NUSF-40 - Tom Bullock Testimony - Dec. 8, 2004
Good afternoon, Mr. Chairman, Commissioners. It's an honor to appear before you
today. My name is Tom Bullock. As a Consultant with TELEC Consulting Resources,
I'm here today to speak on behalf of twenty-two rural Nebraska telecommunications
companies1 on the subject of Voice over Internet Protocol services - or "VoIP" services -
and more specifically on the question of whether the providers of VoIP services in
Nebraska should contribute to the Nebraska Universal Service Fund.
First, on behalf of the Rural Companies, I want to express our appreciation for the
initiative the Commission is showing by opening this docket and investigating this
question. Voice over Internet Protocol can be a rather complicated issue, and we applaud
you for taking it on. I hope that my remarks here today can shed some light on several
important aspects of this issue.
As an overview of our general position, let me just say that we do believe some aspects,
or some portions of VoIP service are properly characterized as intrastate
telecommunications service, and are therefore subject to an NUSF surcharge assessment.
Furthermore, we believe that assessment of the intrastate telecommunications portion of
VoIP service will be, in the long run, an important component of the sustainability of the
Overall, the primary question being addressed in this docket is whether providers of VoIP
services should pay into the NUSF. From our perspective, a useful framework for
approaching this ultimate question is provided by four key issues. These are listed on the
board next to me, and I want to take some time and address each of them at some length.
We believe the four key issues are these:
Number one: Is VoIP service a telecommunications service; or is it an information
service? Our view is that the transmission component of VoIP service is a
telecommunications service. Number two: Does it make sense to regard some portion of
VoIP service as intrastate? As I'll explain in a moment, we believe it does. The third
issue: How do you identify which entities involved in the delivery of VoIP traffic are
actually providing a telecommunications service? Our approach is simply to identify
those entities that are offering, to the public, for a fee, transmission of user information.
Arlington Telephone Company, The Blair Telephone Company, Cambridge Telephone Company,
Clarks Telecommunications Co., Consolidated Telco, Inc., Consolidated Telcom, Inc., Consolidated
Telephone Company, Dalton Telephone Company, Inc., Eastern Nebraska Telephone Company, Elsie
Telecommunications, Inc., Great Plains Communications, Inc., Hamilton Telephone Company, Hartington
Telecommunications Co., Inc., Hemingford Cooperative Telephone Company, Hershey Cooperative
Telephone Company, K & M Telephone Company, Inc., Nebraska Central Telephone Company, Northeast
Nebraska Telephone Company, Rock County Telephone Company, Southeast Nebraska Telephone
Company, Stanton Telecom, Inc., and Three River Telco.
And the fourth: What is the Commission's authority to assess the NUSF surcharge on
VoIP services? We believe that, because some VoIP service providers do offer
transmission of user information for a fee, between end points that lie within the state,
those entities are indeed providing an intrastate telecommunications service, and that the
Commission therefore has the authority to assess the surcharge on the intrastate portion
of those providers' VoIP services.
I. Is VoIP a "telecommunications service" or an "information service"?
The first issue - whether VoIP is a telecommunications service or an information service -
is probably the toughest one, mainly because people seem to hold such strong views on
opposite sides of the matter. We agree with the vast majority of parties who look first to
the definitions of these terms as specified by Congress in the 1996 Telecom Act.
Federal law defines "telecommunications service" as:
… the offering of telecommunications for a fee directly to the public, or to such
classes of users as to be effectively available directly to the public, regardless of
the facilities used.2
And "telecommunications" is defined in the law as:
… the transmission, between or among points specified by the user, of
information of the user's choosing, without change in the form or content of the
information as sent and received.3
On the other hand, "information service" is defined as:
… the offering of a capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing, or making available information via
telecommunications, and includes electronic publishing, but does not include any
use of any such capability for the management, control, or operation of a
telecommunications system or the management of a telecommunications service.4
Simply put, telecommunications is the transmission of user information.
Telecommunications service is the transmission of user information for a fee.
Information service concerns the use or manipulation of information via
Now, some of the parties that filed Comments in this docket argued that VoIP services,
or, more precisely, their particular VoIP services, are information services, and not
telecommunications services. Before we look at their arguments, I'd like to take just a
few minutes and mention three different kinds of computer networks, or data
47 USC 157 (46).
47 USC 157 (43).
47 USC 157 (20).
communications networks that are relevant here. These are listed on the board to my far
A. Enhanced Services Networks
First we have, or used to have, a bunch of what I'll call "enhanced services networks"
- the kind that were around in the 1970s, '80s and early '90s, before the Internet took
over and eclipsed everything. The feature of these service networks I want to
emphasize is that, generally speaking, each of them was built around a central
mainframe computer, or maybe a small group of computers, that housed the real
value of the service. The databases, search tools, calculating software - pure
information services - existed on the central computer. Their associated networks
were built for the purpose of enabling users to connect to the central computer, so
they could use the information services residing on those computers. If people
wanted access to the information service, they had to use the associated network to
reach it. If people wanted to exchange information between them, they had to do it
through the central computer and its network. One of those services was Lexis, a
legal research tool operated by Mead Data Central, now called LexisNexis. In 1975,
Lexis was one of 300 so-called "on-line public access databases."5 A second
example, closer to home, was Nebraska's Agnet, which, despite the word "net" in its
name, actually existed - as an information service - on an IBM mainframe in the State
Capitol Building.6 The Prodigy service, offered through a joint venture between IBM
and Sears, was another such pre-Internet on-line service.7 Each of these information
services had its own enhanced network associated with it.
B. The Internet
The second type of network is the Internet itself. The Internet is a unique network.
Just like there's only one worldwide public telephone network, there is only one
Internet. What is The Internet? Well, it's really a collection of networks, hundreds if
not thousands, of separately owned and operated networks, all interconnected so they
can exchange traffic between them, and consequently between any two end-points
anywhere in the world. The Internet has two main defining characteristics. First, it
uses the Internet Protocol, which I'll have more to say about in a minute, and second,
it uses a uniform addressing scheme administered by globally recognized authorities.8
Up until the mid-80s, the Internet was really a government creation; commercial use
of it was actually forbidden.9 The free, open, commercial Internet as we know it
today has existed for only about ten to fifteen years. In the late 1980s the first ISPs
Global Internet addresses are administered by the Internet Assigned Numbers Authority; see
http://www.iana.net/. Internet addresses for North America are administered by the American Registry for
Internet Numbers; see http://www.arin.net/.
were created, and in 1994 commercial entities replaced the National Science
Foundation as the Internet's backbone.10
C. IP Networks Other Than The Internet
The third kind of network that's relevant here is a network that uses the Internet
Protocol - so it's called an "IP network" - but is not part of the Internet, because
neither does it interconnect with, nor does it share addressing space with, the public
Internet. For example, computers on a private IP network - reachable only from other
computers on that IP network - are not "on the Internet." The reason this kind of
network is relevant here is that the IP networks operated by facilities-based VoIP
service providers generally fall into this category. Their VoIP services are typically
provided over an IP network that is separate and distinct from the Internet. So it's
important to remember that not every IP network is The Internet.
Now, the reason I mention the old "enhanced services networks" with their central
computers is that they formed the backdrop for the FCC's Computer Inquiry decisions,
where the FCC articulated the distinction between "basic" and "enhanced" services. The
FCC recognized the intimate connection between the central computers and their
associated networks, and established the policy that there was this broad category of
enhanced services that utilized basic telecommunications services but that, in the form
that the total service package of basic and enhanced services was delivered to the end
user, the underlying basic service was inseparable from the enhanced service. And so the
total package was deemed by the FCC to be an enhanced service.
The Internet operates on a very different paradigm. There is no central computer
anywhere that houses the value of Internet service. Instead, what makes the Internet so
valuable is, to put it bluntly, that it is so dumb. The design of the Internet Protocol is
based on the idea of a network that would transport user information, unaltered, directly
from one end user to another. The network's value would depend on those end users to
develop innovative and useful applications - at the edges of the network. This idea is
known as the "End-to-End" design principle, and it is a major reason behind the amazing
success of the Internet.11 My point here is that the information value of the Internet is all
on its periphery - actually outside of the network, and, it is that way by design. The
enormous array of information resources, software downloads, games and other
interactive tools available via the Internet are not part of the Internet.
In the Comments they filed in this docket, AT&T and Vonage suggest that the FCC's
Computer Inquiry decisions regarding the "inseparability" of basic and enhanced services
should apply to the delivery of voice information over an IP network. They claim that
the information service component of their VoIP offering renders the entire service
Lemley, Mark A. and Lessig, Lawrence, "The End of End-to-End: Preserving the Architecture of the
Internet in the Broadband Era" (October 2000). UC Berkeley Law & Econ Research Paper No. 2000-19;
Stanford Law & Economics Olin Working Paper No. 207; UC Berkeley Public Law Research Paper No.
37. Download available from http://ssrn.com/abstract=247737.
package an information service. Implicit in this argument is the assumption that there's a
fundamental similarity between the "enhanced services networks" - that existed when the
FCC conducted its Computer Inquiries and established its policy of inseparability - and
today's Internet. Nothing could be further from the truth. There is a crucial distinction
between the old "enhanced services networks" and the Internet - namely, that those old
networks were focused on a central computer, while IP networks, including the Internet,
are not. In an IP network, the idea that the information sent over the network by an
application should be inseparable from the network transport contradicts the End-to-End
principle that is at the very heart of the Internet Protocol.
The Ninth Circuit Court of Appeals, in its 2003 Brand X decision, also rejected the idea
of inseparability with respect to cable modem service, finding that it contains both an
information service component and a telecommunications service component.12 That
decision vacated an FCC Ruling, issued the previous year, that had found cable modem
service to be strictly an information service.13 In the Brand X decision, the court relied on
its own precedent in AT&T v. City of Portland, where it determined:
... the transmission of Internet service to subscribers over cable broadband
facilities is a telecommunications service under the Communications Act.14
As we noted in our Comments, the Brand X decision has been appealed to the US
Supreme Court, by the FCC and by the NCTA - the cable industry association. And just
last Friday, the Court announced it had voted to hear both appeals, probably in March of
Another claim involves protocol conversion. Qwest and Vonage argue that because their
VoIP services involve protocol conversion they should be treated as information services.
Well, let's think about this "protocol conversion." What's being converted here is a bit-
stream. At a gateway, where the IP network and the telephone network meet, data from
IP packets is converted to a Time-Division Multiplexing format, and vice versa. Now,
think back to the definition of telecommunications, from the '96 Act. The words are
"transmission […] of information of the user's choosing, without change in the form or
content of the information as sent and received." We believe what Congress had in mind
as "information of the user's choosing … as sent and received," in the case of voice
transmission, was not a digital bit stream, but rather the sound as spoken by one party and
as heard by the other. In a phone conversation, users don't choose bit streams, they
choose words, and speak them.
See Brand X Internet Services v. FCC, 345 F.3d 1120 (9th Cir 2003).
See Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities; Internet
Over Cable Declaratory Ruling; Appropriate Regulatory Treatment for Broadband Access to the Internet
Over Cable Facilities, GN Docket No. 00-185; CS Docket No. 02-52, Declaratory Ruling and Notice of
Proposed Rulemaking, 17 FCC Rcd 4798, 4799 n.1 (2002), aff’d in part, vacated in part, and remanded,
Brand X Internet Services v. FCC, stay granted pending cert. (April 9, 2004), petitions for cert. filed, Nos.
04-277 (Aug. 30, 2004), 04-281 (Aug. 27, 2004).
AT&T v. City of Portland, 216 F.3d 871, 880 (9th Cir. 2000).
In summary, our view is that the essential behavior of VoIP service fits precisely with
the definition of telecommunications service as contained in both the '96 Act and in
II. Is a portion of VoIP intrastate?
Now I'd like to address our second key issue - whether it makes sense to regard some
portion of VoIP service as intrastate. One point I'd like to make on this issue is that the
legal and regulatory record holds a long series of decisions with a consistent theme: the
ultimate end points of a call determine the jurisdictional nature of the call.17 So, for
example, if we have a VoIP call from a broadband customer to someone with traditional
telephone service, the end points of the call would be the locations of those two people
during the call. The gateway location - between the IP network and the telephone
network - wouldn't matter. And the use of a telephone number - associated with a
particular rate center or area code - would have no bearing on the geographic location of
that broadband VoIP customer. This is because, with VoIP, the user need not physically
be at the location where his phone number is rated in order to use the service. In some
respects, from a jurisdictional perspective, this is not unlike wireless roaming.
Now, several Commenters claim that it's difficult, or impossible, to determine the
location of the end-points of a VoIP call. I'd just make a couple of observations on that.
First, the idea that, because an Internet user can be conducting several Internet
communications simultaneously, the far-end device with which each individual Internet
communication is being conducted has no geographic location, as though it had suddenly
disappeared from the face of the earth, simply doesn't stand up to rational scrutiny.
Second, it may well be true that some VoIP service providers have no mechanism in
place to identify the geographic locations of their users when they place calls, but the lack
of a recording mechanism doesn't mean that those users are not, in reality, physically
situated at a particular location when they place a call. Finally, although information
about users' geographic locations is not centralized in a manner that makes it easy to
classify VoIP calls as interstate or intrastate, that information does exist and could, in
principle, be collected, coordinated, and put to use in this way.
Now, we are not suggesting that every Internet transaction - or even every VoIP
connection - should be tagged as to whether it's interstate or intrastate. But we do believe
it is certainly feasible for periodic samples to be taken to establish reasonable estimates of
the proportion between the two, particularly for VoIP traffic. And in the meantime, as an
See 47 U.S.C. §157 (43), (46) and Neb. Rev. Stat. §86-117 (Cum. Supp. 2002).
See GTE Telephone Operators GTOC Tariff No. 1 GTE Transmittal No. 1148, Memorandum Opinion
And Order, CC Docket No. 98-79 ¶¶ 17-19 (October 30, 1998), recon. denied (February 26, 1999) (GTE
DSL Order), in turn citing Teleconnect Co. v. Bell Telephone Co. of Penn., E-88-83, 10 FCC Rcd 1626
(1995) (Teleconnect), aff'd sub nom. Southwestern Bell Tel. Co. v. FCC, 116 F.3d 593 (D.C. Cir. 1997);
Petition for Emergency Relief and Declaratory Ruling Filed by BellSouth Corporation, 7 FCC Rcd 1619,
1621 (1992) (BellSouth MemoryCall)); Southwestern Bell Telephone Company, CC Docket No. 88-180,
Order Designating Issues for Investigation, 3 FCC Rcd 2339, 2341 (1988) (Southwestern Bell Telephone
Company); NARUC v. FCC, 746 F.2d 1492, 1499 (D.C. Cir. 1984); United States v. AT&T, 57 F. Supp.
451, 454 (S.D.N.Y. 1944); New York Telephone Company, 76 FCC 2d 349, 352 (1980).
interim measure, we believe the Safe Harbor percentage split between interstate and
intrastate established by the FCC for CMRS traffic could be adopted for VoIP traffic, for
the limited purpose of universal service assessments. That percentage is currently 28.5%
interstate and 71.5% intrastate. Time Warner has essentially endorsed this idea in their
CLEC application C-3228 before this Commission, and we believe this is the best
III. How to identify VoIP "telecommunications service" providers?
Our third key issue is that of identifying which entities involved in the delivery of VoIP
traffic are actually providing a telecommunications service. This is important because
there will often be several different entities involved, especially in those hybrid calls that
have Internet Protocol on one side and the PSTN on the other. Some entities may be only
providing wholesale service to another entity. Some might be only providing an
information service. In our Comments, we laid out some examples of VoIP calls and the
multiple entities that can be involved. The guiding principle here is to identify those
entities that are offering, to the public, for a fee, transmission of user information.
Here we need to emphasize the distinction between the Internet and other networks that
use the Internet Protocol but are not part of the Internet, and the difference between a
VoIP service that rides over the Internet and one that rides over one of these IP networks
that is not the Internet. Vonage's service depends entirely on the public Internet and the
PSTN for its transmission capability; Vonage does not own any transmission facilities
itself, at least not in Nebraska. In order to use Vonage's service, customers must also
have their own broadband Internet connection, and it is through that broadband Internet
connection that Vonage's VoIP communication occurs. On the other hand, a facilities-
based VoIP provider such as Time Warner or Qwest will deliver VoIP traffic to its
customers over an IP network that not only rides over its own facilities but that is also
isolated from the Internet. The fact that it is transmitting user information for a fee puts it
squarely in the "telecommunications service" category. Furthermore, the fact that this
transmission occurs over a network that is not the Internet means that any special
consideration regulators give to the Internet would not apply to such an isolated, private
IV. What is the Commission's authority to assess VoIP service?
Our fourth key issue concerns this Commission's authority to assess the NUSF surcharge
on VoIP services. Here we look first to federal and state law. Section 254(f) of the '96
Act permits a State to adopt universal service regulations and to determine the manner in
which providers of intrastate telecommunications services "shall contribute […] to the
preservation and advancement of universal service in that State."18 Sections 86-323(4)
and 86-324(2)(d) of Nebraska law direct this Commission to require every Nebraska
telecommunications company to make an equitable and non-discriminatory contribution
to the NUSF. The Companies believe that a telecommunications company's choice of
network technology should not render it exempt from these contribution requirements.
See 47 USC 254(f).
There is a section of the '96 Act - Section 230 - that some parties have used to challenge
the authority of any commission, including the FCC, to regulate anything related to the
Internet. Specifically, they cite Section 230(b)(2), which reads as follows: "It is the
policy of the United States … to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services, unfettered by
Federal or State regulation."19 Section 230 is part of Title V of the Act, which is called
"Obscenity and Violence." Even a casual reading of the sections of law contained in this
part of the '96 Act clearly shows that this was never intended to address the kind of
economic regulation that is at issue with universal service. Every section of Title V deals
with some aspect of transmitted information - that is, content - and the degree to which
legislatures and regulators can sanction certain forms of expression. Section 230 is called
"Protection for Private Blocking and Screening of Offensive Material." It basically says
that law-makers cannot outlaw obscene material on the Internet, but that parents, schools
and libraries are free to block it if they choose. We strongly disagree with those who
seem to think that Section 230 puts the Internet into the realm of economic anarchy.
We also believe that an important part of the record for the Commission to consider here
is this Commission's own prior proceedings. In docket C-1628, the Commission posed
the question: "Should service providers using Internet protocol contribute to universal
service?" As we noted in our Comments in this docket, all parties except MCI - and that
would include US West, Sprint, AT&T, Aliant and a group of rural companies - at that
time expressed support for requiring telecommunications service providers using Internet
Protocol to contribute to the NUSF.20
At this point I'd like to add a note on the FCC's recent Order on the Vonage petition.21
The FCC found Vonage's VoIP service to be jurisdictionally interstate and preempted the
Minnesota Commission's authority to impose entry regulations on Vonage. While we
acknowledge that it may be reasonable to consider some VoIP services - particularly
those provided over the public Internet, such as Vonage's or Pulver's - to be subject to
exclusive federal jurisdiction with respect to market entry, we must emphasize that the
FCC's Vonage Order does not preempt this Commission from continuing to execute its
statutory mandate to preserve and advance universal service in Nebraska. In fact, the
FCC has left the question of universal service, among others, to be addressed in its IP-
Enabled Services rulemaking docket.22 We believe the appropriate model here is the
treatment of wireless carriers. They're not subject to state entry regulations, are
jurisdictionally interstate, and yet a portion of their revenues is treated as intrastate for
universal service assessment purposes.
Furthermore, we believe the FCC's suggestion in the Vonage Order that they would
similarly preempt a state's entry regulations, even in the case of a facilities-based VoIP
See 47 USC 230(b)(2).
See Comments of the Rural Independent Companies filed in Application NUSF-40, pp. 3-5.
See In the Matter of Vonage Holdings Corporation Petition for Declaratory Ruling Concerning an Order
of the Minnesota Public Utilities Commission, WC Docket No. 03-211, Memoramdum Opinion and Order,
Id., note 46.
provider,23 fails to account for the very significant differences between a VoIP service
where traffic is carried over the public Internet and one where traffic is carried over an IP
network that's not the Internet, but that's designed specifically for voice traffic and relies
on a transmission medium that's owned by the VoIP service provider itself or an affiliate.
As I said earlier: Not every IP network is The Internet.
Another recent development was the passage by Congress of the Internet Tax
Nondiscrimination Act - which basically extends, for another three years, the moratorium
on Internet taxes that expired in November of 2003. This new Act, which the President
signed into law last Friday, contains a new section 1107, regarding universal service
surcharges, which reads:
Nothing in this Act shall prevent the imposition or collection of any fees or
charges used to preserve and advance Federal universal service or similar
State programs-- (1) authorized by section 254 of the Communications Act of
1934 (47 U.S.C. 254); or (2) in effect on February 8, 1996.
This new law explicitly preserves the authority of state regulators to impose universal
service surcharges on telecommunications services.
V. Answers to specific questions posed by the Commission
Now, to the specific questions you've posed, in the initial NUSF-40 Order.
Questions one and two: We do believe that this Commission has the authority to assess
the NUSF surcharge on telecommunications services and only telecommunications
services. We believe the language in the NUSF Act is sufficiently clear on that issue. No
action by either the FCC or any court provides any reasonable basis to conclude
And to jump ahead to number four, we also understand the Commission's assessment
authority, as stated in its February, 1999 Order in the C-1628 docket, to be limited to only
intrastate telecommunications services.
Question three: The Companies believe the essential nature of the transmission
component of VoIP service so closely matches the '96 Act's definition of
telecommunications service that its classification as such is unavoidable. We believe the
appropriate standard for the Commission to use in deciding whether a particular entity is
providing a telecommunications service, and therefore subject to assessment, is to
determine whether it is offering, to the public, for a fee, transmission of user information.
All such entities should bill, collect and remit the surcharge.
Question five: Yes, we do believe that a portion of VoIP service is intrastate. As we
explained in our Comments, the Internet Protocol is, above all, an end-to-end addressing
scheme, and every IP address is associated with a specific piece of electronic equipment
Id., para. 46.
that certainly does exist at a real, geographic location. We believe the example of CMRS
carriers is the appropriate model here, and that a "safe harbor" percentage split between
interstate and intrastate traffic can be reasonably estimated, and later refined through
periodic or occasional sampling of actual VoIP traffic.
Number six, on whether the NUSF Act applies to VoIP service: Yes; to the extent that a
VoIP service constitutes or includes an intrastate telecommunications service, the entire
Nebraska Telecommunications Universal Service Fund Act applies to that service.
And finally, question seven, which deals with the eligibility of VoIP service providers to
receive support from the NUSF: Our view on this is that the framework the Commission
has established in the NUSF-26 docket - where the cost of physical access to a service
provider's network forms the basis for support allocations - should be embraced here.
When, and if, we would get to the point where broadband network access is deemed to be
a "universal service," we believe that the cost of providing that broadband network access
should constitute the basis for determining the support available to the providers of that
In summary, the Companies I speak for do believe that a portion of VoIP services -
specifically, the transmission component of any VoIP service - constitutes a
telecommunications service. And as a result, the Nebraska intrastate percentage of that
transmission component is subject to the NUSF surcharge. We also believe that action at
this time, by this Commission, to assess that portion of VoIP services, will set the stage
for the long-term stability of the NUSF, as consumers begin to migrate from traditional
telephone service to Voice over Internet Protocol.
That concludes my prepared statement.