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July 26, 2000, Wednesday

SECTION: CAPITOL HILL HEARING

LENGTH: 22983 words

HEADLINE: HEARING OF THE SENATE COMMERCE, SCIENCE AND TRANSPORTATION COMMITTEE

SUBJECT: INTERNET ACCESS

CHAIRED BY: SENATOR SAM BROWNBACK (R-KS)

LOCATION: 253 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.

TIME: 9:30 AM. EDT DATE: WEDNESDAY, JULY 26, 2000

WITNESSES:

JOHN SHELBY BRYAN, CHAIRMAN AND CEO, ICG COMMUNICATIONS;

JAMES D. ELLIS, SENIOR EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, SBC TELECOMMUNICATIONS, INC.;

ARNE HAYNES, PRESIDENT, THE RAINER GROUP;

ROBERT TAYLOR, PRESIDENT AND CEO, FOCAL COMMUNICATIONS;

SUE ASHDOWN, CO-OWNER, XMISSION;

TOM DUESTERBERG, PRESIDENT AND CEO, MANUFACTURERS ALLIANCE;

JAMES K. GLASSMAN, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE;

ERIC STRUMINGHER, MANAGING DIRECTOR, PAINE WEBBER;

BODY:
SEN. SAM BROWNBACK (R-KS): The committee will come to order.

The committee today will hear testimony on S. 2902, the Broadband Internet Regulatory Relief Act of 2000. The legislation would eliminate unnecessary regulations that currently inhibit the deployment of broadband services in rural and other areas. I welcome all of you to the hearing. I look forward to the testimony.

Broadband services have the potential to dramatically change the way we communicate, learn, obtain medical treatment, shop, and entertain ourselves. As much change as the Internet itself has wrought in our society, having high-speed access to the Web increases the types of applications that can be provided over the Internet. But before they can be realized, we need to ensure that all Americans, whether they live in urban or rural areas, whether they live in flat or mountainous areas, or whether they live on the coast or on the Great Plains, have access to broadband services. That is what the hearing is about.

The problem is that, while broadband services are being deployed at increasingly rapid pace, they are not being deployed in rural and other high-cost, low-profit areas. A recent study conducted by NTIA and the RUS (ph) found that: "Deployment in urban and rural areas is not proceeding at a comparable pace. The major cable and DSL providers are both concentrating on serving metropolitan urban areas with high population densities. Residents in rural areas will generally be the last to receive the service."

In addition, a recent Sanford Bernstein-McKenzie study found that: "Many of the cable upgrades to date appear to be targeted at the most attractive neighborhoods, i.e., high density and high household incomes."

According to one survey, more than 73 percent of cities with populations of 500,000 to 1 million have cable modem and-or DSL service, but less than 5 percent -- less than 5 percent -- of towns of 5,000 to 10,000 have cable modem service, and less than 2 percent of such towns have DSL service. All the cities surveyed that had populations greater than one million had both cable modem and DSL service, while less than two-tenths of one percent of towns of less than 1,000 people had either cable modem or DSL service.

The NTIA-RUS study found a plausible explanation for this disparity: "The costs of high speed cable data deployment and operation in rural areas are high and, because the subscriber base in rural areas is more dispersed than in more densely populated areas, there is less economic incentive to connect rural areas."

Some members of the competitive community argue that competition will drive broadband deployment into rural areas. That is simply not the case. As the NTIA-RUS study found: "There is little evidence to date that competition among wire-based and terrestrial wireless-based systems has promoted near-term deployment of advanced services in rural areas outside of towns."

In addition, the Sanford study previously mentioned found that: "Wireless will not be a factor in the residential broadband market until at least 2002." The Bernstein-McKenzie report further stated that fixed wireless "will primarily address residential customers and markets in areas where advantageous climates and topographies permit filling in holes that cable and DSL find less economical to serve."

Competition will therefore not drive broadband deployment in rural areas. The economics of broadband deployment in rural areas simply do not facilitate the type of competition that we currently are witnessing in urban and densely populated suburban areas. As a result, Congress needs to provide an incentive to companies to deploy broadband services in rural areas.

Different people have looked at this and said there is different ways we could go. Some Senators have proposed subsidies to facilitate deployment. Others have proposed tax incentives. But before we explore either of these avenues, Congress needs to take a look at how we regulate companies when they provide broadband services. By eliminating unnecessary regulations, we can provide the proper incentives for companies to make broadband as ubiquitous as the telephone.

As even FCC Chairman Bill Kennard has acknowledged, broadband is a nascent market, in which no company or particular technology is dominant.

SEN. BROWNBACK: If no company or technology is dominant, then no carrier should be regulated like a dominant carrier when it offers broadband services. The incumbent rules of section 251[c] of the act should continue to apply to telephony and the old parts of the telephone network, but when it comes to new broadband services and new pieces of the network the incumbent local exchange carriers, the ILECs, should be subject to no more regulation than any other company.

The current disparity in regulatory treatment is most striking with respect to cable companies, which have a comparable customer base as ILECs, yet are almost completely unregulated with respect to high speed cable modem service. According to the Bernstein-McKenzie study again: "Under the status quo, cable has thus enjoyed a benefit, namely freedom from regulation, relative to the telcos on high speed services."

Regulatory parity would provide the ILECs with the same economic incentive to invest in new services, technology, and equipment as any other broadband provider.

ILECs could aggressively deploy new equipment and offer new services without enabling their competitors to borrow the ILECs' facilities. ILECs would recover their costs as quickly as the market permitted.

The Broadband Internet Regulatory Relief Act would address these issues. Primarily what it would do is the large ILECs would be required to provide advanced services to 80 percent of their serviceable customers within 3 years and to 100 percent of such customers within 5 years. ILECs would no longer be subject to stricter regulatory requirements that do not currently apply to cable companies or CLECs for the provision of advanced services. There is a number of other provisions in the bill which we will talk about here from panel members today.

Very few companies would ever enter a new market by serving less profitable areas first. But with the right incentives, the ILECs could be poised to enter the broadband market in rural areas now and prevent thousands of rural communities from being denied high speed access to Internet. The Broadband Internet Regulatory Relief Act provides such incentives and I hope that my colleagues will give it their consideration.

I would note before we go to the panel that Senate Bill 2902 does not in any way, shape, or form prevent the payment of any compensation to competitive carriers for their cost of transporting traffic to the Internet. While the legislation precludes the application of reciprocal compensation to Internet-bound telecommunications traffic, S. 2902 does not prevent the FCC from crafting a new formula for compensating CLECs for handling such traffic on their networks, and I would hope that our witnesses, to the extent that they have stated otherwise, would correct their testimony in their oral remarks.

With that, we have a number of panelists here to testify on two panels on this very important topic of how we get broadband high speed Internet access out to rural areas and broadly dispersed across this country. On panel one we have: Mr. John Shelby Bryan, Chairman and CEO of ICG Communications; we have Mr. James Ellis, Senior Executive Vice President and General Counsel of SBC Telecommunications; Mr. Arne Haynes, Skip Haynes, broadband, The Rainier Group; and Mr. Robert Taylor, President and CEO of Focal Communications.

All cell phones will be turned off during the hearing if you could, or put them on stun if you would, instead of on the other route, if possible.

We will run the clock on -- let us put it on a five minute interval to give you some idea of where you are. We will take your full written testimony into the record if you would like to submit it as such. But I would appreciate your directing your attention as to how can we address this topic of getting the broadband high speed Internet access out to the broader dispersed areas, the rural areas across our country that are being left out in this current expansion.

So with that, Mr. Bryan, if you would be willing to testify.

JOHN SHELBY BRYAN: Good morning. Thank you for the opportunity to appear before you today and discuss the implications of the proposed broadband and reciprocal compensation legislation for national telecom policy. I am Jay Shelby Bryan, Chairman and Chief Executive Officer of ICG Communications, Inc., and I am here also on behalf of COMTEL and ICG is a member of ALTS.

ICG is the largest independent facilities-based CLEC, meaning that it is not affiliated with any cable company, long distance provider, or, importantly for today's hearing, any Internet service provider, ISP.

I begin with one point on which I believe everyone in this room can agree: competition in the local telecommunications market yields numerous customer benefits, including technological innovation, lower prices, and improved quality. Congress brought these very benefits to customers by passing the 1996 Telecommunications Act. My experience has been that the act embodies a great vision that has just begun to be realized.

In many ways, ICG's story is just what Congress intended by the act. We are deploying brand new technologies to provide innovative services. We are building out an extensive nationwide telecommunications network using fiber optics and packet switching facilities, and we are deploying broadband services at a high rate. In addition to all types and sizes of business customers, we also play an important role serving the ISP market. In fact, we are handling 10 percent of nationwide ISP traffic and carry 30 percent of ISP traffic in California alone.

ICG cannot effectuate the pro-competitive goals of the act by itself. We are joined by over 375 CLECs in the United States, including 333 facilities-based CLECs, employing over 70,000 people. The capital that we raise has been spent deploying over 820 voice switches and 1400 data switches, 10.4 million access lines, and over 4 million miles of fiber.

These figures represent no small feat by new competitors who have benefited from almost every provision of the act. I think it is fair to say that there would be no DSL if it were not for CLECs. Virtually the entire Internet backbone network is being provided by competitors. Data CLECs supply over 100,000 of the 500,000 total DSL lines in service, a market share of 20 percent.

More importantly, CLECs instigated the ILECs to deploy DSL themselves, to the benefit of all consumers. SBC says it will make DSL service available to 77 million customers by the year 2002. Would this have happened without the act, without competition? I think not.

In that context, what about the proposed bill? Unfortunately, it would put telecommunications competition in reverse and would severely handicap competitors at the very moment they are beginning to see profitability on the horizon. The central premise of the bill is that the incumbents should not have to unbundle or permit competitors to interconnect with their advanced telecommunications network. It is improbable that ILECs would build a new advanced network that does not depend significantly on the existing network which was built with captured ratepayer dollars.

Moreover, to fence of new network from competitors is bad policy. Do we tell the clever innovator in San Jose with an idea that he cannot connect to Bell's new packet switches to compete calls to his customers, even though it may create a tenfold savings to the ultimate customer? Are we going to wall off networks that are used to provide advanced services, leaving only the old network accessible to innovators and competitors? Such a result makes no sense.

The reciprocal compensation provisions of the proposed legislation would cause serious harm to local competition and, perhaps worse, significant harm to the Internet. How did the dial-up access market develop? Senator Brownback, you were referring to the fact that there is limited service in the rural areas. Well, 3 or 4 years ago the ISP's wanting customers to reach them were not also being adequately served by the ILECs. Their failure created an opportunity for my company. We did a good job in serving the market and won customers. We saved the ILECs from deploying billions of dollars in capital and helped prevent customers from moving off the telephone network to other providers like cable telephone companies.

In spite of the technical and legal complexities, the crux of this issue is simple. While the ILECs want to collect lots of money for the services they provide to CLECs, the ILECs find it inconceivable that they must pay CLECs for the same services. In the simplest terms, CLECs must get paid somehow for the costs they incur.

But let us remember what competitors have had to go through to get this business. Before we can provide service to ISP's, we have to spend at least $10 million for a single circuit switch so people can connect to the Internet. Then we have to deploy fiber or trunking to the Bellco central office and in turn we have to deploy connection to the ISP's. Then we must market the ISP's and sell them our service.

Only after we have made this significant capital investment and these expenses do we earn the right to terminate ILEC customer traffic on our network. While ILECs and CLECs may disagree and litigate about what those costs are, no one actually denies there are costs.

So how should CLECs get paid for these costs? CLECs cannot charge ISP's access charges, as they would a long distance carrier. The FCC has appropriately prohibited the use of that compensation mechanism. What are the other options? The ILECs suggest that the CLECs should bear the burden of these costs themselves. This is not possible. CLECs are constantly seeking capital from the debt and equity markets to build network infrastructures. If CLECs face uncompensated costs, they will be forced to think carefully about serving ISP's, to the detriment of all users of the Internet.

Could CLECs just get the money from ISP's' customers, as the ILECs suggest? We have a grave concern that raising the cost of using the Internet by passing additional costs on to the ISP's will have a dampening effect and the exciting growth in the Internet services. Secondly, we would worry about the negative impact on the many small but innovative ISP's who may not be able to compete against the ILEC- owned ISP's.

Alternatively, if we are not compensated for our network, we would have to evaluate whether it made sense to serve that market. ISP's could be left to search for network capacity, capacity they may not find in the marketplace. Without competition in the fastest- growing segment of the telecommunications market, Internet access, and insufficient capacity on the incumbents' network, where could they go? Nowhere, and the development of the Internet would stop dead in its tracks.

The way I see it, when ILECs pay CLECs for costs of services the CLECs provide, which costs the ILECs actually avoid, what harm could possibly result? Simply because ILECs pay money, even a significant amount of money, to the CLECs does not in and of itself mean something is wrong with the act.

If this is such a problem for the ILECs, they can avoid it by deploying their own network. Instead of coming to Congress seeking legislation that protects them from competition, they can do what we did: build out a network, invest billions of dollars. And if the ILECs want to get rid of reciprocal compensation so badly, do it the way the act intended, the old-fashioned way, by competing in the marketplace for Internet access.

If Congress truly is committed to promoting competition, innovative and consumer choice in telecommunications throughout the Nation, you should not amend the act as Senator Brownback proposes. Instead, Congress must allow the marketplace to continue to develop, with competitors and incumbents competing on fair and just terms.

Due to the competition that currently exists in the broadband marketplace, it is only a matter of time before all Americans have the ability to receive broadband access. No changes in the acts are needed to accomplish this goal. ICG urges you to continue to support competition in the telecommunications marketplace and its resulting benefit to consumers.

Thank you for the opportunity to testify here today. I would be glad to answer any questions.

SEN. BROWNBACK: I appreciate your testimony. I will look forward to asking you the question of how do I get my rural areas served, if you would.

Mr. Ellis.

JAMES D. ELLIS: Good morning, Mr. Chairman. I am Jim Ellis, General Counsel of SBC Communications. Thank you for the opportunity this morning to share my company's views on this important legislation.

SBC in analyzing legislation that affects our business really follows two broad principles: First, competitive markets should be free from government regulation of the rates, terms, and conditions for the services that are offered in those competitive markets. Second, where for some public policy reasons regulation is imposed, it should be imposed on all service providers equally, symmetrically, for the services they all offer in those markets. I am pleased to say the legislation that is before us is going in the right direction with respect to both those principles.

I am not going to take a lot of time talking about the history of advanced services or even current market conditions. But there are a couple points that I think are of fundamental importance in evaluating this legislation. The first one has to do with what people refer to as a bottleneck: Is there a bottleneck for advanced services? Many people talk in terms of the justification for asymmetrical regulation, regulation of the telephone company, is based on the contention that there is a bottleneck.

Well, I submit there is no such bottleneck for advanced services. If we look at the residence market today, cable modem, as we all know, is a direct competitor for the xDSL services provided by the telephone company and others. The provision of cable modem services and xDSL services are provided independently. They do not use our networks and we do not use their networks -- completely independent. In addition to cable modem and xDSL, we know that we have wireless alternatives, terrestrial and satellite are coming on. They do not depend on us. They are provided completely independent of the telephone company operation.

To the business market there is even more alternatives. AT&T and the long distance companies provide direct access to their customers without resort to telephone company facilities. The point is there is no bottleneck as it relates to telephone company control of facilities necessary for advanced services.

A second point: We do not even have a leadership, let alone a dominant, position with respect to advanced services. If there is any evidence of absence of a bottleneck, it is simply that we have in the marketplace four or five customers of the cable modem people for every one we have for DSL. There is no bottleneck. We do not have a dominant market position.

Despite that, what we have is asymmetric regulation, regulation that directly handicaps SBC and the telecommunications telephone companies' ability to deploy advanced services and serve the advanced services market at the same time that asymmetric regulation protects our competitors from full competition and deprives the public of the benefits of a fully competitive marketplace.

Let me give a specific example of what that means. The regulation of the cable modem people is virtually nonexistent. They do not have common carrier obligations, they do not have to interconnect their facilities, they do not have to permit resale. They do not have to -- and this maybe in the future will be the most fundamental point -- they do not have to provide open access. They can dictate the ISP they want to use, the terms and conditions. They can subsidize, they can bundle, and so on.

The telephone company does not have that capability. It is burdened and the public is denied the benefits of a fully competitive marketplace. It does not have to be this way. I would encourage the committee to look at the experience in the wireless industry. In 1983 there were two providers. Today we have five or more in every market, five or more facility-based competitors. That happened with almost no regulation in that industry -- competitive prices, alternative new services. That can be a model for advanced services as opposed to asymmetric regulation.

Now, with respect to reciprocal comp, we fully support the bill. Reciprocal comp was intended, designed to compensate the terminating carrier for its costs, if they were otherwise not recovered, for completing a local call. That is not what is happening. The reciprocal compensation today is not paid for completing a local call when it goes to the Internet, the World Wide Web. Secondly, it has no relationship to the costs of completing them.

I will give a specific example in my own case why it is not a sustainable system. My daughter was in law school several years ago and she came to me at Christmas, and I said: What do you want for Christmas? She said: I would like a second line. I said: Well, that is not bad; that is about $15 in Texas; that is reasonable. I said: Why do you want it? She said: Well, I want to leave my computer on, hooked up to the Internet, so I can get e-mail all the time. I said okay.

So I got her the second line. Southwestern Bell collected $15 or so from me for that second line. I then find out that if she is served, her Internet service provider is behind a CLEC -- ICG, Focal, or one of the others -- and she does exactly what she said, at that time we would have paid that CLEC $450 for a customer that we collected $15. Now, that is not sustainable.

My company will spend something like $750 million. 90-some percent will be in the area of reciprocal compensation. It is money that could be spent to deploy broadband faster to the very communities that Senator Brownback is talking about. We are a company that is committed to spend $6 billion to bring broadband to 80 percent of our market. I wish it could be 100, I wish it could. I wish we could take that $750 million and deploy it to that other 20 percent, many of which involve rural communities.

I would ask the committee to consider these points and I would be happy to answer questions.

SEN. BROWNBACK: Thank you very much, Mr. Ellis.

Mr. Haynes, thank you for joining the committee today.

ARNE L. HAYNES: Thank you, Mr. Chairman, Senator Rockefeller. My name is Skip Haynes. I am the President of the Rainier Group. We are an incumbent local exchange carrier in the foothills of Mount Rainier some 16 miles from Seattle in Washington State. We have been in the business since 1910. My great-grandfather won it in a pinochle game in 1912 and I am a fourth generation manager, and my son just joined the company to run our interactive media operation.

SEN. BROWNBACK: The family still plays pinochle?

MR. HAYNES: We gave it up; it is too dangerous.

In my written testimony I have given you some idea of how small we are, but we have less than 4,000 incumbent phone company access lines that we serve. We have approximately a thousand cable TV customers that -- we have started a cable TV company after the act was passed in 1996. We compete with AT&T, the former TCI. We also have 400 facilities-based CLEC customers. We are an Internet service provider and we provide long distance.

We are very much a startup operation. We have two other operations going. We will soon be competing with Pacific Bell in Central California and with Bell South in Florida. Again, we compete with AT&T, Qwest, the former U.S. West properties, a myriad of IXCs, and Internet service providers. We have 50 employees. Again, we are very small. We are triple our size since the act passed in 1996. So we are aggressive and excited about the new opportunities competition brings.

What we like about the bill, Senator Brownback, is its relief from regulation, and we support relief from regulation in every form, both Federal and State. We believe and we know from experience that regulation impedes competition and that regulatory costs are obscene, and anything we can do to reduce those, including the participation they would like to have in our competitive markets, is important.

SEN. ROCKEFELLER: Do you feel that way about the FAA also?

MR. HAYNES: No, sir, but they are doing a different service, Senator Rockefeller. That is a public safety thing in my opinion.

SEN. ROCKEFELLER: Thank you.

SEN. BROWNBACK: Please proceed with the testimony.

MR. HAYNES: Thank you, Senator Brownback.

There is no digital divide in our Washington State operations. We provide cable modem services now. We are rolling out DSL services and we have conditioned our plant to serve 100 percent of our customers. That means the end of the Scott Turner Road as well as downtown Eatonville with its 1600 customers. That is the world headquarters, by the way.

I am either very bright for starting 10 years ago to develop a data network or I am really stupid for having invested shareholder money in something that we may be forced to give away to competitors. I believe the Brownback believe will allow us to continue to expand our operations. Without the deregulatory aspects of the Brownback bill, we think our operations in Washington could be severely curtailed.

Simply stated, a competitor using our facilities at ridiculously low costs can price their services below ours. Few, if any, of our costs go away at that juncture. Residual customers will have to pick up the difference. This is like Robin Hood stealing from the poor and giving it to the rich.

I started our data-focused expansion 10 years ago when I rejoined the company. I never dreamed that regulators would be so unfair and so unreasonable. If the current regulatory climate persists, I may not be able to continue to invest shareholder money in our incumbent LEC beyond the minimum required to provide plain old telephone service.

Meanwhile our competitor, little old AT&T, has little or no regulation or requirement to unbundle their digital facilities. Subsequent to the Ninth Circuit decision, why should my advanced services be subject to regulation and not theirs?

The Brownback bill has something I am a little more schizophrenic about. That is reciprocal compensation. Our first CLEC does not have a reciprocal comp component. I do not receive it or do not pay it. Our newest one will. We could make a lot of money with reciprocal compensation, but a business plan that is built on windfall profits makes no sense to me, and ultimately justice will prevail and I believe your provisions are correct, Senator Brownback. This is an unreasonable loophole and needs to be eliminated.

One part of the bill that I would recommend some enhancement, please, is preemption of State regulation in the same manner as you are recommending for Federal. State regulators get many of their misguided notions from the FCC. It is also true, based on my experience, that the rules applied to the large companies trickle down to the small companies. Furthermore, the State regulators are drooling to fill the gap where any Federal regulation will go away. So, frankly, the States are more of a concern to us and we request that whatever language is required in this bill to make State and Federal regulation comparable would be very helpful.

I just want to say one more thing. Any one of our employees can better serve our customers than anyone in regulation. So let market forces work, and I believe the Brownback bill will help.

Thank you very much.

SEN. BROWNBACK: Thank you, Mr. Haynes, for joining us today.

Mr. Taylor, thank you for being with us.

ROBERT TAYLOR: Thank you, Mr. Chairman and members of the committee. My name is Robert Taylor. I am the CEO of Focal Communications, as well as the Chairman of the Association for Local Telecommunications Services, also known as ALTS. ALTS represents approximately 100 facilities-based CLECs across the United States, including wire line companies that offer both circuit-switched, packet-switched, and wireless connectivity to circuit-switched and Internet-based networks, as well as DSL companies that provide many of the broadband services we are talking about today.

Focal itself is a facility-based carrier offering services in 19 markets across the United States, with plans to enter 24 by the end of next year.

I certainly welcome the opportunity to appear here today on behalf of these competitive carriers and to explain why 2902 is in our minds anticompetitive and unnecessary. Certainly if any Congressional action is needed, it is action that will provide for stronger enforcement of the act. I think as you have heard from the other three panelists here, a lot has been done in the last 4 years. We have accomplished a lot. Companies like SBC have rolled out DSL to millions of their potential customers.

We are seeing it happen in both big cities as well as in rural markets. Some ALTS members serve rural markets. Companies like McLeod USA are providing broadband services in Iowa and other rural States today.

The act certainly is and was the most important piece of telecom legislation since the original Communications Act of '94, and you the members of this committee should take great pride in what you have accomplished. Since the act was passed, over $30 billion of new capital has been raised and put in the ground to provide new broadband services to customers across this country. The competitive bricks and mortars have meant lower prices, better services, and the revenues of the competitive telecom industry have exploded from less than a billion dollars before the act to almost $6.5 billion in 1999, and CLECs now employ over 70,000 people across the United States. Clearly, a fabulous success.

ALTS and its member companies believe that there is really no need for new legislation, that competition is happening, we are beginning to see the results of it, the numbers are very measurable, and the successes are growing every day.

For example, in one recent Wall Street report SBC was listed as offering DSL services to 14.5 million customers as of June 30th of this year. That is up from 12.8 million customers at the end of the first quarter. In 3 months they added 2 million potential subscribers to their network. That is a pretty fast rollout of high speed broadband technology and I think companies like SBC should be commended because they are fulfilling the mandate of the Telecom Act.

All of this deployment is occurring without any changes. We are all as a competitive industry, both the RBOCs, the small incumbents, and the competitive carriers, building network as fast as we possibly can. You can go knock on the door of Lucent or Cisco or Nortel and look in their warehouses; there is not technology sitting on the shelves. Every bit of chips and fiber and switches being made today is being put in the ground by one of the companies represented here today. We are building and working on the mandate that you gave us in 1996 as fast as we possibly can. It simply cannot go any faster.

Now let me turn to the specific concerns. First, we think the legislation attempts to establish a different regulatory regime based upon the technology deployed. This is going to create some significant problems between the haves and the have-nots simply defined by the technology that they use. 2902 would limit the provisions of the '96 Act as it was designed to open competition not only in the circuit-switched arena, but in all aspects, because when we look at DSL service today, while there are many different providers, all of the facilities, all of the access to the customer, is controlled by the Bell operating company. So there still is a bottleneck out there that needs regulatory oversight.

The distinction based upon service or technology would virtually ensure the monopoly control, Bell's continuing monopoly control, not over older services but over all of the new services. Redefining the pieces of the network that they use today and calling it broadband simply changes their ability and their need to open it up to new competitors, represented by ALTS.

Second, the legislation removes State and Federal regulatory oversight for almost all of the services provided by the local incumbent exchange carrier, even though that carrier today is still virtually a monopoly. In most markets the incumbent still has over 95 percent of the customers interest the market. Competition is beginning. It is not there yet. When we look at the CLEC industry as a whole, I think as of the end of last year there was only one CLEC out there today that was profitable. This is a long-term business. It takes long-term investments and it is going to take a while for this to be a profitable business. But we think the investments are there, the opportunity is there, and it is a sound business to be in.

Third, the bill would prohibit any payment of compensation related to the transportation and termination of calls to the Internet service providers as it is defined today in reciprocal comp. Reciprocal compensation was not the CLECs' design. The rates were not set by the CLECs. The rates were set by the Bell operating companies. The CLECs had asked for zero. The payments that are being made today would have been zero if the plans that the CLECs had proposed 4 years ago would have been put in place.

But, given that, the rates have fallen dramatically from where they were at a penny a minute at the creation of the act to now in some States one-tenth of a cent a minute. So the rates for reciprocal compensation have fallen dramatically and these are contractual relationships, and the process is working.

Fourth, the legislation would not require one dime of new investment in broadband facilities. Certainly it changes some of the rules on which people operate, but it does not force them to do more. Clearly, if that is the goal of the bill, it does not accomplish that in our minds.

To keep the exemption for packet-switched services, the bill requires that an incumbent carrier demonstrates after 3 years that it can reach 80 percent of the customers using an industry-approved standard and existing loop facilities. The same is true of the 5-year test.

But not all customers are served by incumbents, but rather those customers that can be served using existing technology. It is the existing technology that we need access to, because we will deliver the service using the existing technology and the incumbents are doing it and between the two of us we will get there.

Finally, the legislation is not needed to speed the deployment of advanced services. As demonstrated in the press releases of many of the RBOCs themselves, they are deploying DSL services as fast as they can. There is no new need for incentives from a legislative standpoint to get that to go any faster. In fact, as we talk to the manufacturers, there is not the availability from a manufacturing standpoint to build more chips and to build more technology.

The limiting factor is not the regulatory impediments. It is the suppliers, it is the labor market, it is the fact that you guys have created a really good economy. That is the challenge that is out there today. Deployment is occurring under the existing laws in large measure due to competitors like ICG, Focal, and other ALTS members. The message from this rapid deployment is crystal clear: No change is needed in the act. Congress should stay the course and market forces will provide the results that you guys are looking for.

Thank you very much and I appreciate my opportunity to speak here and will certainly answer any questions.

SEN. BROWNBACK: Thank you, Mr. Taylor.

We will run the clock on questions, if I could, for members since newer members have attended and keep this at 5 minutes each for questions if we could. So we could turn that on.

I wanted first to congratulate all of you and anybody associated with telecommunications in the room for the aggressive competition that is generally happening in telecommunications. That was what was envisioned in the act and much of that is taking place.

The one problem and the whole focal point of the hearing is that we are not getting it in an area that I care deeply about, which are rural areas across our country. We have historically as a Nation not decided -- we have decided as this Nation as a part of public policy that we will not leave rural areas behind. Whether it is on rural electrification, rural telephony, any of these things, we have decided, while there may not be as much economic activity because of the density of population or whatever other issues, we are not going to leave them behind.

Yet, on the high speed data transmission, Internet access, they are being left behind. I wish that more of your testimony had been directed at that. But I would direct this particularly, if I could, to either Mr. Taylor or Mr. Bryan on this question. If you disagree with this statistic, then I would like to hear your number, because this one is so bad for rural areas.

According to one survey, more than 73 percent of cities with population of 500,000 to 1 million have cable modem and-or DSL service, but less than 5 percent of towns of 5,000 to 10,000 have cable modem service and less than 2 percent have DSL service. Those are the numbers that we have. That is what the bill is aimed at trying to get at.

Now, could either of you tell me how we could get those areas covered, then?

MR. BRYAN: Let me just respond -- SEN. BROWNBACK: And if you would direct it on that question, I would appreciate it.

MR. BRYAN: I share your concern and I think one of the real ironies is people who live in rural areas probably in many instances require broadband more than maybe inner city dwellers. A lot of small businesses are run out of farms. They need this facility. It is not just an entertainment vehicle. It is actually access to a portal that is going to help their business.

So I think you are right to be concerned about this.

I think very few people in this room would have had those concerns that you now have about broadband access to rural areas 4 years ago. It has only been the activity of the competitors and the innovators that have now raised this to the level of concern. You are concerned about it, we are all concerned about it, because we now realize there is an opportunity for people in the rural areas that no one would have considered had the innovators and competitors not gotten busy and emphasized the benefits and made these benefits available.

Now, those of us who are competitors have only been at this for 4 years and, as you know, 271 relief has only been given just recently, i.e., the ILECs have not been cooperating to let us compete in this marketplace.

SEN. BROWNBACK: In rural areas?

MR. BRYAN: Throughout the country.

SEN. BROWNBACK: You have been able to compete in the urban and suburban ones.

MR. BRYAN: With great difficulty. Hence the reason and the delay in getting 271 relief. I would say that any person in the competitive telephone industry -- I am sure you have heard it in the past -- has complained bitterly that at every step of the way it has been difficult for us to deal with the incumbents.

That is now changing, but for the first 3 years of our existence we have found it difficult to provide service in the cities --

SEN. BROWNBACK: Mr. Bryan, if you could focus. We have got a limited period of time. Why are you not in rural areas?

MR. BRYAN: Well, as we have started this activity 4 years ago, we are obviously going to the markets which are going to be initially more fertile. We have not had the benefit of being a monopoly for 100 years, but certainly it is not our plan to bypass the rural areas. My company actually has a nationwide network that is both in rural and in urban areas. But it is clear that the bulk of our business in the first 2 years is in the more densely populated areas.

We will certainly radiate out of that area into more rural areas over time, but we have only been in this business for a brief time period.

MR. TAYLOR: Mr. Chairman, if I could add. Since the passage of the act there has been a lot of new companies that have been formed specifically to go after rural areas, companies like New Edge Networks, Jado, DSLNet, and TriVergent, all ALTS members.

In addition, having lived outside of Cedar Rapids in a small rural town, there are places where competition in broadband networks is being brought to rural areas. Of the 153 independent telephone companies in Iowa, all of them have fiber. Every high school and junior college in Iowa has broadband connectivity to it today.

SEN. BROWNBACK: But Mr. Taylor, do you disagree with these numbers that I read of the percentages?

MR. TAYLOR: I cannot disagree with those numbers, but the problem is, if you simply take a look at a McLeod USA securities document, the amount of litigation that they have with USWest, now Qwest, trying to get into rural markets is significant. Companies want to get into rural markets. It is difficult to do that.

If more enforcement of the original act was done, we could get in there faster. There are some companies that are beginning to do it, but it is difficult to do it in Chicago and New York and Washington, D.C.

SEN. BROWNBACK: Thank you, Mr. Taylor.

Mr. Ellis, how does the lack of regulation of broadband services offered by cable companies make such services more competitive than DSL services offered by your company?

MR. ELLIS: Senator, I will be pleased to answer that. I would like to just make a comment, if I could, on the answers that were just given, because I think the experience of both these companies makes a point on reciprocal compensation. It is not a question of these companies not serving rural customers. These companies serve primarily and perhaps almost exclusively businesses. They do not serve residential customers in urban cities, and one of the reasons they do not is because of reciprocal compensation and the way it works.

They would be disadvantaged. Every time they retain or obtain a residential customer, instead of being able to collect reciprocal compensation from the ILECs or the telephone company, they end up having to pay it. They are discouraged. They are disincented on the urban residential customers, let alone going out to rural areas. That is a fundamental problem.

Now, in terms of how the rules, the asymmetric regulation, affect us, it is the typical set of having to live with and operate with a regulatory regime when you are competing with people like cable modem that have no regulation. We are regulated pervasively where they are not. So every decision we make has to be in light of that, that we stand at a competitive disadvantage, whether it be in terms of our prices, bundling, packaging, we talked about the 271 issue, their ability to leverage content, their ability to pick and choose what they want to put on, what access they want to give.

All of those things put us at a tremendous disadvantage, as does the fact we are going to pay, as I said, $750 million or thereabouts in reciprocal compensation, moneys that could help us go from the 80 percent of our customers that we will serve with broadband to closer to 100 percent, to cover those rural areas.

We want to be there. We are the only company that has made that kind of commitment. But the asymmetric regulation has no place in a competitive market, and that is what we suffer from. There is no bottleneck. These people have the same options to get to the customer that the cable people do, that we do, that the wireless people do, and the satellite people. But yet we suffer from, and our customers and the public suffers from, asymmetric regulation.

SEN. BROWNBACK: Senator Rockefeller.

SEN. JOHN D. ROCKEFELLER (D-WV): Thank you, Mr. Chairman.

I always like to start out by pointing out that I never had a single constituent or got a single letter, a single e-mail, had a single conversation or a single phone call in which anybody asked me or anybody that I know around here to deregulate the telecommunications industry. So we did you an enormous favor. It was not asked for by our constituents. It was asked for by the telecommunications companies of America.

We did that and in return we extracted e-rate and some other things, which some people in here supported and others did not. But it passed overwhelmingly and it is probably the future of the Nation.

That is why I also disagree with you, Mr. Haynes, when you differentiate between the FAA as being public safety and this kind of regulation. I think there is a big comparison between broadband distribution and public safety in the broader sense, i.e., everybody having a chance, knowing it. Otherwise I think this could become, the digital divide could become the next civil rights movement on a worldwide basis, with terrorism and all kinds of things involved. So I look upon it very differently than you do, obviously.

My question, Mr. Ellis, is to you. You want to -- having come to us and having gotten a great deal, you want the Brownback bill, which I do not support because I think it would undo some of the checks that the RBOCs want so badly to undo now, having settled for them earlier. So there is discussion about regulation.

There is 37 co-sponsors to a bill that Olympia Snowe and I introduced which would give tax credits which would escalate as the broadband got more serious in its intensity for uploading and downloading for rural areas. SBC has not actually taken a position on this and it seems to me that tax credits are often a good way to incent the private sector.

Is this a bill that -- as I say, it is very bipartisan. it is very good, I think. It relates to rural areas.

Is this something that SBC would find in any way helpful?

MR. ELLIS: Senator, we applaud the intent of the bill. We have had our tax people look at that at some length and we have some concerns that the bill does not in its present form accomplish what I think is intended, namely to create incentives to assist in the deployment of broadband. I think we certainly are in favor of the goals and the objectives, and we will be providing some thoughts to your staff and others on the problems that we see in its present formulation.

But the idea is a good one. We applaud it.

SEN. ROCKEFELLER: The idea is a good one, but you say it will not work.

MR. ELLIS: I am not a tax expert, but I have been advised by our tax lawyers and the accounting people that the benefits are not delivered in the way I think was intended. That is, that the incentive, the whole purpose, does not work. The idea is a good one. We have got some ideas on how it perhaps could be improved.

SEN. ROCKEFELLER: Could you share those ideas with us? Because it is not often that the Federal Government offers to help the private sector do what needs to be done. You I believe said, or somebody I think said, that 80 percent of the country was getting broadband or would get broadband. That certainly does not apply where I come from. It is closer to 5 percent of the geography.

MR. ELLIS: What our commitment is that, independent of this legislation or others, we have made the commitment that we will deploy broadband, high speed access to 80 percent of our customers by some time next year.

SEN. BROWNBACK: Well, I congratulate you. I wish you were working in the East.

Thank you.

SEN. SLADE GORTON (R-WA): The Senate is in a roll call right now and Senator Brownback has left to go vote. Have either of you?

We will try to keep this continuous. I can tell my colleagues here, Skip Haynes is both a constituent and a friend. Skip, I think the problems that you face may be evidenced at least in small part by the fact that you are from such a rural area and from so far away they do not know how to spell the name of your company, even the staff here. It is "Rainier," after the mountain.

But I am going to let you add a little bit to the commentary that you make. You have done something that has not happened in most of the rural areas of the country. You are clearly a leader, perhaps in the top one percent. And yet what you are asking for here is to reverse some of the genius and the philosophy behind the 1996 Act and to restore a monopoly situation in broadband and perhaps even in telephony as well, directly or indirectly.

You have arrayed against you not only a number of rather large companies, but most of the intellectual opinion, the outside academic opinion in the country. Your testimony states very eloquently, why should you make an investment, the kind of investment that you have made, if you have got to give it away essentially at less than cost?

Is there not a cure for that complaint short of recreating a monopoly situation?

MR. HAYNES: Senator Gorton, it is great to see you, and it is a reasonable question. But in my opinion, unfortunately, the regulators at the FCC and in Washington State have now been reasonable. It seems as though, while we should wear white hats as incumbents for having provided service as well as we have for as long as we have, that all of the advantages go to the "new entrants." I think if we did have reasonable cost procedures, reasonable prices that we could charge, that would improve the situation. But my experience has been that the regulators have not been reasonable with the incumbents, unfortunately.

SEN. GORTON: And you are speaking of regulators at both levels?

MR. HAYNES: Yes, Senator.

SEN. GORTON: Can you differentiate between the State and the FCC at all?

MR. HAYNES: It has been my experience that the FCC has been unfair and unreasonable in its treatment of incumbents and, if anything, in Washington State it has been worse.

SEN. GORTON: Would any of the other of you, any of you who are on the other side of this issue, like to comment generally speaking on my question?

MR. TAYLOR: Yes, Senator. I think a lot of the issues that revolve around rates, whether they are end user rates or contractual inter-carrier rates such as reciprocal compensation, have remedies out there today that do not need legislation. End user rates can be raised or lowered in most areas fairly easily today. Inter-carrier compensation, reciprocal compensation, are simply rates that are set by the Bell operating companies and dictated to the CLECs. The CLECs have in the past focused on getting those down lower and we have been successful.

I think it is also interesting to note, where I live outside of the Chicago area I get both my phone service and my cable service from SBC and, interestingly enough, if cable is so well unregulated, it is surprising that SBC will not offer me high speed access on my cable system.

But more importantly, though, I think as we look at this, the Ninth Circuit has already decided that cable modem service is a common carrier service. So we are beginning to make sure that the inequities get fixed on the regulatory side, and I think all of the companies here have the pricing flexibility to make sure that that $15 phone line that Mr. Ellis daughter uses might be priced at $20 appropriately, or that the reciprocal compensation rates that SBC set at a penny might be appropriately priced at a tenth of a cent. Those can be done today without any changes from the committee.

SEN. GORTON: Mr. Ellis.

MR. ELLIS: Senator, it has taken Southwestern Bell Telephone Company 110 years to get the basic telephone rate in Texas to $9.85. I believe it was 1979 or '80 since the last rate increase on basic telephone services in Texas, and then it was like 25 cents.

I would like to take a little bit of issue, if I may, with the idea that we are seeking to reverse the Telecom Act. At the heart of the Telecom Act in '96 was a concept that the local company had a monopoly and had a bottleneck control over the provision of basic telephone service, particularly to residential customers. That was at the heart of it. We got it legally. It was there because of public policy for 100 years.

What we are talking about here is something where we do not have that bottleneck. In 1996 DSL was in the thoughts and minds of people. So was cable modem. New service. There are alternatives out there. There is no bottleneck. All we are asking is, given that there is no bottleneck, given that we are behind our competitors in the provision of advanced services -- as I said, four or five customers to one go to our competitors -- given those facts, all we are asking is for advanced services to be treated like our competitors are, not to be burdened.

If we have that option, I am here to tell you it will assist in the deployment to the rural areas, the other 20 percent that my company is not reaching. But there is a fundamental difference in voice communications, where we at one time had a bottleneck, and advanced services where there is no bottleneck.

SEN. GORTON: My time is up.

Senator Dorgan, I will leave it with you and I think Senator Brownback will be back by the time you have finished.

SEN. DORGAN: Well, if I am left alone I may pass some good legislation here.

SEN. GORTON: All by unanimous consent.

SEN. BYRON L. DORGAN (D-ND): It is a rare occurrence.

I probably only have a minute as well. I think the vote is nearly over. But I have been over in the Energy Committee this morning and regret that I have missed some of the testimony.

I do want to just make a couple of comments, however. This hearing I think is important and useful. Monopolies are a kind of cholesterol to the free market system. They plug the arteries of the system. When we passed the Telecom Act, we attempted to unleash the forces of competition in this area. I regret it has not worked as well as I would have liked. There is far more concentration than I would have liked.

But I see also evidence that the act is beginning to work -- new entrants, aggressive, robust competitors coming in, new investment money for startup companies. I think all of that is beginning to work. And I want to let it work. I frankly do not support S. 2902. I think it does short-circuit what we intended to accomplish in the Telecom Act.

I must also say that selling this approach on the basis of its benefits to rural areas I think is not accurate. I would say in North Dakota, for example, U.S. West is selling off most of its rural exchanges and it has been doing that for the last 4 or 5 years, trying to sell all these local exchanges. So I do not think that it can be documented that this somehow would be good for rural areas.

I have introduced legislation called the Broadband REA Program, essentially saying that I do not think the buildout of the infrastructure of advanced services is going to occur unless we do something like we did with electricity or telephone service to rural areas of the country. I support some tax incentives. Perhaps that works. I support something similar to the old REA program with revolving loans. Perhaps that works.

But I do not think that at this moment it makes sense for us to unravel portions of the Telecom Act, and for that reason I do not support 2902. I think this hearing is useful, however, to give an airing to these issues. While I have got to be on the floor of the Senate for the next hour, I will try to get a transcript, and I have read the testimony that you have presented.

As you can tell from the initial discussions, this is going to be a robust, healthy debate for some while to come. It was our intention when we passed this act to create a checklist by which the local exchange carriers could go out and compete in long distance, provided they meet certain things. Now, SBC has met that in Texas, as I understand it. It is not our intention to establish this as a barrier. We want the Federal Communications Commission, the State authorities, to work with the local exchange carriers. If they meet the checklist -- and they ought to be able to meet it; we are not creating barriers here, we are trying to create opportunities -- then we unleash the forces of competition.

But I tell you, I have heard all over this country from people who are new competitors that there are subtle and some not so subtle ways for local incumbents to prevent effective competition. That is the nature of things. That is the nature. It is the way things work. I understand all that.

But I think to pass 2902 really would begin unraveling forces in the Telecom Act that I begin to see working now in a way that I think can be exciting, yes, even for rural areas of the country.

I regret I cannot spend more time. I would love to ask a series of questions, but because of the floor vote I have to leave. Mr. Chairman, thank you.

SEN. BROWNBACK: Thank you, Senator. If you would like to submit some of those questions for the record, we would be happy to have those as well.

Senator Breaux.

SEN. JOHN B. BREAUX (D-LA): Thank you very much, Mr. Chairman. Thank you for having the hearing. It gives us an opportunity to discuss a lot of the issues that have been bubbling up for a long period of time.

I apologize to the panel for being in and out and having to testify before the Ag Committee and then having to vote. It shows you how things work or do not work around here, coming in and out.

But I would like to talk a little bit about the reciprocal compensation issue. Mr. Ellis, my staff tells me you addressed this. I am sorry that I missed it. Can you give me some dialogue a little bit, Mr. Ellis? Perhaps you have already done this, but how did it work before the Internet, the concept of reciprocal compensation? It kind of was a wash before we got into the new transition. We never had real strong rules with regard to payment for the use of other lines before the Internet came into being.

How did it work back in the dark ages?

MR. ELLIS: The concept was in the legislation simply to compensate a carrier for terminating a call if they were not otherwise compensated, and that call had to be local, local calls. We had other things for long distance, but if it was a local call and the carrier was not compensated otherwise.

What we have instead is the reciprocal compensation being paid for calls that, number one, are not local. These go to the World Wide Web. They are not reciprocal. You never get a call back from an Internet service provider at all. And they bear no relationship to the cost of completing that call. In fact, if you think about it, when a customer makes a call to the Internet and it goes to, let us say, ICG, ICG has a relationship with its ISP and that ISP pays ICG for one thing, the terminate the call that we pass off.

Under the present rules as they are being applied, not only do they collect from their Internet service provider for that one way, because nobody originates -- the Internet service provider does not originate a call. So not only does ICG collect from the Internet service provider, but they also collect from the telephone company, and they collect in a manner and in an amount that is totally disproportionate to the cost.

We have specifically asked ICG and others, what costs, submit cost studies that show what your costs that justify these exorbitant rates for reciprocal compensation. I know in three jurisdictions they have not submitted it and to my knowledge not a single data CLEC has submitted the costs for completing a call to justify what we believe is an unjustified and unsustainable amount.

SEN. BREAUX: Mr. Bryan, why has that not been done?

MR. BRYAN: We have submitted costs to SBC. Maybe you are not current with what is going on between the two companies. But it is -- as I said in my earlier testimony, there are actual costs that we incur before we carry one moment of traffic on it. We have to deploy switches that cost us about $10 million. We have to get an interconnection or trunking that, if we lease it from SBC, we obviously have to pay them. We then have to connect with the ISP's and then we have to go and see if we can market those services to the ISP's.

The reason that we have been successful -- so there are substantial costs associated with this.

SEN. BREAUX: Do you think nothing should be done with regard to this issue?

MR. BRYAN: I think that, as Mr. Ellis probably knows, the marketplace is sorting this out. In fact, with his company we are being paid probably 15 percent of what we were being paid 2 years ago.

So the rates have come down sharply and it is envisioned will continue to come down sharply.

It is hard to imagine that any companies should deploy equipment and save in this case SBC capital they would otherwise have to pay. But there is a point here. We got this business because the market, the ISP market, was not being well served by the various incumbents. We came in, we priced it maybe slightly below the Bellco prices.

But we got it because we offered them service that the Bell companies did not want.

SEN. BREAUX: I understand that. I am just worried about the compensation methodology that is being used.

Mr. Ellis, did you make a recommendation on what you think we should do? Should this be something -- I know Senator Lott and I have contacted the FCC with regard to some of their authority in this area to see what they might do about this. But what do you think? Is the marketplace going to take care of this? Do we need legislation? Do we just need to ask the FCC to make a decision on how these imbalances can be fixed or should be fixed? What is the solution?

MR. ELLIS: We support this legislation. But I would just say, I think the industry as a whole agrees there ought to be one policy, not left to individual States. There ought to be one approach to it. That has not happened. The FCC has had it for a long, long, long time, and there has not been a rationalization of the reciprocal comp rules.

SEN. BREAUX: What happens if we do not do anything legislatively? Then do you have 49, 50 different setups?

MR. ELLIS: We have all different in all our jurisdictions. For instance, in Texas the rates have fallen significantly. I gave an example, at one time it was $450, we collected 15. That number is down around, somewhere around $100 versus the 15. In Illinois it is closer to $200. So in all our jurisdictions they are different numbers.

But there is still a significant problem that cries out for a rational resolution.

SEN. BREAUX: So you are satisfied with that part? I mean, the whole bill that Senator Brownback has offered, but with regard to the reciprocal compensation issue?

MR. ELLIS: Absolutely.

SEN. BREAUX: Mr. Bryan, you disagree with that?

MR. BRYAN: I disagree because it results that we deploy capital that the Bellcos would otherwise have to deploy and we just do not get compensated for it. There is an easy way for SBC to solve their reciprocal compensation dilemmas if they are concerned about it. It is the old-fashioned way: Go build a network, put us out of business.

SEN. BREAUX: Mr. Ellis.

MR. ELLIS: Well, they do get compensated. I just gave an example.

There is no reciprocal in this concept. There is no reciprocal traffic from the Internet service providers. Their sole purpose when they connect with ICG is to receive calls that ICG terminates, and ICG gets compensated for that plant, no question about it. When they collocate, as they do with the Internet service provider, and they simply hand the call to the Internet service provider, they Internet service provider is paying them. When they pay them, it is for one thing: to receive calls from them. They never pay them to originate. There is no reciprocal here. They are getting compensated.

MR. BRYAN: May I just add one thing to that? Of course there is reciprocity, because from inception we have used SBC's network and we have paid them for it. There is no question, we have always paid you on time for the use of your network. In this transaction -- and in most transactions we had to pay you much more than you pay us. In these issues, you have to pay us more and I know that is offensive to you.

But there is an issue here. SBC has a customer. That customer has come and wants access to the Internet. They have decided, because we have come in now and said to the ISP's, we will provide you with network. We are now in the middle of that. We did not need to be in the middle of that if they had provided the same service to the ISP's. Well, they can start that tomorrow. We will be put out of the marketplace.

But we are providing a service. If we were not providing the service, then you could have deep concerns that your customers might switch over to the cable companies that are frightening to you.

SEN. BREAUX: Ain't competition great.

Well, Mr. Ellis, I happen to agree. I think that you have made some good points on the issue. I just do not think it is a level playing field at all and I think something needs to be done about that.

Thank you.

SEN. BROWNBACK: Mr. Bryan, let me ask you something on the specific legislation. In your prepared testimony you asserted that my legislation would deny the CLECs the ability to interconnect with ILECs their networks. Where in my legislation is the interconnection requirement of section 251[a] eliminated for the ILECs? Rather than eliminate the ability to interconnect with the ILEC networks, does the bill not simply put the interconnection terms on the same level as interconnection with any other carrier and apply the same resale rules, contrary to your testimony? My bill really does not deprive you of selling an ILECs broadband service, but puts it on the same regulatory level as the resale of any other carrier's services.

If I am a carrier, why should it cost me less to interconnect with SBC than it costs me to interconnect with ICG, or less to resell ICG's services than ICG's?

MR. BRYAN: Well, Mr. Ellis and I agree on one point, that this country's telecom is vital because we can use other people's networks. No one is going to have a comprehensive network. We have to use other people's networks.

It is I think better if we can now, if SBC develops a new technology, if we can then avail ourselves of that new technology and lease that capacity from them. We are happy to reciprocate that and have them use our network. Wherever we have network deployed, if there is a site where SBC wishes to use our network, we will work out an arrangement where they can then take our network and use it.

But to be foreclosed from taking over and unbundling those elements, the very elements that are going to be the advanced and exciting elements, I think not only is it going to be bad for the competitive telephone companies, it is going to be bad for the creative element, because the most creative people in this industry are those who are thinking about new ways to take advantage of advanced networks.

So my view is those networks need to be made open and available to creative -- let us now go back to how this country was when each State would charge taxes. Before you could go from Delaware to Pennsylvania, you had to pay a tax. Let us have it be open and let us let networks be used. We should both be compensated for the use of the network, but we should not be able to create little feudal systems that blank it out.

SEN. BROWNBACK: Mr. Ellis.

MR. ELLIS: This goes back to one of my starting point principles that SBC evaluates legislation. In competitive markets, the government should not regulate rates, terms, or conditions. The advanced services, to distinguish it from the voice side of the business, advanced services is a competitive market. As I have said, we do not have a bottleneck. We have absolutely no bottleneck.

There is no regulation on the other set of wires that go into every house or virtually every house. That is, the cable and cable modem services are completely unregulated. They have no interconnection obligation, no unbundling, and so forth. My basic principle is that, given the existence of alternatives to our DSL services, we should not be treated any differently than those alternatives.

I believe in, as I gave the example of the wireless industry developing without regulation, on normal commercial transactions there would be the interconnection of networks. There would be normal business relations. But I submit, where there is no bottleneck and where cable modem has the exact same set of wires going into the house and they are treated one way, that there is no justification to treat the telephone DSL services in another.

SEN. BROWNBACK: Mr. Taylor.

MR. TAYLOR: I certainly sympathize with Mr. Ellis' position on that. But the great thing there is the Ninth Circuit and the FCC are going to regulate cable modems as a common carrier service. So that other wire into the house will be treated like the wire that is into the house today, so that we are solving that problem through the regulation of the cable modem, and the Ninth Circuit Court of Appeals decided that cable modem service was a common carrier service.

SEN. BROWNBACK: Let me wrap up with one question that I have on it in looking at this overall issue of how we get this deployed to rural areas, which is what the whole focus of the bill is about, is how do we get this out to rural areas. You are not there right now. You cite several companies that are, but the percentages are very low. Bob and Nancy Brownback on the farm in Parker, Kansas, and my brother Jim, they are just not having the access that other places do.

That is what we are aimed at and that is what we are trying to create. Now, some people say let us create tax incentives, other people say let us put subsidies. We are going to do something to try to create a level field here for rural America so that they can have the same access to the same economic needs, and clearly we have those.

I would hope that all of you on the panel would work with us to see the answer to that issue on through. I look at it and I see a clear opportunity to level the regulatory playing field here and create a system where they will reach out. In other words, even by leveling the regulatory playing field, we even put requirements on those people. If they want to have the level regulatory field, they have to build out, 100 percent buildout. So we do not even give just regulatory parity. We say to get regulatory parity you have to do something, and that is to invest in areas which CLECs and your companies have to date been unwilling to do so. They have not been willing to go out into those areas.

Now, if you were to sit here today and to promise me that within a year or 2 the CLECs are going to be about there, 100 percent competitive like the bill is requiring of the ILECs to do, I will be much more interested in what you are saying, rather than just -- it seems like more of a protective of what you currently have in the system rather than being truly interested in how do we address these rural needs. That is what the focus is.

MR. TAYLOR: If I could comment, I think that there are a lot of companies -- and I cited McLeod USA, which is building out all over what I would describe as rural America. The underlying challenge, though, is it is not a technology, it is not a regulatory challenge. It is an enforcement challenge. Getting into incumbent central offices to deploy DSL technology takes a long time. If we could get faster access to the facilities necessary to deploy broadband, it can happen faster.

But even then, it is a people and equipment challenge. Companies like Focal, companies like ICG, quite frankly I can imagine companies like SBC, are deploying technology as fast as humanly possible. If you opened up every door and took away every regulation, I am not sure that manufacturers could make and companies could install the equipment any faster than it is today.

SEN. BROWNBACK: But they are able to do it in the urban areas now and you are able to get in there, but you are not in the rural.

MR. TAYLOR: There is DSL services in rural Iowa, in rural Illinois.

SEN. BROWNBACK: Less than 5 percent.

MR. TAYLOR: It is less than 5 percent in Chicago have DSL services.

SEN. BROWNBACK: I mean, I just go through the numbers with you again, but you are up to 73 percent in the urban-suburban areas, where the market is good.

MR. TAYLOR: But they do not have DSL service. They have the potential.

SEN. BROWNBACK: Cable modem and-or DSL.

MR. TAYLOR: And cable modems -- I mean, cable. I have SBC cable service. They will not offer me a cable modem.

So it is a choice, but the market is addressing it and moving as quickly as they can. I think the example at Rainier, they are deploying numerous different technologies and obviously being successful at it. I think that it will happen. It is a matter of time and enforcement of the current rules.

SEN. BROWNBACK: How much time?

MR. TAYLOR: I cannot answer that because it still takes a technician to climb up a telephone pole and you still put in a piece of fiber optic cable.

SEN. BROWNBACK: How much time before, under the current system, the CLECs will get these advanced services deployed in rural areas to the 80 percent level, Mr. Bryan or Mr. Taylor?

MR. BRYAN: This is almost a bad and good answer to your question. It is unknowable. The only hope I can give you is this whole competition and the evolution of the Internet has resulted in creative solutions.

SEN. BROWNBACK: In 5 years will you be 80 percent?

MR. BRYAN: Let me just give you one little tidbit and then you will see why I am having trouble giving you a time-date. In the last 6 months we have seen the cost of the soft switch ports -- these are not the traditional circuit switches, but the switches that Mr. Ellis and all of us are going to deploy starting next year -- coming down sharply. We have also seen the capacity of these pieces of equipment going up.

None of us could have predicted 6 months ago it was going to happen this way. So I think you are going to find that, with some somewhat traditional network deployed, by adding now new technology we are going to be able to make these old circuits that SBC has going into Farmer Brown's location much more robust in a relatively short time period. I am not a technician, but the one thing I would --

SEN. BROWNBACK: If I could, Mr. Bryan, and I appreciate your answer because you do not feel like you can answer me. But in the legislation we put an answer in there. If the CLECs want there, they have got to do this within a date certain. That is what I am asking, and you are giving me no certainty.

Mr. Haynes, let us wrap this round up, and if Mr. Breaux wants any more questions we will give him another shot at it.

MR. HAYNES: Senator Brownback, I think one of the beauties of this legislation that is proposed is it will increase the demand for broadband services across the country. I will guarantee you when our customers come in and start asking for services and say they are valuable and they are willing to pay a reasonable cost, we find ways to do it.

We pass 3 to 4,000 homes with cable. We have 1,000 cable subscribers. We have 57 with cable modems. The way our company is going to be more successful with cable modems and DSL is when they are reading the advantages in the Tacoma newspaper, where we do not serve, the Seattle newspaper, when they are seeing the Seattle stations bragging about the value.

Furthermore, when the ISP providers complete the rest of the chain, so when you finally get something that works fast at home it does not get bogged down somewhere else in the network. It is very, very frustrating to have a cable modem sitting on my desk in my office, DSL in my home, and I get very slow speeds at certain locations at certain times of the day.

So in my opinion, the beauty of your bill, bringing high speed data in the major metropolitan areas to 80 percent of the people increases the demand and gives us a better market to bring those services in rural America. I think it is a much bigger pie and that is where it is going to help small companies like ours to help serve our customers.

SEN. BROWNBACK: Senator Breaux, do you have any follow-up questions?

SEN. BROWNBACK: Mr. Ellis, and we will wrap this panel up.

MR. ELLIS: Senator, if I may, one of the attractive features from our perspective of your bill is the discontinuance of the reciprocal compensation. As I said, at both ends of the table we have companies that do not even serve the residential customers in the urban communities, let alone out in the rural. Why? I submit that the reciprocal compensation system disincents them from doing that. Every time they serve a residential customer instead of their ISP, every single time, they risk paying the exorbitant reciprocal compensation that we are paying. They are disincented.

In terms of demand for advanced services, it is there. Every single day my company will sell between 3,000 and 5,000 DSL lines, every single day. Where it is available, we cannot keep up. We cannot install as fast as we can sell. It would be the same or even more in the rural areas.

MR. TAYLOR: If I could just add for the record, Focal is providing and in the process of building out to 300,000 homes in rural northern California in Contra Costa County. We have tens of thousands of residential customers up in service today, and there are lots of residential customers being served by CLECs. We serve thousands of residential customers in the city of Chicago, and SBC has known that.

MR. BRYAN: May I just add one thing for the record. The same thing for ICG. I would also add that while we are waiting for broadband services to the rural area, I think it would be a crime to cut off their current lifeline, which is dial-up access to the Internet. People in the rural areas are getting that service to the Internet and to now place higher charges on that service I think will do your rural concerns great damage.

SEN. BROWNBACK: Well, thank you all. Competition is great. I hope you all will help me get my folks served with this, because one way or the other, whether it is tax policy, subsidy, or regulatory relief, we need to act. I think the clear best route to go is on regulatory relief. I think it makes the most sense and it is the fairest way to go.

I thank all the panel members for being here today. The record will remain open if you would like to submit other things with your record.

We next go to the second panel. That consists of: Ms. Sue Ashdown, Co-owner, Xmission, of Salt Lake City, Utah; Mr. Tom Duesterberg, President and CEO of Manufacturers Alliance; Mr. James Glassman, Resident Fellow, American Enterprise Institute; Mr. Peter Pitsch, the Communications Policy Director for Information Technology Industry Council; and Mr. Eric Strumingher, the Managing Director of Paine Webber.

, let us proceed with you first on the panel. We look forward to your statement. Could I ask you to keep your statement to about 5 minutes so we can have as much time as possible for questions. I would appreciate that. The floor is yours. Welcome.

SUE ASHDOWN: Sure. Thank you. Thank you for inviting me, Mr. Chairman and members of the committee. I am Sue Ashdown. I am a Co- owner of Xmission, an independent Internet service provider based in Utah. Xmission was founded in 1993 as the first Internet service provider in Utah, which has plenty of rural areas that it serves. I am also the Executive Director of the American Internet Service Providers Association.

So I am very grateful to have the opportunity to testify on Bill 2902, the Broadband Internet Regulatory Relief Act, because Internet service providers have been mentioned many times already this morning and I think that it is important for this group of Senators to remember that when we are talking about Internet access in rural areas it is predominantly provided by the independent Internet service provider. We are not talking about AOL or Earthlink that are out there providing that access, but it is the small independent local Internet service provider providing that rural access, and we are very concerned about this legislation because we are concerned about the aspects, the way that it would control our access to phone company services that we need to be able to provide our service.

We are excited about the opportunities that broadband Internet access services provide to our customers and as fast as we can get high speed digital subscriber line transport services we are rolling out broadband Internet services to our customers. But we are experiencing a number of disappointing obstacles in our efforts to bring competitive broadband Internet access to consumers.

Foremost among those obstacles are the ongoing efforts of the incumbent local exchange carriers, and particularly in my territory U.S. West, favoring their affiliated Internet service provider in the provision of DSL services. In fact, the Utah Coalition recently filed a petition with the Federal Communications Commission asking for an investigation of U.S. West's practices that favor its affiliate, wholly owned ISP subsidiary to the detriment of independent Internet service providers.

These are practices that are prohibited by FCC rules. They include practices such as the joint marketing of a bundled package of local, wireless, and Internet access services that result in Internet access service being provided at prices well below what that service costs independent competitors to provide.

In the market today, incumbent monopoly carriers are ignoring their common carrier obligations and dragging their feet on opening their networks to competition as the law requires. So as a result, we Internet service providers find it hard to believe that Congress would consider amending the law to reduce or eliminate entirely those legal requirements for the very broadband services consumers are demanding. But that is precisely what Senate Bill 2901 proposes to do.

Xmission and the American Internet Service Providers Association oppose this bill because it would make it even more difficult, if not impossible, for independent Internet service providers to provide high speed Internet access. Senate Bill 2902 undermines competitive ISP's in three ways.

First, the bill would exempt all incumbent carriers from any common carrier regulation by the FCC or the States for the provision of advanced services, which are defined as packet-switched services that deliver 200 kilobits per second in both directions. This definition includes DSL service, which means that U.S. West and the other incumbents would no longer be in violation of the law when they discriminate in favor of their own affiliate or refuse to provide nondiscriminatory access to broadband transport services for independent ISP's.

I might add right here that that was at the heart of our request to the FCC to investigate the discriminatory provisioning that was going on with the Internet service providers in Utah.

In a perverse twist, if this bill were enacted competitive carriers would continue to be required to provide nondiscriminatory access to transport service for Internet service providers under the FCC's rules, but the monopoly incumbent carriers would be free of this burden. It is this rule, enacted as part of the FCC's Computer 2 proceedings, that is one of the basic principles that ensures that we have a competitive Internet today.

Second, in a competitive market ISP's might be able to turn to other carriers in order to offer service to consumers, and we certainly do that today whenever a competitive alternative presents itself. For example, two reasons many Internet service providers prefer competitive carriers are that they will sell us collocation space for our equipment at a central point and they will let us buy local calling numbers so that our customers avoid paying in-state long distance charges for Internet access. The incumbents have always had the ability to sell us these services, but many still choose not to do that today.

Unfortunately, there are unlikely to be many competitors to choose from if this bill is ultimately enacted.

This is the case because Senate Bill 2902 exempts various formulations of packet-based, packet-switched, and advanced services, as well as the new fiber optic facilities, from the pro-competitive requirements of section 251[c] of the Communications Act. Competitive carriers, some of whom are testifying before you today, depend on being able to collocate their DSLAMs, get their access to unbundled network elements, and obtain cost-based interconnection with the incumbent carrier's network in order to provide DSL services independent ISP's need.

Under this bill, competitors would have to duplicate much of the monopoly network before they could offer any DSL services to ISP's, and the cost of this unnecessary duplication would be astronomical. The present rollout of DSL will screech to a halt and competitive broadband will come only to the most densely concentrated business markets, and I do not think that was the intent behind your legislation.

Finally, if the other two changes I mentioned were not enough to ensure competition does not continue to grow, this bill would prohibit the payment of reciprocal compensation for Internet-bound traffic. I am sure we heard already from many of the competitive carriers about this, but let me address it for a moment from the ISP point of view if I have your indulgence.

SEN. BROWNBACK: In 1 minute here, please, because we have got a big panel.

MS. ASHDOWN: Right. Reciprocal compensation occurs when the local carrier whose customer originates a call hands that call off to a second local carrier for delivery to the second carrier's customer. Wireless carriers pay incumbent carriers for completing wireless calls to customers on the incumbent's network and it is no different when the call goes from an incumbent carrier's customer to an ISP served by a competitor. These are costs for which the competitor should be compensated.

If Congress removes the reciprocal compensation obligation, then competitors must either recover their costs from the ISP or stop serving ISP's, and neither result is good from a policy or a consumer point of view. If they have to turn to the ISP's to recover their costs, just as an example, based on the average cost for local traffic of two-tenths of a cent per minute -- SEN. BROWNBACK: If you could wrap it on up, .

MS. ASHDOWN: -- competitors would have to charge Internet service providers an average of six dollars per month to cover their costs. The Internet market is fiercely competitive right now. We are not in the position to be able to charge, to pass those costs on to our customers. They come out of our bottom line. They hurt our ability to serve rural Americans as well as urban Americans, and I hope that the committee will not support this bill.

SEN. BROWNBACK: I can see we disagree on this topic. I hope we can have a discussion about how we do get things out to rural areas.

Mr. Duesterberg.

THOMAS J. DUESTERBERG: Thank you, Mr. Chairman, and thank you for this opportunity to appear on behalf of the Manufacturers Alliance. The Alliance represents over 400 companies across a broad spectrum of industries from aerospace and pharmaceuticals to telecommunications, oil and gas, and others.

I want to talk about your bill, which we support, in a broader context. This bill is important to manufacturers and related services. The American economy, including the manufacturing sector, is enjoying one of the most sustained periods of robust growth in its history and has regained the

international advantage that many thought was lost about 10 or 15 years ago.

One reason for this strong performance is the advent of what is variously called the digital economy, the information economy, or the Internet economy. Whatever the proper name, the phenomenon of ever more connected and powerful information processing is at its core. It is both the explosive growth of connected computing and its systemwide efficiency effects which are contributing powerfully to the low inflation, above trend line growth we have experienced from at least 1995 through this year.

The Internet and its predecessors have already revolutionized the financial sector and are now increasingly changing the manufacturing and retail sectors as well. The Alliance recently held a conference on business to business electronic commerce attended by nearly 150 companies. We learned that B2B sales are expected to grow from today's $400 billion annually to nearly $2.7 trillion or 17 percent of total sales by the year 2004. About 56 percent of U.S. companies are conducting B2B sales over the Internet now and over 90 percent anticipate doing so as soon as 2002.

The advent of Internet-based communications and transactions is also adding to the efficiencies of manufacturing in numerous ways. Auctions, better management practices, remote training, improved customer services, improved supply chain management and purchasing are among these.

The application of these new information technology and Internet- related processes in the manufacturing sector is one reason that this sector has performed well in an increasingly competitive global environment. Productivity in the manufacturing sector has grown by an average of 6.1 percent for the 3 years ending in March 2000, substantially higher than any 3-year period since 1950. Such sustained productivity growth in turn has helped keep a lid on inflation.

Although one cannot attribute all gains in productivity to a single factor since other technological breakthroughs, management improvements, and more efficient financing tools, et cetera, are also contributing to this, data from a recent study conducted by the Federal Reserve Board indicates that up to 40 percent of the recent upswing in trend productivity growth is accounted for by increases in the stock of information technology.

Broadband telecommunications is playing an increasingly pivotal role in the advance of the digital economy. As both manufacturers and retailers move increasingly toward electronic commerce and the use of the Internet as a management tool, the need for ubiquitous high speed connections grows even more crucial. High speed connections are needed not only to play video games and communicate with one's neighbors, but to do video conferencing, exchange design data on the thousands of parts that go into an automobile or an airliner, conduct auctions for raw materials, coordinate just in time delivery systems, facilitate distance learning, promote telecommuting.

If we are to achieve the projected gains from B2B e-commerce in the next few years, we will require high speed connections not only in the urban environments where high speed connections are becoming more available, but also in remote areas where many of America's factories are now located and where numerous American small businesses and American telecommuters would like to be.

Powering the digital economy and maintaining the pace of productivity enhancement responsible for this growth path will require more rapid deployment of broadband networks in both urban and rural environments. There appear to be few technical and economic barriers to the deployment of broadband networks. In fact, there are numerous technologies which are now being tested and deployed for current use and there is a reasonable potential to have a competitive market for broadband services.

Many of the barriers to rapid near-term deployment of broadband services reside in the current regulation of the telecommunications sector. We believe that broadband services will be provided not only by the wireline providers that have been represented on the previous panel, but also by wireless providers, terrestrial and satellite-based providers, possibly even electric power distribution companies.

Broadcasters as well are thinking about getting into the broadband businesses.

While all of these technologies are currently available, they require substantial amounts of capital to develop, test and market. About $10 billion alone is needed to upgrade copper wire connections for DSL service. In the absence of deregulatory parity, some systems are more likely to advance quicker than others. Unfortunately, as the subscriber data show, in the current environment in which some services are subject to regulation or potential regulation, needed investments to develop the service are discouraged or made prohibitively risky.

It is our view that steps to remove regulatory asymmetries and, indeed, to move to a less regulated environment in high speed services are required to promote more rapid deployment of these services. Because competition has already emerged in this market sector with choices between copper wire, cable, satellite, and terrestrial, and fixed wireless, we should move as rapidly as possible to reduce regulation of high speed services.

Incumbent local operating companies, however, face real impediments to their investment in high speed services. The current requirements under section 251 of the Communications Act constitute a real disincentive to the types of investments required to upgrade their systems to offer broadband services. The CLECs clearly lag behind in building out their DSL networks, partly because the benefits of any investment would have to be shared with competitors.

The economist and famous deregulator Alfred Kahn made the case for a lighter hand of regulation in a recent filing in which he said: "If rivals can share use of whatever network facilities they ask for at prices explicitly intended to recover only the minimum cost of employing the most modern technology, it cannot but have a fatally discouraging effect on their initiative and their innovation efforts."

SEN. BROWNBACK: Dr. Duesterberg, if we could wrap it on up I would appreciate it.

MR. DUESTERBERG: I will wrap up by supporting your bill, Senator Broadback -- Brownback. We think this goes a long way --

SEN. BROWNBACK: Brownback.

MR. DUESTERBERG: I apologize. I have the same problem with my name.

We think your bill goes a long way toward removing the current disincentives for investment by the CLECs. It is especially the relief from unbundling and resale requirements and from price regulations which are most significant for promoting investment.

There are other steps the Congress and the FCC could consider to advance the case of broadband deployment. These might include making more spectrum available for high speed wireless data services, which would be important to rural areas, creating transferable property rights for spectrum holders. Congress could also consider allowing more competition in the Internet backbone market.

All these steps would increase investment in broadband and stimulate broader competition and cannot fail but to result in quicker introduction of high speed services at lower prices in both urban and rural areas.

Thank you for this opportunity to appear before the committee.

SEN. BROWNBACK: Thank you, Dr. Duesterberg.

Mr. Glassman, welcome.

JAMES K. GLASSMAN: Thank you, Mr. Chairman, Senator Breaux of my former home State of Louisiana. It is an honor to be here today.

My name is James K. Glassman. I am a Resident Fellow at the American Enterprise Institute, and I have to say immediately I am not an expert in the technical aspects of telecommunications. My interests lie, as many of yours do, at the intersection of the public policy, technology, and finance. For that reason, in February with some colleagues I launched a web site called TechCentralStation, whose slogan is "Where free markets meet technology."

I spent the last 30 years as a journalist for the Washington Post and others and as an analyst advocating free market solutions to vexing public policy problems. I have become in recent months particularly concerned about new attempts by governments at all levels to regulate and tax the Internet.

So you might ask, why would an ardent supporter -- why would I be such an ardent supporter of the 1996 Telecommunications Act? For this reason: The act provides a way to move from an intensely regulated environment to a deregulated environment. That is the goal and, as many others and this Congress understood, that had to occur through a sensible transition since the incumbent operating companies had been nourished and protected as monopolies by government over the past century and thus owned the final mile or so to the customer's home. I liked Senator Dorgan's characterization of monopolies being cholesterol to the free market system.

So a compromise was reached after years of give and take. It was a noble compromise, a good compromise, that all parties appeared to support. But immediately after the bill was passed, the local monopolies began to file lawsuits. Finally, after litigation and foot-dragging, at long last one of the Bells was certified to have opened up in New York, where I now live. The competition as a result has become fast and furious, where 4 years ago it was nil.

Yes, there are problems in New York, as I am sure there will be in Texas, which is the second State to be certified. But in New York prices are falling and broadband hookups are proliferating. The system is working.

Now, with competition here at last, we find the CLECs appealing to Congress to roll back the Telecom Act with such bills as this one. No wonder. Competition is no fun for competitors, especially for companies that used to be monopolies. But competition is great for consumers.

In seeking political help to thwart competition, the ILECs are not alone. Sadly, it is becoming more and more common for high tech companies to ask government for help and for government, unfortunately, to provide it, as I showed in an article I wrote in April in the Wall Street Journal with the headline "Is government strangling the new economy?" With your permission, I would like to enter that article in the record.

SEN. BROWNBACK: Without objection.

MR. GLASSMAN: Let me make a few quick points about this legislation. First, the Telecom Act is working. Do not change it. Two of the largest States in the country have been certified. The Yankee Group predicts that the number of homes subscribing to broadband services will rise from 1.4 million this year to 16.5 million in 2004. That is an incredible pace.

Second, the CLECs are well equipped now under current law to vastly expand their broadband services. Permit me also, Mr. Chairman, to enter into the record a remarkable article that appeared just last month in Fortune Magazine by Stephanie Metah about SBC Communications. The headline was "Why the biggest Baby Bell is wild about broadband." That article quotes the CEO of SBC as saying that his company has launched Project Pronto, which will sell one million broadband DSL connections by the end of 2000 and two million by the end of 2001, up from 139,000 at the beginning of this year. SBC is spending $7 billion to upgrade its system and it expects to get that money back quickly and more in productivity gains. This is without, Mr. Chairman, your legislation.

MR. GLASSMAN: Third, changing the Telecom Act will necessarily produce uncertainty in the minds of investors. Thanks to the act, in just 3 years 300 CLECs have sprung up with $100 billion in market value. They are investing that money in new, deeper, broader systems. You in Congress should be proud of this act that has made this possible.

Uncertainty is the enemy of investors and of companies needing to raise capital. This bill will produce uncertainty. That is the lesson about uncertainty of a book that I co-authored with Kevin Hasett called "Dow 36,000." The point we make about the stock market is that as uncertainty has diminished stock prices have risen.

But if you fiddle with this legislation, with the Telecom Act, make no mistake, if this bill passes the flood gates will open and other legislation will pour through; I believe that investment will slow sharply. Who will suffer? Consumers, your constituents.

Fourth, this bill will just about assure that CLECs will be limited ought sharing old-fashioned technology or they will just have to build out their own networks at prohibitive cost. That was not the intention of the Telecom Act. In effect, this bill brings back the old monopoly that we thought the Telecom Act had buried.

Fifth, the Telecom Act is not holding back the deployment of new technology by the ILECs. In the first place, before the law, even though DSL had been available for many years, it was not deployed. The act itself touched off competition from cable, from fixed wireless, from satellites, and as a result we now have a boom in DSL. As Senator Lott, the Majority Leader, said, deployment is happening not despite the act, but because of the act.

Finally, just very briefly, Mr. Chairman, to refer to your question about rural constituents, how can your rural constituents be served. Basically, by the same way that they are served by Coca-Cola or Ford or buy clothes provided by Walmart -- through market forces. The question really before us in the public policy sense is how to unleash those market forces, and I believe the Telecommunications Act does that.

In short, Mr. Chairman and members of the committee, the Telecommunications Act of 1996 is working. As a fierce advocate of free market solutions and a believer in the power of technology to improve the lives of all Americans, especially disadvantaged Americans, I say do not change this act; if anything, enforce it.

Thank you.

SEN. BROWNBACK: Thank you, Mr. Glassman. I look forward to some questions to engage you as one who is for deregulation, and the bill directs that way as well.

Mr. Pitsch.

PETER PITSCH: Thank you, Mr. Chairman, Senator Breaux. My name is Peter Pitsch. I am Director of Communications Policy at Intel. I am here today to testify on behalf of ITI, the Information Technology Industry Council. ITI is an association of leading information technology companies, the leading computer hardware, software companies, the leading ISP's, and Internet networking companies. Our companies employ over a million people in the United States and our annual revenues in 1999 were over $460 billion.

On behalf of ITI and its member companies, I want to thank you for this opportunity and I want also to endorse S. 2902, the Broadband Internet Regulatory Relief Act. In my oral testimony I want to make four main points.

First, that ITI believes that the rapid deployment of broadband, affordable broadband technology, is absolutely crucial to the achievement of the full potential of the Internet and absolutely crucial to the success of high tech companies, and that the best means of achieving that goal is to rely on market-based competition unless there is a competitive bottleneck, a substantial competitive bottleneck.

Second, ITI believes that 2902 meets this deployment goal and these competitive principles precisely because if it were enacted it would encourage more rapid deployment of broadband technology to consumers through deregulation without undermining the competitive process. Unbundling the ILECs' packet services and freeing them from unbundling regarding fiber deployed to residences would clearly increase the incentive to deploy. Today if they make investments and they fail, they deploy in marginal markets, in medium or small size markets, that fails, their shareholders take the entire loss. If they succeed, they have to share that success with competitors at some regulated, forward-looking economic cost.

Third, while S. 2902 does remove significant regulatory barriers, we believe, ITI believes, that it sufficiently protects or safeguards competition because it requires the existing network to be unbundled. I think this is a very important point which I want to amplify on or, as we at Intel say, drill down on, because I do not think that a lot of the testimony to this point has really hit this crucial aspect of the bill.

To get deregulated, an ILEC first must meet very important buildout benchmarks. Essentially, it must make advanced services available to 80 percent of its customers within 3 years and 100 percent within 5 years. Now, besides directly benefiting consumers, this may actually increase the number of DSL-capable loops available to competitors.

Also, deregulation is conditioned on the ILECs complying with Commission and State collocation and loop provisioning requirements. ITI has long maintained that the incumbents have to make these essential facilities available to their competitors. Indeed, this legislation would increase the incentive to be in compliance with these very rules, which are essential for them to compete.

Indeed, the act, this bill, goes so far as to require the telephone companies to, upon request, make existing copper available even where they have deployed fiber into the distribution network. Thus, on balance we think S. 2902 is a very sensible, balanced approach that removes regulatory barriers on the one hand and keeps protection for the competitors on the other by making the essential facilities available.

The fourth and closing point I want to make is that in these broadband policy disputes ITI has not sided with any one camp. When I hear these debates I sometimes think the warring factions could not agree on a recipe for ice water. ITI has sided with the CLECs and back in December of '98 when we reached an accord with the ILECs we insisted that the ILECs make their networks available to the CLECs, open up the loops and the collocation. That was something that we supported at the Commission. Of course, the Commission agreed.

We also supported the ILECs before the FCC and said their packet switches or DSLAMs should not have to be unbundled, and that was the first step in the direction I think this legislation goes. But at the same time, we insisted that the CLECs have access to these essential facilities.

Lastly, in the area of high speed cable access, ITI has supported the FCC in foregoing from injecting itself or regulating mandatory cable access, again for the very same reason, that we think it is crucial that we have the right incentive structure, particularly when we are not talking about bottlenecks, to encourage all players to deploy.

So as you can see, Mr. Chairman, we have been actively involved in the broadband policy disputes and debates. We have consistently supported one goal, which is let us get a policy framework in place that encourages all the players, whether they be CLECs, ILECs, cable companies, to deploy broadband so as to get the cheapest, fastest, broadband to all Americans.

We believe that your bill moves us, would move us in that direction, and I will be glad to take questions.

SEN. BROWNBACK: Thank you, Mr. Pitsch.

Mr. Strumingher.

ERIC STRUMINGHER: Thank you, Mr. Chairman and Senator Breaux. My name is Eric Strumingher. I am the Managing Director at Paine Webber in New York.

SEN. BREAUX: Still Paine Webber?

MR. STRUMINGHER: Not for long. I think it is going to be UBS Warburg Paine Webber or something like that. But we will just go with Paine Webber for right now.

My specialty there is in equity research, specifically in the telecommunications services area. I give investment recommendations to both large institutional investors as well as retail investors on telecommunications stocks. I hope that I am not representing any particular bias here in my oral testimony and in my written testimony. At times I will have positive recommendations on incumbent local exchange carrier stocks, at times I will have negative ones. The same for AT&T and other industry participants. So I hope that with that background you will agree that this is at least plausibly unbiased testimony.

I want to give you observations on three issues that I think may help you to evaluate the merits of the proposed legislation as they pertain to deregulation of the incumbent local exchange carriers. The first is the challenges faced by these companies in making large investments, such as those required for consumer broadband and also rural broadband initiatives.

Secondly, how regulatory uncertainty complicates the analysis of investment returns, and here I will have some of the same assumptions as Mr. Glassman, but some different conclusions in this area. Then lastly, the ramifications of the proposed legislation on investment in both consumer broadband and rural broadband by non-ILEC companies.

So first of all, there are certain challenges in making large investments about which I would like to elaborate, that are faced by the large ILECs. Just by way of background, some basic premises, for an army to be successful in war the soldiers must have confidence in the general. This kind of confidence is bred by battlefield success. Well, the same is true in a publicly traded company. For a publicly traded company to be a successful competitor in the marketplace, employees must have confidence in the CEO. This comes through the performance of the stock price. That is a basic premise through which I attack this situation.

Now let us consider specifically the issue for the large incumbent local exchange carriers. One, broadband initiatives such as consumer broadband and rural broadband require large up-front investments. SBC Communications, for example, is investing $6 billion by the end of next year in its Project Pronto initiative toward this end.

Number two, these investments typically eat into earnings initially because of the large up-front expenses. The first costs of building a new network are dilutive to earnings in the near term.

Now, lastly, the ILEC shareholder base is very focused on the consistency of earnings growth, I would say more so than that for a cable TV company shareholder or even a CLEC shareholder, both companies that are competing in this space for capital. The willingness of these companies to ignore, for example -- or I should not say "ignore", but put less emphasis on -- depreciation expense, that expense associated with initial investments in plant, is not the same for the investors in the large ILEC stocks.

That is very important. I think, to summarize here, Wall Street makes it tougher on these companies than on other companies to make these similar kinds of investments. Maybe this is part of the reason why companies like Verizon and Bell South and U.S. West have not adopted the same aggressive rollout strategies as SBC Communications.

A case in point here on the effect that this has had on SBC stock. Last year in the middle of the year, the stock was trading as high as $59 per share, but it has traded in the low to mid-forties for the first half of this year, and I believe that this is in no small part due to this Pronto initiative that I have just mentioned to you and the dilutive impact on earnings.

Now, in particular SBC has a CEO who I think has a lot of respect from his employee base, so he may not suffer these kind of reputational damages of the falling stock price. But other companies may not have the same type of situation there, and I would just submit to you that this is an important issue to take a look at.

Now, the second question -- this really leads into the second point that I would like to make, is that big ILEC CEO's -- it is one thing for them to face this challenge in the marketplace if just leading a company and going into risky investments, but to face this challenge with the additional uncertainty about earning a return on the investment is something altogether. The basic return analysis, I would submit to you, is really complicated by regulatory uncertainty.

Three areas in which the regulations may cause some problems here. One, additional costs may be imposed on the large ILECs to modify their network. They may be asked to build new and different networks for the CLECs. Two, these companies may be forced to bear risks of market adoption not only for their services, but for CLEC services as well as a result. Lastly, potential delays in implementing these first two things that I just mentioned will potentially hurt the large ILECs in terms of their competition with cable companies and other operators who do not face these same regulatory restrictions.

You do not have to be an expert in math to know that it is hard to solve an equation with so many moving variables, so many unknowns, and I would submit to you that it is really hard for investors to do this.

Now, lastly I would like to conclude by saying that there is a risk or perceived by some to be a risk that investment will dry up if the ILECs are required to offer extensive interconnection with an unbundling of new infrastructure built for advanced services. I do not think that this is really true. Broadband, especially consumer broadband, is an exciting growth area. It has attracted lots of investment in infrastructure by cable companies, by wireless companies, and I think that there will be more investment of this nature over the course of the next couple of months and in fact the next couple of years.

We will have a very competitive market just by companies who are owning and investing in different facilities than the ILECs to compete with them in the marketplace.

So with that, I will conclude my testimony and be happy to take any questions if you have them.

SEN. BROWNBACK: Thank you very much, Mr. Strumingher. We appreciate that. We appreciate all of your testimony. It is thoughtful.

I disagree with some and I wonder how well the bill has been actually reviewed. The purpose of the bill is to expand these services and get them out to rural areas. Mr. Pitsch I think hit the point of what his group is after is what I am after. We want as much deployment out there as we possibly can have.

It is a deregulatory approach that we are taking on this. Others would take the tax subsidy approach -- others would take the subsidy approach, others would take a tax cut approach. This is a deregulatory approach to it, and it is not taking place today in the rural areas.

Dr. Duerstberger -- Duersterberg. Sorry, I did that to you as well, so I apologize. It was not intended, to do that.

You are representing the manufacturers and retailers. They are moving to use the Internet as a management tool. Would you say that from an economic development perspective an entire community or region that lacks access to broadband services would be at a disadvantage compared to communities and regions that have such access? Is this going to impact your manufacturing in rural areas?

MR. DUESTERBERG: Well, let me answer by saying that in the abstract, if there were an area that totally lacked broadband connections, that would be a severe disadvantage, for two reasons. One, companies that are already located in an area would lack the ability to expand their services. For instance, the automobile industry is going to an on-time delivery system and on-time interactive auction type system for all of their suppliers. If you cannot be connected via broadband connections to the original equipment manufacturers, then you are at a severe disadvantage because you cannot share in the design phase, you cannot share the quality data that they require on a real-time basis. So that is a severe disadvantage.

In terms of economic development, companies that would have to go into an area underserved by broadband access would simply have higher costs. They would have to run a line in at much higher cost than if it were generally available in that area.

So the short answer is yes, I think it does make a difference.

SEN. BROWNBACK: It strikes me in my communities that I represent we have a lot of manufacturers in these rural communities and this is a decided disadvantage and probably going to increase in its nature of impact on the companies in the future as these services are not available in many of the rural areas.

Mr. Pitsch, in your group's efforts they want deployment of services as broadly and as rapidly as possible, because you put forward a lot of the equipment and the services associated with broadband. You have heard the testimony of a number of people here that feel as if this will not help in the deployment of these services, may actually hinder some CLECs from offering these services.

Yet you have appraised the bill and do not deem that it would do that.

What in your appraisal is different from what you have heard in the CLEC testimony or those supporting keeping the current regime?

MR. PITSCH: Mr. Chairman, our view is that competition primarily is going to drive this, that market forces and the profit incentive are going to drive companies to invest. So when we look at the effect of this legislation, we believe that it is crucial that it provide still stronger incentives to the ILECs by eliminating regulation where it is not necessary. So that is the key to understanding our position, is focusing on our belief that competition, unless there is a bottleneck, is the best way to encourage companies to deploy.

For example, as long as the competitors have access to the existing customer lines and the companies', the incumbents', central offices, then they will be able to compete. But if the ILEC now takes a risk and employs fiber and upgrades its network, maybe that is going to drive the cable company to deploy more quickly. Maybe it is going to incent the CLEC to deploy additional facilities.

We want not just ADSL, 1.5 megabits per second. We want VDSL, we want 20 megabits per second. We want people putting more and more fiber, more and more radio equipment out there, and the primary motivation is going to be a competitive threat, and therefore that is where we think policymakers should put their primary emphasis.

We in my written testimony point out that we do support Senator Moynihan's investment tax credit as well. We believe you can make other arguments. However, from a regulatory standpoint, focus on incentives, require regulation only where there is a bottleneck. We think that exists for loops and central office space.

SEN. BROWNBACK: Senator Breaux.

SEN. BREAUX: Thank you very much, panel, for being with us.

Mr. Glassman, Jim, I was trying to look at what you were saying about SBC's Project Pronto and what Mr. Strumingher was saying about it and it seemed like, at least I take it you have two different opinions. I think, Mr. Glassman, you were saying that SBC's Project Pronto is a $7 billion investment and the view on Wall Street is that that $7 billion investment would bring $9 billion in productivity improvement. But Mr. Strumingher, it seemed like you were saying that SBC has never recovered in their stock and it is trading in the low to mid forties, has never recovered to the high of $59 a share, and you think that is in no small part a function of their Project Pronto initiative. It seems like you are saying that Project Pronto has had a negative effect on the stock. And Jim, you are saying that this is a great example of a very good thing for the company.

Can you both comment on your perspective on this?

MR. GLASSMAN: What I was going to say was, look, in the short term, to quote the great Burton Malkiel (sp) of Princeton University, the market is a random walk. We do not know what is going to happen tomorrow or really in the next few months or over the course of a year. But it seems to me that over the long term -- and I am not endorsing SBC stock -- that this kind of investment is going to pay off.

That is what the folks at SBC think and I think it is actually paying off already quickly. It does not necessarily immediately show up in the stock, however. If there is a difference between the two of us, I may have a longer term perspective about the stock and about this kind of investment.

SEN. BREAUX: Mr. Strumingher, is broadband a good investment?

MR. STRUMINGHER: Oh, I think it is a very good investment for SBC, notwithstanding some of the regulatory issues that are out there. The question is more how difficult is it to make this kind of investment, which requires major initial spending that will have an initially dilutive impact on the earnings of a company like SBC or any company that makes that.

While it is true that this will probably make the stock go up over the long term, another great commentator on the market I think said in the long run we are dead. There is a -- the CEO of any big company has a very hard time rallying the troops to do well and selling his vision of the company to Wall Street when the stock is underperforming. This is now a year later and the stock is still well below where it was at the high, and it could well extend for another half a year, a year, who knows. The point is that it has been rough sailing for the company.

I do not want to excuse SBC or try to rationalize anything. I am just telling you this is tough, and when we add additional complications like regulatory uncertainty that makes it even tougher.

SEN. BREAUX: Mr. Strumingher, I guess Senator Brownback would argue that his legislation is trying to clear up some of that regulatory uncertainty. In your opinion as one who follows this very closely, can the RBOCs and the regulated companies in this area under the current regulatory scheme make the billions of dollars of investment in broadband under the current system and do it effectively from a market standpoint? Or would something like Senator Brownback is suggesting make that market situation more predictable and stable for them?

MR. STRUMINGHER: I think it would clearly make it more predictable. The problem, as I mentioned in my remarks, is that it is very difficult right now to try to estimate the returns on the investment when you do not really know what the requirements are going to be of you. You may be asked to redesign your network in a totally unanticipated way to accommodate competitors, for example. The providers of the technology to you may be asked to change the way the technology looks or the way the technology functions in order to satisfy a competitor.

All the while, the cable operators, the companies that are using MMDS and PCS frequencies, the satellite operators, who do not face similar types of regulatory hurdles, are charging ahead fast and furious.

SEN. BREAUX: The cable companies, for instance, which are not common carriers, is that a significant economic advantage to them as they move into broadband applications?

MR. STRUMINGHER: In a word, yes.

MR. GLASSMAN: Senator Breaux, can I just add something? It seems to me that perhaps it is true that Senator Brownback's bill will be beneficial to the ILECs, but I do not think that it is the function of this Congress -- maybe it is a function of Mr. Strumingher -- to pick winners here. Maybe this will be good for the ILECs, but it is not good for other competitors, and I do not think we should choose.

My point in my testimony was quite simple, that even absent Senator Brownback's bill SBC has invested $6 billion. That is a lot of money, and I think we are going to see more investment from ILECs and CLECs under the current regime.

SEN. BREAUX: Mr. Strumingher says that investment has contributed to their stock being very low.

MR. GLASSMAN: Look, you know, I long ago gave up trying to figure out the short-term movements of the stock market. I do not think anyone can explain why a stock moves in the short term the way it does. I do not think, if I can put in a plug for my book or my basic philosophy of investing, I do not think anybody should try, really. I think you should buy good companies that have good leadership and stick with them for the long term.

SEN. BREAUX: Mr. Strumingher.

MR. STRUMINGHER: If I could just have one more opportunity to clarify what I am saying here. The argument here is not whether investing for the long term is good or not. It is just a recognition that short-term variations in the stock price can have a meaningful impact on a company's willingness to make certain investments. While SBC has in fact invested or committed to making this investment, it conceivably could have been a lot more, a lot faster.

We have not seen Bell South, we have not seen U.S. West, we have not seen Bell Atlantic, et cetera, step up to the plate in the same way. While there may be a myriad of reasons for this, I would not be surprised if one was these issues that are being raised here.

SEN. BREAUX: , let me ask you a question.

Bell South has stated that they are paying about $500 million or so to smaller telephone companies more than they receive from their usage fees versus the flat fees. SBC before I got here, I take it, talked in terms of it costing them $450 for installing his daughter's Internet line and getting $15 back from his daughter for the usage on the flat fee basis.

Is there not an inequity here that needs to be addressed? I mean, those numbers are just astronomical.

MS. ASHDOWN: Are you suggesting that Internet prices need to be higher? I just want to make sure I understand the question.

SEN. BREAUX: No, I am just suggesting that -- the argument I think that some would make is that what they are able to receive as opposed to what they pay is vastly out of any kind of realistic proportions. The FCC, I know I have asked them along with Senator Lott to try and look at some ways to address the reciprocal compensation issue.

Is there not a need to do that? I mean, it seems like they make a very good case about the inequities that they have right now.

MS. ASHDOWN: Well, I notice, though, that they are not asking to eliminate reciprocal compensation across the board. They are just asking to eliminate it where it is bothering them the most right now. They still want, I think -- if they were asking for zero across the board, that would probably hurt them in terms of the competitive companies that are going to be dealing with a smaller base of subscribers, where all of their calls are going to be terminating on the network with the most market share. There they stand to do very well on reciprocal compensation.

So where it is not hurting them they do not want to get rid of it, and where they have to pay they do want to get rid of it. As far as how that affects the consumer, I think that it definitely is a concern for the Internet service provider if it means that we are burdened with the cost of terminating those calls and we have to pass that along to our subscribers because, as you know, the average price for Internet service in this country is around $19, $20 a month. There is a reason for that, and if I have to add $6 a month to my prices on average that comes straight out of my bottom line.

I cannot compete with -- and I think Bell South is a very interesting example now that you mention it, because Bell South, for instance, is offering $39.95 DSL access. With that DSL access they are throwing in a free modem, they are throwing in the phone line, they are throwing in the Internet access. Then on the wholesale model that they are presenting to the Internet service providers in Bell South territory, they are selling the wholesale DSL loop to the Internet service providers for $39 month and telling the Internet service providers: Go ahead and sell all the Internet access you want at 95 cents a month.

I think that is a definite reason that Internet high speed DSL access is being deployed more slowly than it could be.

SEN. BREAUX: So your recommendation is that we do not do anything in this area, either the Brownback bill or --

MS. ASHDOWN: Well, from what I have been able to observe and in my dealings with CLECs and buying phone services from them, what they have told me is that the reciprocal compensation issue is contractually agreed to between them and the phone companies, and of course the incumbent phone companies, thinking that all the traffic was going to be ending over there, insisted on a very high rate in the beginning, and that rate has come down quite a lot since they realized what was going to happen with the Internet traffic.

I do not think that there are very many CLECs that are counting on that continuing to go away. But I do not see why it should go away for them and not go away for the incumbents.

SEN. BREAUX: Thank you.

Thank you, Mr. Chairman.

SEN. BROWNBACK: I want to make clear, because there have been some assertions of what the bill is aimed at. The effort of the bill is not to advantage one company or another. The effort of the bill is to get these services out to rural areas. I have a problem. These services are not in rural areas. You have great robust competition in New York City, Mr. Glassman. I am glad you do. God bless you for it. I wish we had it in rural parts of Kansas, and we do not have it.

The numbers again: 73 percent have these sort of services in population of cities over half million, less than 5 percent in cities 5 to 10,000. So that is the target. That is what we are trying to aim at, is how do we get these services there.

I think most of you heard the last panel, where the CLECs, I asked them: When are you going to be there? When can we expect you? Not certain, we do not know, maybe some changes in technology, maybe some possibilities here.

The bill has a buildout requirement. To be able to get the regulatory relief, you have got to build out 100 percent within 5 years to be able to get that. So that is my focus with this, and it is a deregulatory effort.

I would hope that if you do not agree with this, that you would come back and say, well, okay, but we could do it this way, we could get the buildout that you want by going this route. And Senator Moynihan's approach is one way to do that, which is to say let us provide a tax credit or a subsidy in some way through the tax code of doing that. I happen to think that going the regulatory relief is the way to go.

But if you have a better way, I am all ears to be able to hear that, because we are being left behind New York City in this, and we take some umbrage about that occurring. We have not in the past left rural areas behind. So this is the effort, and if you have a different way to go to get this done -- I do not know if you have, Mr. Glassman or , now a way that we can go at that. I would appreciate the suggestion.

MS. ASHDOWN: I actually do have a suggestion, Mr. Chairman.

SEN. BROWNBACK: Good.

MS. ASHDOWN: That is that enforcement of the existing regulations would be a big step in getting Internet access out to the rural areas. My big concern with the bill is that removing the obligation for incumbent carriers that, as you know, have been selling a lot of rural switches off, but in the areas where they still are in the rural areas and they own the switches, if this bill passes they are under no obligation to provide nondiscriminatory provision of the lines that Internet service providers need to be able to get to get to the phone company for access.

SEN. BROWNBACK: Ms. Ashdown, if that is the case why has that not been a problem in urban areas, where you have 73 percent penetration, and it has been a problem in rural areas?

MS. ASHDOWN: It actually is a problem in the urban areas.

SEN. BROWNBACK: Well then, why have you busted through there and not in rural areas?

MS. ASHDOWN: I would submit to you that the Internet service providers are not busting through very well in the urban areas at all.

SEN. BROWNBACK: 73 percent. I will be happy with that in rural areas if you will give me that.

MS. ASHDOWN: Right, I understand that. But I am not very happy with 73 percent when the lion's share of that market has gone to the incumbent by their violation of Federal regulations. Letting them continue to violate Federal regulations in order to get them to have the same kind of monopoly market share in the rural areas is not, I think, what you want to see. What you want to see is more competition in the rural areas.

SEN. BROWNBACK: I want some service.

MS. ASHDOWN: Yes, but are you saying that you want service and you are happy to have a monopoly and you do not care whether it is competitive service or not? Because that is what this bill is going to do.

SEN. BROWNBACK: We want some service and we do not presently have it.

Mr. Pitsch.

MR. PITSCH: Thank you, Mr. Chairman. I want to emphasize that ITI wants competition. We want multiple providers. We think that is key. If we thought this bill would undermine the possibility of multiple providers, we would not be supporting it. We think that the bill prudently makes essential facilities available.

But the goal should not be, to use Mr. Glassman's phrase, to favor one sector of the industry over another. I think the logic of the Telecommunications Act, 251[d][2], is this necessary to competition, I think speaks on behalf of the approach this legislation is taking.

I think, to answer your question before perhaps more bluntly, different sectors of the various factions here arguing have very concentrated economic interests. They happen to be narrow. CLECs do not care how the ILECs do, ILECs do not care how the CLECs do. In fact, probably it is inverse, and the same for cable. I want to emphasize, we have been looking at this, we have a very intense interest, and, to put it perhaps uncharitably, we are arms merchants. We want all of them out there, we want them succeeding, and we want them going at loggerheads.

We believe the best way to do that is to rely on competition and deregulation, but, very importantly, also make those essential facilities available. As long as that is the case, I think we will have robust competition.

SEN. BROWNBACK: Mr. Glassman.

MR. GLASSMAN: Mr. Chairman, I think sensible people want exactly the same thing, Mr. Pitsch, and I just think there are different ways to go about it. Now, I have a great deal of respect for you, Mr. Chairman, in sticking up for your rural constituents. But of course, as you know, there are Senators who have large rural constituencies, like Senator Stevens of Alaska, Senator Dorgan, who was just here, from North Dakota, who differ with you and who agree with me that the best way to get service to your constituents is through the competitive process that was set in motion by the 1996 Telecommunications Act.

But I think we should not be naive about this. The truth is that rural areas are not going to be served as quickly as urban areas and suburban areas. As you said, I live in New York City. My block on Amsterdam Avenue, there is a Korean restaurant and there is an Italian restaurant and there is a Spanish restaurant, on and on and on. I am sure that is not true in most rural areas. However --

SEN. BROWNBACK: That is not necessary for competition. For us, what we want is to be able to have access to be competitive. That is why we did rural telephony, that is why we did rural electrification.

MR. GLASSMAN: But you are getting that and you are going to get that through the competitive process. Do not forget that the world's largest retailer is a company that started in Bentonville, Arkansas, serving rural communities. There are lots of businesses out there and we heard from the first panel about numerous CLECs that want to serve these underserved areas.

I really think that we have a process that is working and to interfere with it at this point would be, I believe, a mistake. It has been a mistake throughout the history of this country, quite frankly, for government to intervene in markets when there is no one who has more incentive to provide services to someone who is going to pay for it than a business. We just should not be getting in the way of those businesses, even if we are extremely well intentioned in wanting to help them.

SEN. BROWNBACK: Walmart would not be there without rural electrification years ago, nor without rural telephony.

MR. GLASSMAN: I would agree.

SEN. BROWNBACK: You can question whether that should continue today.

MR. GLASSMAN: Right.

SEN. BROWNBACK: I think there is a legitimate question about that. But my point is we have never tried to create a Swiss cheese across the country on competitive abilities and that is why you can get a Walmart in Arkansas, in rural Arkansas. I do not want the same here, but I would appreciate any thoughts that you would have, anybody, on this. If you see ways that we should tighten the bill down, that we can still deal with the rural competition and yet address the concerns that you have, that you have, , anybody else, I am very open to doing that.

My objective is quite specific on this and if you see that we are having negative impacts in other areas because of the way it is drafted, let me hear of how we could tighten that focus so that we still hit the target that we are aiming at without addressing your concerns. I know there are a number of different economic issues and interests that are here.

I do appreciate the panels traveling here, your time, your interest, your intensity. The record will stay open for the requisite number of days.

The hearing is adjourned.

END

LOAD-DATE: July 29, 2000

Document 16 of 133.


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