Copyright 2000 Federal News Service, Inc.
Federal News Service
July 18, 2000, Tuesday
SECTION: PREPARED TESTIMONY
LENGTH: 4393 words
HEADLINE:
PREPARED TESTIMONY OF WILLIAM E. KENNARD CHAIRMAN FEDERAL COMMUNICATIONS
COMMISSION
BEFORE THE HOUSE COMMITTEE ON THE
JUDICIARY
SUBJECT - H.R. 1686 -- THE "INTERNET FREEDOM ACT" AND
H.R. 1685 -- THE "INTERNET GROWTH AND DEVELOPMENT ACT"
BODY:
Thank you Mr. Chairman and Members of
the Committee. I appreciate the opportunity to testify before the Committee this
morning.
I would like to state at the outset that I agree wholeheartedly
with the objective of speeding deployment of broadband services to all Americans
regardless of where they live. Nobody should be left behind in the broadband
revolution.
Despite the old saying, however, sometimes you do have to
look a gift horse in the mouth, particularly if it is a Trojan Horse. I am
afraid that is what this legislation is. It appears to be a gift horse to
competition, but it is really just the opposite. The genius of the
Telecommunications Act of 1996 (1996 Act) is the delicate balance it strikes
between regulation and deregulation to achieve competition in all forms of
communications, and to deploy the fruits of that competition to all of the
American people. Indeed, the Judiciary Committee's special role in crafting a
dual role for the FCC and the Department of Justice in reviewing Bell company
applications under Section 271 deserves mention. The process has worked well,
and consumers are better off as a result.
I am sure that increased
competition is the well-meant intention of the proposed legislation.
Inadvertently, however, I believe this legislation will not only upset the
balance struck by the 1996 Act, but it actually would reverse the progress
attained by the 1996 Act. In an effort to move us forward, this bill mistakenly
moves us backward.
The 1996 Act Is A Model For the World
Last
week the European Commission (EC) issued a bold package of proposed legislation
and directives aimed at bringing the Internet revolution to Europe. It is no
coincidence that the EC's initiative looks like a close cousin of our
Telecommunications Act of 1996. The European Commissioners have concluded that
in order to chart a course towards American-style Internet growth they must
build a vessel not unlike the 1996 Act. This course includes such staple items
included in our Act as local loop unbundling and collocation.
In fact,
government officials from emerging and established nations frequently visit the
Commission to study the American network-of- networks that the 1996 Act has
created, and how multiple, privately- owned service providers give consumers
choices. Increasingly, they endorse the idea of an independent regulatory agency
with the power to bust up monopolies, as opposed to relying solely on antitrust
litigation to deregulate monopolies. For example, New Zealand is revisiting its
efforts to deregulate through antitrust enforcement and considering instead
tools similar to those set forth by Congress in the 1996 Act.
We are
setting the example for the rest of the world. Changing course midstream by
diminishing the BOCs' incentives to open the local markets would not only be
detrimental to American consumers, but would also put at risk the leadership
role the United States has played in the global telecommunications market.
A Fabric
The 1996 Act is a fabric, with the thread of each part
connected to every other part. Unravel one thread, and you risk unraveling the
entire fabric. That is my concern with the legislation before you.
Pull
the thread of data traffic, and the seams of the Section 271 provisions are
weakened. Pull the thread of data traffic, and the threads of telephony, video
transport, and wireless transmissions will fray. As I tell regulators from other
nations, you cannot cherry-pick the 1996 Act. In this age of convergence, no
network is an island, and the conduit and content of each is entwined with every
other.
Under our system, the 1996 Act had to be carried out in three
stages: rules had to be written, the rules were tested in court, and now the
rules are being implemented. Now that implementation is fully underway it would
be tragic to change directions.
This is not an insignificant exemption.
In fact, as I discuss below, data traffic has already surpassed voice traffic on
long haul networks. Eliminating data from Section 271 would eliminate a crucial
incentive for the incumbent BOCs to open their local monopoly markets. The
opening of local markets is absolutely critical for accelerating
broadband deployment. My message to you today is simple: the
Telecommunications Act of 1996 (1996 Act) is working. Because of years of
litigation, competition did not take hold as quickly as some had hoped. The
fact, however, that it is now working is undeniable. Local markets are being
opened, broadband services are being deployed, and competition, including
broadband competition, is taking root.
The Commission has a long history
of fostering innovation and investment in new technologies, such as the
Internet. Specifically, we have consistently refused to impose legacy
telecommunication regulations on providers entering new markets. For example, in
1983 the Commission declined to subject information service providers to access
charges, concluding that such regulation is unnecessary and would be harmful to
the development of the industry. More recently, in order not to stand in the way
of successful advanced services deployment, we declined to require incumbent
LECs to unbundle packet switched and other advanced services equipment. The
Commission found that in a dynamic and evolving market, regulatory restraint was
the best way to further the Act's goal of encouraging facilities based
investment and innovation. Similarly, as I discuss later, we have thus far
refused to impose legacy telecommunications regulation on cable broadband
service providers.
Rapid Growth of Broadband Deployment
The Commission's faithful implementation of the Act has resulted in an
explosion of broadband deployment. As of the beginning of the
year 2000, we estimate there were 2.8 million broadband, high-speed
telecommunications lines that deliver service of speeds of at least 200 kbps.
Two million of those lines were serving residential subscribers. This is a
six-fold increase from the previous year.
The DSL business is growing so
fast that the BOCs are struggling to keep up with demand. The Wall Street
Journal reported last week that SBC is installing about 3,500 DSL lines each
day. At the end of the first quarter of 2000 there were approximately 800,000
DSL lines in service in the United States. About 75 percent of those lines are
provided by incumbent LECs and 25 percent by competitive carriers.
These trends show no sign of slowing down. Analysts project that
deployment of DSL will increase by 300 to 500 percent over the next year.
Analysts also estimate that subscribership to cable broadband services will at
least double by the end of this year, and by the end of 2005 will have 20
million subscribers. Incumbent LECs and cable operators are predicted to invest
over 25 billion dollars in infrastructure improvements over the next four years
to bring broadband services to their customers.
The market-opening 1996
Act sparked infrastructure investment in telecommunications facilities by
incumbent LECs as well as competing carriers. For example: Incumbent LEC
investment in infrastructure was flat or declining until the passage of the 1996
Act; After the 1996 Act, incumbent LEC investment jumped approximately 20
percent; Aggregate industry investment subsequent to passage of the Act,
including both incumbent LECs and competing carriers, nearly doubled, increasing
from 30 billion dollars to 60 billion dollars.
These statistics do not
paint a picture of incumbent companies prevented by legal requirements from
deploying new services to consumers.
The vision of the Act and the
vision shared by the FCC -- that consumers will have a choice of providers
offering a choice of pipes into the home or workplace -- is being realized. It
is being realized through the opening of markets required by Congress in the
1996 Act. The rapid growth of broadband services is tangible proof that the
market-opening requirements of the Act are working.
The Section 271
Incentives to Open Local Markets
Simply stated, the Act requires the
BOCs to open their local markets to competitors. Section 251 states the rules of
the game and Section 271 provides a structured incentive for BOCs to play by the
rules. At its core, Section 271 is a simple yet clever proposition: in exchange
for opening their local facilities to competitors, the 1996 Act provides the
BOCs with the substantial reward of the long distance "carrot." Altering this
balance by exempting data traffic from the restrictions in Section 271 would
inhibit, rather than further, the Act's goal of fostering robust
broadband deployment.
As local markets are opened,
broadband deployment is both stimulated and accelerated.
Specifically, it is the opening of those local markets that is driving
broadband deployment and innovation. This is true because
nondiscriminatory access to the "last mile" and the ability to collocate -- both
components of the competitive checklist are critical inputs for the provision of
DSL service.
Unfortunately, the first three years of the implementation
of the 1996 Act were characterized not by cooperation but by confrontation.
Litigation instead of collaboration. The result was uncertainty, confusion, and
delay. We lost valuable time. Then, in January of 1999, the Supreme Court
largely affirmed the Commission's implementation of the market-opening
provisions of the Act. Once the smoke cleared, we began to witness a sea change.
Finally, the battles began to move out of the courtroom and into the
marketplace.
Within approximately the last six months, the Commission
has unanimously approved Section 271 applications for both New York and Texas.
We need only review the state of competition in New York and Texas to know the
Act is working. More activity is on the horizon. The BOCs have indicated that
they intend to file applications for numerous states across the nation within
the next six to nine months. The Commission welcomes, and looks forward to,
these filings.
As I have stated before, opening markets can be difficult
work, and establishing competition is not easy or fast. But both Verizon
(formerly Bell Atlantic) and Southwestern Bell have shown that it is well within
the grasp and control of the BOCs. I commend both of these companies, and the
New York and Texas Commissions, for their dedication and hard work in ensuring
that the fruits of competition are enjoyed by local and long distance consumers
in Texas and New York.
As envisioned by the 1996 Act, the Section 271
carrot has fueled the growth of local and long distance competition. Because
Verizon and Southwestern Bell opened their local facilities to competitors in
New York and Texas as required by the Act, competition in the local telephone
market has flourished in those states. One analyst estimates that competitors
will serve about 20 percent of the local lines (approximately 3 million lines)
in New York by the end of this year. That is a substantial increase from the 7
percent of the local lines that competitors served in New York at the end of
1999 (approximately 1 million lines). Verizon is completing over 270,000 local
orders each month for competitors in New York. Local competition is thriving in
Texas as well. The Department of Justice estimated that competitors served over
800,000 lines in Texas at the end of last year. That is about an 8 percent
market share. Competitors' customer base, however, has been steadily increasing.
For example, in May -- the most recent month for which we have data --
competitors added over 170,000 new lines in Texas. And, I am happy to report,
that a large portion of the increase in local competition in these states since
Section 271 authorization has been in the residential and small business
markets.
The hard work of satisfying Section 271 has not only benefited
New York and Texas consumers of local services. In the first three months after
gaining 271 approval, Verizon captured over 400,000 long distance customers in
New York. Analysts estimate that Verizon will take as many as 1.5 million long
distance lines in its first year alone (about 10% of the market) -- well ahead
of the 1 million lines Verizon set as its goal for the year. Verizon expects to
capture 25 to 30 percent of the long distance market within 5 years. Analysts
predict that they will meet this goal easily. Many predict that Southwestern
Bell will have similar success in Texas. This is no small prize. Texas alone
represents about 10 percent of the nation's long distance voice and data market.
The opening of local markets drives competition, innovation, and
produces a breadth of offerings. We have witnessed a dynamic market for
broadband services develop as a result of the opening of local markets in Texas
and New York. Although DSL technology has been available for years, it was not
until the passage of the Act that competitive providers -- called data LECs or
DLECs -- specializing in DSL deployment were born and began offering DSL service
to consumers. Competitors need to collocate their equipment in BOC central
offices and require conditioned local loops before they can even offer
facilities-based DSL services. Then, to be competitive, DLECs require timely and
cost-based loops and collocation. Once the DLECs had access to the inputs
necessary to offer their DSL products to consumers, the threat of such
competition spurred the BOCs to develop their own DSL products. Competition from
the incumbent monopolies, in turn, is spurring the DLECs to develop even more
new and innovative broadband products, services, packages, and prices. It is
precisely this sort of competitive cycle that will accelerate the availability
of broadband technology for all Americans.
Of course, competition among
technologies as well as providers is also driving this investment. Wireless
technologies -- both terrestrial and satellite -- are also on the scene.
High-speed Internet service via satellite is available today virtually
everywhere in the United States, including rural areas. Analysts project that
wireless technologies will have 6 to 12 percent of the broadband market by 2004.
Analysts also project that DSL will overtake cable as the overall leading
technology for delivery of broadband services as early as 2002, with cable
retaining its dominance amongst residential and small business customers until
2004, when cable and DSL will have equal market shares.
I am proud of
the FCC's record in holding firm on the requirements of Section 271. As our
experiences with New York and Texas have shown, there is no substitute for the
hard work of compliance. The rewards of Section 271 compliance are plentiful.
For the first time in history consumers are able to choose their local service
provider and take advantage of increased competition for their long distance
calls as a strong new competitor enters the market. The rewards do not end
there. Competitive markets are also bringing consumers new choices in technology
for the 21st Century.
Removing Incentives By Exempting Data
The
great competitive success stories we have been witnessing as a result of the
incentive structure established by Section 271 would be few and far between if
the proposed legislation becomes law. As currently written, Sections 251 and 271
do not draw a regulatory distinction between voice and data services. Carving
out interLATA data traffic from the prohibitions in Section 271 would remove a
potent incentive from the 1996 Act.
Currently, the majority of traffic
travelling over long haul networks is data -- as opposed to voice traffic.
Indeed, analysts expect that data traffic will comprise approximately 90 percent
of all traffic within four years. The wholesale data service market is expected
to generate 41.3 billion dollars in 2005, up from 9.9 billion in 1999. In a
world where data is experiencing explosive growth and is rapidly outpacing voice
traffic, allowing the BOCs to carry long distance data traffic before they have
satisfied the requirements of Section 271 would severely undermine the BOCs'
incentive to open their markets.
Changing the rules of the game at this
juncture would also undercut the substantial infrastructure investment being
made by competitive telecommunications providers. For example, competing
carriers have invested 30 billion dollars in new networks since the passage of
the Act and are now investing over 1 billion dollars every month in their
networks. In 1999, competing carriers have spent over 15 billion dollars on
overall capital expenditures, up from about 9 billion the year before. Investors
will cut off the spigot when competitors are forced to try to compete with
monopoly incumbent providers without full and fair access to the BOC's
bottleneck facilities.
I disagree with the notion that further
deregulation is the only way to enable incumbent LEC deployment of broadband
services in rural and high cost areas. The BOCs simply do not need to provide
access the entire way from the customer to the Internet backbone in order to
provide broadband access to their rural customers. Rather, they can provide such
broadband services to those customers the same way they serve their urban and
suburban customers -- by handing data traffic that is headed out of the LATA off
to another provider who can carry it across the LATA boundary. That provider
then carries the traffic to the Internet backbone.
Is this the most
efficient way to provide service to customers? No. Is it the most cost
effective? Certainly not. Does it preserve the incentives of the BOCs to open
their local monopoly markets to competitors faster than they otherwise might?
Absolutely.
The simple reason why rural customers, and other customers
in unserved and underserved areas, are not yet being served as robustly as we
would like is not caused by legal impediments. Rather it is largely about simple
economics. Providing customers with sophisticated services in areas of low
density is an expensive undertaking. As such, we are mindful that some rural
customers face more limited competitive choices for broadband services at this
time. Accordingly, to the extent that there may be instances where a LATA
boundary is standing in the way of consumers getting broadband services from
BOCs, the Commission has set up a LATA boundary modification process. For
example: A BOC that provides advanced services to customers within a state may
demonstrate that it cannot obtain an interLATA provider to connect its in-state
network to the Internet and request a LATA modification to allow it to connect
its network to the nearest out-of-state Network Access Point; A BOC could also
request a LATA boundary modification to allow it to serve a particular customer,
such as a hospital or university, where the customer cannot obtain an interLATA
connection for its network; or A BOC may also demonstrate that it would not be
able to deploy xDSL service to a LATA within a multi-LATA state unless the BOC
is allowed to aggregate traffic from one LATA to another, or may be the advanced
services provider of last resort for residential customers within a particular
state. The BOC may then argue that it is uneconomical to deploy advanced
services to such customers without a LATA boundary modification.
Notably, we have not received any requests for LATA modification since
adopting this procedure in February 2000, and have received no requests to
refile prior petitions. It is difficult to understand how LATA boundaries are a
barrier to broadband deployment when no BOCs have even
attempted to obtain such relief in the past five months. The Commission has
stated its commitment to reviewing, in an expeditious manner, all LATA boundary
modification requests that would provide consumers with advanced services.
Cable Access
Another important issue that the proposed
legislation addresses, Mr. Chairman, is the question of whether consumers can
choose from among multiple Internet service providers (ISPs) independently of
how they connect to their ISP. The issue is most often raised in the context of
whether cable operators offering broadband access to the Internet. This is often
referred to as the "open access" issue, though some call it "forced access."
I'll just refer to it as the "cable access" issue.
First, I agree that
much of the growth of the Internet can be attributed to the significant choices
available to Internet users and the interconnected network of networks that
characterize the Internet. Anyone can send an e-mail to anyone else on the
Internet. Anyone using an ISP that is connected to the Web can access websites
anywhere in the world. This ability is a core characteristic of the Internet and
it should continue.
The issue raised by advocates of cable access is
whether regulation is needed to ensure this kind of global interconnectedness by
providing consumers choices of ISPs if they connect to the Internet via their
cable system just as those who connect to the Internet over their dial-up
telephone lines.
Advocates of mandatory cable access want regulators to
set rules ensuring competitive access.
I believe that before we impose
regulation we should see if a problem develops rather than assume the worst and
jump in and regulate.
The Commission has been consistent in its approach
to cable access. It examined the issue nearly two years ago in the AT&T/TCI
merger proceeding and in the first 706 Report to Congress. In both instances we
declined to create a new regulatory regime to address what was only a
theoretical problem. The Commission again declined to impose cable access rules
in the AT&T/Media One merger earlier this year.
We have adopted this
market-friendly approach because we believe that imposing access regulation
would impose costs on any new entrants into the broadband conduit business,
thereby raising a barrier to entry to potential competitors in this market. The
Commission would like to encourage such entry, not throttle it; if the market
puts pressure on incumbent cable firms to open up their networks to multiple
ISPs, imposing duplicative regulatory costs is simply counterproductive to
encouraging conduit competition.
Recent events have been encouraging in
this regard. Over the last year, cable operators have made public commitments to
allow their subscribers to choose among multiple ISPs. They also have entered
into formal memoranda of understanding with ISPs to permit such competitive
access. And, AT&T has announced a technical trial in Colorado in which they
will provide access to ten ISPs on over its cable network.
These
developments support my continued belief that there are powerful marketplace
incentives to move the cable platform to an open platform permitting access to
multiple ISPs. But it also is time to see how these market driven agreements are
translated into concrete commercial arrangements.
Last month the U.S.
Court of Appeals for the Ninth Circuit in the AT&T Corp. et al v. City of
Portland case confirmed the FCC' s role in establishing a national policy for
cable access as well as clearly recognizing the Commission's authority to
forbear from regulation in this area. In addition, the court found that the
provision of Internet access over cable was both a telecommunications service
and an information service. The categorization of "telecommunications" service
does not, however, necessarily mean that the service is subject to all of the
traditional common carrier regulations that apply to telephone companies.
Indeed, the Commission has the statutory authority to forbear from such
regulation.
I plan to propose to my fellow commissioners that we
initiate a proceeding that will examine the implications of the Portland
decision and establish a framework for cable Internet access. While the current
indications are positive, the Commission is of the view that in this
fast-changing industry, we must constantly reassess our position on this issue,
and be prepared to move quickly should industry conditions change for the worse.
Similarly, the policy of relying on market forces in the first instance
to create a competitive dynamic in the deployment of advances services is
working in the wireless and satellite industries in which new competitive
entrants are investing in facilities for high speed Internet access with a
minimum of regulation.
This preference for a market-driven approach to
cable access is often noted by incumbent local exchange carriers to be in
contrast to what they see as requiring access by competitors to their broadband
services. The reality is that we've taken a consistent approach to new broadband
advanced services across platforms. In the Commission's Advanced Services Order,
the Commission declined to require incumbent local exchange carriers to unbundle
their advanced DSL equipment such as DSLAMs as long as competing carriers are
able to provide their own advanced service.
The 1996 Act is clear that
because of their historic monopoly status, incumbent LECs during the transition
to competition must permit competitors to lease local loops in order to connect
their own equipment. But, once this is possible, the Commission has chosen to
encourage incumbent LEC investment in new advanced technologies and services by
not requiring that they make those new investments to competitors on an
unbundled or discounted basis.
This policy has been enormously
successful. According to industry analyst Telechoice, in the six months ending
in March, incumbent LECs more than tripled the number of central offices with
DSLAMs from about 1,200 to more than 3,800 while increasing deployed DSL lines
from 220,000 to 563,000 customers. The growth of broadband services is
explosive.
Conclusion
In conclusion, the 1996 Act is working.
The explosive growth in the deployment of broadband services and the vigorous
local competition in New York and Texas prove that the Act is working. Passage
of the proposed legislation at this critical juncture would disrupt the Act's
delicate balance between regulation and deregulation, postpone the benefits of
competition to consumers by creating uncertainty and litigation, curtail the
flow of investment into new markets, and inhibit the Act's goal of fostering
broadband deployment. For all of these reasons, I urge you let
the Act continue to work.
END
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