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

LENGTH: 4699 words

HEADLINE: PREPARED TESTIMONY OF CLARK MCLEOD CHAIRMAN AND CO-CEO MCLEODUSA INCORPORATED
 
BEFORE THE HOUSE COMMITTEE ON COMMERCE
 
SUBJECT - MEGA-BELL LEGISLATION AND ALTERNATIVES TO ENSURE NONDISCRIMINATORY AND QUALITY ACCESS TO ALL INTRACITY NETWORKS

BODY:
Changing the fundamental rules of the 1996 Telecommunications Act as proposed by the Mega-Bell companies is unnecessary and harmful to competition and consumers.

The telecommunications industry is divided into intercity and intracity markets. For the last 17 years since divestiture of AT&T, numerous competitors have entered the intercity (long distance) markets and constructed multiple intercity fiber networks. These networks are carrying both narrowband and broadband service across the country. Long distance competition is robust and so much intercity fiber exists throughout this country today that arguably in the short term supply exceeds demand. The last thing we need is more intercity capacity as proposed in this so-called "Internet Freedom and Broadband Deployment Act." What we really need are intracity networks with broadband capacity. Existing intracity networks are narrowband only. This is the real "Digital Divide." It exists between intercity broadband fiber networks and intracity narrowband copper networks.

This divide can only be effectively bridged by competition. Meaningful competition, not legislative "relief," will drive appropriate investment and technological advancement just as it has for the past five years. Meaningful competition absolutely depends on quality access to all intracity (local) networks that are controlled exclusively by the Mega-Bells. The biggest impediment to accelerating competition in the local markets and bringing the broadband benefits of competition to consumers is the lack of nondiscriminatory and quality access to the local intracity network.

Congress should not simply "give" the Mega-Bells access to additional intercity long distance services without first ensuring nondiscriminatory and quality access to all intracity networks by complying with the 14-point checklist. "Relief' in this case would mean re-monopolization. The Mega-Bells have refused to compete and resisted opening their intracity networks. They have challenged the scope of "unbundled network elements (UNEs)," attacked TELRIC pricing and attempted to impose special fees and costs on competitors, all of which has delayed competition.

If Congress wants to facilitate competition it must ensure nondiscriminatory and quality access to all intracity networks. To ensure such quality access, Congress should add a "stick," not reduce the "carrot," by mandating compliance with the 14-point checklist by a specific date and authorizing damages to aggrieved parties for noncompliance. Several states are authorized to award and have awarded damages directly to competitors for discriminatory conduct. Congress needs to authorize the FCC to award damages to competitors and consumers.

Finally, when nondiscriminatory and quality of access to all intracity networks is irreversibly obtained thereby entitling the Mega-Bells to offer additional intercity long distance services, consumers will be the beneficiaries.

**********

On behalf of McLeodUSA, I would like to thank the Committee for the opportunity to talk with you today. I would like to accomplish two goals today: first, summarize our concerns with providing the Mega- Bells unwarranted additional access to intercity long distance markets; and second, propose alternatives that will improve nondiscriminatory and quality access to all intracity networks, thereby accelerating the benefits of competition to consumers.

I. McLeodUSA is exactly what Congress envisioned. A. Entrepreneurial

In the early 1980s, I was CEO of Teleconnect, a company founded to compete in the long distance industry. I started basically out of my garage and began to bring the benefits of competition to my customers. In 1981, the Federal Communications Commission (FCC) mandated AT&T to allow competitors complete use of its existing network. As public policy continued to develop and support competition in that industry, several competitors, including Teleconnect, began to have success. Over the course of about 8 years we built Teleconnect into the fourth largest long distance company in the country employing nearly 7,000 employees. In 1990, MCI purchased the company, then named TelecomUSA. So you can see that entrepreneurial spirit can produce effective competition.

In 1992, I organized McLeodUSA, headquartered in Cedar Rapids, Iowa, and began competing in the local and long distance telephone markets. We started slowly. When the Telecommunications Act of 1996 ("the '96 Act") was passed, we were able to take our company public and really accelerate our competition with the local monopoly Bell companies.

McLeodUSA's corporate team is recognized as one of the strongest management groups in the telecom industry: strong because of our breadth, and strong because of our depth. With the support of policy- makers, we can continue our competitive activities at a similar pace if policy makers do not give unwarranted favors to the Mega-Bells that will delay or foreclose competition.

McLeodUSA Incorporated is a Nasdaq-100 company traded as MCLD. The Company's Web site is available at www.mcleodusa.com.

B. Serving a Wide Range of Customers

We serve both business and residential customers. In fact we have more residential customers than business customers. Our goal is to be the number 1 and most admired company in the markets we serve. We cannot accomplish that by only serving large business customers in large cities, so we rejected that model. The Mega-Bells like to portray competition as competitors who merely "cherry-pick" high-margin large business customers. This portrayal is clearly false as to McLeodUSA.

We also serve a wide range of communities ranging from cities as small as a few hundred people up to cities as large as Chicago. The '96 Act only required .the Bell companies to open their intracity networks. Consequently, McLeodUSA is currently serving or plans to serve customers in all markets served by the Bells (now including GTE).

In the communities we serve, our focus is primarily on small and medium sized enterprises. While we do serve residential and large businesses, we have found that small and medium sized businesses are largely underserved. We have good success with those customers using our beat-cop sales approach that meets customers face-to-face. Currently our average customer only has about 6 lines. So again you can see we are not in this business to only serve the "high margin" large business customers of the Bell companies.

II. McLeodUSA is bringing competition and its benefits.

In March 1996 we served approximately 40,000 local access lines. By December 2000 we served 1.1 million lines. Although we have demonstrated rapid increase in our annual compounded growth rate, we currently serve less than 1% of the nearly 200 Million access lines served by the Bell companies. We can attest to the fact that competition in the local markets is a long-term endeavor.

A. Jobs

In late 1994 we had approximately 200 employees, primarily in Iowa. Today we have nearly 11,000 employees working in 130 offices located across 25 states. We have invested in and created jobs in many of the districts of the members of this committee. We expect our job creation will continue to grow as long as public policy continues to support competition.

B. Technology

At the end of 2000 we had 50 central office and long distance switches and 396 data switches in operation. In addition we deployed and operated nearly 22,000 route miles of fiber optic cable connecting most of those facilities, growing to more than 30,000 miles by year- end. Our one functional network connects 810 cities in all 50 states allowing McLeodUSA to reach approximately 90% of the U.S. population. Even better, we are now actively developing next-generation enhancements to our network. This activity will allow us to offer high speed, broadband, next-generation services throughout our network coverage area. The one critical missing requirement, however, is nondiscriminatory and quality access to the intracity network.

McLeodUSA is not alone in the installation of fiber optic cable. I encourage you to look at other competitive companies who are installing fiber optic networks. I believe you will see an astonishing amount of intracity fiber and technology installed.

During my years in the competitive long distance industry, I saw deployment start in the early '80s and really take off after divestiture in 1984. During the next 15 years, numerous competitors have entered the intercity long distance markets and constructed multiple intercity fiber networks. Long distance competition is robust and so much intercity fiber exists throughout this country that arguable supply exceeds demand. This should not surprise anyone and, I contend, is the normal consequence in a truly competitive industry. Consumers are reaping the benefits through reduced long-distance rates.

This country has an oversupply of intercity network capacity to carry all services, both narrowband and broadband. We do not need more intercity capacity as proposed in this so-called "Internet Freedom and Broadband Deployment Act." What we really need are intracity networks with broadband capacity. Existing intracity networks are narrowband only. This is the real "Digital Divide." It exists between intercity broadband fiber networks and intracity narrowband copper networks.

This divide can only be effectively bridged by competition. Meaningful competition, not legislative "relief," will drive appropriate investment and technological advancement just as it has for the past five years. Meaningful competition absolutely depends on quality access to all intracity networks.

Quality access means much more than simply ordering a loop or circuit. It entails equal, nondiscriminatory treatment in every step of the process, including Pre-ordering (exchanging information), Ordering (accurate and timely data exchange between competitors), Provisioning (confirm and implement orders accurately), Maintenance and Repair (service problems) and Billing.

III. Changing the Fundamental Rules of the '96 Act is Unnecessary and Harmful to Competition and Consumers.

A. Unnecessary

Changing the existing system of laws and regulations as supported by the MegaBells will definitely not address the critical problem of nondiscriminatory and quality access to all intracity networks. Congress debated the telecommunications issues for seven years before finally passing the '96 Act with the support of all segments of the industry. Since then the FCC has further defined and enforced the law. The system is working, and could be strengthened with certainty of compliance by the Bells and additional enforcement of the current law.

During the past 5 years, McLeodUSA and other competitors have formulated and executed business plans. We are aggressively competing under the existing rules and never asked Congress for any legislative "favors."

In sharp contrast is the action of the original seven Bell companies and GTE. Although the stated purpose of the proposed legislation is to allow the Mega-Bells to provide intercity long distance data services, it is interesting to note that these Bell companies have always been free to provide these services outside of their own regions. In fact, at the time the '96 Act became law, it was anticipated that we would see widespread competition between the Bell companies. In this sense, the original seven Bell companies and GTE controlled their own destinies. They could have chosen to, and were expected to, compete directly against each other. If they had, they could be in the intercity market today. Instead they merged to form four larger, stronger "Mega-Bell' monopolies.

During their merger review proceedings, both SBC and Verizon made commitments to compete outside their region to gain regulatory approval. Their actions since show that their promises were hollow. For example, given the size and scope of SBC it would not have been difficult (in fact, I believe it would have been relatively easy) for SBC to invest in fiber to connect its California operations with its Texas operations and actively compete in Arizona and New Mexico along the way. But they refused. Furthermore, Verizon had competitive operations and customers in Illinois, California, Indiana and Texas and was poised to compete with SBC in those states. Instead, they recently sold that business to SBC. The result is increased monopoly and decreased competition in these states. Verizon avoids competition and SBC invests in its monopoly rather than in competition. Their choices have slowed the development of competition and delayed competitive choices for consumers.

Furthermore, the Mega-Bell-controlled intracity network serves over 90% of the nation's business and residential lines. They also have a combined market capitalization of $404 billion as of April 4, 2001, which is about 33 times larger that the aggregate market cap of CLECs. Their size and last mile stranglehold puts them in control of the course of competition. Even large companies like AT&T, WorldCom and Sprint are not in a comparable position because they lack ownership or quality access to the intracity network. Instead of working with us to provide quality access to the intracity network, the Mega-Bells have constructed countless roadblocks, like imposing special charges only on competitors, and pursued numerous legal challenges to the requirements we felt they agreed to.

Now, in spite of their actions and their inherent competitive advantage, they are before Congress asking for favors. Last year, they asked Congress to eliminate reciprocal compensation payments. Now they seek unwarranted access to the intercity longdistance business that will only delay competition and preserve their monopoly over local markets. Their actions warrant consternation not "relief."

Congress should not being granting "favors" to the Mega-Bells. Since our existing system is working, and we have robust intercity networks, there is no need to give "relief." When Mega-Bells effectively open their intracity network quality access, the FCC grants authority to provide long distance service. To date the FCC has granted long- distance (intercity, narrowband and broadband) approval in 5 states: New York, Texas, Kansas, Oklahoma and Massachusetts. Numerous other Section 271 activities are ongoing. Most of the remaining 45 states have invested heavily in the 271 process, and we should support that investment of tax dollars. We should also consider what has already been given to the Mega-Bells. Currently the telecommunications industry is divided into intracity (local) and intercity (long distance) markets. The Mega-Bells currently have access to and control virtually the entire intracity portion of the industry. On the long distance side, the industry is further divided into intra-LATA (which the Mega-Bells also have access to) and the interLATA markets. The inter-LATA segment is further divided into in-region and out-of-region. The Mega-Bells have always had access, but refused to serve, the out-of-region segment. We must not simply "give" them access to an additional part of the intercity long distance market.

B. Harmful to Consumers and Competition

We are making progress on opening the critical local loop bottleneck. We cannot afford to stop or slow that effort by allowing Mega-Bells to prematurely enter the intercity long distance data market.

Today the sole method of solving the last mile bottleneck is by offering the "carrot" of in-region intercity long distance entry. Of the total "pie" of telecom revenues, the Mega-Bells already have access to more than one-half by offering local and intraLATA long distance service. In fact they dominate that portion of the total telecom market. SBC alone now serves approximately one-third of all access lines in the country.

If you do not find the pace of local competition acceptable, the solution is to increase the "carrot" or add a "stick," rather than to reduce the carrot. Data services constitute the high-growth, high- revenue segment of the intercity long-distance market. It makes up the largest portion of the "carrot." If it is lost, there will be almost no remaining economic incentive to comply with the 14-point checklist in Section 271 and provide quality access to the last mile local loop.

In addition it is almost impossible to divide the "carrot" as a practical matter. There is no meaningful distinction between voice and data. Whether you are watching voice or data, when they are digitized and transmitted over a fiber optic cable they are both just flashes of light. When you see those flashes there is no way to determine whether the message is voice or data and, therefore, no way to know if the message should be allowed. Furthermore, as voice over the Internet technology continues to develop, the problem grows. If we allow the Mega-Bells to provide long distance service for the Internet, then when voice communication over the Internet becomes widespread, the "carrot" will be gone and there will be no incentive to ease the stranglehold on the last mile local loop.

Just as important is access to capital. Since passage of the '96 Act, McLeodUSA and other competitors have raised billions of dollars in capital to fund aggressive plans to deploy broadband networks to serve business and residential consumers in both urban and rural America. Continued access to capital is a critical need for competitors like McLeodUSA to continue providing consumers with a competitive choice. McLeodUSA is acutely aware of the need to maintain investor confidence in the national goal of bringing competition to the telecommunications marketplace as set out in the '96 Act. Legislation which would carve out intercity long distance data services from the pro-competitive goals of the '96 Act would surely be seen by Wall Street investors and others in financial markets as a retreat from that national commitment and bad for competitors. As a result, the ability of new entrants to raise the capital needed to bring true, facilities-based competition to all telecommunications markets could be placed in jeopardy. Such a further constriction on an already tight capital market could slow the drive toward competition even though that is not what supporters of such "data deregulation" legislation intend.

During last year when Congress considered changing the rules and granting legislative "favors" to the Mega-Bells, access to capital declined dramatically. The stock prices for the Mega-Bells decreased in equal comparison to the overall market drop. In contrast, the CLEC stock prices were really punished and driven to historical lows. During a 52-week period prior to April 4, 2001, stocks have fallen the following amounts: Mega-Bells: 39% and CLECs-94%.

Although stock prices for the strongest CLECs like McLeodUSA, Allegiance Telecom and Time Warner Telecom only fell 80%, 89% and 65%, respectively, Wall Street clearly favored the Mega-Bells who were the clear beneficiaries of the proposed changes in the rules. CLEC stock prices disproportionately decreased for two key reasons: uncertainty in the public policy arena and continued difficulties in accessing the Bells' intracity networks.

Certainty in public policy will steady the capital markets. Additional capital flowing to competitors will allow continued deployment of intracity fiber to connect with the existing copper network owned by the Bell companies. This will help connect the intracity network with the robust intercity network and bring high-speed services to every home in the local market.

IV. Alternatives to Ensure Non-discriminatory and Quality Access to all intracity Networks, thereby Benefiting Consumers

A. Separate Mega-Be!!s' Network and Retail operations

In order to facilitate the growth of competition we must return our focus to nondiscriminatory and quality access to the "last mile" local loop.

As I described earlier, by the end of 2002, McLeodUSA will be capable of delivering broadband service to within a local telephone connection of approximately 90% of the U.S. population. Our fiber network will be up to the Mega-Bell bottleneck at the local loop. But, we need continued commitment from policy-makers to help open the bottleneck in order to complete delivery of broadband services to customers. There is an inherent conflict of interest between the Mega-Bell's dual role as both the network supplier and retail competitor. As the Mega- Bells lease their local network infrastructure to CLECs, the Mega- Bell's retail operations are threatened with lost customers and revenue. As long as they can, the Mega-Bells will preserve the use of their last mile network for preferential use by its retail operations.

The only viable, long-term solution, and the very best way to facilitate competition, is to separate the Mega-Bells' network and retail operations. Competitors and Mega-Bell retail operations must each have quality access to the local infrastructure (loops, unbundled switch ports, unbundled trunks) on a nondiscriminatory basis. As we have seen before in other circumstances, separate but equal does not work. Mega-Bell retail operations must be required to purchase the same network inputs at the same rates, under the same terms and conditions and through the same operation support systems (OSS) as competitors. And, Mega-Bell network operations must be made blind. When an order or request is received they must not know whose order is being handled in order to insure equality.

Separation can be done either structurally, by breaking the Mega-Bells into two companies, or functionally by establishing processes and procedures to separate the operations. Qwest has recently undertaken functional separation and while we are at the very early stages we hope their actions will be fruitful. We are working closely with Qwest in this process and are willing to work with others. We believe, however, that if competitors can show that functional separation has not occurred, then either the FCC or state regulatory bodies should have jurisdiction and authority to require structural separation. In the end we must have separation to insure quality access for all competitors to the ubiquitous network paid for by consumers, along with improvements being paid for with forward-looking UNE rates and true parity regarding provisioning Of local service, which is the cornerstone of the Section 271 competitive checklist.

B. Require Mandatory Date Certain Nondiscriminatory and Quality Access to all intracity Network

Requiring specific actions can also facilitate competition by the Mega-Bells. What I propose here is adding a "stick" to our policy scheme, in addition to the "carrot."

Congress should make compliance with the 14-point checklist in Section 271 of the 96 Act mandatory. Compliance with the 14-point checklist will provide competitors with nondiscriminatory and quality access to the intracity network. So the key is for Congress to amend Section 271 to require the Mega-Bells to meet those requirements to the satisfaction of the FCC by a date certain. If they fail to do so, the statute should provide a penalty for noncompliance and the penalty must be sufficient to make compliance the more economic alternative. The statute should also authorize a private cause of action so that those who are harmed by any Mega-Bell's failure to comply with the law could bring suit to recover damages. These actions should also allow recovery of treble damages and attorneys fees as well as awards of punitive damages in egregious cases. These tools have been adopted previously by Congress to produce results and can be used now to establish effective competition.

Congress might also consider another alternative. Require the Mega- Bells to meaningfully compete out of region before they are allowed to offer long distance service in region. Such a requirement could be easily measured. For example we could require each Mega-Bell to actively serve a substantial number of customers in at least 150 central offices in at least 25 different markets within the territory of the other three Mega-Bells before they can offer in-region long distance.

C. Award Damages to Competitors

Congress should authorize the FCC to award meaningful damages directly to competitors when the Mega-Bell company is found to have engaged in anti-competitive conduct, violated the law or breached an agreement. Awarding damages to competitors is the fastest way to speed competition and benefit consumers by incenting the MegaBells to change their behavior and fix the problems, rather than simply pay the fines as a cost of doing business.

McLeodUSA has experienced the absolute truth in the concept that awarding damages directly to aggrieved competitors benefit consumers. State Commissions in Iowa, Minnesota and Colorado, through various proceedings and processes, have established a series of objective, measurable and verifiable standards in provisioning local service. If QWEST fails to meet these standards, the Commissions are authorized to require QWEST to pay damages directly to competitors. Since January 1999, QWEST has paid $4.76 million directly to McLeodUSA for failure to comply with its obligations as determined by these 3 state Commissions. Requiring the Mega-Bells to pay damages directly to the aggrieved competitors was one reason QWEST negotiated a long-term agreement that, among other things, accelerates McLeodUSA's entry into additional markets throughout the 14-state footprint of QWEST. Competition benefits. Consumers benefit.

In contrast, the Illinois Commerce Commission (ICC) does not have the statutory authority to award damages directly to competitors, and consequently, the Mega-Bell has chosen to merely pay the fines as a cost of doing business rather than fix their problems. During the past 18 months, the Illinois Commerce Commission (ICC) has imposed fines over $60 Million for anti-competitive acts and historically unacceptable quality of service performance. Under Illinois law, however, all damages imposed by the ICC are simply deposited into an Illinois state general fund. SBC, with a market capitalization of $147B as of April 4, 2001, chose to pay these $60M fines merely as a cost of doing business rather than fix the problem. Therefore, because the ICC cannot award damages directly to competitors, competitive providers are hurt and consumers are denied a competitive choice. I want to stress this critical fact: awarding damages directly to aggrieved competitors will accelerate competitive entry into more markets and provide consumers a competitive choice.

Conclusion

Today we clearly have a "Digital Divide." It exists between intercity broadband fiber networks and intracity narrowband copper networks. It can only be effectively bridged by competition.

Mega-Bells have refused to compete and resisted opening their intracity networks, which has delayed competition. Congress must not reward those actions.

Meaningful competition will drive investment and technological development and absolutely depends on quality access to all intracity (local) networks that are controlled exclusively by the Mega-Bells. The biggest impediment to competition in the intracity market is the lack of nondiscriminatory and quality access to the local intracity network.

If Congress wants to facilitate competition, and the related advancement of broadband services, it must ensure nondiscriminatory and quality access to all intracity networks. This proposed Mega-Bell legislation does nothing to accomplish this goal, and therefore, Congress should oppose it.

To ensure such quality access, Congress should not further restrict our access to capital by changing the agreed rules, but instead should mandate compliance with the 14point checklist by a specific date and award damages to aggrieved parties for noncompliance.

Again, I thank the Committee for the opportunity to appear before you today, and would welcome the opportunity to answer any questions that any of the Members might have.

END

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