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Hearing Exhibit 4 - Bullock Testimony



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  • 1. NUSF-40 - Tom Bullock Testimony - Dec. 8, 2004 Introduction 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 Fund. 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. 1 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. 1
  • 2. 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 telecommunications. 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 2 47 USC 157 (46). 3 47 USC 157 (43). 4 47 USC 157 (20). 2
  • 3. communications networks that are relevant here. These are listed on the board to my far left. 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 5 See http://www.lexisnexis.com/anniversary/30th_timeline_fulltxt.pdf. 6 See http://beef-mag.com/hughes/beef_years_onfarm_computing/. 7 See http://en.wikipedia.org/wiki/Prodigy_(ISP). 8 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/. 9 See http://encyclopedia.thefreedictionary.com/History%20of%20the%20Internet. 3
  • 4. 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 10 Id. 11 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. 4
  • 5. 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 next year.15 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. 12 See Brand X Internet Services v. FCC, 345 F.3d 1120 (9th Cir 2003). 13 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). 14 AT&T v. City of Portland, 216 F.3d 871, 880 (9th Cir. 2000). 15 See http://www.latimes.com/business/la-120304internet_lat,0,4586378.story?coll=la-home-headlines 5
  • 6. 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 Nebraska law.16 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 16 See 47 U.S.C. §157 (43), (46) and Neb. Rev. Stat. §86-117 (Cum. Supp. 2002). 17 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). 6
  • 7. 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 approach. 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 IP network. 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. 18 See 47 USC 254(f). 7
  • 8. 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 19 See 47 USC 230(b)(2). 20 See Comments of the Rural Independent Companies filed in Application NUSF-40, pp. 3-5. 21 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, FCC 04-267. 22 Id., note 46. 8
  • 9. 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 otherwise. 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 23 Id., para. 46. 9
  • 10. 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 network access. 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. 10