TESTIMONY OF JOHN J. LANGHAUSER

CHIEF COUNSEL, CONSUMER SERVICES GROUP, AT&T CORP.

 

BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

 

REGULATORY ASPECTS OF VOICE OVER INTERNET PROTOCOL

July 23, 2004

 

 

Mr. Chairman and Members of the Committee, 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 the key market segments -- large enterprises, call centers, small offices, teleworkers, and residential users.  We’ve been delivering Business IP services since 1997, and in March 2004, AT&T launched its residential VoIP service, known as AT&T CallVantagesm Service.  Today it is offered in 32 states and Washington D.C. -- that’s 100 major markets in less than four months.

VoIP is the convergence of voice and data, with the potential to bring choice and innovation to the telecommunications marketplace.  If allowed to grow unimpeded by legacy regulation, it will offer consumers an increasing array of advanced features not available today to enhance ways of communicating and simplify busy lives. 

VoIP will also contribute significantly to the business world.  Teleworkers using VoIP will be far more productive and successful at their work.  VoIP will bring the kind of advanced voice and data service now available only to Fortune 500 companies within the reach of small and medium-sized businesses.  Much of Silicon Valley is now in the IP value chain and will benefit from an IP explosion in this market.  The resulting productivity gains can, in turn, drive broader economic growth and raise standards of living for all Americans.

These benefits will only emerge, however, if policymakers act promptly to limit regulation to a light-handed regime that allows VoIP to develop free of burdensome regulation at the federal, state or local level.  Imposing today’s inflated access charges on nascent VoIP providers would severely impede the growth of VoIP.  VoIP providers are already paying substantial compensation to local exchange carriers for the right to terminate traffic on their networks.  They should not have to subsidize their established competitors as well.  With respect to intercarrier compensation, the priority should be on reform rather than burdening innovative new services and technologies with an outmoded regulatory model heavy with subsidies.

VoIP seeks only the favorable regulatory treatment that other emerging voice technologies have received.  Relieving wireless carriers of much incumbent economic regulation led to amazing increases in investment, innovation, and consumer adoption.  While the FCC authorized commercial cellular services in 1981, in 1992 there were only nine million subscribers.  It was only when Congress empowered the FCC in 1993 to forbear from imposing legacy regulation on cellular providers and made significant additional spectrum available for their use, and the FCC exempted them from tariffing and entry and exit regulation, that wireless use exploded.  By the end of 2002, there were 141.8 million subscribers nationwide.

Many questions regarding whether to foster VoIP’s emergence as a competing technology or saddle it with legacy wireline regulation and stifle its development are currently before the FCC.  Unless and until Congress acts, we believe it is incumbent on the FCC -- indeed, consistent with its congressional mandate -- to take steps to establish an appropriate regulatory framework that encourages investment and innovation.  The FCC’s unreasonable delays to date in resolving even the most preliminary regulatory issues surrounding VoIP do not meet the basic requirements of sound administrative procedure.

Firm resolve in enforcing the pro-competitive policies of the 1996 Act is a necessary first step on the path to VoIP.  Business cases based on a “build it and they will come” approach to deploying mass-market local facilities have been almost uniform failures. Congress recognized this when it passed the 1996 Telecommunications Act and provided for resale and the unbundled network elements platform (UNE-P) to enable carriers to develop local subscriber bases which would support a migration to building their own local facilities. In both the business and residential markets, however, facilities-based service requires a significant concentration of demand to be economic.  To the extent multiple networks can ever economically compete, a significant customer base is needed to justify network deployment and reduce the risk of such deployment.  Today, AT&T provides local service to more than 4.3 million residential lines and 4.5 million business lines, including 1 million small business lines.  We have done so through a combination of facilities-based entry -- we have invested billions of dollars in our own local facilities since 1996 -- and the lease of Bell network elements.

 In the wake of the regulatory certainty generated by the U.S. Supreme Court TELRIC decision and the highly contested FCC Triennial Review announcement in February 2003, AT&T entered local service in thirty-seven additional states for a total of forty-six states.   However, in view of the regulatory uncertainty generated by this same Administration and FCC’s decision not to appeal the D.C. Circuit reversal of the February 2003 order, AT&T has had to re-assess the business case for local and long distance residential markets.  The re-introduction of regulatory uncertainty has strangled mass-market local competition in its very infancy.    

AT&T strongly believed that the D.C. Circuit decision is both wrong and flatly contradicts Supreme Court precedent, but the Administration refused to appeal it.  The Bell companies’ refusal to negotiate reasonable interconnection and leasing agreements in the wake of that decision has left AT&T no choice but to stop incurring the costs to solicit new local phone customers in its residential markets.  With the Bell companies poised to raise wholesale rates for UNE-P as early as November, we will simply not be able to provide a bundle of local and long distance services economically and build the customer base that so greatly facilitates our VoIP deployment. 

Without appropriate legislative and regulatory treatment, VoIP could develop into yet another technology controlled by the Bells.  Without competition, the Bells may digitize voice but have no incentive to develop the myriad software applications for advanced and converging features that truly promise to change the way we communicate.  Remember that these are the same companies that held back the deployment of DSL services to residential customers for some ten years so customers would have to take their other, higher priced services.  Only when forced by competition, in that case the deployment of broadband Internet connections by cable operators and competitive carriers Covad and Rhythms, did the Bells finally introduce mass-market, high-speed Internet access service.  Similarly, without the threat of losing customers to a VoIP rival, the Bells will have no incentive to invest in and deploy this new technology or the rich array of features it is capable of providing.

 The prospects for competition will be thwarted, if the Bells are allowed to continue such anticompetitive practices as refusing to sell their broadband service to customers that purchase voice service from a competitor, or requiring their broadband customer to purchase a local exchange line as well.  The Bells’ ability to restrict broadband customers from subscribing to anyone else’s voice services has attracted widespread attention and many states have sought to prohibit these anticompetitive practices -- but they continue.  Unless we and other competitors are allowed -- quickly -- to fairly compete for voice customers, we will not be able to invest in VoIP, and VoIP will become just another Bell-controlled technology. 

Legislation proposed by Chairman Sensenbrenner and Congressmen Conyers  would greatly further the goal of competition and protect against the incumbents’ anticompetitive practices by reaffirming the application of the antitrust laws to the telecommunications sector.  It would prevent the Bells from attempting to perpetuate their monopolies by unlawful tying or refusing to share network facilities with competitors at reasonable prices.  AT&T strongly endorses this legislation.

            Let me provide more detail on each of these points.

VoIP Holds the Promise of New Choices and More Capabilities

 

VoIP holds the promise of choices and capabilities far beyond today’s circuit-switched offerings.  It enables consumers to enhance and tailor their communications services to their needs and lifestyles at competitive prices.  It very well could be the “killer app” to drive widespread broadband adoption for which we have all waited.  It could also be an important economic driver for our nation.

AT&T fully intends to lead the VoIP revolution for businesses and consumers.  We have invested heavily to upgrade our total network, including some $3 billion in 2003 alone, and we have already met our goal of providing VoIP service in the top 100 markets in the country this year.

With VoIP, voice service is just another “hosted application” like e-mail, letting customers take their phone numbers wherever they go and access connections over any device, such as a standard home telephone, wireless phone, or computer.  AT&T’s consumer offer, AT&T CallVantagesm Service, for example, already includes a host of new advanced features and the ability for consumers to dynamically tailor and control their feature settings via website or telephone any time day or night as often as they want.  Advanced features include advanced call forwarding features and “do not disturb” options that enable consumers to program the service so that the phone answers to their needs instead of the other way around.  AT&T CallVantagesm Service provides subscribers a “Personal Call Manager Web Site,” which gives subscribers complete, dynamic control over their answering, voice mail and other capabilities.  Subscribers can check their voicemail from their computer and forward information as a “talking” e-mail.  Innovations, and the resulting benefits to consumers, will only increase as device manufacturers, network operators, service providers and application developers take full advantage of the ability to integrate voice, data and advanced computer capabilities.

            In the IP environment, voice services can also be provided much more efficiently.  IP technology allows for more efficient routing of calls than traditional circuit-switching.  These efficiencies enable more innovative service packages.  Current VoIP offerings allow customers that have a broadband connection to place unlimited calls anywhere in the country for a single, low monthly price.  The Alexis de Tocqueville Institution concluded earlier this year that government at all levels could save $3-10 billion annually -- up to 60% of their current phone bills -- by replacing circuit-switched service with VoIP.  You should not, however, think of VoIP as “cheap phone service.”  It promises to be lower-cost, yes, but with a host of new communications management features and options that go well beyond today’s “plain old telephone service” (“POTS”).

A “Hands-Off” Approach Is the Appropriate Regulatory Approach for VoIP

Allowing VoIP to develop in the marketplace is a critical step to bringing this Nation into the digital age.  AT&T welcomes the fact that many Members of Congress support a “hands off” approach to VoIP and have introduced legislation that would bring the benefits of competition and innovation to the telecommunications marketplace.  Congressman Pickering, for example, has proposed a deregulatory approach to VoIP that acknowledges the need to reform the current subsidy system and allow this nascent service to flourish.

Fundamentally, VoIP legislation must recognize that because the Internet is global in nature and these services will be deployed nationwide, a federal framework makes the most sense.  Forcing U.S. VoIP providers to develop 50 different varieties of VoIP services to comply with a patchwork of potentially inconsistent state regulatory burdens could hinder their development.  Continuing regulatory uncertainty as to federal versus state regulation of VoIP, or worse yet, the regulatory uncertainty that would accompany implementation of 50 different regimes to regulate VoIP, would inevitably impede investment, in direct opposition to the federal policy of creating a regulatory framework that promotes the growth and development of broadband services.  Indeed, recognizing the critical importance of a uniform, nationwide deregulatory environment, the Pickering bill prohibits even the FCC from regulating VoIP applications except as specifically authorized. 

Such an approach will be critical to VoIP’s ability to lead the United States’ broadband revolution:  the United States’ broadband penetration lags behind that of a number of other countries.  Many of those who have higher rates of broadband penetration have recognized that allowing VoIP to flourish will contribute to a positive economy and allow them a competitive edge in the global marketplace.  The United States, too, must protect its economic interests by abandoning outdated policies favoring and protecting incumbent revenue streams.

Allowing emerging VoIP services to develop free of unwarranted, legacy regulation allows carriers to design the service to respond to customer needs and interests, and to remain flexible in their business plans as customer preferences emerge, rather than be bound by a government-dictated vision of what the service should include and what is a benefit to consumers.  As FCC Chairman Powell stated on February 8, 2004:

the case for government imposed regulations regarding the use or provision of broadband content, applications and devices is unconvincing and speculative.  Government regulation of the terms and conditions of private contracts is the most fundamental intrusion on free markets and potentially destructive, particularly where innovation and experimentation are hallmarks of an emerging market.

 

The wisdom of this approach was confirmed recently -- in reverse -- when a new local VoIP provider concluded it could not stay in business in any of the states in which it had been operating when faced with an order from Washington state regulators to register as a telephone company and comply with the same laws as other long distance companies (including the payment of access charges).  Regulators must be able to approach VoIP service flexibly if they expect VoIP to bring its promised benefits to consumers and competition.

            We agree with those who’ve said that providers of VoIP services must meet important social policies.  Providing access for the disabled, enabling public safety (911) response, and cooperating with lawful requests for information from law enforcement are issues that the industry can and is working to resolve, and AT&T is taking a lead in these efforts.  While government has a legitimate role in ensuring that these things get done, it should refrain from regulating this new service in these or other areas in the absence of a demonstrated failure on the part of industry to act appropriately.  We may also need some flexibility and reasonable transition periods to achieve these policy goals, in recognition of the fact that IP-enabled services present different technical and operational issues than those considered when the legacy common carrier regulations were originally developed.  Nonetheless, we believe that the enormous flexibility and power of VoIP promises to address these issues in ways superior to current circuit-switched technology.

Other legacy regulations, however, will require substantial revisions before they can or should be applied to VoIP.  The universal service and intercarrier compensation schemes are irremediably broken and indeed, no longer make sense even in the context of the traditional, circuit-switched wireline telephone services for which they were developed.  Prompt attention to these fundamental flaws in existing regulation is urgently needed so that IP-enabled services are not burdened with costly and outdated, broken regulatory schemes that would prevent VoIP services from reaching their potential.

            Let me emphasize that nothing about VoIP threatens universal service.  The problem with the universal service fund (USF) is that it is still supported by a shrinking base of interstate revenues for traditional telecommunications services.  A growing fund with a shrinking base cannot be sustained.  It’s long past time for the universal service systems in this country to be reformed, and we support VoIP being part of the broader reform of the USF system.  We think VoIP providers should contribute to a reformed universal service system -- in a sustainable, fair, and nondiscriminatory manner.

AT&T has proposed a contribution system to the FCC that would replace the current revenues-based system with a numbers/capacity-based system that is fairer and more sustainable.  Under our proposal, providers would pay a flat-rated charge for each assigned telephone number that maps to a unique end-user’s service.  Services known as “special access services” would also be assessed a flat-rated charge based on the capacity of the service.  Such a system would be competitively neutral, and would provide a solid foundation for the fund because the use of numbers is increasing.  Moreover, VoIP providers would be fully included, since their service nearly always uses traditional phone numbers -- as would future technologies, which are likely to retain the use of numbering.  The Commission has full authority to implement such reforms -- but it has yet to do so.  In fact, it has delayed action on every major VoIP issue it has confronted thus far.  It took the FCC 18 months to decide the merits of a petition AT&T filed -- and nearly as long to rule on a similar one filed by pulver.com -- regarding the regulatory consequences of offering VoIP services.  Such delay fails to meet basic notions of fairness in administrative procedure -- and harms competition.  Carriers need clarity and predictability in the marketplace if they are to make the risky investment needed to make VoIP widely available.

            Especially unworkable and in need of attention are the Commission’s vastly outdated access charge regulations.  The access charge scheme was developed decades ago to ensure that whenever a long distance company used the local network, it would subsidize local service by paying grossly inflated rates to the local carrier.  While there was much in this framework to which one could object, it remained workable as long as local carriers and long distance carriers operated in separate markets.  Its infirmities became apparent and unsustainable when those carriers entered each others’ markets, and even more so when wireless companies and ISPs became the largest users of access minutes.  For that reason, eight years ago, Congress ordered that implicit subsidies, including those in access charges, must be eliminated.  Unfortunately, they still remain in place eight years later, and the FCC’s long-promised overhaul of its intercarrier compensation regime has yet to occur.  While Chairman Powell commendably opened a proceeding examining needed revisions as one of his first acts as Chairman, that docket remains unresolved more than three years later.

Now, the emergence of VoIP services dramatically underscores the urgent need for the Commission to meet its responsibilities under the APA and complete intercarrier compensation reform.  Whatever the historical wisdom of requiring interexchange carriers to subsidize through inflated access charges local exchange carriers operating in a different market, it makes no sense to require nascent VoIP providers to subsidize the monopoly local exchange carriers against whom they will be directly competing.  VoIP providers collectively serve only several hundred thousand customers, while the Bells serve nearly one hundred million.  Having VoIP providers subsidize the incumbents cannot be the right answer.  No one demanded that the auto industry subsidize the buggy manufacturers, or the computer industry the typewriter providers, or email the post office.

The far better course is comprehensive reform of the intercarrier compensation regime to eliminate market distortions and opportunities for regulatory arbitrage.  Nearly every segment of industry agrees that there is a need to move to a rational system in which all traffic is exchanged under the same compensation rules.  Even OPASTCO -- the Organization for the Promotion and Advancement of Small Telecommunications Companies -- acknowledges the need for intercarrier compensation reform, although its members directly benefit from current law.  In a hearing before the Senate Commerce Committee on June 16, 2004, Arturo Macias, current Chairman of OPASTCO, testified that although it was important for rural carriers to be able to recover their costs of providing access to their networks, current intercarrier compensation rates are not cost-based, and OPASTCO would not oppose their reform. 

Until that reform occurs, however, these legacy access charges should not apply to IP-enabled services, even on an interim basis.  Even Qwest agrees with us that providers using IP at either the origination or termination points of telephone traffic should not pay access charges, even if the traffic at some point traverses the public switched telephone network.  The imposition of above-cost access charges on IP telephony would radically alter the economics of providing VoIP services and would severely impede the development of those services.

Contrary to the Bells’ claims, VoIP providers do not get a “free ride” when they don’t pay access charges.  To the contrary, VoIP providers typically purchase what are known as Primary Rate Interfaces (“PRIs”) -- a type of high-speed line -- or other local business lines to connect to the public switched telephone network, and they pay for termination as an enhanced service.

AT&T agrees that affordable service needs to be maintained in high-cost areas of the country.  Applying the legacy access charge regime to VoIP, however, is not the way to achieve this result and would prove counterproductive and market-distorting.  It simply slows the deployment of new and desirable technologies while driving users away.

*                      *                      *

Today we are at a crossroads where we must call upon your leadership.  If VoIP is to deliver on its promising potential -- and offer something truly different in the marketplace -- then it cannot be treated and regulated like plain old telephone service.  We are asking for your support to keep that from happening, so that Americans can finally realize the long-promised benefits of widespread competition and the innovations promised by VoIP.

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