Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 25, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
5043 words
HEADLINE: PREPARED TESTIMONY OF
REED E.
HUNDT
BEFORE THE SENATE COMMITTEE ON THE JUDICIARY
SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS AND COMPETITION
BODY:
Mr. Chairman and Members of the Committee:
Introduction
It is a pleasure to appear before you today to testify on
the state of competition in telecommunications. During my tenure as Chairman of
the Federal Communications Commission, I had the privilege to appear before this
Committee on several occasions. I am delighted to have this opportunity to renew
acquaintances with many members of the Committee and to meet members who have
joined since I last appeared.
This is my first opportunity to appear as a
member of the private sector. My testimony today reflects my personal views and
not necessarily the views of any of the companies with which ( am affiliated. I
currently serve as a member of the boards of directors of Allegiance Telecom,
Inc. and NorthPoint Communications, Inc., both of which are facilities-based
providers of telecommunications services. I also serve on the boards of Ascend
Communications, Inc., a telecommunications equipment manufacturer, and Novell,
Inc., a manufacturer of computer software. In addition, I am a consultant to
venture capital firms and an international consulting firm.
I am especially
pleased and honored to appear today with such distinguished colleagues, each of
whom has played a critical role in making the telecommunications and information
sector the most dynamic and productive in our nation's economy.
Senator
Pressler spearheaded the bi-partisan legislative effort that resulted in
passage, by overwhelming majorities, of the first comprehensive reform of the
Communications Act of 1934. Over the past three years, we have seen incredible
growth in new investment in telecommunications and information service firms and
an equally awesome expansion in the array of services that these firms are
delivering to the American people. The dynamic growth and expansion have even
spread to other industries and undoubtedly have contributed to the country's
productivity gains. And this economic growth has created thousands of new jobs
for American workers. None of this would have been possible without the
Telecommunications Act of 1996.
Assistant Attorney General
Klein has led the Administration's vigilant enforcement of the nation's
antitrust and merger laws. These efforts are vital to preserving the
unprecedented robust growth of our free market economy. In particular, they
provide an assurance to investors and entrepreneurs in the telecommunications
and information industries; an assurance that they will succeed or fail on the
basis of the creativity and quality of their products and services, free from
the pernicious effects of anticompetitive practices.
Of course, Chairman
Kennard has been at the center of the FCC's implementation of the 1996 Act,
first as the Commission's General Counsel and now as Chairman. Throughout the
Commission's deliberations on the scores of rulemaking proceedings mandated by
the statute, Bill was an invaluable source of insightful, prudent legal advice
on an enormous range of complex issues. He also supervised the work of Chris
Wright and other extremely able litigators in the Office of General Counsel who
have defended the Commission's orders in federal courts throughout the United
States. I learned from my experience as Chairman that you can count on somebody
appealing every decision that the FCC issues in carrying out its
responsibilities under the 1996 Act. Incidentally, a major accomplishment under
Chairman Kennard and General Counsel Kennard is the FCC's outstanding success
record in appellate cases.
In my testimony today, I would like to
concentrate on a few principal themes:
- The forces of competition and
innovation in telecommunications that were unleashed by the
Telecommunications Act of 1996 have fueled the unprecedented
growth in this sector of our economy over the past three years.
- The
dynamic expansion of telecommunications and information services since 1996
would not have occurred without the concerted efforts of the Congress, in
particular the leadership of this Subcommittee, the Department of Justice and
the FCC to undertake initiatives that removed legal and economic barriers to
entry into local and other telecommunications markets. p The challenge of the
coming months is to ensure that consumers,especially residential consumers,
throughout the country enjoy the benefits of competition.
- The ultimate
objective of the 1996 Act is deregulation of local telecommunications markets so
that consumers, not government agencies,decide the products and services that
are offered and the prices charged.
Telecommunications in the United States
- A True Success Story
Over the past three years, the United States economy
has demonstrated a unique ability to continue to grow and prosper in a faltering
world economy. I believe that the unparalleled growth in this country's
telecommunications and information sector has contributed significantly to the
expansion of the national economy. We are the world's leaders in these
industries - Americans have more choices among providers, services, and
educational resources than consumers anywhere else in the world.
The
Telecommunications Act of 1996, in my view, is largely
responsible for this economic success story. The Act opened telecommunications
markets that have been closed to competition since the beginning of this
century. It unleashed the creativity of innovative entrepreneurs and gave Wall
Street the confidence needed to invest billions of dollars in these start-up
firms. Indeed, the Telecommunications Act of 1996 was
instrumental in converting the telecommunications and information sector from a
beneficiary of' national economic growth to one of the key drivers of that
growth.The impact of the 1996 Act on the telecommunications industry is well
documented in the report released on February 8, 1999 by the Council of Economic
Advisers. 1 The Act jump-started the entry of competitive local exchange
carriers (CLECs) into markets around the country. Today, CLECs are competing
with the incumbent monopoly telephone companies in every one of the top 100
urban markets as well as 250 business trading areas. 2 The number of switches
deployed by CLECs increased from 65 before the Act to almost 700 by the end of
1998.3 These firms have a market capitalization of over $30 billion and employ
more than 50,000 workers.4
And the CLECs are having a significant impact on
the markets where they compete. Data analyzed by the Council of Economic
Advisers indicate that CLECs doubled their share of total local access lines
during 1998 5 and accounted for approximately five percent of the revenues in
local telecommunications markets by the end of 1998.6
The expansion of the
wireless telephone industry over the past few years has been even more
remarkable. In 1993, approximately 16 million Americans subscribed to cellular
service. By 1998, subscribership had increased to more than 60 million.7
New
competition from digital personal communications services (PCS) has contributed
importantly to the expansion of the wireless industry.
It is estimated
that median prices per minute for wireless customers (what the typical customer
pays) declined by up to 30 to 40 percent for residential subscribers and between
30 and 50 percent for business customers.8
According to the CEA Report,
capital investment in the wireless industry now amounts to $50 billion and
annual revenues approach $30 billion.9 The new challenge for this burgeoning
industrar: to compete with traditional wireline telephone services for
residential and business customers.
Although the CLEC and wireless segments
of the industry have enjoyed unprecedented growth over the past three years,
nothing has surpassed the explosive expansion in Internet use and Internet
companies. The CEA Report estimates that the number of Internet "hosts"
(computers that store information that is accessible via the Internet) increased
from fewer than 3 million world-wide in 1993 to 20 million in 1997 to over 35
million in early 1998. 10 Estimated Internet users in the United States grew
from about 28 million in 1995 to over 73 million in 1997 to more than 80 million
in 1999 or almost one in three American adults,11
Recognizing the importance
of this new medium, Congress included a provision in the 1996 Act, section 706,
that is expressly designed to promote the deployment of advanced
telecommunications services to all Americans. Telecommunications carders, led by
the CLECs, are meeting this need by deploying high-speed Internet access
services, such as digital subscriber lines (DSL), and are aggressively marketing
these services to residential and business customers nation-wide. The Role of
the Federal Government
All of us at this table and the members of this
Committee have been privileged to be part of this unprecedented explosion in the
telecommunications and information industries since 1996. Indeed, I think one of
the most important lessons we can learn from this experience is the enormous
impact that a clear, forward-looking national policy can have on these
industries.
Each of the governmental bodies represented in this hearing -
legislative branch, executive branch, and expert independent agency - has spent
the last three years sending the same message to the American business
community. We will vigorously promulgate and enforce policies that foster
competition in the telecommunications and information industries and ultimately
permit the complete deregulation of local telecommunications markets.
Indeed, the leadership of this Committee, Chairman DeWine and Senator Kohl,
almost two years ago made one of the most important contributions to the goals
of competition and deregulation. At that time, the press was full of stories
about merger discussions that were taking place between AT&T and a Bell
Operating Company. In my opinion, if those discussions had produced an
agreement, the resulting merger would have completely undermined Congress's plan
for bringing the benefits of competition to consumers in local
telecommunications markets. Instead, Chairman DeWine and Senator Kohl
courageously stepped forward and encouraged the FCC to take a position on that
impending merger. In the wake of that letter, the merger talks collapsed and
AT&T was forced to pursue a new strategy. The recently approved merger
between AT&T and TCI is, in my view, a direct result of the earlier
intervention by Chairman DeWine and Senator Kohl. That merger is right for all
of the reasons that the earlier merger was wrong. The acquisition of TCI will
enable AT&T to offer to residential consumers a facilities-based, high-speed
data alternative to the offerings of incumbents. Absent facilities-based
competition for residential customers, complete deregulation of local markets
will never be achieved.
The timely action of Chairman DeWine and Senator
Kohl underscores another point about introducing competition and deregulation
into monopoly markets previously protected by government franchises. Prompt,
effective governmental action is necessary from time to time in order to
dismantle historic hindrances to competition and to prevent new ones from being
erected.
The growth of wireless services and Internet usage demonstrates the
benefits that a fully deregulated market for local telecommunications services
can offer to consumers. The elimination of retail price regulation for wireless
services combined with the entry of new competitors has led to the stunning
growth in wireless usage that I noted earlier. For consumers, deregulated
wireless services today offer a mind-boggling array of features and pricing
plans. The Internet likewise has flourished in a completely free market,
stimulated by continuing declines in the prices of personal computers and
Internet access together with the incredible growth in service providers and the
services available over the Internet. The Telecommunications Act of
1996 is designed to deliver the same benefits of lower prices and more
choices in the local telecommunications market.
Competition and deregulation
also will benefit incumbent telephone companies enormously. These changes will
free incumbents from the pricing and other controls that governmental agencies
exercise over their operations. Incumbents will compete vigorously with newer
providers to serve the growing demand for high-speed data and other innovative
services. Incumbents are already benefiting from the growth in demand for
Internet access and other data services. The CEA report noted that the number of
American households with more than one telephone line rose from 8.8 million in
1993 (9.4 percent of residences) to 15.7 million in 1996 (16.5 percent).'2 Local
competition also will mean that the Bell Companies will be free to offer long
distance service in the areas in which they provide local telephone service. We
learned during the transformation of the long distance industry from monopoly to
competition that as an incumbent loses market share, its revenues nonetheless
can continue to grow from increased demand for new and more efficiently priced
service offerings.
Bringing Competition to Local Telecommunications Markets
The dominant themes of the Telecommunications Act of 1996
can be succinctly captured in two words: competition and deregulation. The
Congress, Department of Justice, FCC, and state regulatory commissions all have
made essential contributions to the successes to date in moving toward
accomplishment of these objectives. But, there is also much to be done.
Congress set forth in the 1996 Act an extremely innovative plan for
achieving those goals. It gave new competitors in the telecommunications
industry the tools they need to enter the market quickly and establish their
presence. Congress also granted the Commission both the authority to adopt rules
to facilitate that entry as well as the responsibility for eliminating those
rules as soon as competition rendered regulation unnecessary.13
Some
provisions of the 1996 Act eliminate formal, legal limits on entry into
telecommunications markets. Section 253 of the Communications Act, for example,
bars any state or municipality from adopting any requirement that "may prohibit
or have the effect of prohibiting the ability of any entity to provide any
interstate or intrastate telecommunications service."14 And the Commission has
used that authority on several occasions to remove entry barriers that
threatened to foreclose new competitors from local telecommunications markets.
15
Congress also recognized, however, that simply eliminating the statutory
and regulatory barriers to entry into local markets would not immediately lead
to effectively competitive markets and deregulation. New competitors needed
access to the incumbents' networks as the first step in the development of
competitive local markets. Congress, therefore, required the incumbent telephone
companies to interconnect their networks with the networks of new entrants. In
the absence of such a requirement, the incumbents would have no incentive to do
so. To the contrary, incumbents would recognize that a new competitor would find
it impossible to market its service if its customers were unable to place calls
to, and receive calls from, customers on the incumbent's network.
For the
same reason, Congress ordered incumbents to provide access to their networks for
lease by new entrants. Requiring these new firms to construct completely new
networks that duplicated the incumbents' networks would have ensured lengthy
delays in the delivery of the benefits of competition to consumers, especially
residential consumers.
I want to emphasize that in my view, Congress
intended unbundled network elements to be a transitional stage in the evolution
of competitive local markets. Congress wisely understood that complete
deregulation of those markets would require the presence of facilities-based
alternatives to the incumbent providers. Otherwise, government regulation of the
prices of network elements would remain necessary.
Thus, although I
regard CLEC access to unbundled network elements at efficient prices as
essential to the rapid emergence of local competition, the ultimate success of
the congressional plan for competition and deregulation depends upon the
deployment of alternative facilities to serve consumers, and the sharing of
facilities not likely to be built redundantly.The Department of Justice has
pursued the same goals of competition and deregulation through its antitrust and
merger policies. As everyone knows, the Department is currently involved in the
trial of its antitrust suit against Microsoft. At the risk of oversimplifying an
extremely complex case, Microsoft's operating system allegedly is functionally
similar to the local telephone loop. That is, Microsoft is allegedly the
dominant provider of operating systems for personal computers. Those systems
function as the interface between the consumer and the vast array of software
that is needed for the computer to communicate with the Internet, obtain access
to and download information from millions of websites, send documents to
printers and perform thousands of other applications. Similarly, the local loop
is currently predominantly provided by a single firm and functions as the
interface between the consumer and the telecommunications infrastructure. In
both circumstances, the key to creating and preserving effective competition is
to ensure that the interface is accessible by multiple providers - in the case
of the Microsoft operating system, software and peripheral equipment providers
and in the case of the local loop, competing providers of telecommunications
services.
Of course, concerns about a dominant firm in one market leveraging
its power to dominate a related market may be mitigated as its position in the
original market erodes. For example, the development of full, facilities-based
competition in local markets may reduce the unbundled network elements that need
to be provided.
The Department also contributed significantly to the
Commission's review of the applications of two Bell Operating Companies to enter
the in-region long distance business, pursuant to section 271 of the Act.16 In
the cases of SBC's application to enter the Oklahoma long distance market and
Ameritech's application to enter the Michigan long distance market, the
Department submitted an extensive analysis of the applicants' compliance with
the requirements of section 271. The Department's submissions formed a critical
part of the record in those proceedings on which the Commission relied in
reaching its decisions.
And certainly the FCC has embraced the goals of
competition and deregulation in implementing the 1996 Act. Because Congress gave
to the FCC the tools necessary to open monopoly telecommunications markets to
competition, the Commission has been able to adopt rules that opened each of the
three paths of local entry mandated by the statute to new firms. The unbundled
network element rules, for example, enable new competitors to enter local
telecommunications markets by using the incumbent provider's network to offer
new services tailored to meet the needs of nascent market segments. The
Telecommunications Resellers Association last year reported to the House
Commerce Committee that between 1995 and 1998 the percentage of its membership
that provided service over facilities the resellers owned or leased from
incumbent local exchange carriers rose from 34 percent to 54 percent, a
significant shift away from simply reselling the services offered by incumbents.
Moreover, some of these new entrants have leased loops from the incumbents
in order to create services that are particularly attractive to Internet service
providers. Merrill Lynch has reported that CLECs have become quite successful in
competing with incumbents to provide new lines to business customers. Internet
service providers, as a group, are responsible for a significant share of this
constant demand for new lines, because, at least in part, the CLECs are doing a
better job of serving this market segment than the incumbents.
CLECs today
frequently offer to install new lines within 24 hours at lower rates than the
incumbent carders offer. Consequently, many CLECs have attracted Internet
service providers as customers. Together, these new entrants into the
telecommunications and information industries have made possible the rapid
expansion of Internet access to residential customers. Between 1997 and 1998,
for example, retail sales over the Internet more than doubled. Further, it has
been estimated that electronic commerce will total $300 billion by 2002.17
Pursuant to its congressional mandate, the FCC also rejected proposals that
would have limited access to, and retarded use of, the Internet. In particular,
the Commission refused to permit incumbent telephone companies to assess
interstate access charges on calls that consumers place to reach their Internet
service providers. Had it acceded to these requests, consumers using the
Internet would have paid per- minute-of-use charges. And, undoubtedly, the
unbelievably explosive demand for Internet access that we have witnessed in the
past three years would have suffered a devastating blow.
We don't have to
speculate about what would have happened if the Commission had not followed the
pro-competition, pro-Internet policies of the Congress and Administration. You
only have to look around the world at other countries to see what would have
happened.
We all have seen instances where a foreign government has adopted
policies that are intended to discourage use of the Internet: high access
prices, limits on the types of traffic that may be carried. Result: growth in
electronic commerce in these countries has lagged far behind the amazing rates
that the United States has sustained year after year. The CEA report, for
example, notes that "the United States ranks far above Japan, Germany and the
United Kingdom in public participation in the Internet, as measured by the
number of hosts per capita."18 I also do not think it a coincidence that this
nation's economy as a whole has substantially outperformed the economies of
those countries in terms of annual economic growth, low inflation and low
unemployment.
A few years ago, some incumbent telephone companies discussed
deploying ISDN service in their territories in order to provide high- speed data
services to both residential and business consumers. But, those incumbents were
not highly motivated. The results were delayed deployment; slow resolution of
technical problems, which made installation an ordeal for customers; and high
prices, which made the service unaffordable for most consumers, including
students. A better policy is competition and deregulation, trusting that demand
will drive the deployment of high-speed data links.
The Role of National
Telecommunications Policy Today
What lessons can we draw from the successes
in telecommunications since passage of the 1996 Act? Perhaps, the paramount
lesson is the vital importance of establishing and enforcing a national
telecommunications policy. Congress recognized this when it passed the Act and
gave the FCC the authority - indeed, the obligation - to implement national
rules to govern the development of fair and effective competition in all
telecommunications markets in all regions of the country. And leaders from both
parties and both chambers - Senators Lott and Hollings and Congressmen Bliley
and Markey emphasized the role of a national telecommunications policy in
accomplishing the goals of the 1996 Act in the brief they filed in the Eighth
Circuit in support of the FCC's interpretation of the statute. Just a few weeks
ago the Supreme Court endorsed the view expressed in that brief.
Specifically, the Supreme Court held that Congress in passing the
Telecommunications Act of 1996 established a national
telecommunications policy. The FCC is responsible for adopting rules to
implement that policy and the state commissions are responsible applying those
rules in the arbitration proceedings they oversee. The Act created a new
partnership between the FCC and the state commissions and the success of the Act
depends directly on the strength of that partnership.What should be the focus of
national telecommunications policy today? In my view, the most important
objective is the delivery of the benefits of local telecommunications
competition to residential consumers. The data from the CEA report that I
discussed above indicate that many businesses in both large and small
communities across the country today have a choice for local telephone service.
That progress toward full and fair competition for business customers needs to
be sustained, but residential consumers, by contrast, to date have not seen much
of the tangible benefits of local competition.
I would like to suggest a few
elements of a national policy that would advance the interests of consumers.
National Rules Governing Non-Discriminatory Access to Unbundled Network
Elements -- Currently, the incumbent telephone companies control the only
telecommunications networks linking virtually all residential customers.
Eventually, wireless companies, cable systems, and CLECs likely will
offer an alternative means of access, but that will take time. The ability of
new entrants in the near term to use elements of the incumbents' networks --
including combinations of elements -- to offer service is the only realistic
chance that residential consumers have to realize significant, concrete benefits
from the 1996 Act.
Efficient, Pro-Competitive Prices for Network Elements --
The Supreme Court upheld the FCC's conclusion that the 1996 Act adopted a
national standard for the pricing of access to unbundled network elements.
Specifically, the Act authorized the Commission to promulgate rules that would
enable new entrants to obtain access to elements from any Bell Company or other
major carrier in the country at economically efficient rates. To that end, the
Commission adopted a pricing methodology for state commissions to use in setting
the network element rates that incumbent telephone companies within their
jurisdiction would charge. The so-called TELRIC or Total Element Long Run
Incremental Cost methodology is designed to produce prices for each carrier's
network elements that approach the prices that would result from a competitive
market. The FCC's rules also require the unbundled network element rates to be
deaveraged geographically, with a minimum of three areas. This requirement is
intended to ensure that significant variations in the cost of providing elements
in different areas of a state are reflected in the elements' prices, rather than
obscured by averaging the costs across the entire state. As Chairman Kennard
rightly stated in his remarks yesterday before the NARUC Winter Meeting,
deaveraged pricing of unbundled network elements "is a central tenet of (the
FCC' s) competition policy." Providing non- discriminatory access to unbundled
elements will not lead to residential competition if the prices for those
elements are wrong.
Improved Access to Advanced Services -- Residential
consumers require access to high-speed data and other advanced services if they
are to take full advantage of the rapidly growing array of telecommunications
and information services. Carriers, incumbents and new entrants, should have
incentives to invest efficiently in new technologies to compete to serve this
market. And the Commission should ensure that incumbents make network elements
available to new competitors in a manner that enables them to offer advanced
services to residential customers.
Calling Party Pays for Wireless Carriers
-- As I mentioned above, we are only beginning to see substitution for basic
telephone service between wireless service providers and incumbent telephone
companies. That process should be hastened by continuing declines in the charges
for wireless calls. I am doubtful, however, that truly effective substitution
between these providers will develop in the near term unless the calling party
on a wireless call begins to pay for calls, rather than the called party as is
typically the case today.Prompt, Efficient Transfers of Customers -- Vigorous,
effective competition for residential consumers did not really take hold in the
long distance business until the advent of"l +" access. Similarly, residential
consumers need the ability to change carriers quickly and without disruption if
new entrants are to be able to compete effectively in this market.
Effective
Enforcement -- Rules that are designed to lead to broad- based residential
competition are unlikely to be successful without a commitment to the swift and
sure enforcement of those rules.
We have made significant progress in the
last three years toward dismantling the monopolies that historically have
dominated the provision of local telecommunications services in this country.
Today, there can be little doubt that consumers in cities and towns throughout
the nation, especially business customers, are reaping substantial benefits from
the work of the Congress, the Department of Justice and the FCC since 1996. The
challenge in the coming months is to make these benefits available to all
consumers.
I thank you again for your invitation to appear at this hearing
today. I would welcome the opportunity to respond to any questions you may have.
FOOTNOTES:
1 Progress Report: Growth and Competition in U.S.
Telecommunications 1993-1998, Council of Economic Advisers (Feb. 8, 1999)
(Progress Report).
2 Progress Report at 18.
3 Id. at 17.
4 Id. at
18, 16.
5 Id. at 24 (Chart 6.
6 1d. at 24 (Chart 7).
7 Id. at 29
(Chart 9).
8 Id. at 27.
9 Id. at 27-28. 10 Id. at 36.
11Id. at
36-37.
12 Progress Report at 35-36.
13 Se.ee 47 U.S.C. section 160.
14 47 U.S.C.paragraph 253.
16 47 U.S.C.paragraph 271.
17 See
Progress Report at 37-38.
18 Progress Report at 36 (citing Atkinson, Robert
D. and Randolph H. Court. 1998. New Economy lndex: Understanding America's
Economic Transformation. Washington, D.C. :Progressive Policy Institute, at 30).
END
LOAD-DATE: February 27, 1999
