Copyright 1999 Federal News Service, Inc.
Federal News Service
NOVEMBER 4, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
3772 words
HEADLINE: PREPARED TESTIMONY OF
ROY NEEL
PRESIDENT AND CEO
UNITED STATES TELECOM ASSOCIATION
BEFORE THE
SENATE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION
BODY:
Thank you very much, Mr.
Chairman, for giving me the opportunity to testify at this hearing. The hearing
is timely and an important one. As the President and CEO of the United States
Telecom Association, I am here on behalf of the over 1100 local telephone
companies that we represent throughout the United States. Our members are at the
front lines of local competition and the thrust of my testimony today will be
that if you are a business in a large urban market you have many competitive
opportunities. In contrast, if you are a residential customer in a rural market
you will have very limited competitive options. We also expect that cable
operators who are today providing telephone service in some markets will greatly
expand that service to other markets.
Let me begin by quoting a recent
remark made by the Chairman of the Federal Communications Commission, William E.
Kennard with respect to local competition. Chairman Kennard made the following
statement at a hearing before the House Commerce Committee's Subcommittee on
Telecommunications, Trade and Consumer Protection on October 26, 1999. In the
local phone sector, we are starting to see the fruits of our procompetitive
policies. There are now at least 20 publicly traded CLEC with a total market cap
of 33 billion (dollars). That compares with only 6 CLECs with a market cap of
$1.3 billion at the time of the passage of the 1996 Act. In the first quarter of
1999 alone, almost a million CLEC access lines were installed. (Emphasis Added)
THE LOCAL MARKET Is OPEN
As a starting point, let me share with you some
summary information on the state of local competition that USTA provided to the
House Commerce last December (1998):
Demonstrate Competitive Activity with:
LEC Total
PSC CLEC Certifications 9,762 Signed Agreements with Competitors
5,475 PSC Approved Agreements 2,881 Unbundled Loops 285,402 Resold Lines
2,849,469 Resold Business Lines 1,650,092 Resold Residential Lines 1,260,751
Resold Coin 35,226 Resold Private Lines/Data CKTs 78,756 Minutes of Use (MOUs)
Exchanged 307.1 Billion (Since 1995) Interconnection Trunks in Operation
1,801,977 (Local Only) Collocation Arrangement (activity) Physical 2,385 Virtual
2,220 Wire Centers with Collocation 4,956 Number of Lines in Offices with One or
44,593,956 More Collocators NXX Codes Assigned to CLECs 11,413 Total
CLEC-Provided Local Exchange 3,510,476 Service Lines
The above information
was compiled by our local telephone companies and it shows that there are a lot
of competitive entrants. This original research done by USTA has been validated
by subsequent studies done by both us and others. I also intend to demonstrate
to you that, as Chairman Kennard noted, the competitive situation has become
much more competitive in just this last year of 1999.In May of this year, USTA
submitted to the FCC (CC Docket No. 96-98) a report prepared by Peter Huber and
Evan Leo for the Bell operating companies and GTE entitled the UNE FACT REPORT.
The report was done in contemplation of the UNE remand proceeding at the FCC so
it emphasized network elements, such as switches which are a key component to
facilities-based local competition. This extensive research confirmed our
earlier (December 1998) assessment regarding the state of local competition.
This report showed, for instance, that 167 CLECs had deployed 724 switches in
320 cities as of March 1999. A chart showing the locations of the switches is
attached to my testimony, and it graphically corroborates my earlier statement
about where the competition is going.
What leaps off the page of the
attached chart is that competitors have business plans that target urban areas.
In Washington, D.C. , for instance, 14 CLECs operate 23 switches in the
Washington Metropolitan Statistical Area.
The UNE FACT REPORT secondly
looked at 3 categories of RBOC/GTE Wire Centers those with 40,000 lines or more,
those with 30,000 lines or more and those with 20,000 lines or more (see
attached charts). The research showed dispositively that wire centers with the
greatest density have the greatest degree of competition, thus providing
probative evidence that the CLEC business plans place their emphasis on business
customers, as it is within the reach of these dense wire centers that the great
preponderance of business locate. Drive around Washington today, for instance,
and observe where the streets are being torn up to install fiber optic cable and
this point will be made. As our UNE FACT REPORT further observes, there is more
local competition three and a half years after passage of the 1996 Act than
there was three and a half years after EXCUNET H opened up the long distance
market to competition in 1978, by requiring AT&T to interconnect with long
distance competitors.
In the advanced service market, the UNE FACT REPORT
points out that the competitive situation is even more pronounced. CLECs already
lead incumbent local exchange carriers (ILECs) in providing advanced services
over ILEC loops. CLECs offer advanced services to over 5 million homes and ALTS,
the CLEC trade association, predicts that number will quadruple in 1999, with
data constituting 20 percent of CLEC revenue by 1999.
Our two studies on
local competition have been confirmed by the Local Competition: August 1999
report of the FCC's Common Carrier Bureau. This report indicates that by the end
of June 1999, facilities-based CLECs were in every state and in all but 18 of
the nations 193 LATAs. Furthermore, this report's assessment of where
competition is developing corresponds precisely with our own analysis. The
report says:
One such assertion, made by virtually all analysts is that
competition is emerging most rapidly in urban business districts. This
observation meets with prior expectations, which are based on historical
telephone cost and usage patterns. For example, a large body of literature
describing the cost structure of the telephone network supports the conclusion
that local telephone companies incur greater costs by serving rural customers
than by serving urban customers. Furthermore, business customers, which are
often concentrated in urban areas, have historically used the network more
intensively than residential customers. Consequently, local telephone companies
have historically collected a disproportionate share of their local telephone
revenue from business customers. In concert, these factors indicate that the
high-volume, low-cost customers in urban business districts are more attractive
to new entrants than either rural or residential customers.
The business
plans of CLECs reflect the economic realities of the marketplace.
There
is considerable profit to be made in serving business customers, but there is
less in serving the overwhelming majority of residential customers. US West in
its territory has, for instance, lost to competitors 70% of its high capacity
traffic. For most residential customers in most states, local residential
telephone service is still highly subsidized by a 50 year old system of implicit
subsidies. Investors behind CLECs know this and well over 95 % of all capital
flowing to CLECs is targeted at business customers, even though these customers
represent only 35 % of the total U.S. telecommunications market. CLECs are also
no longer small companies as their market capitalization in 1999 is larger than
the United States airline industry.The competition situation is changing and
growing everyday. Just yesterday, for instance, Bell South announced that
Network One will spend $500 million with Bell South's unbundled network element
combinations or so-called UNE-P. This is the largest such deal reached to date
in the telecommunications industry.
CRITICAL IMPEDIMENTS TO THE FURTHER
DEVELOPMENT OF LOCAL TELEPHONE COMPETITION
1. LACK OF COMPREHENSIVE
UNIVERSAL SERVICE REFORM.
In March 1994, USTA submitted to this Committee
its universal service amendments to Senator Hollings' bill, S. 1822. We had
been, by this time in 1994, internally assessing and developing for 3 years our
policy recommendations to preserve universal service in an era of local
competition. USTA's evaluation concluded that the system of implicit subsidies
could not survive in a competitive era; that subsidies need to be explicit; that
all providers of telecommunications services needed to contribute to universal
service preservation; and that local telephone rates had to be rebalanced. The
USTA amendments proposed four basic universal service proposals for a
competitive era:
1-- eliminate implicit universal service subsidies
2--
require all providers of telecommunications service to contribute to the
preservation of universal service
3-- establish explicit subsidies to
provide adequate and sustainable support for universal service
4-- authorize
ILECs to rebalance their local telephone rates
During deliberations on the
1996 Act, several highly motivated Senators formed a coalition that became known
as the ':Farm Team "to protect telephone services, especially in rural areas.
Senators, including Dorgan, Exon, Pressler, Rockefeller, Kerrey (Nebraska) and
Stevens made this objective the centerpiece in the debate on legislation that
ultimately became the 1996 Act. By August 1994, the "Farm Team "had embraced
three of these four USTA principles. Elimination of implicit subsidies was not
adopted by the ':Farm Team, "but rate rebalancing was. (See, Rural Area
Amendments "Farm Team "Draft III -- August 1, 1994.)
I am emphasizing the
Senate and the '"Farm Team" deliberations, because it was the Senate's universal
service provisions that were adopted by the 1996 Act. The 1996 Act embraced
three of the four USTA universal service principles or at least that is what we
thought on February 8, 1996 when President Clinton signed the
Telecommunications Act of 1996. The 1996 Act did quite clearly
rejected our rate rebalancing proposal. Had it been adopted local competition in
my judgment would be much further along, especially with respect to local
residential competition. Most states are reluctant to rebalance rates, because
rebalancing rates results in local residential telephone rate increases and
local business telephone rate decreases. Some states, such as Nebraska have
rebalanced rates and created a state universal telephone service fund, and it
has proven successful. In our March 1994 submission to you, we emphasized how
important rate rebalancing is and we said: "The universal service provisions of
this legislation do not permit the adjustment of prices for telecommunications
services, especially in light of the competition that it fosters." In other
words, if you want local residential telephone competition to flourish you must
rebalance local telephone rates."
The FCC was required by Section 254 of the
1996 Act to complete action on universal service reform by May 8, 1997. To date,
the FCC has failed to do so. This failure in combination with the Congress'
rejection of rate rebalancing in the 1996 the Act has perpetuated the economic
distortions that existed at the time of the 1996 Act's passage and that work
against the competitive goals of the Act. I am talking here about the fact that
local residential service is supported by a vast array of implicit subsidies
mechanisms which include: interstate access charges, vertical services (e.g.,
call waiting and caller ID), local business service, intrastate toll services
and urban to rural support. These subsidy practices which began in 1949 and
which continue unabated today result in ILEC provision of residential service in
many areas at below cost rates.
Without rate rebalancing and/or complete
universal service reform, local residential service, except in low cost urban or
similarly densely populated areas or provided by means of alternative technology
or resale, will be uneconomical for competitors to provide. Consequently, there
is a dearth of local residential competition, but there is significant local
business telephone competition. As the Department of Justice observed in its
recent Evaluation of Bell Atlantic's New York interLATA application, loops in
Manhattan are 2000 times more dense than in upstate New York. Such density will
economically support both competitive business and residential service, but low
density in rural areas, for instance, will not.
The 1996 Act has, as we have
seen, accelerated the trend towards competition in the provision of local
telephone service. Competitors, however, are immediately drawn to the business
customers of the ILEC, because the CLEC realizes that the ILEC in most states is
still required to price local telephone service to the business customer above
cost in order to subsidize local telephone service. Quite obviously, this
regulatory scheme is one that could exist in the monopoly telephone era, but not
the competitive. Neither the states nor the FCC have eliminated implicit
subsidies, which seemed to be one of the clarion calls of the 1996 Act, even if
rate rebalancing was not.
2. SECTION 271 RELIEF.-- A second critical
impediment to local competition is the failure to date to authorize a single
RBOC to provide interLATA telecommunications service in their regions. I doubt
seriously if any of you who were on the Committee in 1995 and 1996 would have
ever envisioned that statement being made at the end of 1999 -- 3 years and 9
months after the 1996 Act's signing. One of the principal goals of the 1996 Act
was to get BOCs into the long distance market in order to enhance competition in
that telecommunications market segment as well. The watchword during the
consideration of the 1996 Act was simultaneity, meaning that BOCs should be
authorized to provide long distance through Section 271 simultaneous with the
opening up of the local market through Section 251. Simultaneity was abandoned
within six months of the 1996 Act's passage. Chairman Pressler, for instance,
opined on the Senate floor during debate on S. 652 that the Competitive
Checklist would be easy for BOCs to pass, because it was simply an amalgam of
extant state regulatory requirements.
The 1996 Act's requirements for RBOC
entry were pretty straightforward. If a BOC had a facilities-based or
predominantly facility-based competing provider of telephone exchange service to
businesses and residences and if the RBOC met the 14-point checklist, the RBOC
should be approved for long distance service if the FCC determined that entry
was in the public interest. As Solomon Trujillo Chairman and CEO of US West
testified before this Committee in April of this year, and reinforced in his
letter of May 7, 1999 to Senators McCain and Hollings, the FCC has made this
entry very much more complicated. In his letter, Mr. Trujillo pointed out that
the 14-point statutory checklist has been, by US West's fully documented count,
increased to a 690 point checklist. Section 271(d)(4) of the 1996 Act prohibited
the FCC from expanding the checklist. In 1999, to find out what requirements a
BOC must meet for interLATA authority forget about the 1996 Act. The only place
to find the state of the law at any one point is to look at all of the FCC
orders and rules. As Mr. Trujillo pointed out, however, in his letter: Over the
three years since passage of the Act, the FCC has conducted at least ten rule
making proceedings creating Section 271 compliance obligations and has rejected
each of the Section 271 applications filed by three different BOCs. A consistent
pattern has emerged where each rulemaking and decision adds to or alters the
compliance requirements, sometimes very significantly. (Emphasis Added)
The
continually evolving nature of these requirements points up the difficulties
that BOCs face in their effort to obtain long distance relief within their
regions. In performing the analysis necessary to identify these regulatory
accretions to the statutory scheme enacted by the Congress, a number of
regulatory approaches adopted by the FCC are so noteworthy that they require
brief, separate discussion.
(Emphasis Added)All told, the existing or
proposed FCC requirements enumerated in the Study levy enormous operational,
administrative and economic burdens on BOCs in their effort to gain Section 271
relief. The costs associated with meeting these requirements constitute a
significant barrier to BOC entry into the interLATA market. Insofar as these
requirements are extended to BOC provision of advanced data services, as
proposed by the FCC, they could also delay, if not foreclose, rapid, wide-scale
entry by BOC's into the broadband service market. (Emphasis Added)
Even the
Department of Justice agrees that the compliance requirements for Section 271
have expanded. In its recent evaluation of Bell Atlantic's New York application,
the Department of Justice refers to the "ever receding finish line for meeting
the requirements for entry into the long distance market."
Despite all of
this, I am advised by the Bell operating companies that there are three very
promising Section 271 applications in the pipeline: Bell Atlantic for New York;
Bell South for Georgia; and SBC for Texas. These, I am advised, will even meet
the 690-point checklist -- if the goalpost is not moved even further. Bell
Atlantic's application is currently before the FCC for its 90-day review, after
having received the endorsement of the New York Public Service Commission
following a lengthy and rigorous analysis by that state. The Department of
Justice has even concluded that the FCC "... may be able to approve Bell
Atlantic's application at the culmination of these proceedings."
All three
of these states (New York, Texas, Georgia) have facilities- based competition
for both residential and business customers. An abbreviated snapshot of the
competitive situation in these 3 states would be as described in the below
chart:
STATE NEW YORK TEXAS GEORGIA
CLEC Over 500 294 138 Certifications
Operational 100 162 61 CLECs
CLEC 1.3 million 1.3 million 305,000
Provided Access Lines
Today, long distance carriers have a very real
incentive to keep the BOCs out of the in Region interLATA business as they will
surely lose some of their long distance market share to the BOCs. Consequently,
they are not significantly entering the local telephone market for residential
customers. This business customer oriented business plan will end in a hurry
once the BOCs are given in-Region interLATA authority. A good example of this
occurred in Connecticut where SNET, prior to being acquired by SBC, was allowed
to offer a package of local and long distance services. Both AT&T and MCI
lowered their intrastate long distance rates and offered a bundled package of
local and long distance services to compete with SNET.
The failure to
provide BOCs with interLATA relief is one of the most critical impediments to
local competition. Once Section 271 relief is authorized, competitors will no
longer purposely avoid serving residential subscribers. Today, if competitors
provided wireline facilities-based services to both businesses and residences,
this would unquestionably show that the local market is open, thus enabling BOCs
to obtain Section 271 relief. Once BOCs are permitted to offer long distance,
the long distance companies will find it necessary to enter the local market.
DEPLOYMENT OF ADVANCED SERVICES
The 1996 Act requires the FCC take steps
in ensure rapid deployment of advanced telecommunications services as mandated
in Section 706(b). There is no company that possesses market power in provision
of advanced telecommunications service; hence, there is no reason for ILECs to
be regulated differently than any other provider of advanced services. USTA
agrees with AT&T CEO Michael Armstrong, who recently stated: "No company
will invest billions of dollars to become a facilities-base broadband services
provider if competitors who have not invested a penny of capital nor taken an
ounce of risk can come along and get a free ride on the investments and risks of
others." All providers, CLECs, ILECs, and cable providers should receive the
same regulatory treatment that is no regulation of advanced services regardless
of who the provider is. Second, BOCs should be given immediate authority to
provide interLATA data services in order to enhance the Internet backbone and
provide high speed Internet access throughout the country. Many, even relatively
large cities and some states, have no Internet Point of Presence (POP).
There is no reason, for instance, why DSL which is an interstate
telecommunications service should be regulated differently from Cable Modem
Service, a cable service, but it is! DSL is pervasively regulated as a
telecommunications service, but cable modem service is virtually unregulated as
a cable service. Chairman Kennard just last week testified at the earlier cited
House hearing that these two services, cable modem provided by cable operators
and DSL services provided by ILECs are functionally equivalent. Look, however,
at the regulatory differences between these two functionally equivalent
services: (NOTE: Tables not transmittable)
The Internet is changing the
world in ways never contemplated. Data and high speedaccess to the Internet are
the important competitive matters of today and tomorrow and this is no
David/Goliath story. ILECs have as their principal competitors in advanced
services such companies as AT&T, which when its Media One merger is
complete, will be not only one of the nation's largest long distance telephone
carrier, but also the #1 cable television company. In the area of cable-based,
high-speed Internet access, AT&T would own 78% of @Home (330,000 customers)
as well as nearly 40% of Road Runner (-75,000 subscribers) --bringing AT&T
one step closer to offering a nationwide, all-in-one Internet, video and voice
communications service. AT&T will have direct access to at least 60% of U.S.
homes. Moreover, AT&T will also have significant chunks of:
-- Three of
the top four cable firms
-- The two largest high-speed Internet companies,
and
-- A share of virtually every major cable TV network
CONCLUSION
To summarize, there is certainly competition for business subscribers.
Residential competition has been frustrated by the failure of most states to
rebalance local phone rates, and the failure of the FCC and most states to
reform universal service to eliminate implicit universal service subsidies.
Third, we need regulatory parity in the provision of advanced services -- cable
modem service and DSL service are functionally equivalent and neither should be
regulated.
END
LOAD-DATE: November 9, 1999
