Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 25, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
3663 words
HEADLINE: PREPARED TESTIMONY OF
JOEL I.
KLEIN
ASSISTANT ATTORNEY GENERAL
ANTITRUST DIVISION
U.S. DEPARTMENT
OF JUSTICE
BEFORE THE SENATE JUDICIARY COMMITTEE
SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS, AND COMPETITION
SUBJECT -
THE STATE OF COMPETITION IN THE TELECOMMUNICATIONS
MARKETPLACE THREE YEARS
AFTER ENACTMENT
OF THE TELECOMMUNICATIONS ACT OF 1996
BODY:
Good morning, Mr. Chairman and members of the
Subcommittee. It is a pleasure for me to appear before you today on behalf of
the Antitrust Division of the Department of Justice to share our perspective on
the progress of the Telecommunications Act of 1996 in the three
years since it was signed into law. As always, we are grateful for your support
and your interest in our work, and for your continuing dedication to ensuring
that the Act achieves its purpose of bringing more competition to all sectors of
the telecommunications industry.
A report released by the President's
Council of Economic Advisors earlier this month describes with statistic after
statistic a telecommunications marketplace that has become increasingly vibrant
and robust in the wake of the 1996 Act and other pro-competitive policies. As
reported by the CEA, hundreds of new firms have entered all sectors of the
industry, new and incumbent firms have collectively invested tens of billions of
dollars in facilities, services, and R&D, network capacity has increased,
new technology is being deployed, and roll-out of advanced communications
services is accelerating. Output has increased and prices have declined
industry-wide. A copy of that report is attached. The 1996 Act and its
procompetitive, deregulatory framework clearly set the right course.
Even
with these tremendous strides, there remains much hard work to be done before
the job of bringing competition to all parts of the telecommunications industry
is finished. That is particularly true as to the local exchange. And we arestill
awaiting the day when a Bell Operating Company will have achieved the degree of
local exchange market-opening required as a precondition for long distance
entry. While some of this is taking longer than many might have liked, we at the
Justice Department remain as convinced as ever that the Act's fundamental
framework is sound and that, if we stay the course, we will continue making
steady progress under the Act in bringing increased competition to all
telecommunications markets, with its associated benefits to America's consumers.
Unfortunately, but perhaps predictably given the stakes involved, we have
had to devote a significant amount of time and energy during these first three
years to litigation -- regarding not only numerous specific local exchange
marketopening disputes under the Act, but also the meaning of the Act, its
jurisdictional scheme, and even its constitutionality.
Happily, in the last
few months, the most fundamental of those court challenges have been resolved,
and in favor of the Act. The D.C. Circuit and the Fifth Circuit have now
rejected constitutional "bill of attainder" challenges to the Act, with the
Supreme Court denying certiorari in the Fifth Circuit case.
And just last
month, the Supreme Court issued its ruling in the Iowa Utilities Board case,
which resolved the Act's major jurisdictional issues and upheld the FCC's
authority to adopt a uniform national set of rules forimplementation of local
exchange market competition, including rules governing pricing and unbundled
network elements.
The litigation is not over yet. Challenges to the
substance of the FCC's pricing rules, which the Supreme Court did not rule on,
remain to be considered by the Eighth Circuit. And the FCC will conduct further
proceedings on its unbundled network element rules, which may be subject to
further court challenges. But hopefully, the remaining issues can be dealt with
quickly, so firms will focus more of their energies on business strategy instead
of litigation strategy. Local Competition
The Act embodies ambitious goals.
It was designed to dismantle the legal, administrative, and regulatory structure
that had governed local phone monopolies for decades, and replace it with a
fundamentally new imperative: the local telephone market must be opened to
competition. That is the Act's linchpin. The Act also envisioned competitive
benefits to consumers from allowing the Bell Companies to enter and compete in
long distance, once they had demonstrated that the local bottleneck logjam was
broken.
The Act provided for three different distinct avenues of competitive
entry into the local exchange for a competitor to use separately or in
combination to build or assemble a competing service: first, using the
competitor's own networksand facilities, interconnected with the incumbent
carrier's network; second, using the unbundled network elements (or "LINEs") of
the incumbent's network (or a combination of UNEs and the competitor's own
facilities); and third, reselling the incumbent's retail service offerings.
According to the CEA report, competitive local exchange carriers ("CLECs") have
so far captured between 2 and 3 percent of the local exchange market as measured
by lines, or about 5 percent of the market measured by revenues. Resale and UNE
account for more than 70 percent of lines served by CLECs, with facilities-based
accounting for the remainder.
Although there are some important success
stories, each of these avenues has its own limitations, and it is important to
consider each of them separately.
Facilities-Based Competition
In the
limited sphere where competitors have been able to reach numerous profitable
customers and to limit their reliance on the incumbent carrier's network to
simply connecting their own networks to it -- the urban business customer market
-- competition has already made considerable headway. According to the CEA
report, since the Act's passage new competitors have been authorized to enter
local markets in every state in the U.S., and new carriers have entered all of
the top 100 U.S. urban markets, as well as 250 smaller business trading areas.
In fact, most major cities nationwide already have several facilities-based
carrierscompeting with the incumbent for urban business customers. The number of
switches owned by CLECs has grown from 65 before the Act to nearly 700 by the
end of 1998, and the CLECs are building out their fiber networks at a fast clip.
According to the FCC, the amount of fiber deployed by CLECs tripled between 1993
and 1997. And some estimates indicate that CLECs added more than 120,000 route
miles of fiber to their networks during just the first three quarters of 1998.
According to the CEA report, new entrants have successfully raised billions of
dollars in financing in capital markets, increasing market capitalization for
CLECs from almost nothing in 1993 to over $30 billion today. (This figure does
not include debt financing or private venture financing). These new entrants
typically, and naturally, set their sights first on urban business customers as
the most profitable slice of the local exchange market, just as the first
competing long distance carriers did. Their focus has initially been limited to
dense business districts, although their network coverage areas have begun to
expand to reach other urban and suburban business "corridors" and office parks
and, in some cases, have even begun to reach some residential apartment
buildings.
In addition, there are now some encouraging signs regarding
the prospects for cable company entry into local telecommunications markets --
although it istaking longer than some predicted. AT&T's decision to acquire
TCI may have been what put this prospect back into the headlines recently. But a
number of cable companies are now well into the process of implementing the
necessary upgrades to their cable systems to offer services such as local and
long distance telephony and high-speed Internet access.
Wireless technology
also offers some competitive potential. Market expansion and increased
competition within the cellular and personal communications systems sectors is
making these mobile wireless services more ubiquitous and affordable. In
addition, several new competitors have begun to enter the local exchange market
using fixed wireless technologies to provide the "last mile" of network
connection to the customer. Finally, there are a number of firms hoping to enter
the local exchange market using satellite technology.
While these
developments are encouraging, facilities-based mass-market local entry efforts
are still extremely limited and will take time to develop.
Unbundled Network
Elements Competition
The avenue of using the incumbent's unbundled network
elements, or a combination of unbundled elements and the competitor's own
facilities, has often developed at a frustratingly slow pace, and the
overwhelming majority of the very few mass-market customers served by competing
carriers are resale customers.The FCC estimates that CLECs are now using UNEs
leased from incumbent carriers to serve approximately 260,000 U.S. customers.
This represents a tiny portion of all local customers, and most of them are
concentrated in a few areas. In most states the figure is still extremely low.
For example, in Bell South's second Louisiana application, we found that only
about 100 unbundled "loops" had thus far been ordered and provisioned in the
entire state. In some other states, the figures are somewhat higher, but the
fact remains that competition using UNEs -- an integral part of the Telecom
Act's mandate -- still has far to go.
Resale Competition In sheer numbers of
new local customers signed up, resale competition appears to have been the most
successful avenue thus far. But because competition is largely confined to
marketing and billing for the incumbent's services -- with virtually total
reliance on the incumbent's network -- resale does not allow for a full range of
possible cost-saving innovations, so its potential competitive benefits are
limited. It is therefore highly unlikely to be a sufficient engine by itself for
bringing the range of competitive benefits to mass-market consumers that the
Telecom Act intended. Indeed, many CLECs, including AT&T and MCI, have
abandoned the resale strategy. And a company that was once one of the nation's
fastest growing local service resellers, with hundreds of thousandsof local
access lines, was forced by late last year to lay off almost half its employees.
In short, all three avenues for competitive entry have limitations that keep
any one of them from being a complete solution. We need all three.
For
broad, mass-market entry, the facilities-based avenue has limitations that can
be solved only over time, and at considerable expense, as competing networks are
physically extended to individual households. And the resale avenue has
limitations that are inherent, because by nature it involves selling the
incumbent's services. That is why we believe it is critical that the unbundled
network elements route remain viable, and why so much attention is being focused
on overcoming the difficulties in pursuing it. So let me talk for a minute about
what those difficulties are.
Difficulties to Remedy in UNE Access
There
have been two different kinds of UNE difficulties to deal with. The first has
been the difficult legal process of clarifying and interpreting the Act's UNE
mandates. The second has been the difficult technical and logistical process of
implementing those mandates.
Let me first say a few things about the legal
difficulties. The meaning of the UNE mandates has been a major focus of the
litigation over the Act, figuringprominently in the Iowa Utilities Board case --
and perhaps predictably, given the extremely high stakes involved in exactly
what CLECs are entitled to under the Act, in what manner, and at what price.
Disputes over the meaning of these mandates have generated a tremendous amount
of federal litigation, as well as related state commission rulings,
arbitrations, and FCC rulemakings.
Some, though by no means all, of that
skirmishing has been laid to rest by the Supreme Court's decision in the Iowa
Utilities Board case. That decision has resolved most of the disputes to date
involving unbundled network elements, and has rejected a variety of incumbent
local exchange carrier policies and practices which unnecessarily increased the
costs or diminished the quality of services for competitors that use the
incumbent's UNEs. For example, the Court upheld the FCC's rule prohibiting the
incumbent carriers from the anticompetitive and wasteful practice of refusing to
provide already- combined network elements in their combined form, thus forcing
competitors to purchase them separately and recombine them on their own, at
additional expense. While there are still some details to be worked out -- which
will likely involve some further proceedings before the FCC and the federal
courts -- we are hopeful that the Supreme Court's resolution of so many of these
issues will now make it easier for important business and investment decisions
to be made with more certainty regarding thelegal landscape, propelling the
competitive process forward as the Act intended.
Now let me turn to the
technical and logistical difficulties. Quite apart from the difficulties in
clarifying and interpreting the UNE mandates, the process of implementing the
unbundling and interconnection requirements of the Act has been an enormously
complex undertaking, requiring hard work and substantial expenditure by the
incumbent local exchange carriers as well as by the new entrants. In particular,
working out the technical details for sharing complex telecommunications
networks, and developing the systems to support such sharing, has proven to be a
formidable task.
However, as we have explained in our section 271
evaluations, it is such a formidable task precisely because access to
operational support systems ("OSS") and other wholesale support processes is so
essential to the development of massmarket competition. This access is what
enables a competitor to sign up a new customer, process the customer's service
order and transmit it to the incumbent, switch the customer's service from the
incumbent to the competitor, provide a new service to the customer, provide
accurate customer billing, and manage any repair or service problems.
Put
simply, I do not believe that you will have mass-market competition in local
markets without adequate non-discriminatory access to the incumbentcarrier's
OSS, a reliable means to measure the incumbent's wholesale performance, and an
effective enforcement mechanism to ensure against poor performance or
"backsliding" after section 271 approval.
We already have a telling example
of the critical importance of OSS in the resale context, where access to the
incumbent carrier's OSS is no less important. I am sure many of you are aware of
the efforts by MCI and others to roll out massmarket resale service in
California in late 1996 and into 1997. MCI was quite successful in marketing its
new local service offering, and in the ensuing months signed up some
30,000-35,000 customers wishing to switch their local service provider from
Pacific Bell to MCI. But Pacific Bell did not have adequate electronic systems
and wholesale support processes developed to handle MCI's order volume. Pacific
Bell was not able to keep up with processing these orders manually, which
resulted in huge backlogs of thousands of orders. Pacific Bell attempted to
remedy the problems by adding hundreds of employees to help with manual order
processing, but the order backlogs remained or grew even larger. In the end, MCI
was forced to withdraw its resale offering in California. I use this example not
to single out Pacific Bell, but rather to underscore why these OSS interfaces
and support process are so very important if we are to give local market
consumers meaningful competitive options.
Role of the Department of
Justice
Now let me turn more specifically to the Department of Justice's
role in all this. The role given to us in the Act is to advise the FCC on Bell
Company applications for long distance entry under section 271. And, of course,
to enforce the antitrust laws. But we have always viewed our responsibility
under the Act as more than merely giving a thumbs-up or thumbs-down to section
271 applications as they come in. That's why we not only articulated our
standard for recommending section 271 approval -- that the local exchange market
involved be "fully and irreversibly open to competition" -- but also have
devoted considerable resources to helping the Bell Companies and all others
concerned understand what we mean by that standard. And we have tried to do this
not only in the competitive analyses we have provided for section 271
applications to date, but also in formal and informal discussions with everyone
concerned.
Recognizing the critical importance of OSS access to the process
of opening local exchange markets, as part of our overall section 271
responsibilities we have, when asked, collaborated with the efforts of state
commissions in New York, Texas, and elsewhere to tackle the OSS issue. There is
no question that non-discriminatory access to OSS has emerged as one of the
remaining hurdles tothe market opening that is an essential precondition to the
Bell Companies' gaining section 271 approval at both the state commission and
FCC level. These "OSS testing" proceedings at the state level have demonstrated
that developing these systems, interfaces, and processes is difficult, but I
think they have also demonstrated that it can be accomplished. In addition, the
involvement of the state commissions and independent third parties in the
testing processing has been particularly useful not only in pointing out
problems and moving forward to remedy them, but also in removing some of the "he
said-she said" disputes between the Bell Companies and the new entrants from the
debate.
These proceedings are well underway, and we will continue to work
with the state commissions and the industry to complete them. We hope that these
proceedings will identify Bell Companies whose OSS and other wholesale support
processes may now be sufficient to obtain section 271 approval, or at a minimum
that they will clearly demonstrate what steps we still need to take towards
local market opening and section 271 approval. Importance of Section 271
As
we reflect on the first three years of the Act, I believe one of the most
important lessons we can take from our experience is how absolutely critical
section 271 is to achieving the Act's market- opening goals. The progress
towardopening the local exchange markets that many have complained is far too
slow has taken place in good measure because of the prospect of long distance
entry for the Bell Companies as a reward. One of the most ambitious aspects of
the Act is that it requires and expects the incumbent local exchange carrier to
assist competitors that wish ultimately to take away its customers. Imagine how
much more difficult this process would be without the incentive of long distance
entry for the Bell Companies.
For the same reasons, the Department has paid
considerable attention, in developing our competitive standard for assessing
section 271 applications, to the question of how to ensure that a local exchange
market remains open even after the application has been approved and the
incentive of gaining entry is no longer a factor. We are hopeful that the
collaborative proceedings in New York, Texas, and elsewhere will help fine-tune
and implement the performance measures, the reporting requirements, the
performance benchmarks, and the regulatory and contractual enforcement
mechanisms that will be necessary to protect against such post-271 entry
"backsliding."
Conclusion
We never expected the monopoly structure that
has characterized the local exchange for most of this century to be removed
overnight. But Congress madethe right decision three years ago in deciding that
it was time for competition to be the touchstone for our national
telecommunications policy in all markets, including the local exchange. The Act
reflects Congress's wel1-founded faith in our free- market economy, faith that
in the telecommunications industry as in others, competition will strengthen our
economy and ensure that American consumers benefit from increased choices,
enhanced offerings, and better prices.
Just as MCI and others refuted the
many pessimists who said that competition in long distance would never be
achieved -- as recently as 1986, one observer predicted that AT&T would find
itself alone in the basic long-distance market by the end of the century -- so
will the many large and small CLECs ultimately prove that competition is the
right choice in local markets as well.
Before we get there, there is a lot
of hard work yet to be done. Rather than legislatively revisiting the Act, I
think the fight approach is to maintain our efforts to make the Act work. In my
view, its basic framework is sound. The difficulties we have experienced in
implementing it are of the kind to be expected with such an ambitious
undertaking. After all the work that has gone into implementing the Act, and
litigating it to a common, judicially interpreted understanding where required,
I am concerned that revising it at this point would only lead to more litigation
and more delay.The work before us now is not to set the policy -- you have
already set the policy, and it is the right one -- but to continue sweating the
details that go into implementing that policy. We in the Justice Department are
used to sweating these kinds of competitive details. We remain committed to the
pro-competitive goals of the Telecommunications Act, and we will continue
working vigorously to help enforce them.
I urge you to read the attached
Council of Economic Advisors report. It lays out the remarkable competitive
vibrancy of the telecommunications industry on a macro level. As we continue to
work in the trenches to ensure all markets are competitive, we should not lose
sight of the dynamism of the telecommunications marketplace writ large and the
instrumental role the 1996 Act plays in this story.
END
LOAD-DATE: February 27, 1999
