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A. 1. a.(1)(a) i) a) I. 1. A. a.(1)(a) i) a)DocumentgTech InitInitialize Technical Style. k I. A. 1. a.(1)(a) i) a) 1 .1 .1 .1 .1 .1 .1 .1 Technical2,a5TechnicalTechnical Document Style)WD (1) . a6TechnicalTechnical Document Style)D (a) . a2TechnicalTechnical Document Style<6  ?  A.   a3TechnicalTechnical Document Style9Wg  2  1.   2'Ya4TechnicalTechnical Document Style8bv{ 2  a.   a1TechnicalTechnical Document StyleF!<  ?  I.   a7TechnicalTechnical Document Style(@D i) . a8TechnicalTechnical Document Style(D a) . 2H2Y \!!'"z,PleadingHeader for numbered pleading paperP@n   $] X X` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, Arizona!`#%N!  X` hp x (#%'0*,.8135@8:56Cty of PhxPhoenix Case Format3q> (h  p k`G 1  1 y!h'TTLddXh'y  1 ! 1 A,&L9&dd,& W X` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8: dddyb   \\ y %\dddy  k  # _ p^7D #HERITAGE REPORTING CORPORATION  W ! #Xu&_ x$&7/3XX#Official Reporters#Xw P7[hXP# 1220 L Street, NW, Suite 600 "Washington, D.C. #r(202) 6284888In Re:` `  hh# ) ` `  hh# ) REPORT TO CONGRESS ON ) UNIVERSAL SERVICE EN BANC ) Pages:` ` 1 through 105 Place:` ` Washington, D.C. Date: February 19, 199800*ZZ     X` hp x (#%'0*,.8135@8:0*H&H&@@Ԍ` `  MR. COMSTOCK: Thank you, Mr. Chairman. As a policy matter, I just would like to point out there seems to be a lot of concern that if you do something to bring internet into or internet access, more specifically, into a telecommunications service, you're suddenly going to impose massive amounts of regulation. I think that's only the result if the Commission fails to exercise its Section 10 forbearance authority. ` `  That section was added specifically in the 1996 Act in recognition of the fact that we were going to sweep in more people, and it allows you to craft a regime that's appropriate for the technology involved. The reason that it says that anybody who is providing a telecommunications service shall also be treated as a common carrier was to prevent large operators, like the ARBOCs, from simply saying, "I'm not a telecommunications carrier and not a common carrier," and suddenly getting out from all the existing rules and regulations. You were given the flexibility to do this. ` `  Let me speak briefly to two other points that were raised. There's obviously a lot of confusion about what the Internet is. I think as many of us have been involved in the debate over Internet taxation know, the internet is really simply a set of protocols. It is a means of transmitting information. That is used to interconnect a%?0*H&H&@@ large number of machines, as has been pointed out. ` `  The Defense Department pays for some of that. There is federal money going to pay for some of the rest of it even though these nets are being phased out. ` `  But I think the most important point for everybody here including the schools and libraries people is how do you reach that last mile. And the bottom line is packet switching is not more efficient for getting to the home. You've got a single circuit that's going there. And in most cases, nobody else is trying to use it. So the fact that you have packet switching is irrelevant. That's only important if you've got multiple pathways to the same location. ` `  So this efficiency argument that the internet advances is really a misnomer. The expensive piece of the network, the part that nobody is able to duplicate hence we have no competition today is that last mile. It's from the central office to the house. That's what universal service is supposed to support. ` `  And for the schools and libraries, I mean, that was an excellent presentation. We all support it. But how do your students get the internet to the home and where are we going to be five years from now if they continue to only get plain old voice service and can't get internet access at the home? You can't do much learning at home once you%@0*H&H&@@ know, if all you can do is get it at school. ` `  CHAIRMAN KENNARD: Ms. Dyson. ` `  MS. DYSON: Okay. I just want to make a couple of points. First, it's not strictly true in the end, the advantage of internet telephony is that you can use that single line to the home and get both voice and data simultaneously. That that's a great advantage. ` `  But what I really wanted I wanted to ask a question to which I'm not expecting a straight answer. But nonetheless ` `  (Laughter.) ` `   internet telephony basically has two benefits. One, it is in fact a more effective use of capacity because that's what packet switching is all about. But it also benefits from being out from under various regulatory requirements and access charges. It obviously the difference is much greater when you're talking about international telephony when the prices are much greater. ` `  But can you give us some sense of what the how much is due to the one and how much is due to the other? When we have a truly efficient marketbased pricing scheme for regular telephony, what will be the advantages of IP telephony? ` `  MR. EVSLIN: Yes, let me answer that. Today if both were on purely a marketbased basis, the cost of IP%A0*H&H&@@ telephony, the true engineering costs, might for similar services let's ignore the fact that it can be used for much better services that can't be provided might be as little as 25 percent better than for traditional circuit switching. ` `  But that's today because the technology with IP telephony is about is substituting computer power for bandwidth. And by Moore's law, we know that the price of computer power keeps getting cut in half every year and a half. So today's economics that favor IP telephony become much more favorable as we move forward. ` `  Also, as much more of the communications broadly (inaudible) is data communications, then the data network, even without this whole discussion, just gets bigger than the voice network. And so the economic advantage of piggybacking on the data network as opposed to having a separate voice network is much, much greater. And then of course there's this enormous potential for developing applications because voice and data are now in the same format and on the same network as each other instead of being on separate networks. ` `  To use to give you a straight answer to the first part of your question, there is a huge arbitrage advantage in international IP telephony that most of the savings comes from arbitrage. And that's not surprising%B0*H&H&@@ because most of the costs of international telephony come from the arbitrary accounting rate structure. ` `  That's not true in domestic telephony. And I would argue that it suits the U.S. public policy and FCC policy to take advantage of that arbitrage to drive the fat out of the accounting rate structure, both in traditional telephony and in IP telephony so the people can make cheaper international calls and so the balance of payment stops getting damages by the funny accounting that goes on around callback services. ` `  CHAIRMAN KENNARD: Do we have any other questions from the bench? ` `  COMMISSIONER POWELL: I would like to go back to the boring legal question for a second. To what extent and I guess this is really for you, Earl, I'm sorry but are we just quibbling over this definition because to what extent is it true that Congress has conferred to the Commission a fair amount of discretion in even if they are telecommunications carriers as to who contributes and who gets support? ` `  As you note yourself, the provisions speak of an evolving it's not very clear. It sometimes says evolving level. But if you go on to read, it really does suggest that there is an evolving definitional exercise in determining what services are eligible for support and that%C0*H&H&@@ the Commission in combination with the joint board is given the discretion to make those determinations and evolve them over time. ` `  So that even if we did as you suggested and then said that an internet service provider was in fact providing a telecommunication service, we would still have legal freedom to make a policy determination as to whether the maturity of those services have reached a point where we either want them to contribute or we want them to gain support. ` `  You, yourself, suggest some discretion by pointing to Section 10 forbearance. But I would potentially argue I don't even need that provision. You know, and even in one spot, you know, in 254(f), we're specifically given the power to decide who else can be required to contribute if we determine the public interest. ` `  MR. COMSTOCK: Well, as long as that person is a provider of telecommunications and I think I would argue that it's not a quibble because you the statutory definitions are specific. And as I said, some of this was the compromise that was reached between the house and the Senate as to how we were going to keep universal service within a contained amount of money. ` `  What concerns I think many people is if you decide that these enhanced service can never by definition be a%D0*H&H&@@ telecommunications service, then you're deciding something sort of so far down at the root of a tree that you never have those options that you just outlined later down the road. ` `  If they are in fact providing telecommunications service and I think some internet services are primarily the transmission of the user's information without changing the form or content those are telecommunications and therefore should be telecommunications services. ` `  If you if you allow them to overlap and be in there, then you do have some of that discretion. Under Section 10, you have the clear authority to forebear from applying any provision of the Act to a telecommunications carrier, class or class of services. But I think when it came to, for example, the contribution requirement, the hurdle for you would be a little bit higher because the statute specifically says you're supposed to contribute. ` `  Now, you could still find in the public interest and because of these other factors that are outlined in Section 10, you don't need to do that. But I think that you would have to make that exercise. ` `  As to some of the other decisions, for example, the common carrier regulations that people keep referring to, I don't think the hurdle is very high at all because while Congress has said, yes, they shall be treated as a%E0*H&H&@@ common carrier to the extent that they provide a telecommunications service, you can point back to the entire range of computer decisions and other things where you've already decided that these really are not common carrier services though they may in fact be telecommunications services under the Act. ` `  So I think the Act is structured in a way that gives you a little bit more flexibility. I don't think you have the flexibility under the evolving definition to decide that a service that you've announced today as an information service is later a telecommunications service. ` `  I think that's where you get yourself into real trouble. It's where as if you said, for example, on internet access, you said, yes, it's a telecommunications service, then you go through the four hoops that are in in (c)(1) 254(c)(1), you say, well, it's not available it's not subscribed to by a majority of residential subscribers. ` `  So therefore, it's out. We're not providing internet access as a basic supported service today. We may be tomorrow. And then when you jump down to the advanced services issue for schools and libraries, it's a nobrainer. You say, well, this is a service that is needed for schools and libraries and we're going to provide it because we don't have to jump through the same hoops as we do in (c)(4).%F0*H&H&@@Ԍ` `  But I will disagree with Howard. I don't think your interpretation of (c)(3) is correct. It says, services referring back to universal service which is an evolving level of telecommunications service. It doesn't give you the authority to jump out and say you can provide information services. Even (h)(2) is specific. It says, "access to advanced information services and telecommunication services." ` `  So I mean I think you are bound by the statute and that's why it's important that you go all the way back to the definitions at the root and look carefully at where you draw the line there. ` `  CHAIRMAN KENNARD: Let me follow up on the forbearance argument that you advanced. Assuming for the sake of argument that this agency, the federal jurisdiction were to deem internet services as telecommunications services and then forebear from this mountain of regulation on the theory that this is a evolving technology and we want to foster its growth. ` `  What assurances would we have though that state jurisdictions would not having seen that the federal jurisdiction has deemed these telecommunication services, then impose their own mountain of regulation thereby defeating the whole theory of the forbearance argument? ` `  MR. COMSTOCK: I would refer you to Section 10(e)%G0*H&H&@@ which specifically says, "State enforcement after Commission forbearance: A State Commission may not continue to imply or enforce any provision of this Act that the Commission has determined to forebear from applying under Subsection (a)." I think that covers it. ` `  And also I would point out that today you have it both ways with respect to information services. On one hand, in 1983, you said these were all interstate services; states can't touch them. And then on the other hand, you say they're a local service and therefore they don't have to pay access charges. So clearly that's survived various challenge and has existed. But I think more specifically, 10(e) protects you from exactly that possibility. ` `  COMMISSIONER POWELL: Should I be troubled though by Section 232(b)(2) which says the Act generally affirms the Commission's policy by noting that well, "The United State's policy to 'preserve the vibrant and competitive free market that presently exists for the Internet unfettered by federal or state regulation' "? I don't know any area that is more laden with regulation than being a common carrier subject to those provisions. It seems that's an utterly inconsistent statement. ` `  MR. COMSTOCK: I don't think it's inconsistent at all because, first of all, a policy statement does not trump the statutory requirements of the Act. I would point out%H0*H&H&@@ that earlier the House had specific language statutory language forbidding the Commission from regulating the internet. The Congress did not adopt that and never will adopt such a statement because blanket exemptions like that always get us into trouble. ` `  So you have that general policy statement out there. And that to me then gives you even more authority under Section 10 to point back and say here's the reason Congress has said we don't want lots of regulation. So we're frankly going to decide that these internet services are telecommunications services. But the only provisions of the Act that may apply may be the universal service contribution. ` `  Maybe it's the provision that protects customer privacy. It says you can't sell information that AOL or anybody else picks up. I mean, why shouldn't that apply?!!H!!HMaybe the provisions regarding disability access should apply. But, I mean, you can go through the Act and decide what you want. And frankly, 230(b)(2) gives you plenty of authority then to say in addition to all of the other reasons we may have cited, here's the policy statement by Congress saying we should minimize any regulation of the internet. ` `  But it doesn't trump the statutory language that says certain things are telecommunications. We knew about%I0*H&H&@@ the internet when we did the statute. And frankly, if you continue the basic and enhanced distinctions as you have them today, five or 10 years out there's going to be nothing that's telecommunications. So I fail to see how you would give any effect to the Act. ` `  And frankly, it has a huge impact on local competition. The statute is very specific. You get access for the provision of a telecommunications service, not a telecommunications service and an information service. So I think at some point, the Commission runs a grave risk of hurting the other provisions of the Act that were carefully structured if you go down this path of saying only this very narrow class of services is in fact telecommunications service. ` `  COMMISSIONER POWELL: But in the context of the provision that talks about evolving services, it does speak separately of telecommunications services and information services. I mean, in (c) I don't want to get hypertechnical but it says, "Evolving level of telecommunications services and the Commission shall establish periodically under this section taking into account advances in telecommunications and information technologies and services." ` `  MR. COMSTOCK: That's right, because again it's prefaced with the words "access to". And you want to have%J0*H&H&@@ access to. You may need for advanced information services, you may need large bandwidth capacity. That's where the statement in the report is completely consistent. It may include dedicated data links. You may need a huge pipe. And if that's what the Commission decides you need, that's fine. ` `  But again, it's it's there's a line drawn there. It's "access to". And as I said, to the extent the Commission decides that Internet access is a telecommunications service, you don't have any problem. ` `  Your only problem when the thing has got you tied in knots is that you've drawn this old line, this pre1996 line, and tried to carry that forward and still get get as people I think rightly pointed out, you want competitors to be able to provide access to the internet. You don't want to limit that. But you do that by bringing more people into the definition of telecommunications carrier and then crafting the appropriate regime under Section 10, not by trying to hide them in a definitional line down in Section 3. ` `  CHAIRMAN KENNARD: Commissioner Ness. ` `  COMMISSIONER NESS: Mr. Comstock, you point to the you point to the decisions in conference not to adopt specific language of on the House side. Can you point to specific language in the conference report that would%K0*H&H&@@ clearly show that Congress intended to really restructure a regime that has been in place for an extended period of time, expressly so? ` `  In other words, we had for for years and years made the distinction between basic and enhanced services. The MFJ had a similar distinction between common carrier communication services and information services. One would think that if this was going to be a major change in in the regime, that Congress would have expressly so stated and not done so via definitions that can be interpreted one way or another. Can you point to some specific affirmative language apart from what they did not adopt? ` `  MR. COMSTOCK: I think the short answer is you have to take it in totality. I mean, the reality is, well, yes, many people are immersed in the nuts and bolts of the MFJ decision and the basic and enhanced distinction. You'll notice that Congress did not adopt any of those things directly. ` `  I know there were many attorneys that tried to say that we did this, we did that. The reality was Congress tried to craft a scheme that made sense to it. And frankly, as you well know from a brief that was filed in support of the FCC's position before the 8th Circuit, there were things Congress did in that Act and thought it may have accomplished that didn't didn't totally work. And so I%L0*H&H&@@ can't say I can point to anything definitive that says in black and white, we intended not to adopt the basic enhanced distinction. I think that would be a misnomer anyway. ` `  What we clearly intended was you have the flexibility to go forward. And what we did not adopt which was in earlier drafts was specific statutory language that said these two may not overlap. We gave you that flexibility. And I think when you look at the other provisions of the Act, for example, the statement, "There should be an evolving definition of universal service or evolving level of telecommunications services;" how do you get there if you continue down this path of very narrowly crafted transmission services when everything is increasingly being packaged together. ` `  As you're finding out yourself here in this panel, we can barely figure out where to draw the line. So that's that's why I'm saying the definitions don't force you to draw that line. There's nothing in the statute that says that must be the case. And to give effect to all of these other provisions and the many other objectives, regulatory parity and local competition, universal service, you're tying yourself in a knot by continuing that pre1996 definition which put together at a time when you had no forbearance authority. That's the reason the forbearance authority is there, to take care of that problem.%M0*H&H&@@Ԍ` `  COMMISSIONER NESS: You talked a little bit earlier about the contamination theory in Computer III. Where would you draw the line? How would you distinguish the transmission from the other services such that it is no longer an enhanced service, rather to distinguishable, measurable services? ` `  MR. COMSTOCK: Well, I would suggest that there are some services that are both an information service and a telecommunications service. And what you need to do is look at what is the user getting out of that service. When I sign up for an email, the fact that it may be stored on some server is really irrelevant. The fact that there is a header ad is completely irrelevant. I mean, if I get a fax today, it's it's printed out oftentimes with all kinds of information that wasn't on the original page. >>So that doesn't change it. ` `  When it comes into my office today, it goes into a server. I get the choice of reading it online or downloading it. Again, that shouldn't change it because the transmission from the user is the same. You have an option you can either draw the line or make them overlap and say that some services that are both. If you draw the line, I would suggest that you move it from the basic transmission and focus on what is it that the user is primarily interested in. IP telephony I'm interested in%N0*H&H&@@ talking to somebody. When I send an email, I'm interested in sending a specific message. I don't want it changed. I mean, if it ends up wrapped someone place else, that's really a problem in the transmission. So that's what I would suggest you look at. ` `  COMMISSIONER NESS: I don't know whether you want to hear this but another thing that's going to happen is the payment arrangements from the consumer side are going to change dramatically. You're already seeing people offering no just free email but free internet access in exchange for subjecting the consumer to advertisements. I think you're going to see sender pays email where the ISP is in the collection business and hands out commissions and so forth. And I don't know what that means but it certainly makes this whole thing even more complicated and much harder to decide what it is you're going to levy any fees or access charges against. ` `  CHAIRMAN KENNARD: Does that lead you conclude where I think you're going is that you can't look at this problem from a sort of service offeringbyservice offering approach. You would have to draw a a rather sweeping line and then look to see whether various services should be required to pay or not as opposed to doing it sort of technologybytechnology, servicebyservice. ` `  MS. DYSON: Yes. I guess I'm saying I think it is%O0*H&H&@@ so complicated that you don't want to mess with it for two reasons: 1) you don't want to mess with it; 2) if you do, they will immediately figure out clever ways to get around it. And so, again, if you lead it to the providers of capacity to figure out what it is that they're selling to other people and to assess charges among themselves, this includes access fees, without and I know it's hard to withdraw from a monopoly market and there are local monopolies and so forth. ` `  But in the end, what you really want is to let the various players decide for themselves and allocate the costs maybe even to advertisers. ` `  MR. DIX: May I comment on that, Ester? For the market reality of not doing anything, to Commissioner Powell's point of if there is not interpretation, is that we carriers under whom these obligations currently exist be forced into making some perhaps unwise business decisions around trying to avoid for competitive reasons these very requirements. ` `  And what I mean by that is it would be very easy for us, very expensive, but we could begin to deploy IP services, Internettype services inside a circuitswitch environment. And certainly if you look at some of our larger competitors in our business in MCI, they run the former NSF net, the backbone of 40 percent of the Internet,%P0*H&H&@@ and they are also a common carrier. ` `  And the question I have to you is if you don't change the definition of a telecommunications carrier, then I assure you that MCI will consider a strategy wherein they will begin to move their circuit services in an accelerated fashion to that Internet service to avoid paying these access charges in this common carrier status. ` `  To that point, I have another piece of anecdotal evidence. Today's Washington Post, a story by Stephanie Mata (phonetic) says, "Bell's advanced data networks has entry into the long distance business." And what it says, if I could just briefly read, "Some Bell's are planning sophisticated data networks based on Internet protocol, IP technology that would haul computer data at high speeds over long distances." ` `  Now, if I can read ahead a little bit, "The Bells insist" and they're seeking, as you know, with the FCC to be able to carry this on an interstate basis. And they're contending that it is a data service. "The Bells insist that they aren't trying to surreptitiously get into the voice long distance business. 'It is conceivable that there will be incidental voice usage', concedes Edward Young, Bell Atlantic's associate general counsel." ` `  I'm not here to impugn his reputation, but nobody in this industry believes that he intends to carry just%Q0*H&H&@@ data. What he was trying to do is what the rest of us are going to be forced to do which is try to skirt this policy issue by the deployment of this technology and avoid the regulations. So I put it to you, if if an MCI is both an Internet service provider and a common carrier, what traffic is subject to this and what traffic isn't? If there's no redefinition of telecommunications, then I assure you that all of us will look to avoid these access charges and other things by shifting our business to IP, i.e., nonregulated types of technologies. ` `  CHAIRMAN KENNARD: Ms. Dyson, would you like to respond? ` `  MS. DYSON: Yes, just very briefly. And the irony of it is of course that this is probably a good technological and business decision because according to Tom Evslin, you're going to get approximately 25 percent more efficient use of whatever capacity you have. And so this is something devotedly to be wished. The only challenge is the unequal application of the access charges. ` `  MR. DIX: That is correct. Thank you. That is correct. ` `  COMMISSIONER POWELL: Why why are we isn't an error being made assuming that universal service automatically must be synonymous with access charges? I mean, one of the potential advantages is things moving to a%R0*H&H&@@ more efficient, more cost efficient network is that price goes down. And if one of the notions of universal service is affordability, there is at least theoretically the possibility by moving traffic to more efficient networks, you will indeed lower price. And people who we're worried about making sure are subsidized are actually being subsidized by the market and technology rather than by the United States Government. ` `  MR. DIX: But, Commissioner, the definition of a telecommunications provider goes back to this basic carrier definition. And we're contending that there is no difference in in this specific phrase, that that transmission between or among points specified by the user of the information he's choosing without the change in the form or content of the information as sent and received which is the definition for a telecommunications carrier is no different from an information service provider than it is for a common carrier. We are doing exactly the same thing; delivering exactly the same piece of information in a different medium. ` `  Therefore, there seems to be a link, at least in my mind, between the universal service fund and access charges because they're both predicated on the same definition. ` `  COMMISSIONER POWELL: You're a lawyer when you%S0*H&H&@@ want to be. ` `  (Laughter.) ` `  CHAIRMAN KENNARD: Mr. Comstock. ` `  MR. COMSTOCK: Yes, if I could just respond briefly on the issue of access charges. I don't disagree that you need to find a way to do things without access charges. And as I said before, I'm certainly not advocating that you take the current regime and apply it to the ISPs. We're collecting enough money today. The problem is as traffic shifts, that then increased the costs that have to be paid by the voice users which just increases the cycle and makes it more rapid. ` `  The real issue is the Commission in the states have been setting access charges at least since 1983 supposedly because they paid for the use of the network and because it goes to support universal service. As is illustrated in the Stevens letter, there is a problem. Even businesses in some cases are not paying the full cost of the line as as determined by the regulators. Now, I'm not saying that's correct. But I mean, the Commission has to step forward at some point and say either we made the right decisions in the past or we didn't. ` `  But assuming that the rates the Commission and the state commissions set are accurate or close to, then you have this 25 billion dollars in payments from long distance%T0*H&H&@@ players to the local players supposedly to support the cost of the most expensive piece. And and you're seeing evidence of that. That's part of the reason we're not getting local competition. If you want the more efficient packets which is going to the home, then you better pay the local exchange carrier for packet switching. If you tell them they're only getting universal service for circuit switching, then they're not going to install packet switches. So you don't get the better band width to the home. ` `  But, I mean, somewhere in there, there's this mushy pot of 25 billion dollars. And you can't just say by exempting out an everincreasing class, we're somehow going to get rid of it. You have to decide and delve in what it is. And all I'm saying is that when you do that, you should throw everybody into the pot. And then that gives the ISP the exact same incentive as the IXC to reach the customer directly, through a more efficient network. There aren't any ISPs today building networks to people's homes. They're not interested, you know. ` `  CHAIRMAN KENNARD: Ms. Lesser. ` `  MS. LESSER: I am afraid that what's happening here is that Internet telephony is really becoming a bogeyman. And what I'm hearing, with all due respect to Mr. Evslin and Mr. Pulver, little more than a really at this%U0*H&H&@@ point a theoretical service. I mean, we saw some demonstrations earlier today. There certainly is development in the Internet telephony area. But we have no market data. We have no idea how consumers are going to respond. ` `  And I think when we talk about the ISP question, we need to look at the other services that ISPs are providing and for AOL, really the only services. We are not providing an Internet telephony service right now and yet you're talking about, you know, whether or not we're providing a comparable voice service. We don't have a voice service. And so what I think we need to emphasize is our services operate what is essentially on top of the telecommunications infrastructure. ` `  And frankly, my business people would be shocked to hear that we have telecommunications revenues because they see it as a huge cost center for America Online. I am paying for telecommunications service because I certainly need those services and they certainly the transmission element is critical. But I basically take those services as a retail customer and I then bundle those services with the services I'm providing and pass them on to consumer. ` `  So if I were essentially just in looking at universal service, I realize that access charges is a different question and I can address that, as well. But I%V0*H&H&@@ would essentially be paying twice because right now, I'm spending hundreds of millions of dollars a year for telecommunication services on which through which I am I am making a universal service contribution. And if I were required on top of that to look at my information services revenues and make another contribution, then I would indeed be paying twice. ` `  So I think it's important to not let Internet telephony which, again, there certainly is going to be a market for and I think the Commission has to pay close attention to the development of that marketplace. I don't my personal opinion is that I don't think you'll opt you should or will opt to regulate since what we've seen is a lot of innovation in a marketdriven in a marketdriven environment. But I do think that we need to make sure that it isn't the bogeyman for complete reclassification of ISPs at this particular time. ` `  CHAIRMAN KENNARD: Mr. Comstock. ` `  MR. COMSTOCK: If I could just address the issue of double payment briefly. The point is you pay for lines from the central office to the ISP center just like an IXC does. Yet an IXC does pay access charges. And the end user who is buying the long distance service also pays to the IXC charges that they don't pay if they use the Internet. ` `  For example, if I get online and talk to my%W0*H&H&@@ brother in Cleveland for two hours, whether it's by voice or video or in a chatline email, I pay 70 cents a day to the ISP. That's basically what it costs me, plus I pay from my local phone service. If I picked up the phone and made the same conversation, I would pay what I paid for my local phone service and I would pay at 12 cents a minute, I would pay $14.40. ` `  Now, maybe maybe there's something wrong with that and it needs to be readjusted. But the point is why should I be able to communicate, have the same conversation one way and I pay 70 cents; the other way I pay, well, 20 times as much. So I mean, you're not double paying. You are contributing to universal service to the extent that the business lines are above cost and some of that money gets transferred. But you're not paying as much as a similarly situated IXC is paying to support the local network. X X EI'm not saying what the IXC is paying is right. I'm just saying you're not paying as much. ` `  And the second point I would make is if AOL is not providing voice telephony, it may be only your email services that we need to worry about or your Internet fax services. ` `  (Laughter.) ` `  But the point is you are providing some telecommunications service. There are lots of other%X0*H&H&@@ services you're providing that I wouldn't include. ` `  COMMISSIONER NESS: If I could follow up on that. Isn't the carriage of an email message essentially the transmission between or among points specified by the user of information of the user's choosing? ` `  MS. LESSER: Well, in some ways certainly if you just look at the text of the message I mean, if I send a message to my mother that says, hi, mom, and she receives it, she receives that text. But what she also receives are additional capabilities which is the service that we're providing whether they are storage capabilities, whether they are reply capabilities, the entire browser that goes with the email. ` `  So that while that an element of the message that is received on the other end certainly looks to the user from a textual standpoint as the same message from a substantive standpoint. What is wrapped around it, the service that we are providing which is you know, which is reply, which is forward, which is storage capabilities is much more than I mean, I think it's really wrong to just look at the text of that message. ` `  There's much more on the screen. If you look down a little bit more, you'll see at least on AOL, if you look down, you'll see the footers. And if you look on most email systems, you'll see the headers. But there is a lot%Y0*H&H&@@ more information that goes along with that to enable that message to travel and to get to the recipient. ` `  CHAIRMAN KENNARD: But what difference does that make? I mean, if if the message being communicated is is to your mother is basically the email transmission, what difference does it make if there are other capabilities that may or may not be used? If if what we're talking about is whether we have a regulatory regime that in effect creates distortions, the fact that you have other capabilities seems, as least preliminarily, sort of irrelevant. ` `  MS. LESSER: Well, I know, but the other capabilities are not perhaps I misspoke. They're not severable. I mean, we're not I'm not talking about one capability versus another capability. I'm talking about the email service itself has to be looked at holistically. And that entire service is not just the transmission of the text. It is all the other capabilities that I spoke about. So I don't think it is right to say aren't we talking about several different services. ` `  COMMISSIONER NESS: Is that more a function of reformatting rather than changing the content? ` `  MS. LESSER: I suppose it depends on your version of content. I mean, when we look at the historical definition of enhanced services and the definition of%Z0*H&H&@@ information services in the Act, all of the things that we "do to that test" or wrap around it in order to make it go to the recipient are included in those information services. We're not simply providing just the transmission I mean, it's if you look at it very literally, obviously you say sent and received and perhaps focus on what the user is seeing. But I think if you look at the entire service, the answer is no. ` `  CHAIRMAN KENNARD: Mr. Symons. ` `  MR. SYMONS: Mr. Chairman, thanks. What I would like to do is maybe go back and try to answer your question from 45 minutes ago: Why shouldn't the Commission extend the existing regulatory structure to services that look to the end user to be the same? And I think there's a short answer that might sound flippant, but maybe isn't upon further reflection. And I think the answer is because you don't have to. ` `  And, in fact, if you attempted to take the regulatory structure that was designed over 64 plus years to address monopoly concerns that arose when the telephone network was constructed and even, I think more appropriately, monopoly concerns when the railroads were built because that's where Title II comes from, there doesn't seem to be a real need at this juncture to take that regulatory structure and apply it to a set of nascent%[0*H&H&@@ services. ` `  And in this regard, I think both the point that Mr. Evslin made and that Jill Lesser I think are worth worth repeating. That I think there's a there may be a distinction between IP telephony which turns out to be the poster technology of what a difficult problem this is for the Commission, not to take anything away from the difficulty, and other information services that are provided over the telecommunications network. ` `  Let's put aside Internet telephony for a moment. That's clearly the most difficult issue. It's one that's going to come back long after April 10th has come and gone. If you look at the other services, email, voice mail, even Internet access, I think there's an alternate history of the 1996 Act from the one that's been presented here this afternoon that suggests that in fact when Congress adopted the definitions of telecommunications and information services, it was in fact borrowing heavily and overtly from the MFJ and from Computer II. ` `  The definition of information service, which would largely be read out of the statute by much of the conversation here today, means the capability of generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications. That definition was drawn largely from%\0*H&H&@@ the MFJ. And going to Commissioner Ness' question, there is an expressed reference in the House report that says we are taking this definition from the MFJ. ` `  If you go back to the MFJ, it turns out email, voice mail, even Internet access it used to be called the gateway service all of those things were present and brought before the Court and the Justice Department. And it turned out, as between telecommunications and information, each one of those things was an information service even though in the MFJ, nearly the same definition telecommunications also existed. ` `  The fact is that those capabilities, email, voice mail, access to some sort of information gateway, were deemed capabilities for acquiring, storing and retrieving and making available information; not telecommunications; not the provisioning of a pure pipe because each of those services, whether it's email or voice mail, involved some sort of enhancement to the pipe if I could use that term here. ` `  My fear is that by trying to address every single problem, every single very thorny issue that you doubtless, you and your successors will confront here in advance of this April 10th report, what you'll end up doing is doing what no one can do, is taking a snapshot, engaging in a static analysis of a very dynamic set of questions, and%]0*H&H&@@ inevitably, as all of us would under the same set of difficult circumstances, making the wrong prediction about how things will roll out after April 10th. ` `  There's no need to do that, certainly not for this report. And it may not even be advisable to try and do it as a matter of policy right now. There are these questions unfortunately are probably best attacked incrementally. I suggest I would also suggest that that there's not that much of a difference between the post1996 regulatory structure and the pre1996 regulatory structure. ` `  Internet telephony is clearly a very difficult issue. I would suggest that you don't need right now to deal with that because it is not any more than some press releases and some and some tinkering, LCI's LCI's concerns, which are legitimate will be legitimate to the contrary not withstanding. ` `  If you take it perhaps a little bit at a time rather than trying to bite it all off and trying to decide essentially what's undecidable, I think you'll be faithful to the statute, I think you will address the legitimate concerns about universal service that will arise, and I think you'll do it without having to essentially back into regulation only to have to turn around and deregulate under your forbearance authority which would seem to be a very%^0*H&H&@@ cumbersome way essentially to leave us all in the same place we are right now. ` `  CHAIRMAN KENNARD: Ms. Lesser. ` `  MS. LESSER: What I was going to add was I think that I mean, I actually agree with a lot of what Howard just very articulately said. And I think that I would like to comment just for a moment on the forbearance issue. It seems to me that as we and as Earl pointed out there are there are a lot of inefficiencies that have historically been included in the access charge system and the universal service system. ` `  And, you know, as we look at whether or not a long distance call on the telephone should actually cost as much as it does, it seems somewhat backwards to me to say, okay, well, we admitted that that is an inefficient service that needs to be looked at again; but why don't we bring other people into it and then try to essentially then figure out what to do. ` `  It seems to me the way to do it is to look at the Internet as an unregulated industry and the innovation that has essentially incurred because of how unregulated well, how marketdriven the Internet has been and basically say why don't we take from why don't we learn lessons from the Internet rather than simply trying to bring a new an entirely new industry under old regulation. %_0*H&H&@@Ԍ` `  I mean, I think one of the most important aspects of this is certainly the position that the United States Government has taken overseas. We have made a historic telecommunications agreement just several months ago essentially or really more than a year ago now time flies has essentially said to the world, you know, do not regulate the Internet and please, essentially, make sure that telecommunications regulation is stripped away as we go forward as technologies converge. ` `  If we in this country all of a sudden say, well, actually we're going to change our minds and now call the Internet a regulated entity but we're going to pick and choose as to what we at any given time think is important to regulate, I think what we end up with is big confusion and certainly a lot of inconsistency from a policy standpoint around the world. ` `  CHAIRMAN KENNARD: Mr. Evslin. ` `  MR. EVSLIN: Mr. Chairman, just to add to that, the rest of the world has taken the United States' advise and the European Community has decided not to do this type of regulation until at least the year 2000, recognizing that the industries are both in their infancy and are no substantive threat to the more regulated industries today. And I think that's true. And I I have to there is a lot of hype about Internet telephony. %`0*H&H&@@Ԍ` `  But the most wild projections of what it can be, having it be less than a billion dollars next year in an industry that's worldwide 200 billion dollars and growing by ten percent a year and again, the most optimistic projections don't have Internet telephony, this poster boy, with a market share equal to one year's growth in traditional telephony until seven to ten years from now. So part of the answer to why shouldn't we regulate this is there isn't any threat now. ` `  On the other hand, access charges certainly do cause distortion. Access charges cause distortion in economic decisions even if there were no such thing as IP. And so there is real damage being done by the current access charge regime. ` `  And so it would seem that regulatory time is much better spent unencumbering the traditional telecommunications industry from the uneconomic aspects of access charges so that their decisions are not distorted, so that they do have an incentive to deploy the more effective and more cost efficient IP networks, so that they do have an incentive to replace the circuitswitch last mile with an IP last mile, not to get around regulation, but because the economics are simply better absent access charges. ` `  So it would seem that the best course for the Commission would be to concentrate on undoing the%a0*H&H&@@ distortions caused by access charges by getting rid of the access charges, not by applying the distortions to everyone. ` `  CHAIRMAN KENNARD: Thank you. Please. ` `  COMMISSIONER TRISTANI: This goes back to something we were you were talking about was the email unenhanced service. And I'm having a lot of difficulty with all of this because I love the Internet. I have a Disney.com kid. I just visited schools in San Juan, Puerto Rico where they have one provider per 450 students and and a basic line, so it takes forever. They love it. ` `  At the same time, we look at these things and and is as fax telecommunications service? ` `  MS. LESSER: A fax? ` `  COMMISSIONER TRISTANI: A fax. ` `  MS. LESSER: Yes. ` `  COMMISSIONER TRISTANI: Yes, right. And I know that a lot of people between Europe and the U.S. are sending their faxes through email to avoid the high price, the exorbitant price that they pay for a fax. And I know you say, well, it's different; we have all these other capabilities. But but ` `  MS. LESSER: They're not exactly ` `  COMMISSIONER TRISTANI: I'm having trouble with that. ` `  MS. LESSER: They're not exactly sending their%b0*H&H&@@ faxes through email. What they're doing perhaps I don't know who you're referring to ` `  COMMISSIONER TRISTANI: Well ` `  MS. LESSER: But what you are doing is attaching files to email ` `  COMMISSIONER TRISTANI: Yes, well, yes, I know. ` `  MS. LESSER: which which to me the user ` `  COMMISSIONER TRISTANI: Part of it's the same thing. ` `  MS. LESSER: Well Well, I ` `  COMMISSIONER TRISTANI: And it's much cheaper. ` `  MS. LESSER: Well, it's it's it is the same thing and it's not the same thing. You either, you know, get the paper off your fax machine or you download. You basically look at your email screen and the browser that the email provides and essentially use that functionality to download. ` `  And if you again, if you look at the information services definition which is only two years old, you see it says generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications. I am absolutely not disputing that the telecommunications infrastructure and the services, you know, are critical to the provision of email. But they are not definitionally%c0*H&H&@@ the same. In fact, they are definitionally distinct. ` `  COMMISSIONER TRISTANI: But to me the user it's the same thing. Anyway ` `  MS. DYSON: The fact is sending it by email is a much more efficient use of the capacity because one ties up a voice line and the other doesn't. And so there is a reality there that the the data service is in fact much cheaper to provide. ` `  MR. DIX: But Esther, if I could jump into your point, both pieces of information can be transmitted and are transmitted in that form to the user who sees them in the same way whether they come from AOL or from us. Is this true? All right. So if we go back to the definition that says you're transmitting information without form or content change, which is exactly what's happening, then you are in effect in effect by the definition transmitting information without form or content in the same way that we are which is a definition of a telecommunications provider. ` `  MS. LESSER: But we just fundamentally disagree as to whether or not we are changing the form or content of the message. ` `  MR. DIX: Well, here's my point. Private IP networks are being built by large corporations today. This is Internet protocolbased networks that run on the same technologies that the Internet uses. CISCO is the leader in%d0*H&H&@@ providing these technologies. It never touches the Internet, the piece of information, the IP packet. It resides in what we call Intranets or private IP networks. You can use email in the same way that you can send it via AOL via one of these networks, and that is no more or less enhanced than via transmitting it via AOL. What AOL does is they facilitate the access to the user in the same way that we facilitate a phone call to a user. ` `  AOL is not the Internet nor is ITXC. They are access providers to the Internet. It is a difference. ` `  CHAIRMAN KENNARD: I would like to give Commissioner FurchtgottRoth an opportunity. ` `  COMMISSIONER FURCHTGOTTROTH: Thank you, Mr. Chairman. I would like to thank all the witnesses for coming today. I would particularly like to thank Mr. James for making the trip all the way from Nebraska; a very very inspirational story you told us. And I would also like to thank Mr. Comstock for providing us with an insight into conference. And I really appreciate all the comments about how the House just made the Senate do certain things. ` `  (Laughter.) ` `  I I have actually a long list of questions. And in the interest of time, I think it might be more efficient for me to try to catch some of the witnesses at a later date. I don't want to hold up the proceeding longer%e0*H&H&@@ than it is. Thank you though. ` `  CHAIRMAN KENNARD: Thank you. Earl, I think you'll have the last word today. We're out of time. ` `  MR. COMSTOCK: All right. I'll be brief. I think the point was made with respect to the email. The fact that there are additional things added, that's why the definition focuses on the user's information. It's really not relevant how the service provider packages it. I think fax is important. It's 40 percent of the traffic and it does provide 40 percent of the revenues. ` `  Lastly, let me take on Howard's point about the MFJ. Members on the floor of the Senate and the House both characterize the 1996 Act as a major overhaul of the '34 Act. I well, as I said before, I can't point to specific things that say, yes, we intended to get rid of basic and enhanced. I can tell you most members didn't get down to that level. They did intend this to be a major overhaul. They spent a lot of time on universal service. They spent a lot of time on local competition. ` `  And both of those would be gutted frankly if you went with what Howard suggested of keeping the old definitions. You would not have the ability for people to get on to the local network to provide services that we all consider telecommunications today. It's a very narrow definition, the basic and enhanced distinction.%f0*H&H&@@Ԍ` `  And the last thing I would say is keep in mind, when you did basic and enhanced, you did it under your regulatory authority. If you apply that to a statutory definition, the Court is not going to give you the same deference. Computer I to Computer II to Computer III, you went back and kept changing what was a basic service and you kept moving things that had been enhanced into the basic category. ` `  Well, if you do that now, the Court is going to say, well, what changed with respect to that service. And the answer is going to be nothing. You changed because the industry changed. But that doesn't change the definition in the statute. So I would just advise a lot of caution on that. And I don't think that Howard is correct that the Congress clearly considered this issue. What they did what was an evolving definition of telecommunications service for universal service and that can't happen if you simply carry forward the pre'96 Act regime as if nothing ever happened. ` `  CHAIRMAN KENNARD: Thank you, Earl. Unless we have other questions from the bench, I think we should adjourn because we are over time. Commissioner Tristani, did you have something? ` `  COMMISSIONER TRISTANI: I would like to make some closing comments. ` `  CHAIRMAN KENNARD: Okay, sure.%g0*H&H&@@Ԍ` `  COMMISSIONER TRISTANI: I want to thank all the panelists and thank you in particular, Earl, for an inside history of the Act. And I want to thank Mr. James, too, for coming from Nebraska. I'm from Albuquerque, New Mexico, so I'm closer to your part of the world. I also have my dearest older brother is a school teacher in Catholic high school in Albuquerque. And I think I know a little bit about the needs of Catholic and and all schools. And so I do appreciate your perspective and we do care about that. ` `  But we have some very difficult issues here: policy and Congressional mandate and definitions. And we all are going to study this very hard. But I don't think someone said April 10th will be the end of it. It may be the beginning. So thank you. ` `  CHAIRMAN KENNARD: Commissioner Ness or Commissioner Powell, closing comments? Well, with that, then I would like to thank all of our panelists for a terrific and very lively discussion of some very, very difficult issues. You've brought a tremendous amount of expertise here to us today. And I I deeply appreciate your participation. I would also like to thank the people here at the FCC who made this possible; in particular, Kevin Werbach and Melissa Waxman, Dr. Bob Pepper, Marcelino FordLevine, and Pam Gallant, not to be confused with Paul Gallant. Thank you all for coming. Thank you.%h0*H&H&@@Ԍ` `  (Whereupon, at 4:11 p.m. on Thursday, February 19, 1998, the meeting was adjourned.) // // // // // // // // // // // // // // // // // // // // // // //%i0*H&H&@@  ? (! i   X` X VE Heritage Reporting Corporation &(202) 6284888V i    "REPORTER'S CERTIFICATE ă   ?X  FCC DOCKET NO. : None  ?  CASE TITLE : Report to Congress on Universal Service  ?x  HEARING DATE : February 19, 1998  ?  LOCATION :  Washington, D.C.  I hereby certify that the proceedings and evidence are contained fully and accurately on the tapes and notes reported by me at the hearing in the above case before the Federal Communications Commission. Date: __22698_ __Shari Bowman______________ Official Reporter Heritage Reporting Corporation 1220 "L" Street, N.W. Washington, D.C. 20005  ? <! TRANSCRIBER'S CERTIFICATE ă  I hereby certify that the proceedings and evidence were fully and accurately transcribed from the tapes and notes provided by the above named reporter in the above case before the Federal Communications Commission. Date: __________ ______________________________ Official Transcriber Heritage Reporting Corporation  ?  <!PROOFREADER'S CERTIFICATE ă  I hereby certify that the transcript of the proceedings and evidence in the above referenced case that was held before the Federal Communications Commission was proofread on the date specified below. Date: __________ ______________________________ Official Proofreader Heritage Reporting Corporation