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Mr. Neel, I am delighted to have you here. You and I have worked on telecommunications, privacy and other issues for a long, long time. I am glad to have you here. STATEMENT OF ROY M. NEEL, PRESIDENT, U.S. TELEPHONE

ASSOCIATION Mr. NEEL. Thank you, Mr. Chairman.

Like Director Freeh and others, I want to thank you and Chairman Edwards and your able staffs in working so hard on this. There has been a lot of time devoted to it. It has been a difficult balancing act and your staff has really done a Herculean job trying to figure all these things out.

It is true that this legislation that you have introduced is a significant improvement over the original administration proposal, particularly in the areas of extending the transition period to 4 years, requiring that the Government reimburse carriers in perpetuity for the costs of expanding capacity to meet law enforcement's needs, improvements in the reasonableness standards, and a number of the privacy considerations. These are all important improvements and we appreciate that.

But as I testified in March, we are still not sure that this kind of legislation is really necessary, beyond, of course, appropriating the kinds of funds that will be necessary for law enforcement to purchase the technical capacity and capabilities from the telecommunications carriers.

Law enforcement authorities already tell us they have the authority to force communications carriers to make these transmissions wiretappable, and as many have said, we have been working with Government to try to figure out these technical solutions. In fact, whether this legislation becomes law or not, this kind of cooperative effort will have to continue.

I think it is important to remember the history of this relationship. We understand there are only about 1,000 court-ordered wiretaps a year, about half of these in New York City's metropolitan area alone, and about a quarter of them involving cellular technology, and half of those in only two States. So the incidence of the demand here is somewhat isolated.

We are concerned that this legislation would create a ubiquitous demand for this technology throughout the country, affecting all manner of compliance problems for telephone companies where there have never been wiretap requests.

Contrary to the testimony, or at least somewhat different from the testimony of the Director, we don't know of any instances where our companies, where telephone companies, have refused to assist law enforcement to accomplish a legal wiretap order. His testimony indicates that they found 183 instances where there have been problems. We may just disagree on the semantics involved. We would very much like to see that list and those examples and try to help work through them, if possible.

Moreover, our companies spend a great deal of money routinely complying with law enforcement requests with no reimbursement. One of our companies alone in an area with only moderate requests spends well over $3.5 million a year routinely meeting these requests.

Our concern with the draft

Senator LEAHY. Let me just make sure I understand. The $3.5 million is spent by the company with no reimbursement from the law enforcement, Federal, State, or anybody else?

Mr. NEEL. Correct. These are just routine costs of meeting courtordered compliance.

Our concern with the draft, despite the fact that it is much improved, centers around three main issues. First of all, the scope of coverage. We still think there is a problem in exempting certain types of carriers serving certain kinds of markets. We think that represents some safe harbors for criminals, frankly. If law enforcement believes that is an adequate trade-off to make, there is still the problem of creating a kind of competitive disparity because the technologies that serve those kinds of customers essentially being exempted from these requirements incur fewer costs and represent to customers a more secure network for them. So there is something of a problem there.

We think there needs to be more clarity on the issue of reasonableness

[Interruption. Coughing by Senator Leahy.)
Mr. NEEL. It's been a tough day.
Senator LEAHY. It's not the testimony. [Laughter.]
Mr. FREEH. You're not allergic to me, are you?

Senator LEAHY. It's that stern look I was getting from Jim Kallstrom back there. [Laughter.]

He's always scared the hell out of me. (Laughter.]

Mr. NEEL. Well, let me go on. We believe there still needs to be further clarity on the reasonableness standards, and essentially what I mean is while the legislation does create safe harbors to a certain extent where companies could deploy technology or consider it without facing fines, we do think there needs to be some clarity to ensure that a company won't face huge problems from law enforcement or that, in using your words, that technology will not be stifled. We think there are still some problems there.

But most important, and I think you have mentioned this, as has Ms. Edwards, we are very worried about the cost reimbursement question. We think that the $500 million estimate of the cost to build capacity and capability in every carrier's network is severely understated. As I noted in March, we believe that it will cost about $1.8 billion to solve the call-forwarding problem alone, and that is only one technology.

We also think it is unrealistic to cap at 4 to 6 years the reimbursement for capability. Essentially, the problem is this. If we take a snapshot right now, you might be able to predict, using services that are on the shelf, what it might cost to make those capable of wiretapping, but we are looking at a very volatile time. Just as if you had looked at the period from 1978 to 1982 and looked at this network, all you would have had to do is go to AT&T and ask for a cost estimate and order something to happen. In 1982, the Government broke up the telephone company and we had an explosion of new services and technologies and all the rules were thrown out.

Right now, across the street, the Senate this morning has taken one further step to blow up the telecommunications system as we

know it by injecting more competition, more technological advancement into the network, and we don't have any idea what new products, services, and networks will come into existence.

What this legislation, to a certain extent, and what the administration, we think, has done is look at the nation's telecommunications network using the old traditional model of a local monopoly and local carriers. We don't have that anymore. Already, there are any number of new kinds of telecommunications providers coming into communities and doing new things, some of which would escape the coverage of this.

Moreover, we don't think anyone wants to stifle the development of those things. If you have the fear of a problem, a legal problem, in deploying a new service or technology, the call forwarding of the future, if you will, you are going to be less willing to make massive investments in that if you are facing the very real legal problems of deploying it if there is no technological fix in place.

We also think that despite the belief of some that the cost to local carriers will never be de minimis, after 4, 6, 10, or 20 years. We think these costs will be incurred in perpetuity, not only to increase capacity, the reimbursement of which is covered in this legislation, but to build in the sheer capability of doing that.

We think the legislation also fails to take into account all the other issues that are at work right now in a competitive environment. We think there will be an explosion of new services and we hope those will be taken into consideration. That can essentially be fixed by taking the lid off of the time constraint for reimbursing carriers for putting capability into the networks.

We take these concerns of law enforcement seriously. We want to be part of the solution and we have some suggestions. As I mentioned, I think that the legislation should expand the coverage to include some of these private networks, hospitals, motels and hotels, and so on, the private systems that would otherwise be excluded.

We think you should clarify this reasonableness standard so local carriers, especially small telephone companies, won't fear massive fines and not be forced to install very expensive technology in the out years that they would otherwise not do.

Finally, we think that if you are going to have legislation, that it ought to provide adequate funding and extend the authorization of that funding beyond the 4 to 6 years. Those will make major improvements in legislation that has already improved considerably from the original proposal. Thank you.

[Mr. Neel submitted the following:]

PREPARED STATEMENT OF ROY NEEL ON BEHALF OF THE U.S. TELEPHONE

ASSOCIATION

USTA, which represents more than 1,100 small, medium and large local exchange telephone carriers throughout the United States, commends Senator Pat Leahy and Congressman Don Edwards for their considerable efforts in working with industry, privacy organizations and law enforcement on this important legislation.

USTA has been an integral force in negotiations leading up to the introduction of this bill. In this regard, members of Judiciary Committee staff, particularly Jim Dempsey and Beryl Howell, have been remarkable for their patience and skill in brokering the many improvements over earlier drafts of this legislation. And we remain fully committed to working with Congress to develop a bill that will stand the test of time.

While this legislation is a considerable improvement over earlier versions, the legislation does not fully satisfy these criteria.

By exempting certain telecommunications providers and networks, the bill is biased against the public switched network. It lacks sufficient protection against unreasonable government requirements. It imposes new cost burdens on the nation's telephone companies, and may curtail investment in and deployment of new network services at a time when investment in the National Information Infrastructure (NII) is a matter of national policy.

IS THIS LEGISLATION NECESSARY? It is important to note that law enforcement authorities conduct about 1,000 wiretaps a year in the nation. Of those, roughly half are conducted in the New York City metropolitan area. About a quarter are cellular-based, and half of these occur in just two states.

As I testified earlier this year, the New York Times reported on March 1, 1994, that documents obtained through the Freedom of Information Act indicated that a survey of several FBI offices found "no instances in recent years in which FBI agents had encountered any technology-based problems in conducting wiretaps.” Indeed, where any difficulties have arisen they have been quickly and satisfactorily resolved. (See Digital Privacy and Security Working Group Interim Report, March, 1994, which outlines current law-activities in meeting law enforcement requirements.)

The area of most concern to law enforcement authorities is not in technological barriers to interception, but in capacity limitations in the wireless/cellular environment, where tremendous demand growth has limited the number of ports available to law enforcement for conducting wiretaps.

USTA maintains that legislation is not necessary. Telephone companies consistently have cooperated in good faith with law enforcement, and currently participate in a joint industry and law enforcement standards-setting body which already is addressing surveillance challenges posed by technological advances in telecommunications.

USTA's concerns with this legislation are focused on three areas of the bill: 1) scope of coverage; 2) deployment of new services; and 3) cost recovery. 1. Scope and the Issue of Competitive Neutrality

ALTERNATIVE TELECOMMUNICATIONS PROVIDERS NOT COVERED BY THE BILL The bill covers only “common carriers,” a term which is losing its traditional definition. The term also has different definitions in different states. The concept of limiting the bill to common carriers neglects significant classes of service and service providers who do not fall under the common carrier definition and yet provide competitive alternatives to the services offered by common carriers.

Competitive access providers, shared tenant services, and dozens of other telecommunications service providers compete directly with traditional telephone companies to offer services that look, smell and walk like “plain old telephone service (POTS).”

Every major metropolitan area contains dozens of these alternative telecommunications networks. (See the attachment, “New York City Buildings Connected to Competitive Telecommunications Service Providers.") The World Trade Center, New York Port Authority, University of Michigan, the State of Iowa, office buildings, and hotels-not to mention Internet-are but a few examples of such competitive communications networks. Many of these networks dwarf most of USTA's members' networks.

The millions of users of the Internet could in some cases escape the bill, too, because the bill exempts "free" (i.e., taxpayer financed) private networks. Nearly half of all data traffic in the nation travels over Internet networks. The service is growing by nearly a million users worldwide each month, but significant portions of this traffic are outside the scope of this legislation.

Another class of exempted telecommunications service providers is shared tenant services, which, as described by the FCC, “provide their users with local_and interexchange basic service.” (Policies Governing the Provision of Shared Telecommunications Services, CC Docket 86–9, Report and Order, 3 FCC Rcd 6931. December 6, 1988.)

Yet, they are exempt from coverage under this bill.

We can identify who our competitors are and what their services are today. We cannot predict what new technologies and services will be developed in the future. Nor can we determine exactly how these existing services or their applications will

affect the traditional local exchange business. We do know, however, that major segments of the local exchange market-those that carry the highest volumes of traffic and are the most profitable are being diverted to alternative networks.

To the extent that these alternative services compete with the services offered by local exchange companies, they should be covered in the scope of this legislation.

IS THE BILL COMPETITIVELY NEUTRAL? In other words, the legislation should not distinguish between one group of service providers and another. If the intent of this legislation is to facilitate government surveillance of electronic communications, then public policy should provide for the government to be able to capture such communications wherever they may be taking place, not just on the traditional local exchange network. Otherwise, steadily increasing amounts of communications that bypass the local exchange network will also circumvent surveillance efforts.

By escaping the requirements of this legislation, these alternative telecommunications networks are given a competitive advantage in both cost and marketing. They do not have to spend considerable sums in modifying equipment or services to comply with the Act. They do not have to be hauled to court or the FCC whenever there is a dispute. They can market their "enhanced security" over public switched network carriers. And security is a major component of consumer confidence, trust and loyalty in choosing a telecommunications provider.

The FBI contends that its "problems” do not lie in these alternative networks; thus, the legislation need not cover these new entrants on the telecommunications scene. But that view embraces an historic perspective. Since the legislation is intended to address future telecommunications technologies, it is important that its coverage also takes a forward-looking view.

LEGISLATION SHOULD COVER SERVICES, NOT “ENTITIES" USTA continually has proposed language which would apply the requirements of the Act evenly to any service which involves switching or transmission of electronic communications for hire to unaffiliated parties. By applying the bill to services, and not to companies (i.e. common carriers), the bill would attain competitive neutrality.

The Sectional Summary accompanying this bill includes a reference to a functional definition of “local exchange carrier" in Mouse-passed M.R.3636. This support language should be put into the legislative language.

The legislation does provide the FCC with authority to determine when or if an alternative service provider should be covered by the bill, "when such service is a replacement for a substantial portion of the local exchange service and that it is in the public interest to deem such person or entity to be a common carrier for purposes of this Act.” (emphasis added.)

But clearly, there's already difference of opinion in interpreting “substantial portion” since many of the above-mentioned networks are not covered. 2. Reasonableness and deployment of new services and technologies

Senator Leahy is quoted in the August 10 edition of Communications Daily as saying that the goal of this legislation “is to assist law enforcement needs without

frustrating the development of new communications technologies or the competitiveness of America's high-tech industry.'

But reasonable minds still are debating whether the actual provisions of this legislation accomplish that goal. Doubts still exist as to whether companies can deploy technology that cannot currently be tapped without facing the threat of court action and possible withdrawal of a technology, service or feature.

Even worse, the existence of this potential threat could hinder investment and development efforts in the nation's telecommunications infrastructure. If a company is faced with investing millions of dollars in a new product, but finds in the middle of its development efforts that a surveillance capability will be very difficult and expensive—to develop, the company may decide to "cut its losses" and abandon an otherwise valuable product development effort.

Further, if a technology is achievable, the bill requires that companies comply with the capabilities requirements. Does this mean that a small telephone cooperative in rural Vermont must modify or retrofit its facilities even though there is little or no likelihood that its surveillance capabilities will ever be needed?

For example, the FBI'S REQUIREMENTS document declares law enforcement's desire to "follow” calls through the network to their ultimate destination. This may be possible as an application of advanced intelligent network (AIN) technology, not yet deployed. One conservative estimate of the cost of deploying this feature would

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