House Subcommittee on Telecommunications and the Internet Holds Hearing on COPE Act

March 30, 2006. The House Commerce Committee's (HCC) Subcommittee on Telecommunications and the Internet held a hearing on HR __ [PDF], a committee print of a bill that may be titled the "Communications Opportunity, Promotion, and Enhancement Act of 2006", or COPE Act.

Formally, there is not yet a bill, or sponsors of a bill. However, members of the Subcommittee stated at the hearing that the sponsors are Rep. Joe Barton (R-TX), the Chairman of the HCC, Rep. Fred Upton (R-MI), the Chairman of the Subcommittee, Rep. Chip Pickering (R-MS), and Rep. Bobby Rush (D-IL).

Rep. Upton, who presided through most of the hearing, stated that he expects there to be a Subcommittee markup during the week of April 3. Both he and Rep. Barton added that he wants there to be a full Committee mark up in 4 to 5 weeks.

The statements and questions of the members of the Subcommittee demonstrated that this is not a consensus bill, and that there is more support among Republicans than Democrats. Rep. Ed Markey (D-MA), the ranking Democrat on the Subcommittee, criticized the bill. Rep. John Dingell (D-MI), the ranking Democrat on the full Committee, said that "I do not support the legislation being considered today."

Rep. Fred UptonNational Cable Franchise. Rep. Upton (at right) stated that "with approximately 33,000 local franchise authorities nationwide, the current locality by locality franchise negotiation process is standing in the way of progress."

He said that the bill "establishes a national franchise option to streamline entry into the marketplace". It also "preserves the option for cable operators and localities to strike their own local franchise deals in lieu of a national franchise". It also "preserves -- in the national franchise -- critically important elements of the legacy local franchise framework, namely (1) local control over rights-of-way; (2) a franchise fee of up to 5% of gross revenues; (3) required carriage of public, educational, and government (PEG) programming; and (4) an additional 1% of gross revenues -- on top of the 5% franchise fee -- for PEG and institutional network support."

Rep. John DingellRep. Dingell (at left) responded that "this proposed legislation would allow the creation of the broadband equivalent of gated communities in our cities, towns, and countryside, as well as on the Internet. Public rights-of-way could be hijacked for the profits of large private companies, which are, under this draft, freed of important obligations to serve the public."

Rep. Markey stated that the bill should contain a build out requirement. He argued, the incumbent could skimp on service upgrades, or withdraw services altogether. He asserted that the bill would result in withdrawal of service in some areas, and higher prices.

Rep. Steve Buyer (R-IN) said that the bill should be more broadly written to encompass "video services", rather than merely "cable services". He argued that video satellite should be included.

Network Neutrality. Some members of the Subcommittee criticized the bill for its lack of a stronger network neutrality provision. Rep. Dingell said that the lack of an effective network neutrality provisions would allow "private taxation of the internet".

Rep. Markey condemned the network neutrality title as deficient. He argued that the principles do not go far enough, and that the FCC also needs rulemaking authority. He said that the bill "effectively condones online discrimination and then ties the hands of the agency from promulgating any guidelines to address it."

Rep. Rick Boucher (D-VA) criticized the bill for its lack of a "genuine network neutrality provision". He argued that the bill as drafted would allow a "drastic change in the architecture of the internet". He asserted that broadband providers will create a fast lane and then charge content providers for access to this.

Rep. Jay Inslee (D-WA), whose district is home to many Microsoft employees, argued that the bill should have a broader network neutrality requirement.

VOIP/E-911. Rep. Elliot Engel (D-NY) said that the bill is an "enormous step forward". He singled out for praise the E911 mandates for VOIP service providers. He added that cell phone taxes should go to PSAP upgrades, and that disability access mandates should be imposed upon VOIP services providers.

Rep. John Shimkus (R-IL) stated that "the draft is good". He praised the imposition of E911 mandates on VOIP service providers. He added that he continues to struggle with the network neutrality provisions.

Municipal Services. Rep. Upton stated that the bill "prohibits states from preventing  local governments from providing telecommunications, information, or cable services".

Rep. Buyer argued that there should be a right of first refusal for incumbent service providers.

Comments of Witnesses. The Subcommittee heard from a large number of witnesses, all of whom also submitted prepared testimony. See:

Kyle McSlarrowThe NCTA's McSlarrow (at right), who represents cable operators that already provide cable service pursuant to local franchises, and now face increasing competition from other video providers, criticized the national franchise provisions of the bill.

He wrote that "having made little effort to enter the video business, the phone companies are back claiming that they need special rules that would allow them to enter the video marketplace in a manner that would give them a regulatory advantage over their competitors."

He offered blunt criticism of the ILECs in his written testimony. "Rather than spending the last ten years offering video competition, as they promised, they have invested their time and tremendous financial resources in the courts and at the FCC attempting to frustrate Congressional efforts to promote voice competition. They have successfully crushed most of their local voice competitors and swallowed their long distance competition."

He argued that the franchising process is not a barrier to entry for the ILECs and that the Congress should not establish an national franchise. If anything, he said, the Congress should only streamline the existing local franchising process.

He argued that the phone companies, by avoiding local franchising, would be able to offer services without the obligations imposed by local franchising authorities, including to serve all areas within a service area. He asserted that phone companies may serve only high value customers. He warned of "cherry-picking" and "redlining".

He also praised the language in the bill regarding VOIP and interconnection. He wrote that "Limiting interconnection and related rights to providers of voice services using traditional technology would ensure the Bells retain their market dominance by hampering the introduction of digital voice services -- the best hope for competition in the voice market."

He also argued that the bill goes to far on network neutrality. He said that it would "impose regulation on the Internet."

And, he argued that "municipal broadband should be limited to areas where the private sector does not or is not likely to serve."  He asserted that municipal governments will subsidize or favor their own services.

Finally, McSlarrow complained that the fee provisions will result in higher fees paid by cable operators.

Walter McCormick, who represents phone companies that seek to provide video services without having to obtain thousands of local franchises, offered his enthusiastic support for the national franchise provisions of the bill.

He expressed opposition to the network neutrality title of the bill. He argued that there should be no legislative mandate. He reiterated the statement that he has made many times recently, that "our industry has stated that it will not block, impair or degrade consumer access to the internet". He added that since the "FCC has made clear that it has the authority to enforce its broadband principles ... legislation in this area is premature. Any grants of new regulatory authority or statutory ambiguities could chill innovation and investment."

He also advocated imposing further regulatory burdens on VOIP service providers. He also opposed giving VOIP service providers interconnection rights.

He also argued that the municipal services title should not be in this bill. He also urged the Congress, in separate legislation, to "stabilize universal service" and "to address inter-carrier compensation".

Paul Misener of Amazon testified as the representative of large corporate providers of internet content who seek a broad network neutrality mandate in any legislation. Similarly situated companies include eBay, Google, Yahoo and Microsoft.

He said that legislation should "keep the telco and cable operators from taking their market power over broadband Internet access and extending it to market power over broadband Internet content."

While many members of the Subcommittee, witnesses, and other commentators, used the term "network neutrality", few offered any meaningful definition or explanation of the term, or any proposed network neutrality legislative language. However, Misener did articulate both an explanation and a proposed solution.

First, he addressed existing competition. He said that "nearly all Americans will have two or fewer providers available: the phone company, the cable company, or both. And, unfortunately, even the lucky consumers for whom multiple service providers are available will continue to face discouragingly high costs of switching among them. Equipment swaps, inside wiring changes, technician visits, long term contracts, and the bundling of multiple services all contribute to these costs."

Misener, who previously worked at the FCC as a legal advisor to former Commissioner Harold Furchtgott-Roth, also argued that the FCC's data on broadband availability is misleading. It relies on too minimal a definition of broadband (200 mbps in one direction), and measures the number of providers in each zip code, even though an individual located in one part of that zip code may not have access to all of the broadband service providers who serve other parts of that zip code.

Hence, he concluded that consumers face "at best an oligopoly and, for the vast majority of Americans, a duopoly of the local phone and cable companies". He argued that "In such oligopolistic conditions, firms easily can and do leave consumers with fewer services, higher prices, or both."

"Content providers currently pay network operators for the amount of connection capacity they use, and network operators can charge consumers different prices depending upon how much bandwidth they use", wrote Misener. Moreover, "Phone and cable companies plan to restrict American consumers’ access to such content based in large part on lucrative deals they intend to cut with third parties."

He said that the phone and cable companies use one of three technologies, "hybrid fiber-coax by the cable operators and either fiber-to-the-home or fiber-to-the-node plus DSL twisted pair by the telco operators". He continued that "all three technologies have been designed to operate the same way in practice, with two downstream components: a very high capacity ("fast lane") cable-like private network component, and a much lower capacity ("slow lane") downstream broadband Internet access component. The fast lane will be operated as a closed network, while the slow lane will be more (but, as it turns out, perhaps not entirely) open." (Parentheses and internal quotations in original.)

He said that phone and cable companies plan to control connection capacity in three ways, "a closed fast lane and an open slow lane", a "paid `police escort´ within the slow lane", and "preferential ``local on-ramps´´ into the slow lane". (Internal quotations and emphasis in original.)

First, he asserted that "each network operator has or is constructing a fast lane for their affiliated broadband content provided by a sister company and a slow lane for broadband Internet content provided by others".

Second, he asserted that "the network operators intend to offer paid prioritization", which he called "police escort" in the slow lane, for broadband internet content providers. He wrote in his prepared testimony, and emphasized in his oral testimony, that "such police escort should not be made available for a fee; otherwise those unable to pay the fee will always be stuck in traffic."

Most of the rhetoric of the network neutrality proponents was expressed with reference to consumer choice and consumer access. Misener also employed this consumer choice wording. However, his argument is that it is the providers of internet based content that will not enjoy equal access to consumers. He asserts that the lack of competition in providing content providers with access to their customers will enable the phone and cable companies to exert market power in their activities and operations related to the content providers. They will be able, and in fact will, sell different levels of access to different content providers. He equates providing faster access to some content providers, with providing degraded access to others.

McCormick argued that phone companies will "not block, impair or degrade consumer access to the internet". The key word here may be "consumer". McCormick did not state, for example, that phone companies will "not block, impair or degrade content provider access to the internet". Misener argues that they will.

Misener further argues that the phone and cable companies will be successful in this strategy because, due to the lack of competition among broadband service providers, many content providers will not be in a position to refuse to pay for faster services. Moreover, consumers who become aware of and dissatisfied with these arrangements will not be able to switch to another broadband access provider who does not engage in such activities. That is, Misener describes a form of rent seeking behavior by broadband access providers, based upon market power, in which rents are extracted from content companies. He seeks statutory prohibition of the practices that constitute such rent seeking behavior.

And perhaps, one implication of this rent seeking interpretation is that, as a result of the pursuit of rents rather than profits, consumers are harmed. However, he did not articulate any of the usual scenarios under which rent seeking may harm consumers, such as reduced production, inefficient allocation of resources, or resources wasted pursuing monopoly rents (although the number of lobbyists and publicists employed on this subject suggests so).

He did argue that the consumer harm results from consumers not having access to the content of their choice.

Under his interpretation, phone and cable companies capture rents from the content companies. Another pro network neutrality witness, Jeannine Kenney of the Consumers Union, went a step further, and argued that "The fees charged to content and service providers will inevitably be passed onto consumers who have already paid for high-speed access." If Misener's and Kenney's interpretations were combined, then phone and cable companies would be extracting rents from indirectly from consumers.

Many argued that the absence of network neutrality will harm innovation. Misener and others argued, for example, that many hypothetical new small companies will not be able to pay the phone and cable companies' higher rates for better access, and hence, the new and innovative content and services that they would offer, and the new technologies that they would develop, will not come about.

But then, Amazon, Google, and Microsoft are not start up companies who cannot afford to pay higher rates. They are the one who would be paying the higher rates, part of which might constitute rents.

Said Misener, "we oppose the collection of monopoly rents".

Misener argues that the bill's provisions regarding network neutrality "are wholly inadequate". He suggests that the FCC should also have "general rulemaking and enforcement authority".

Also, unlike most others, Misener offered specific network neutrality statutory language. He recommended, first, that the Congress provide that "Content transiting an operator’s broadband Internet access network may be prioritized only on the basis of the type of content and the level of bandwidth purchased by the consumer, not ownership, source, or affiliation of the content. (That is, for traffic within the broadband network’s Internet access lane, ``police escort´´ may be provided only based on the kind of traffic and whether the consumer has a paid more for a somewhat higher speed limit.)" (Parentheses and internal quotations in original.)

Second, he recommended that legislation provide that "The terms for local content injection must be reasonable and non-discriminatory; network operators must not be allowed to give preferential deals to affiliated or certain other content providers. (That is, ``local on-ramps´´ into the Internet access lane need not be free, but the road owner must not charge unreasonable or discriminatory rates to favor their own or only some others' traffic.)" (Parentheses and internal quotations in original.)

Jeannine Kenney of the Consumers Union criticized the bill's national franchising provisions for not containing build out requirements, and for depriving local authorities of consumer protection powers.

She also argued that the bill lacks adequate consumer protection requirements. She wrote that "Services, content and applications delivered via broadband offer consumers new opportunities for competitive telecommunications and video services. But the telephone and cable companies that dominate the broadband market have strong incentives to shut out those competitors through access tiering, by impairing transmission, or by prohibiting use of devices or applications on their networks." She urged the Congress to "pass clear legislation and require the FCC to issue strict and enforceable regulations prohibiting discriminatory practices. The enforcement process must be timely and require the network operator to bear the burden of proof. We must ensure that no entrepreneur is posthumously vindicated by the FCC after a complaint process drags on for months."

Randy May of the Progress and Freedom Foundation (PFF), reviewed some of the recommendations that have been developed by the Digital Age Communications Age (DACA) project, which is sponsored by the PFF.

He said, as has the DACA project, that the Congress should "jettison most of the current statue" which is based on "techno-functional constructs" and "stovepipe" regulation, including regulation based upon the statutory categories of telecommunications, information service, cable service, and others. He also argued that instead of a FCC rules based regulatory regime, the Congress should put in place a new regulatory paradigm based on competition law principles, in which the FCC would adjudicate complaints of violation of competition principles.

He criticized the bills' network neutrality title, which gives the FCC adjudicatory authority to enforce its August 2005 policy statement.

He commended the bill's language giving the FCC case by case adjudicatory authority, rather than rulemaking authority. Also, the fourth principle in the policy statement which provides that "consumers are entitled to competition among network providers, application and service providers, and content providers". May noted that this "appears to extend the FCC purview to application and content providers, such as Google, EBay, and Yahoo, perhaps providing a basis for complaints to the FCC that the market segments in which they participate are not "competitive"."

However, he urged the Congress "not to enact into law any specific net neutrality provision mandating access rights and non-discrimination obligations".

He articulated a view of the state of competition in the market for broadband services that is much different from that expressed by Amazon's Misener, and other net neutrality proponents. He wrote that there is increasing competitiveness. And as a result, he said that it is "very unlikely that broadband operators will take any actions of the type intended to be prohibited by the net neutrality prohibitions". He argued that if the broadband providers "are going to invest billions of dollars building out new broadband networks, it is safe to assume that the operators will not find it in their interest to block or impede subscribers from accessing services and content that the customers find valuable."

He added that the Congress should not impose statutory neutrality mandates because "the ability to bundle distribution with content, and to enter into efficient business arrangements with unaffiliated content and applications providers, may be crucial to providing the incentive to invest. In this regard, the ability of an operator to differentiate its service from that of another operator, or even in some circumstances to discriminate among unaffiliated providers, may be critical to the decision to invest in new networks and service applications."

He concluded his discussion on the network neutrality issue by recommending that "if Congress insists on dealing with this issue in this bill, it should incorporate into the provision the unfair competition standard that is at the heart of PFF's DACA regulatory framework. And it should specifically tie the FCC’s authority to enforce the broadband principles to violations of the unfair competition standard." See, DACA report [PDF] titled "Proposal of the Regulatory Framework Working Group".

In contrast, May praised the national franchising title of the bill. He also argued that national franchises should be more broadly available, and that perhaps PEG and institutional network mandates should be eliminated.

Jeffrey Citron of Vonage made three points regarding the VOIP/E911 title of the bill. "First, nomadic VoIP providers like Vonage need access to all the 911 elements necessary to provide a comprehensive solution; the Committee print addresses this concern. Second, many 911 centers refuse to complete VoIP emergency calls without the same liability protections that exist for wireline and wireless carriers; this provision would need to be added to the bill. Third, Congress should carefully contemplate a forward path towards building out a flexible, more technologically advanced 911 network while preserving innovation and competition."