Copyright 2001 Federal News Service, Inc.  
Federal News Service
April 25, 2001, Wednesday
SECTION: PREPARED TESTIMONY

LENGTH: 4949 words

HEADLINE: PREPARED TESTIMONY OF PAUL K. MANCINI VICE PRESIDENT AND ASSISTANT GENERAL COUNSEL SBC COMMUNICATIONS INC.
 
BEFORE THE HOUSE COMMERCE COMMITTEE

BODY:
Thank you for the opportunity to appear and testify before you this morning. I am Paul K. Mancini, Vice President and Assistant General Counsel of SBC Communications Inc.

HR__, commonly known as the Internet Freedom and Broadband Deployment Act of 2001 will encourage greater broadband investment and deployment of high-speed Internet access to consumers in all areas of the country. It will balance the unjustified and anticompetitive regulatory disparity that currently exists between different broadband providers, help close the Digital Divide, and encourage competition by providing customers with more choices and higher quality services at competitive prices.

I commend Chairman Tauzin and Ranking Member Dingell for their leadership and for recognizing that the application of rules designed to regulate the legacy voice network has delayed the availability of high-speed Internet access for consumers, has delayed the widespread deployment of broadband services for consumers, and has slowed competition between competing providers in this market.

There are two fundamental competitive principles that should guide Congress. First, competitive markets should be free from governmental regulation of the rates, terms and conditions under which goods and services are provided to the public. Second, if there is some public policy reason for regulating a competitive market, all service providers in that market should be subject to symmetrical regulatory requirements. In other words, the same services in the same market should be regulated in the same way, regardless of who is providing the services or what technology is utilized to deliver those services. Let consumers decide who to select based on competitive markets, and not on the result of regulations that pick winners and losers.

Congress need look no further than to the wireless market for confirmation that these principles will benefit consumers and competition. In the early 1990s, Congress decided that a competition model (rather than a regulatory model) should be used for the wireless market. Hence, neither the FCC nor the states regulated the prices, terms or conditions in that market and there are no requirements for wirelesss providers to unbundle their networks or to assist their competitors entry into the market. As a result, investment in the wireless market has exploded, prices have fallen dramatically, and consumers have benefited from the robust competition in that market by seeing more choices, more innovation and lower prices.

HR is a step in the fight direction toward fulfilling these fundamental principles in the market for high-speed Internet access services. Any legislation to promote the delivery of these services to the public should reduce the asymmetric regulation that currently exists between the cable industry, the telephone industry and other providers of these services, and bring about more competition and choices for consumers and to the marketplace. It is only through full and fair competition that consumers in the market for high-speed Internet access services can obtain the benefits of quality, choice and price.

SBC strongly supports HR__ and encourages this Committee and the Congress to pass this legislation. This bill is procompetitive and it will remove costly and unnecessary barriers to entry by lifting disparate regulation in the competitive high-speed Internet access market and the competitive high-speed data services market.

In considering HR, it should be emphasized that in the market for high-speed broadband Internet access - all competitors, including SBC as well as cable, fixed wireless and satellite providers, started from the same starting block. In the market for high-speed data and Internet access services, there are certain undisputed facts that compel adoption of this legislation: -- First, the market for high-speed Internet access services is a competitive market in which there are four different types of providers (using different technologies) competing head-to-head---able modems, Digital Subscriber Line or DSL, fixed wireless and satellite providers.

-- Second, there is no "bottleneck" in obtaining access to the customer -- none of the Internet access providers depend on the facilities or networks of their competitors to reach their end user customers.

-- Third, all local exchange careers (LECs) that provide DSL are behind in the provision of high-speed Internet access services - cable modems currently dominate this market and serve three out of four customers who use such services.

-- Fourth, the LECs are heavily regulated when they attempt to provide competitive Internet access services (while cable and the other competitors are unregulated) and the LECs (but not their competitors) are required to assist their competitors in entering this market.

-- Fifth, SBC and the other Bell companies are at a competitive disadvantage in that they cannot provide competitive high-speed Internet access and data services on an interLATA basis, while their cable, fixed wireless, satellite and other competitors are free to do so and do not face the same restrictions.

-- Finally, state regulatory commissions have unwisely asserted jurisdiction over only the DSL providers in the high-speed Internet access market and, to date, at least one commission has required the so-called "unbundling" of the high-speed Internet access and data networks of the incumbent local exchange company (ILEC) (including requiring the mixing and matching of line cards made by different manufacturers located in remote terminals). This so-called "unbundling" is clearly contrary to the intent of this legislation, and, it in fact, would be prohibited if HR is enacted. These types of requirements apply only to the incumbent local exchange company and not to any other high-speed Internet access provider - furthering increasing the regulatory disparity of a competitive service.

The effects of the disparate regulatory treatment that currently exist in the highspeed Internet access market include reduced investment by LECs in this market, the inefficient deployment of new technologies, higher costs, fewer choices for consumers, and continuation of the "digital divide." Hence, elimination of the regulatory disparity between the Bell operating companies (BOCs) and their competitors in the high-speed Internet access and data services markets is essential to fulfilling the fundamental principles outlined above.

In summary, access to high-speed Internet connections is crucial in today's economy. High-speed connections to the Internet mean faster downloads and can provide a lifeline to small businesses, schools and hospitals. Communities that have access to high-speed Internet connections will prosper and grow in the Information Age. Communities that don't will find themselves on the wrong side of a growing digital divide. Consumers with high-speed Internet connections will be able to get on-line with the speed they need to link with far away friends and family members, tap the latest medical or educational resources, or enjoy multimedia entertainment.

However, different rules for competing high-speed Internet companies are not only bad public policy, they are stifling and distorting investment and competition and creating anticompetitive barriers to entry. That slows down choices and new technology for consumers. Without full and unfettered competition in this market, many consumers will never have access to high-speed Internet services or they will only have access to the services provided by the dominant cable modem provider.

There is no downside in passing HR __ Consumers benefit from the growth of competition and the elimination of costly and anticompetitive barriers to entry in the market for high-speed Internet access services. Equalizing the regulatory treatment of competitors will permit my company (as well as other providers in this market) to compete for customers fairly, resulting in greater choices, lower prices and more rapid technological innovation. By contrast, the failure to enact H.R. will freeze or reduce DSL deployment and investment, and leave the rest of the country with no alternative to the dominant local cable operation and the other providers in this market. Some competitors may want to delay the inevitable competition that will result when all markets are open to competition and to handicap the Bell companies when competing in the Internet access market, but such a policy will harm competition and consumers. The same competitive services should be regulated the same way. One competitor should not have to incur increased costs and operate at a competitive disadvantage simply because of the type of technology that it uses. Such regulatory disparity is bad public policy, it creates barriers to entry, it distorts investment decisions and the marketplace, and it restricts choices for consumers.

Background

Historically, the only telecommunications pathway or wire to nearly every home and business in this country was the local copper loop used to provide voice service. Until recently, the local loop was part of a circuit-switched network which was capable of transmitting only narrow-band analog or digital voice, and slow speed switched data services. The local exchange telephone companies provided these services pursuant to a legally franchised monopoly, and thus were subject to pervasive regulation at both the state and federal level. As competition began to develop in the telecommunications marketplace, the local loop continued to be viewed as the only way for competitors to deliver voice services to the customers. In other words, it was considered a "bottleneck."

However, approximately 25 years ago, there developed another telecommunications pathway or second wire to the home. Cable service began to emerge as an alternative to broadcast television service, through the use of antennas located at the cable provider's head-end that received programming from satellites, which was then transmitted over coaxial cable to homes and businesses. Coaxial cable was different from the LECs' local copper loops, in that it was capable of transmitting broadband video and high-speed data services.

Additional telecommunications pathways to homes and businesses rapidly developed through various wireless technologies, including digital satellite service, cellular and PCS services, as well as fixed wireless.

Meanwhile, as competition was developing in the telephone industry, the Internet began to evolve. When the '96 Act was being debated in Congress, the scope of the Internet and the provision of high-speed Internet access to the public was uncertain. Congress sought to address this new telecommunications phenomena and the promising new advanced services through passage of Section 706 of the '96 Act. Section 706 established a new national telecommunications policy to "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans." Specifically, Congress directed the FCC and state commissions to pursue this objective by "utilizing price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulatory methods that remove barriers to infrastructure investment."

Unfortunately, neither the FCC nor the States have eliminated, or even reduced, the regulation of ILECs, particularly when they are trying to compete in the competitive advanced services market.

Cable Modem versus DSL Service

With the evolution of the Internet, both the cable and telephone industries had to develop the technologies necessary to provide their customers with high-speed Internet access and data services. The cable industry developed cable modems to be used in conjunction with their broadband coaxial cable networks. The ILECs were at somewhat of a competitive disadvantage because their narrow-band local copper loops were not designed nor were they equipped to provide high-speed service to consumers or businesses. Hence, we had to develop a new technology -- DSL service, in order to provide digital information at high bandwidths over copper loops.

While the ILECs were developing DSL service, the cable industry has been rapidly deploying its cable modem technology. The ILECs are now playing catch-up and are scrambling to deploy DSL service as a competitive alternative to cable modem service for residential and small business customers. But, the cable industry is far ahead of the ILECs in terms of actually serving customers. At the end of the first quarter of 2000, there were approximately 2.5 million residential subscribers to high-speed Internet access services in the United States. Of these 1.9 million, 77% were cable modem subscribers. Only 21% were DSL subscribers. It obviously makes no economic or public policy sense, for the FCC and the states to continue to regulate the nondominant player in this competitive market (DSL), when the dominant player (cable companies that provide cable modems) serve three out of four customers in that market and they are completely unregulated.

Thus, the consumer market for the delivery of high-speed broadband Internet access and data services is a highly competitive market served by the cable industry, the ILECs, fixed wireless providers and satellite companies. The FCC has recognized, and it is beyond dispute, that the high-speed Internet access market is a separate and distinct market in which cable modem service, DSL service, fixed wireless service and satellite access service provide the same high-speed Internet access and offer to the same residential and business customers the same advanced and high-speed data services.

Most importantly, the ILECs had no "head-start" in the deployment of advanced services technologies. The ILECs possess neither de facto nor de jure monopoly in the provision of broadband Internet access, advanced services, or high-speed data services. And, finally, it is absolutely clear that the LECs' local copper loop is no "bottleneck" in the provision of high-speed Internet access and data services to consumers. None of the four types of providers in this competitive market rely on or use the facilities or networks of their competitors.

Asymmetric Regulation

Unfortunately, the rules and regulations that apply to the provision of advanced services by the cable industry, ILECs, fixed wireless and satellite companies are entirely different.

The cable industry is essentially unregulated in the provision of cable modem service. Under Title VI of the Communications Act, the cable industry (as well as fixed wireless and satellite access providers) are not required to interconnect with its competitors, nor unbundle its facilities and make them available to competitors, nor provide collocation space to its competitors, nor resell its services to competitors, nor provide advanced services through a separate subsidiary. Moreover, the cable industry is not currently required to give its customers a choice of an Internet service provider. This unparalleled ability of the major cable providers to control both the means of access to the Internet, combined with its control of the content that is delivered to consumers provides it with an enormous competitive advantage in the marketplace. For example, AT&T/TCI/Media One and AOL/Time Warner control vast holdings in the access and content market. AT&T/TCI/Media One is the largest cable provider and provides cable modem service to almost 30% of all cable modem customers. AOL/Time Warner, directly and through its ownership of RoadRunner provides cable modem service to approximately 38% of cable modem customers. Together, AOL/Time Warner and AT&T also own 8 of the top 15 video programming services, including 4 of the top 5. As a result, it is more likely that the cable industry and other broadband providers, rather than ILECs, will continue to hold a dominant position in the provision of high-speed Internet access and advanced services.

This is in stark contrast to the telephone industry, where the ILECs remain pervasively regulated today, even when they try to provide competitive advanced services that do not use or rely on the legacy voice networks.

Under Title II of the Communications Act, the ILECs are subject to common carrier regulation in their provision of broadband Internet access, advanced services, and high-speed data services. In addition, the ILECs are obliged to assist the CLECs in offering competing DSL services through the interconnection, unbundling, and collocation requirements of Section 251 (a) and (c) of the Telecommunication Act of 1996. Moreover, SBC's advanced services affiliates, through which SBC provides Internet access and high-speed data services, are required to provide interconnection under Section 251 (a) and permit resale under Section 25 l(b).

Unfortunately, under an asymmetric regulatory scheme, the regulators, not the marketplace, determine the winners or losers. That significantly affects the growth of the services and the availability of choice.

Accordingly, any legislation addressing high-speed broadband advanced services should eliminate the regulatory disparity between the cable companies, telephone companies, fixed wireless providers and satellite companies when they provide high Internet access services.

This bill goes a long way toward accomplishing this objective by exempting highspeed data and Internet access services and the facilities used to provide such services from regulation, and by eliminating any further unbundling requirements with respect to high- speed Internet access and data services.

Economic Benefits

The rapid deployment of high-speed services is essential to expanding and reviving the economy. During the last economic boom, the information technology sector generated roughly 30% of the total annual U.S. economic growth and 70% of the total U.S. productivity growth. However, just as it helped revive the economy during the last boom, the present downturn in the Internet and high-speed industry has contributed to a broad downturn in overall growth and investment. The tightening of capital markets before Internet firms could begin booking profits caused this chain reaction. In part, these E-commerce and content providers have failed to create profitable businesses because slow narrowband connections limit the Internet's potential. Slow connections inhibit this industry by limiting product information to static pictures and text. Highspeed Internet access, with speeds up to 100 times greater than narrowband, eliminates these impediments. The broadband market is heavily oriented towards content, and will include packages of video and data. The key broadband offering is an integrated package of transport and content, not just transport alone. The cable industry occupies the strongest position in this market because it has the facilities and faces NO regulation. Likewise, the telephone companies today are in the best position to compete with the cable industry and other broadband providers to bring new services, lower priced services, and more choices to consumers, but not without making a substantial investment to build a competing broadband network. This is exactly what SBC has started.

Project Pronto

On October 18, 1999, a few days after SBC closed its merger with Ameritech, we announced one of the most ambitious network enhancement upgrades in telecommunications history. We called this Project Pronto to emphasize the speed that customers want to access the Internet and the need for quick time-to-market to compete with cable modem providers and others that are providing alternative technologies for high-speed Internet access. Unlike many programs and services offered by the large long distance companies and other local competitors, this Project was intended to serve the mass residential and small business market, not large business customers. In other words, customers wanted high-speed access, cable companies already had a head start in this market and we needed to commit capital and deploy new facilities fast in the market. The size of the Project is huge, as is its $6 billion price tag. It calls for constructing 16 thousand miles of new fiber optic cable, 17 thousand "remote terminals" and much more equipment. This was an SBC shareholder driven investment, with no tax incentives or government loans. Project Pronto involved SBC acquiring and deploying new types of advanced services equipment that all other potential DSL competitors could have invested in and deployed on their own.

Pronto started out covering all 13 SBC states. Besides the quality of life enhancing benefit of bringing high-speed Internet access to the broader mass market of residential and small business consumers that make up your constituents, Pronto means more jobs in each state and contributions to the economy via purchases of equipment from several vendors for items such as the new fiber facilities and new equipment used to provide this access.

State Regulatory Minefields

Managing a project of this scope and complexity is hard enough from a pure business perspective, but the road to deploy Pronto has also involved trying to manage our way through a regulatory minefield. The recent DSL related regulatory requirements imposed in Illinois illustrate how onerous and technically infeasible requirements can distort and potentially destroy competition in the high-speed Internet access market. The regulatory requirements in Illinois are such that SBC has determined it must suspend Pronto deployment in that state. This decision was made with great reluctance in that it, in effect, concedes market share to the dominant provider of high-speed Internet access, the cable modem providers and the other providers in that state. However, we made this decision because of our obligations to our shareholders to make investments where there is an opportunity to earn a reasonable return on such investments. The end result of this situation is that, if the Illinois Commerce Commission ("lCC") does not reconsider its order, consumers in that state will lose a choice in the high-speed Internet access market, and all DSL providers within SBC's ILEC territory in Illinois (including SBC's own affiliate) will fall even further behind cable modem providers who already serve about 3 out of every 4 residential customers. The bottom line is that consumers and DSL providers lose and cable increases its lead in this market.

What is so bad about the Illinois regulatory situation? While the subject is quite technical in nature, essentially the ICC is applying rules primarily designed to open the legacy local exchange voice market to these new DSL-capable facilities and equipment in the high- speed Internet access market. In our view, the types of state actions ordered by the Illinois Commission not only are unlawful under the 1996 Act, but also they apply solely to one provider in the market (DSL), destroy the incentives of SBC and other LECs to invest in the high-speed Internet access market, and compliance with those requirements are technically impossible. Even the manufacturer of the advanced services equipment in question has testified under oath that they are technically infeasible and simply will not work. As a result of these actions, SBC has had to suspend deployment of DSL facilities in Illinois, to the detriment of consumers and competition in that state.

Specifically, these rules require the Pronto architecture to be made available in minute piece parts in a "mix and match" manner to allow competitors to install equipment components made by different manufacturers inside SBC's advanced services equipment. There are substantial problems with these rules. First there are portions of the Illinois orders that just don't work. Trying to fit one vendor's components in another vendor's equipment is like trying to insert a Sega game cartridge into a Nintendo game system or a Toyota carburetor into a Ford engine. It won't fit and it won't work.

It is not just SBC that is saying this. So do the manufacturers of the telecommunications equipment in question. The chief technology officer of Alcatel has submitted a sworn affidavit to the ICC that the requirements imposed by the ICC are simply not technically feasible. The ICC requires the Pronto architecture to do things it is just technically not capable of doing. All of these new obligations are unworkable from an economic, technical and operational perspective. Even if these requirements were technically feasible (which they are not), they add unnecessary and unjustified complexity and costs. They undermine the business case for proceeding with Project Pronto in Illinois. These additional costs - which may exceed more than $500 million for Illinois alone -- would price DSL completely out of the Internet access marketplace. While SBC is not opposed to providing access to its Pronto high-speed Internet access service to competitors at forward looking prices and, in fact, offers to do so, it cannot deploy new DSL facilities under the Illinois regulatory model.

A major concern is that the FCC and other states may decide to follow the counterproductive policies enacted in Illinois. Onerous regulations that single out only the non-dominant provider in this competitive market discourage investment and eliminate the benefits that facilities based competition brings to consumers. This important issue calls out for a national direction and policy.

We believe that this bill is essential and to promote investment and competitive choice to the benefit of American consumers.

InterLATA Restrictions

One of the key regulatory disparities in the market for high-speed data and Internet access services is the restriction from offering interLATA long distance services. Section 271(c) of the Act prevents the Bell operating companies (BOCs) and their affiliates from providing services across LATA boundaries and from offering the Internet backbone service itself. This restriction is no longer necessary or required because the market for high-speed data services for business customers is a fully competitive market and the BOCs are not in a monopoly position in this market. None of our competitors in this fully competitive market -- cable companies, satellite or wireless providers, the interexchange carders, nor the CLECs -- are subject to this restriction.

The interLATA restriction thus places BOCs at a significant competitive disadvantage, in the provision of a full complement of competitive high-speed data services. Most medium and large business customers have offices in multiple locations, states, or even countries that need to be interconnected for the exchange of high- speed data communications. Frequently, these business customers also want someone to manage these high-speed data networks, including for example the ATM and Frame Relay engines, SONET rings, and interLATA transport. This requirement places the BOCs at a distinct competitive disadvantage, because they are unable to be full service providers to these business customers.

There is no continuing need for the interLATA restrictions for these services. As the FCC has found, the business market for high-speed broadband services is separate and distinct from the consumer market for the same services.! Virtually all business customers have access to high-speed broadband service that is typically provided over T1 lines, and business customers have many competitive alternatives for obtaining that high-speed broadband access. 2 Accordingly, there is no "bottleneck" in the "last mile" to the business customer for such competitive services.

Finally, the interLATA restriction (as well as the other disparate regulatory requirements) artificially inflates the BOCs' costs of deploying high-speed Internet access and data service technologies, and renders that deployment less efficient. These costs are reflected in our costs to our customers, and they preclude our ability to exert downward pressure on the retail rates in these markets to the detriment of customers. Further, it means that significant portions of our nation, particularly in rural areas, cannot receive high-speed access to the Internet because they are not close enough to a hub that can connect them to the Internet backbone. With the limited interLATA relief contained in this bill, the BOCs will be in a position to connect these communities to the Internet, thus making available to rural consumers and businesses the same high-speed Internet access and high-speed data services that are available in urban areas.

Conclusion

HR __ has gained the support of many members of this Committee and over 70 members of the House. It is a major step in the right direction to correct the imbalance in regulation and close the "digital divide." We look forward to working with the Committee and the Congress to achieve these objectives.

Thank you for the opportunity to comment on this very important legislation which will, if passed, promote competition and benefit all consumers by providing them with more choices and higher quality services at lower prices.

FOOTNOTES:

1 In the Matter of Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, Report, CC Docket No. 98-146 at Para. 28 (released February 2, 1999).

2 Id. at Para. 26.

END

LOAD-DATE: April 26, 2001