect personally that that is a dramatic underestimation.

At issue is whether VoIP telephony should be regulated, and if so, to what extent? VoIP represents a unique challenge to regulators because it does not conform to the current regulatory paradigm which reflects the legacy system of Public Switched Telephone Network, or PSTN. VoIP differs from this end-to-end telephony because it converges services that have historically been unregulated, information services and regulated telecommunications services.

The FCC's task in this regard is no minor feat. Indeed, FCC Chairman Michael Powell has stated that VoIP promises the most important shift in the entire history of modern communications since the invention of the telephone. While the FCC first addressed the regulatory treatment of VoIP with respect to universal service in 1998, it has yet to do so in a comprehensive manner. We look forward to discussing the FCC's progress toward the establishment of a definitive framework for VoIP.

At the same time, understanding the enormous benefits of VoIP to businesses and consumers alike, prompt action is necessary that will promote, rather than undermine, the development of this technology. Indeed, time is of the essence for federal guidance. Several states have launched legal or regulatory proceedings addressing VoIP, calling into question whether VoIP should be subject to state taxation or whether federal preemption is more appropriate.

We have the opportunity today to consider those issues relevant to the development of a thoughtful, yet timely approach toward the regulation of VoIP from those that know of this subject matter extremely well. The subcommittee maintains jurisdiction over the Administrative Procedure Act and has a long history of providing effective oversight of the federal administrative process by conducting hearings into regulatory practices at federal agencies.

For example, the subcommittee has examined in hearings the FCC's regulations concerning license transfers, rules noticed by the Federal Reserve Board and Treasury Department concerning the authority to monitor banking activities, the role of Congress in monitoring administrative rulemaking. Furthermore, the subcommittee has legislative and oversight responsibility for issues of state taxation affecting interstate commerce, which is a central issue in this debate.

And now from my distinguished colleague, Mr. Chabot, for any opening statement he may wish to make.

REP. STEVE CHABOT (R-OH): No.

REP. CANNON: Thank you. The gentleman's entire statement will be placed in the record. I ask unanimous consent that members have five legislative days to submit written statements for inclusion in today's hearing record. Hearing none, so ordered. I ask unanimous consent for the inclusion of two matters into the record.

I have for inclusion in the hearing record a policy paper from the National Cable and Telecommunications Association concerning a facilities-based VoIP competition, and also a letter from the Department of Justice concerning the Communications Assistance for Law Enforcement Act, CALEA. This letter submits that CALEA must be considered when VoIP regulation is discussed. Without objection, these documents will be included into the record. Before I begin with witness introductions, interested parties will likewise have five days to submit written statements.

I'm now pleased to introduce today's hearing witnesses. Our first witness is Robert Pepper, chief of Policy Development at the Federal Communications Commission. In this capacity, Mr. Pepper has served as direct advisor to FCC Chairman Michael Powell on long-term policy planning. He is also the co-chair of the FCC's Internet Policy Working Group and has primary responsibility for developing the commission's overall relationship with the financial community.

Prior to his fulfilling his current appointment since March of 2003, Mr. Pepper was chief of the FCC's Office of Plans and Policy, beginning in 1989. Mr. Pepper has published and lectured widely on telecommunication policy issues. He's a graduate of the University of Wisconsin, Madison, where he received his doctoral degree.

Our next witness is John Langhauser, vice president of law and chief counsel to Consumer Services Group of AT&T Corporation. Mr. Langhauser joined AT&T in 1982 and has held legal positions in the state government affairs, antitrust litigation, international business services, federal regulatory and public policy groups. Prior to joining AT&T, he was a litigator with the firm of Dewey Ballantine in New York. Mr. Langhauser graduated cum laude from Harvard Law School and summa cum laude from the State University of New York at Plattsburgh.

Our next witness is Mr. Stephen Cordi, deputy comptroller for the Maryland Comptroller of the Treasury. Mr. Cordi has served in this capacity since 1994 and has primarily responsibility for tax administration. He is also the immediate past president of the Federation of Tax Administrators.

Mr. Cordi was the first director of the Compliance Division of the Maryland Comptroller, following its creation in 1993. For 13 years prior to this appointment, he was the director of the Maryland Sales and Use Tax Division. Mr. Cordi first entered state service in 1974 as special assistant of the attorney general for the comptroller. An attorney and certified public accountant, he is a graduate of Haverford College and Georgetown University Law Center.

Our final witness is Mr. James Kirkland, general counsel and senior vice president of Covad Communications. Mr. Kirkland is responsible for overseeing all of Covad's legal issues relating to regulatory and legislative affairs, corporate governance and employment and finance. Prior to joining Covad, Mr. Kirkland served as general counsel and senior vice president of Spectrum Development for the privately held Clearwire Technologies, Inc., a broadband Internet service provider based in Dallas, Texas. Before joining Clearwire, Mr. Kirkland spent 17 years with Mintz Levin Cohn Ferris Glovsky and Popeo PC, located here in Washington DC, who are specialized in communications law. Mr. Kirkland holds a bachelor's degree from Georgetown University and earned a law degree with honors from Harvard Law School.

I extend to each of you my warm regards and appreciation for your willingness to participate in today's hearing. In light of the fact that your written statements will be included in the record, I request that you limit your oral remarks to five minutes. Accordingly, please feel free to summarize or highlight the salient points of your testimony. I can assure you that you'll have more time to explain particular points thereafter.

If you look, we have a lighting system that starts with a green light. After four minutes it turns to a yellow light and then at five minutes turns to a red light. It's my habit to tap the gavel at five minutes. We'd appreciate if you'd finish up your thoughts within that time. We don't expect you to just cut off. We're actually anxious to understand what you think is important for us to understand. But that's a timeframe that will actually help us move through the hearing.

After all the witnesses have presented their remarks, the subcommittee members in the order that they arrive-and I suspect that's just one other member-will be permitted to ask questions of the witnesses subject to the five-minute time limit. Pursuant to the direction of the chairman of the Judiciary Committee, I ask the witnesses to please stand and raise your right hand to take the oath. Do you swear or affirm under penalty of perjury that the testimony you're about to give is true and correct to the best of your knowledge, information and belief?

WITNESSES: I do.

REP. CANNON: The record should reflect the witnesses answered in the affirmative. You may be seated.

And, Mr. Pepper, would you now proceed with your testimony?

MR. ROBERT PEPPER: Good morning, Mr. Chairman, and distinguished members of the subcommittee. It's my pleasure to come before you this morning to talk about Voice over Internet Protocol or VOIP, or VoIP.

VoIP services and applications are dramatically expanding beyond the limited functionality of traditional telephone voice service and, at the same time, challenging the traditional economic and regulatory structures that have governed the traditional telephone industry for more than a century.

Saying that VoIP is just another way to make a phone call is much like saying that eBay is just another way to have a garage sale. This ignores the fact, obviously, that e-commerce and the Internet have fundamentally changed the way we compare products and prices, transact business, and the way service providers compete for and relate to consumers. VoIP is best understood as bringing this dynamic to the market for voice communications.

The traditional network delivered voice over brilliantly designed, dedicated and centrally managed network. Whoever owned the pipe into your home owned the customer. On the Internet, however, the voice application and, in fact, all applications are separated from the physical transmission network. They ride over that network but are agnostic as to who provides it.

Thus anyone who can attach a server to the Internet can allow 200, 300, 400 people to talk to one another. Voice is becoming little more than one application of many over a multi-use digital broadband network, less like stand-alone phone service and more like a free or almost free add-on to something else you can buy from multiple sources.

Indeed, the majority of Voice over IP applications, including voice instant messaging and talking to players of live interactive games like Xbox look nothing at all like traditional telephone service. These are fundamental changes in an industry that has been regulated for almost a century on the assumption that all providers are monopolies, protected by an elaborate regulatory regime in which they use dedicated narrowband networks. It would be irrational for regulators to ignore these changes and automatically apply legacy regulation without first seriously examining whether it's relevant.

History provides two excellent examples of a better way: cell phones and the Internet. These technologies were largely freed of common carrier regulation, notwithstanding long, hard-fought battles to impose it. Today, the American consumer and the American economy are far better off for having steered a deregulatory course. These two industries grew from reaching just a handful of customers to bringing substantial benefits to tens of millions in the absence of any significant common carrier regulation.

The commission has begun examining VoIP issues in this light in a notice of proposed rulemaking regarding IP-enabled services as well as in specific petitions. The commission began its reexamination of VoIP because development of this promising technology might very well be hampered by unjustified, conflicting and burdensome regulatory requirements that could result as different state commissions and courts begin to address the area. In this environment, the commission cannot simply assume that inaction will create an environment that encourages innovation, investment and competition.

In response to the NPRM, the commission received over 150 comments and 86 reply comments from a very wide variety of parties. The commission already has issued two orders resolving petitions for declaratory ruling, one filed by Pulver.com and the other by AT&T. In addition, the commission is considering VoIP-related petitions from Vonage, Level 3, SBC and Inflexion. The commission also is considering questions related to Voice over Internet Protocol and its universal service contribution, intercarrier compensation, and our upcoming CALEA proceeding.

The commission's decisions in this area will have the farthest reaching consequences of anything the commission currently is considering. What's at stake is nothing less than the future of electronic communications for future generations. The commission, however, is constrained by the act, which divides the world into regulated telecom services and unregulated information services. When dealing with revolutionary new technologies, we need to start from the perspective of how to best create the world we all want to live in, rather than applying tired regulations, soon to be rendered obsolete.

While the commission has some ability to fine tune treatment of new technologies, given its discretion and flexibility granted to it by Congress, the commission's latitude is limited by the act. If you believe that VoIP and other new technologies are transforming the telecom market in ways that cry out for new regulatory approaches, you need to consider whether the tools the commission has today are appropriate for that task. In the meantime, the commission is moving forward with its work and guidance and leadership from Congress is crucial to the success of our process.

Mr. Chairman, on behalf of the FCC I want to thank you for calling this hearing, and we look forward to working with you and other members on these issues.

REP. CANNON: Thank you, Mr. Pepper.

Mr. Langhauser.

MR. JOHN LANGHAUSER: Mr. Chairman, Congressman Chabot, thank you very much for giving me the opportunity today to discuss Voice over Internet Protocol. AT&T intends to provide IP-based services to all of our key markets. In March of this year, we launched our residential VoIP service, known as AT&T CallVantage. Today it's offered in 32 states and Washington, DC. That's 100 major markets in four months.

Voice over IP is a foundation for our future. Indeed, because of recent federal policy changes concerning unbundled network elements, VoIP will soon become AT&T's only viable alternative for offering new competitive local service, but unfortunately only for those customers who can obtain and afford broadband. Much of Silicon Valley will benefit from an IP explosion. Small businesses will profit from affordable VoIP services. The resulting productivity gains can in turn drive broader economic growth.

These benefits will only emerge if policymakers bring certainty and stability to the regulatory rules surrounding VoIP. It should be regulated with a light hand at the federal level. In particular, it should not be saddled with the current flawed intercarrier compensation requirements. VoIP cannot be allowed to develop into yet another Bell-controlled technology. AT&T's ability to compete for customers and invest in VoIP will be hampered if the Bells are allowed to continue such anti-competitive practices as refusing to sell broadband to customers purchasing voice services from a competitor.

Let me provide more details. VoIP holds the promise of choices and capabilities far beyond today's circuit-switched offerings. In the IP environment, voice services and features can be provided and enhanced much more efficiently. VoIP could well become the killer application that drives broadband adoption.

AT&T fully intends to lead the VoIP revolution. We've invested heavily to upgrade our total network, including some $3 billion last year alone. Our consumer offer includes advanced features, such as the ability to check voicemail from your computer and dynamically control your feature settings yourself.

AT&T has long been committed to providing a choice for a local telephone service. Today we provide local service to about 4.7 million residential customers and 4.5 million business lines. Virtually all the residential customers are served using UNE-P. But VoIP, which requires broadband, is not an option for the majority of our current local customers.

Legislative and regulatory certainty which fosters VoIP as an emerging technology will encourage AT&T to invest in VoIP and remain in the domestic residential voice market. Congressman Pickering's bill provides for federal regulation and access and universal service reform. Chairman Sensenbrenner and Congressman Conyers have offered legislation ensuring that the Telecommunications Act is not construed to supersede the antitrust laws. We commend these efforts to restore the potential for a competitive communications marketplace.

We agree with those who have said that VoIP must provide access for the disabled 911 and must cooperate with requests from law enforcement. In contrast, the universal service and intercarrier compensation schemes of today are badly broken and require substantial revisions before they can or should be applied to VoIP. The FCC's delay in reforming these regimes benefits the incumbents.

Nothing about VoIP threatens universal service. The real threat is the shrinking base of interstate revenues that support the system today. AT&T has proposed moving to a flat rate charge for each telephone number, which would include VoIP, be competitively neutral, and provide a solid foundation for the fund. The FCC has full authority to implement such reforms, but AT&T's petition has been pending for over 15 months. Current access charge regulations are especially unworkable, but the FCC's long-promised overhaul of intercarrier compensation has yet to occur.

VoIP collectively serves several hundred thousand customers nationwide, while the Bells serve nearly 100 million. It makes no sense to require nascent VoIP providers to subsidize the monopoly of local carriers. No one demanded that the auto industry subsidize the buggy manufacturers or the computer industry, the typewriter providers. If VoIP is to deliver on its promising potential, then it cannot be regulated like a plain old telephone service. Today we are asking for your support to keep that from happening so that all Americans can realize the competitive and innovative benefits of VoIP technology.

Thank you again for inviting me here today and I look forward to your questions.

REP. CANNON: Thank you, Mr. Langhauser.

Mr. Cordi.

MR. STEPHEN M. CORDI: Thank you, Mr. Chairman, Congressman Chabot. Good morning and thank you for the opportunity to testify on the regulatory aspects of Voice over Internet Protocol. I'm here on behalf of the Federation of Tax Administrators. The FTA is an association of tax agencies of all 50 states, New York City and the District of Columbia. My comments today will be limited to the state and local aspects and preemptions found in H.R. 4129, a bill that's been referred to this committee, and I'll leave the regulatory matters to those with expertise in those areas.

We have four major objections to the preemption of state tax authority found in H.R. 4129. It discriminates against other providers of voice communication services and represents a considerable fiscal cost to the state governments. It runs completely counter to the country's established system of federalism and no case has been made for preempting state and local tax authority. Our reasoning is as follows.

First, Voice over IP is an exciting new technology. It's always tempting to want to nurture a new product, but in doing so you must not forget existing and competing products. One of the primary goals of tax policy is to treat similar taxpayers and similar goods and services in a similar fashion. Government should not choose the winners and losers in the marketplace through tax policy.

One thing is clear. Preempting state taxation of Voice over IP services will put land phone services and wireless phone services at a competitive disadvantage. The technologies are different but they are functional equivalents. All three industries provide voice communication services. All three and those that will emerge in the future should be taxed in a similar manner. Preempting state taxing authority for prospective Voice over IP is 180 degrees in the wrong direction.

Secondly, state and local governments currently collect about $10 billion annually on sales of telecommunication services. The Congressional Budget Office has estimated that preempting the taxation of Voice over IP could reduce state revenues by at least $3 billion per year within five years, and that may be, as the chairman said in his opening remarks, an underestimation of the growth of Voice over IP. And we anticipate that the preemption would also accelerate the growth of Voice over IP and quickly lead to the loss of much of the remainder of the $10 billion.

Beyond that, it's possible that H.R. 4129 as written would also prohibit the states from collecting some substantial part of the $7 billion we now collect in property income and sales taxes from existing telecommunication providers as assets are shifted to Voice over IP. In short, preempting the taxation of Voice over IP services will have a major and adverse impact on state and local fiscal systems, constitute a de facto repeal by the Congress of a source of taxation available to state and local governments for more than a century.

Third. Broad preemption of state tax authority to tax Voice over IP services represent a radical departure from historical practice where the states and federal government were sovereign entities with the right to tax. Congress has heretofore generally limited preemption of state and local taxation to our situations where there's been excessive reporting or a-reporting burden or a compelling need for uniformity.

Finally, not only is this a uniquely broad preemption, no evidence suggests that there's a compelling national interest in eliminating the state taxation of the technology. There's certainly not been a showing of the need for preemption on the basis of complexity or lack of uniformity. There may indeed be bona fide issues that need to be resolved on how state and local taxes should be applied to Voice over IP services. Any new type of business creates the need for new regulations and policy adjustment.

It certainly seems excessive to preempt the better part of an entire tax from the theory that there may be issues that need to be resolved. Any issues can best be dealt with through an honest and constructive dialogue affecting all-involving all affected parties.

And, in conclusion, Voice over IP services hold significant potential to improve our society. Congress can promote competition, preserve state authority and protect the public interest by refraining from any policy that unnecessarily preempts state and local taxing authority, discriminates against traditional voice communication providers, and disrupts state and local fiscal systems.

Thank you.

REP. CANNON: Thank you, Mr. Cordi.

We're on a remarkable roll here where three out of three witnesses have done under five minutes.

MR. JAMES KIRKLAND: I think the rule means I get that much time to myself now. Is that the --

(Laughter.)

REP. CANNON: Well, depends on what you say. (Laughter.) You keep us interested, you'll probably have a long time. Thanks. Mr. Kirkland, please go ahead.

MR. KIRKLAND: Good morning, Chairman Cannon and Congressman Chabot. Thank you for offering me the opportunity to provide Covad's perspective on Voice over IP and how best to ensure that this exciting new technology is rolled out as rapidly as possible.

The Judiciary Committee's oversight in this area is as important today as it has ever been in light of recent activity in the D.C. Circuit. And, frankly, customers like Covad who have invested around the 1996 Act in competitive businesses, investing hundreds of millions of dollars in facilities, at some point start to feel like there has been kind of a bait and switch. In January, I read the Trinko decision, where the Supreme Court discussed how the role of regulation perhaps reduced the importance of antitrust scrutiny.

And two months later we have a major court decision that essentially removes fundamental elements of the regulatory scheme and we're wondering, you know, where does the buck stop? We need antitrust enforcement. We need rigorous antitrust oversight. We also need market opening regulation to facilitate the introduction of new competitive technologies.

I think in the Voice over IP area, this is a very exciting technology but it's easy to get lost in terms of what it means in the marketplace and competition. And the new services that are in the marketplace, companies like Vonage and AT&T's CallVantage services, are essentially what we call applications or software. They operate on a computer but they do not directly interrelate with the underlying broadband network. These applications or software programs can be delivered over any kind of broadband network, and the providers who provide these services, by definition do not control the underlying transmission facilities that these services ride over.

They are like a web browser or any other application that rides over the Internet. They are simply software, and the underlying transmission facilities are provided by other the phone companies via DSL, by companies like Covad over DSL, by cable companies over broadband facilities.

This is a critical point because every time you hear about a new technology, new forms of competition, there is a big emphasis on revisiting the need for underlying regulation of bottleneck facilities. The local phone network remains the one ubiquitous set of loops that connects all homes and all businesses in this country. While you hear a lot about new technology, for example, the cable companies, they predominantly serve residential areas. They do not serve the small businesses of this country. All the new technologies you hear, broadband over power line and broadband wireless, are many years away.

So for the foreseeable future, to the extent that you want innovation and competition, companies like Covad will still need to access that ubiquitous network of loops in order to provide our services. In addition, you know, the history of innovation is driven not just by the software or the application, but also the network. Software has an area in which it can operate and function, but if you can combine innovation and software with innovation in the network, you will have a much better, more accelerated introduction of advanced features, more of a productive spiral of innovation.

And so, for example, Covad is able in the Voice over IP arena not just to provide an excellent software package that provides all the exciting features that we've been talking about: an ability to dial phone calls off your computer, a single inbox that has all of your voicemail, e-mail and faxes in a single inbox, an ability to control those features, to forward calls to different numbers on the fly, so if you're going somewhere different for a weekend. And in order to do that, however, we're also able to protect the voice quality of the service that goes over that line because we control our network.

I think-I would just point out, you know, Voice over IP is here. Covad is launching the service in 100 cities. We recently had our launch party in Washington and we expect to be nationwide by the end of this year. We raised $125 million in new capital to fund this rollout, and we are very excited about this technology. But pro- competitive market opening regulation still has a very critical role to play.

I think-one other final point is I think the history of innovation of this country shows that while large companies have been a source of innovation, small companies have been a very important source of innovation as well. So it's critical that this committee, via its oversight as well as the legislative process, preserve those competitive alternatives, and we appreciate your attention to these issues. I look forward to your questions.

REP. CANNON: Thank you, Mr. Kirkland.

The chair recognizes the gentleman from Ohio, Mr. Chabot, for five minutes.

REP. CHABOT: Thank you, Mr. Chairman. Unfortunately, I have a flight in less than an hour, and security being what it is nowadays, one never knows how long it's going to take to get through security. So I will yield my time to the chairman to grill the witnesses here this morning. And I want to thank them for their very interesting and informative testimony. And my staffer is here as well, so we'll be following very closely and look forward to working with all of you in the future on this important technology. Thank you. I yield to the chair.