Copyright 2001 Federal News Service, Inc.  
Federal News Service
April 25, 2001, Wednesday
SECTION: CAPITOL HILL HEARING

LENGTH: 9293 words

HEADLINE: AFTERNOON SESSION OF A HEARING OF THE HOUSE ENERGY AND COMMERCE COMMITTEE
 
SUBJECT: INTERNET FREEDOM AND BROADBAND DEPLOYMENT ACT OF 2001
 
CHAIRED BY: REPRESENTATIVE W.J. BILLY TAUZIN (R-LA)
 


WITNESSES: DOUGLAS C. ASHTON, BEAR STEARNS & COMPANY; JAMES CICCONI, GENERAL COUNSEL & EXECUTIVE VICE PRESIDENT, AT&T; JOSEPH GREGORI, CEO, INFOHIGHWAY COMMUNICATIONS; JAMES HENRY, GREENFIELD HILL CAPITAL LLP; GORDON HILL, ECONOMIC OPPORTUNITY, ELMIRA NEW YORK; PAUL MANCINI, SBC MANAGEMENT SERVICES; CLARK MCLEOD, MCLEOD USA; CHARLES MCMINN, COVAD COMMUNICATIONS; PETER PITSH, INTEL; TIMOTHY REGAN, CORNING INCORPORATED; THOMAS TAUKE, VERIZON

BODY:
REP. TAUZIN: I would ask all our guests to take seats and to get comfortable again. The chair will recognize himself and then members in order of their appearance for a round of questions. The chair recognizes himself.

Let me first make a statement, and then I want to ask a few questions of you. History is a good gauge by which you can tell where people have been and where they're going. I just want to remind this audience and all of you that there was a time in the history of this panel when we took on the deregulation of the cable industry in 1986. We accomplished that into law. And we were back here in 1992, reregulating cable because we discovered in those interim years that cable, in its vertical integration, had fairly well monopolized the video marketplace.

There was a huge fight, if you recall, in '92 when we took on the issue of whether or not we ought to provide competitors for cable then and in the program access provisions that created the satellite industry. We allowed cable to go back into total deregulation, to let those new rules in '92 expire, on the basis of that renewed interest in video competition and satellite services and the good effect of the program access bill.

It is for that very same reason that Mr. Dingell and I bring this bill today, is to make sure that we don't have to come back, as we did in 1992, to revisit the question of cable deregulation, as cable now moves into broad-band deployment and broad-band services. Several members mentioned that today.

And Mr. Cicconi, I want to focus on that first. If we didn't have a phone issue here, if this wasn't about the side of your business that has to do with telephones, it was strictly about whether or not cable is going to be permitted in this country to operate broad-band services in the deregulated marketplace we provided for cable, which we want to preserve in this new marketplace, these advanced services. And the minority competitor with DSL continues to be regulated.

I've got the list of them, Mr. Mancini. There are 22 different requirements from the phone companies trying to provide broad-band services that don't apply to cable. Absent -- just getting away from the phone company issues themselves, telephone service, how could cable expect that Congress wouldn't one day be forced to reregulate you if there isn't enough competition out there in the marketplace and cable's share of broad band grows from 75 to 80 to 90 to wherever it may end up being, absent a fair playing field? Mr. Cicconi.

MR. CICCONI: Mr. Chairman, first of all, cable's share of multi- channel video is declining dramatically. Its competitors have about 20 percent of the market. They're growing at twice the rate of everyone else. So the opposite is happening in local phone service. I dare say --

REP. TAUZIN: But wait a minute. There's a limited amount of time. I want you to get away from phone service.

MR. CICCONI: Okay.

REP. TAUZIN: I want you to simply answer the question. How can cable not expect this panel one day to be revisiting regulation of cable rates, terms and conditions when video for cable becomes part of broad-band services and you've got 75, 80, 90 percent of the market, because we haven't created a fair playing field for competitors?

MR. CICCONI: Well, Mr. Chairman, first of all, the chart you held up is, with respect, somewhat misleading. I know that the Bell companies produced it. They picked out 20 areas where they're regulated that we're not. I could produce about 30 areas where we're regulated that they're not.

REP. TAUZIN: Bring me a chart like that. I want to see that.

MR. CICCONI: I'd be happy to provide you that. But several of the largest, I mentioned in my opening statement. We have regulation by 30,000 local franchising authorities across America. The Bells have to deal with nothing of the sort. We pay about $2 billion annually in local franchise fees.

REP. TAUZIN: Well, the Bells pay all kind of --

MR. CICCONI: The Bells pay nothing of the sort. The Bells benefit from the universal service fund. We don't benefit from that in providing these services.

REP. TAUZIN: So you think right now, the state of the law is a fair playing field and cable is as regulated as the Bell companies in the provision of broad-band services?

MR. CICCONI: Mr. Chairman, we're regulated differently. We're both regulated, but we're regulated differently.

REP. TAUZIN: Are you as deeply regulated as the Bells?

MR. CICCONI: Mr. Chairman, you yourself decided there in the program access rules that satellite would be regulated differently than cable. Cable has program --

REP. TAUZIN: Are you as deeply -- I don't have a lot of time. Are you as deeply regulated in the provision of broad-band services as the Bells? Do you make that assertion to this committee?

MR. CICCONI: We are regulated. We are regulated differently. We have our obligations. They have theirs.

REP. TAUZIN: Let me move on. We heard a huge difference of opinion in the middle of the panel -- by the way, we've had to excuse Mr. Hill. He had to catch a plane. I apologize for that. We've heard a huge difference of opinion as to whether or not the Bells are really incentivized to connect the last mile, to lay the fiber and to hook up the homes; as Mr. Tauke indicated, to do something more than just build big networks that fly over us, but actually connect their homes and their towns or small businesses to broad band.

Mr. Regan, whose companies builds the fiber, would love to see the Bells putting down more fiber to the home. Mr. Pitsh is obviously representing a company that's been critical and instrumental in the computer industry, in the power of this new technology, to serve us so well. They're both telling us that we had better worry about these unbundling requirements because they serve as a disincentive to investment in connecting the homes. Mr. McMinn says no -- and I think Mr. McLeod says no, too -- these are good laws and that we're going to get deployment regardless.

The guys that make the cable and the guys that literally empower the computers for us tell us it ain't happening unless we change the laws. I want to ask you, Mr. McMinn, we wrote a law in 1996 to try to create and empower competition for telephone service. I'm very interested. How many residential telephone consumers does Covad serve? The telephone service.

MR. MCMINN: Mr. Chairman, we're not in telephones.

REP. TAUZIN: You're not in -- turn on your mike.

MR. MCMINN: Yes. We're not yet in the telephone service.

REP. TAUZIN: So you serve zero residential telephone consumers, telephone service.

MR. MCMINN: We have a technology that is --

REP. TAUZIN: But you're not doing it.

MR. MCMINN: We have a technology that is operational in the San Francisco Bay area that's in trial with our own employees to provide not just one telephone line on top of one DSL line, but up to 10 telephone lines on top of --

REP. TAUZIN: But for the time being, you're providing data services to customers, no telephone services.

MR. MCMINN: Mr. Chairman, we've only been around three years. We have managed to put in place a footprint that covers half the United States in that time. But we have not yet managed to offer voice services and data services to competition.

REP. TAUZIN: To a single customer. I want to get at -- this is the last question; my time is up. I want to get a good understanding of your argument that unless we change the policy on unbundling, we do not incentivize the connection to the homes. I think there's 7 percent of the homes in America connected to broad band right now. And unless we change the policy, that number doesn't rise rapidly. That's kind of what I heard from you two guys. I'd like you each to elaborate on that. Why is that true?

MR. MCMINN: Mr. Chairman, I think I can put it quite intuitively. If you're a company making a broad-band investment and if it fails, you assume the entire risk. Your shareholders assume the entire risk. But if it succeeds, your up side is capped by unbundling requirements, which in most of these states, the cost of capital is about 13 percent. You're obviously going to undercut the business proposition to make investment, and this investment is risky. It's uncertain. It's discretionary. This is not plain old telephone service.

REP. TAUZIN: We're talking about new investments.

MR. MCMINN: We're talking about --

REP. TAUZIN: We're talking about building new investments.

MR. MCMINN: Exactly. So on that level, I'd submit this isn't cold fusion. You know, if they can make more money doing it, they'll do it.

REP. TAUZIN: Mr. Regan, if you'll answer, please.

MR. REGAN: I guess my answer is somewhat similar to Peter's, except I guess I want to modify it a little bit. We've studied a very specific segment of the market, and that is the deployment of what we call broad band. This is the capability to deliver all the services, both in and out of the home, in new-build and in rehab situations. And what we have found is that the rate of return is insufficient to justify the investment because of the unbundling rules at Telrec (sp).

REP. TAUZIN: And finally, do you agree with that, Mr. Tauke?

MR. TAUKE: The financial issues are one thing, and I agree with what they said about the financial issues. But frankly, the more troublesome things right now are the technical issues. If you put -- let's say right now, as you know, we have a limit on the length of deployment of a DSL service. If you live more than 1800 feet from the central office, you can't get it.

The logical thing to do is to deploy fiber to the neighborhood. If we are going to deploy fiber to the neighborhood, then we have to -- this is just one example, but we have to then offer co-location in remote terminals, those little green boxes you see in suburban neighborhoods, for competitors. To offer co-location in remote terminals requires that we expand those remote terminals or have a garden pot of several of these remote terminals in an area. Expansion would be the thing you do.

When you try to expand, you have to get neighborhood association approval, zoning ordinances. You have to go to zoning authority, city/county, to do this. The hassle of trying to get co-location in remote terminals is so great that it is a huge deterrent, in addition to the economic issues, but it's a huge deterrent in the deployment of fiber. So we aren't deploying fiber to the neighborhoods right now, and this is a big deterrent, as much as we could, and this is a big reason why.

REP. TAUZIN: Thank you very much. Mr. Dingell.

REP. DINGELL: Thank you. Mr. Chairman, I have a series of questions which I will direct at Mr. Tauke, Mr. Mancini and Mr. Cicconi. These will all be yes or no responses. (Laughter.) I'm doing that because we have a limitation on time and I want to be of assistance to our witnesses, Mr. Chairman. (Laughter.)

Now, gentlemen, at an earlier hearing, my friends at AT&T, Verizon and SBC agreed on one thing, that cable modem service and DSL are functionally equivalent services. Do any of you disagree with that statement? Mr. Cicconi, Mr. Mancini and Mr. Tauke. Do you disagree with that?

MR. CICCONI: Yes, sir. I think they're very different services.

REP. DINGELL: You do. All right. Mr. Mancini, do you agree?

MR. MANCINI: (Presumably ?) not in the FCC, and I think every other independent analyst would agree.

REP. DINGELL: So you're contesting, then, what was said earlier. Mr. Cicconi is contesting what AT&T told the committee earlier. You are not, Mr. Mancini. Mr. Tauke, what is your view on the matter?

MR. TAUKE: They offer the same service to consumers.

REP. DINGELL: And they are substantially identical?

MR. TAUKE: They're substantially identical.

REP. DINGELL: Very well. Now, Mr. Tauke, is Verizon's high- speed Internet service regulated by the federal government? Yes or no.

MR. TAUKE: Yes.

REP. DINGELL: Mr. Mancini, is SBC's high-speed Internet service regulated by the federal government? Yes or no?

MR. MANCINI: Absolutely, yes.

REP. DINGELL: Now, Mr. Cicconi, AT&T offers high-speed Internet service. Is that regulated by the federal government?

MR. CICCONI: Yes, sir, over cable it is.

REP. DINGELL: You're saying cable is regulated?

MR. CICCONI: Under the cable act, the cable services offered are regulated by the government and subject at all levels.

REP. DINGELL: What are you required to do under this public regulation?

MR. CICCONI: We're required to get local franchises. We're required to pay local franchise fees.

REP. DINGELL: Now, I'm not asking you about cable. I'm asking about your Internet services. Are they regulated by the federal government?

MR. CICCONI: Not in the same way, no, sir.

REP. DINGELL: Just answer my question.

MR. CICCONI: Not in the same way.

REP. DINGELL: So they're not -- now, how are they regulated?

MR. CICCONI: I've indicated that under the cable act, there are various requirements --

REP. DINGELL: All right.

MR. CICCONI: -- that we have on cable services. That's a cable service.

REP. DINGELL: All right, let's go through that. Are you subject to FCC-prescribed depreciation rates on your investments? Yes or no?

MR. CICCONI: I don't know off the top of my head.

REP. DINGELL: You don't know. Do you have a legal duty to interconnect with other companies, including your competitors? Yes or no?

MR. CICCONI: When we offer telephone services --

REP. DINGELL: When you offer telephone services. We're talking now about your Internet services.

MR. CICCONI: No, sir.

REP. DINGELL: Are you compelled to do that at this time?

MR. CICCONI: No, sir.

REP. DINGELL: You are?

MR. CICCONI: I said no.

REP. DINGELL: You are compelled to interconnect with other companies when you offer Internet services?

MR. CICCONI: No, sir.

REP. DINGELL: You're not. Now, with regard to Internet services then again, does the government require you to allow your competitors to resell your services? Yes or no?

MR. CICCONI: Does the government require us to let our competitors resell our services? No, sir.

REP. DINGELL: Okay. Are you under duty to negotiate access to your network on your Internet services?

MR. CICCONI: No, sir.

REP. DINGELL: Must you allow competitors to physically co-locate on your property?

MR. CICCONI: No, sir.

REP. DINGELL: Must you obtain government approval before carrying Internet service traffic over long distances?

MR. CICCONI: No, sir.

REP. DINGELL: Okay. Now, Mr. Mancini and Mr. Tauke, you are required to be regulated by government on all of those matters, are you not?

MR. TAUKE: That's correct.

REP. DINGELL: Very well. Now, Mr. Cicconi, if cable modems and DSL are functionally equivalent services, why should a DSL be subject to federal regulatory burdens on these matters while cable modem service is not?

MR. CICCONI: Do I have to answer yes or no, sir, or can I explain my answer --

REP. DINGELL: No, just give us --

MR. CICCONI: -- and provide an explanation?

REP. DINGELL: -- a short, pithy answer. (Laughter.)

MR. CICCONI: They're regulated differently because the Congress has concluded that one is a bottleneck facility and the other is not. You have a choice of receiving cable services through -- the type of service cable offers through a variety of means. You don't have a choice today in local phone service. That is why they're regulated differently.

REP. DINGELL: Now, Mr. Cicconi -- so you make a very interesting point. What percentage of the share of broad-band residential market service does cable modem service currently have? Seventy-five percent?

MR. CICCONI: It's about 4 million out of a little over 6 million, sir.

REP. DINGELL: What percentage is that? Seventy-five percent?

MR. CICCONI: Roughly.

REP. DINGELL: Roughly.

MR. CICCONI: Roughly.

REP. DINGELL: Okay. Now, assuming that DSL has all the remaining broad-band customers, that would put telephone companies at a 25 to 30 percent market share. Now, Mr. Pitsh, you're an economist. Does that sound like a bottleneck or a monopoly to you?

MR. PITSH: Sir, I'd say that in that broad-band market, cable has more market power than DSL.

REP. DINGELL: Would it be fair to say that -- (inaudible) -- up 75 percent?

MR. PITSH: I'm always reluctant to -- (laughter) -- call anything less than 90 percent?

MR. PITSH: I'm always reluctant to -- (laughter) -- call anything less than 90 percent. It's obviously -- sir, I think your questions are going very much in the right direction. (Laughter.) I think -- if I could just take --

REP. DINGELL: We agree on that matter.

MR. PITSH: If I could just say two sentences by way of explanation. I think that the broadband market is a dynamic, nascent market --

REP. DINGELL: And it's 75 percent controlled by one kind of --

MR. PITSH: It is now controlled by one. However, if the regulatory environment were straightened out, if wireless spectrum becomes available, then these shares could change. I think the point is --

REP. DINGELL: Is -- this is a wonderful point. Is DSL a bottleneck?

MR. PITSH: No, I do not think --

REP. DINGELL: You do not think so. All right, now --

REP. TAUZIN: The gentleman's time has expired --

MR. CICCONI: Can I have a little data that --

REP. DINGELL: Mr. Cicconi -- this is what I really want to ask you -- (laughter) -- if Congress were to pass a law that required AT&T to lease its broadband facilities to competitors at cost, to allow competitors physically co-locate on AT&T premises, and which would permit access to AT&T's network by all competitors who want to interconnect, would you recommend that any further investments by AT&T be made in broadband facilities? Yes or no? (Laughter.)

MR. CICCONI: Mr. Dingell, that is really not the situation facing us here. one is a monopoly facility and the other is not.

REP. DINGELL: That would put you, my dear friend, on exactly the same awkward ground upon which -- (laughter) -- Mr. Mancini and Mr. Tauke stand. And would you then if you were in that position rush out to instruct your company to make investments in this area? Or would you say, you know, I think we could put our money most profitably to work in other places? What would be your response? Would you first invest or --

MR. CICCONI: Mr. Chairman --

REP. DINGELL: -- to invest? Which is it?

MR. CICCONI: Mr. Dingell, with respect there is no impediment today, regulatory or otherwise, to DSL deployment. I am transgressing upon the chairman's time. He wants you to --

REP. TAUZIN: He'd like you to answer his question. Why don't you do that, Jim? Would you invest or not invest?

REP. DINGELL: How about Mr. Ashton. Mr. Ashton, you're an expert in these matters. If you don't have I think any particular access regarding these matters, would you advise clients of your company to rush out and invest under these circumstances?

MR. ASHTON: No, I would not.

REP. DINGELL: Would not. Gentlemen, thank you for your kindnesses.

REP. TAUZIN: Thank you, Mr. Dingell. The chairman of the subcommittee, Mr. Upton.

REP. UPTON: Thank you, Mr. Chairman. And I look a lot at my district as a microcosm of the country -- a lot of different blends. We have ethnic strengths and we have a very good blend of rural and urban, large businesses and small, terrific educational state universities there as well. When I look at -- Mr. Stupak is here -- a partial map of Michigan -- sorry, we don't have the Upper Peninsula here -- on the other side -- (laughter) -- I forgot it's this way -- when I look at a map of Michigan, a partial map of Michigan, it's also my district in this corner of the state, Southwestern side, also looks like a microcosm of America. By the way, yellow means DSL -- Michigan DSL service is provided by Ameritech. In other words, the answer is there's not a lot that's there.

And as I look at this legislation, and as I look at the intent of where I want this technology to go, I want to see all of Michigan in yellow, including the Upper Peninsula too. But, sadly, this is where we are. And our district I don't think is any different than very many districts around the country, particularly when you have such variances as mine. And I guess, Mr. Mancini, I would like to know from you -- I know that there is a Project Pronto, of which you are prepared to testify, with regards to -- though I think the clock ran out. But how is that investment proceeding, and what will this legislation do in terms of speeding up shading our state yellow?

MR. MANCINI: Well, Congressman, as you are aware, there are distance limitations in DSL. In other words, if your home is beyond 15,000 feet from a central office, DSL really can't provide service. About 40 to 50 percent of our customers are within those space requirements. So if we hadn't started Project Pronto, we could have served approximately 40 to 50 percent of our customers. What Project Pronto does, is it's a $6 billion investment or bet on our part -- no tax credits, no government assurances behind it -- to extend that network from 40 to 50 percent to 80 percent. As a result of this $6 billion investment, which requires us to lay fiber from the central office, build new remote terminals closer to the neighborhoods, put new advanced services equipment inside those remote terminals, and hook up to the fiber, we will be able to reach 80 percent of the customers. That investment is proceeding in Michigan and the rest of the country. But, as I mentioned, it is on indefinite hold in Illinois because -- and this causes us great concern, because what the Illinois commission did is being considered by commissions in Kansas, Texas and California. The end result of those kinds of overregulatory decisions, which definitely do not apply to cable, could destroy the economic base and our incentives to invest.

What the Illinois commission did was to go well beyond what the 1996 act or the FCC have required regarding unbundling. They've required that within those little remote terminals that are close to the neighborhoods there are what we call line cards, which are used to provide a split to data voice. They require us to allow competitors to take their own line cards made by their own manufacturers and try to insert them into this facility. First of all it's technically unfeasible. The manufacturer of that equipment has said that it cannot be done. And in addition, as a result of those requirements, it has imposed an additional $500 million cost on us. That destroys the economic base. As a result we will not deploy Project Pronto in Illinois, and over a million Illinois customers will not have an alternative to cable.

REP. UPTON: Mr. Henry and Mr. Ashton, as I have had many, many meetings over the last couple of months with a variety of different interested parties, one of the common comments is that particularly with the CLEC industry is in big trouble, that they are not getting the return on their investment, and some have suggested that this legislation would in fact provide the final nail in the coffin. That presupposes of course the argument that the corps is already inside the coffin. You too have a little bit of a different view in terms of the Wall Street analysis of the CLEC industry, and perhaps what this legislation will do. Can you expound as you look at each other's arguments that were made during the testimony and offer some comment?

MR. ASHTON: I'll go first. I am encouraged by the questioning this afternoon, when I see more questioning geared towards the cable competitors of the cable industry than the earlier commentary which is very CLEC-dominated. And the reasons are because of where those companies focus their networks and where the networks have largely not been modernized. And that goes back to my earlier comments this morning, which were you have to think about the markets in terms of large business and small business and residential access. And in the large business market I think it looks more like the core market. It's been largely -- you can say in some cities it's been overbuilt to some extent. There have been a lot of fiber runs in the cities, which was a natural way for the CLEC market to try and grow up and get into the business. But if you look at the small business and residential market, it's not where the CLECs are largely dominant, it is not an overly economical market for them. And so I think more or less we have to move the commentary towards broadband access in those markets to a competitive battle between the regional Bell companies and the cable companies.

And I think the other thing is a little bit of this is in hindsight. The CLEC market itself is in dire straits, and this may or may not kind of put that sector to rest to some extent.

REP. UPTON: And that was -- I'm getting the signal from my chairman -- but that happened with or without this legislation?

MR. ASHTON: I think it would happen with or without it. I don't think -- it's my personal opinion, not Bear Stearns's opinion on this, but it's my personal opinion that this bill or without this bill that those competitors are not really worth worrying about.

REP. TAUZIN: I thank the gentleman. The chair recognizes the gentleman from California, Mr. Waxman, for a round of questions.

REP. WAXMAN: Thank you very much, Mr. Chairman. Mr. Mancini, in a letter last fall to Pacific Bell, two small California cities in Ventura County, California complained that they were being red-lined based on the population and income levels and the long-term business development potential. They had been trying to get DSL service for two years before they sent their letter complaining. At the same time, a spokesman for Pacific Bell told the LA Times that the company's only obligation is to provide basic telephone service, that high-speed Internet service is deregulated and the cities didn't have enough potential customers to be profitable.

Now, Pacific Bell had more than a 19 percent increase in earnings last year, and in fact Pacific Bell's annual profits have ranged from almost 12 percent to almost 21 percent. How much income -- let me ask you two questions -- how much in profits do you believe Pacific Bell and SBCs and other local carriers are going to have to have to earn for them to have enough of an incentive to offer high-speed Internet service to underserved areas?

MR. MANCINI: I can't answer what the profits need to be, but I can tell you what the criteria are and how we decided to spend $6 billion to expand our network to cover 80 percent of our customers. And those had to do with where essential offices were located, where population centers were located, where the growth was going to be. It was purely a decision on what is the most effective way to expand the network. But in addition to this, we did make a commitment to the FCC which we have kept that we would deploy in what are called underserved and rural areas. So as part of that $6 billion we have in fact gone to areas which we would not have economically normally done.

REP. WAXMAN: Well, let me ask you this -- I want to point out that John Briton (ph), who is the media director for Pacific Bell, is quoted as saying the high-speed Internet service is deregulated, and Ohi (ph) and Filmore, these two cities, don't have enough potential customers to be profitable. What assurances do we have in H.R. 1542 that you will every deploy long-distance data service in some areas of this country that are not going to fit that profile?

MR. MANCINI: I think there's a difference -- my guess is that those areas are in fact already served by Pac Bell with regards to long-distance data. So I think they would immediately be able to provide that. With regard to high-speed Internet access, you know, every company has to make economic decisions. It's a competitive market. I think that the right question is: What incentives do the telephone companies as well as the cable companies and wireless companies and satellite companies have to serve those areas? It's not just us. This is not a monopoly market.

REP. WAXMAN: Does the bill give you any requirement to ever serve those areas?

MR. MANCINI: It doesn't give us or anyone else a requirement to serve specific areas.

REP. WAXMAN: You began to offer long-distance service in Texas about a year ago. And can you tell us whether you're offering service in rural areas?

MR. MANCINI: We are offering service in every single community, every single customer that we serve.

REP. WAXMAN: Mr. Tauke, Verizon has met the 14-point checklist in New York State and can offer long-distance service there. Can you tell me how many rural markets you are currently offering long- distance service or when you plan to roll out service to those areas?

MR. TAUKE: We are offering long-distance service, the traditional long-distance service, every place in New York State to every customer. In terms of high-speed data services, that varies from area to area of the state.

REP. WAXMAN: One thing I can't understand, and maybe someone on this panel can answer it for me. There's a savings clause in Section 232(b) of H.R. 1542, at the bottom of page six, which reserves to the states the right to continue to regulate voice services if this bill is enacted. And my understanding is -- and a number of my colleagues have pointed this out today -- that voice and data are identical when transmitted with pack-and-switching technology. Can anyone explain to me as a technical matter how voice and data traffic carried over high- speed data service lines can be separated so that the states can fulfill their regulatory function? Yes, Mr. Tauke?

MR. TAUKE: Well, Mr. Chairman, I think there is a substantial amount of confusion following the discussion this morning on this issue. If Verizon for example under this bill builds a broadband network, we cannot market, we cannot bill, we cannot charge for any voice service that goes over that network. Now, if someone else provides -- purchases --

REP. WAXMAN: No, but my question was about technologically -- how a state can regulate it.

MR. TAUKE: Let me just speak to it. I'm trying to get into that. Just as is the case today, if AOL leases a line from us in order to provide ISP service to a customer, and they over this broadband line offer voice services, and they charge for the voice services, we can't do anything about that. We get no money from it, we aren't marketing it. We can't do anything about it. And whether or not the state commission can regulate what AOL does on voice services, it's a good question today and it will be a good question if this bill passes. But it doesn't change what is currently the situation relating to AOL offering IP telephony.

REP. WAXMAN: Mr. McMinn, can you respond to my question?

MR. MCMINN: I think that the era of distinction of voice and data is disappearing. As ones and zeroes are indistinguishable from each other, they are also indistinguishable in terms of how far they have traveled and how they have traveled to get to a particular customer. I mean, take a teleconference, if it is handled over the Internet between people that are in New York State and California. Is that long distance or is that data or is that voice? How about if someone makes a transcript of that conference and makes it available on a Web site that is accessible in Florida. Is that voice or is that data? And supposing someone chooses to modify and redistribute that? I mean, is that voice or is that data or is that video? I don't think that technologically the distinction is going away. Bits are bits.

What I think is important for everyone to remember is that we are trying to enable a most competitive broadband distribution system for those bits. And it's not about one versus the other; it's about giving the consumers as much different choices as they can get -- as many different options to be able to get it. So we shouldn't be picking winners and losers between CLECs, ILECs and cable companies. We should be figuring out how to make all three of those networks continue to compete.

REP. TAUZIN: The gentleman's time has expired.

The chair recognizes the gentleman from Oklahoma, Mr. Largent, for a round of questions.

REP. LARGENT: Thank you, Mr. Chairman. Mr. Ashton, in your written testimony you state that we need regulation that will -- quote, "We need regulation that will reward risk-taking, one that gives those who do the risk-taking the incentive to garner its rewards." And I wholeheartedly agree with that statement. My question to you is: How does rolling back access provisions, such as line-sharing rules, reward Mr. McMinn's company, Covad?

MR. ASHTON: Our point is that your voice network is basically built out, and competing in that market is largely something that can go on if it was worth competing for. There's no restrictions in the curve balls. Nor do I read this act to restrict voice competition. But if you look at the broadband services build-out, and you go beyond narrow band services, we need a new access network, and the cost of that is going to be extremely high. And in my belief in order to get us going in that direction it's not just regulation, and I would not propose that this reform will just -- holds all the answers. There are technical and equipment costs and issues that need to drop. And more than anything, and it's often forgotten, we have to identify services that will actually travel over this network, and people will pay money for and demand in a large enough quantity to actually pay for the network build-out. And that's a question that is still out there. But that is a major risk, because high-speed, you know, $40 a month or whatever it might be, is not going to be enough to pay for this build-out. So I see it as a major risk. I see it as a new type of risk that the larger carriers have not had to deal with before. And I see it as something where we should reward that kind of risk- taking if it takes place.

REP. LARGENT: But major risk -- and yet -- and this leads to my third question, and I'll ask the SBC folks in just a second -- major risk -- SBC's data revenues increased 39.9 percent to $2.1 billion compared to $1.5 billion in the year-ago quarter. The company's data revenue stream has nearly doubled in the past two years. Man, that's the kind of risk I'd like to get in on -- 39 percent rate of return. Wouldn't you? I mean, that's what you would advise your customers, wouldn't it? Let's get in the kind of risks that has the return of 39 percent. That doesn't seem like a lot of risk to me. And yet the bill that we are talking about, what this hearing is about, is going to take players like Covad out of the market, so they have zero ability to invest any capital in making this kind of investment. Am I correct?

MR. MCMINN: No, I don't believe --

REP. LARGENT: I'm not asking you. I'm asking Mr. Ashton.

MR. ASHTON: : Okay, I wasn't sure. First off, the services being offered today are being offered to he customers that are the easiest to offer them to, those that are within the distance limitations of central office switches if it's DSL, or all-data services. Data services are not that new. We have been offering T1 and Frame Relay and all kinds of data services for some time, and that's where the companies are doing very well, because there is more data demand than there ever used to be. The question is to bring this down to the mass market, which I think is what we would all like to see, that's going to require a different type of expenditure -- so we are not talking about the large business market where they derive most of their data revenues from. We are talking about the consumer market and the small business market. And those customers are largely not part of these numbers, they are not part of the growth, and they won't be addressed because there are different economic questions addressing them versus large businesses.

REP. LARGENT: Mr. Ashton, you seem like a pretty sharp guy -- are you aware that the CFO of Verizon Communication sits on the board of directors for Bear Stearns?

MR. ASHTON: I am aware of that. But these positions --

REP. LARGENT: I thought you would be.

MR. ASHTON: Well, I want to make this very clear -- we are also the largest I think -- and James can answer this better than I can -- but we were one of the major financiers of CLECs, and we were the primary investment bank behind Covad. But it's important that the committee knows that my comments are mine and not Bear Stearns.

REP. LARGENT: Mr. McMinn, in your testimony you've outlined your concerns with eliminating line-sharing. I am curious what has Covad's experience been with the Bell companies' willingness to provision a line or loop when you sign up a customer?

MR. MCMINN: Our position has really been compromised. Let me just -- unfortunately it's going to take me a few seconds to give you the history here. As soon as the FCC determined that they were going to encourage the adoption of line-sharing, which was April of 1999, we began to offer customers -- DSL to consumer customers at a loss. We knew it was uneconomical to do it on second lines, but we anticipated the passing of that line-sharing order, and we began to offer consumer services. The FCC finally passed that line-sharing obligation in November of 1999. We thought that then we would be able to offer up line-shared lines. It took an additional year until some but not all of the ILECs were able to offer line-sharing for us. And in particular let's take the case of Verizon. They claim publicly that they install 3,500 line-shared lines per day increasing their customer base. In the first full year of operation they were unable to give us 3,500 lines of line-shared DSL. That's the disparity of all this.

I think it's also important to remember that we are not talking about wanting a free ride on these remote terminals or the fiber that might be put into the field. What we are asking for, and the only thing we are asking for, is access to the 1.6 billion miles of copper that are out there in the plant. And even in the most optimistic scenario of rolling out remote terminals, that at least two thirds of that existing copper plant will remain in effect. It's that two- thirds of the copper plant that lies beyond these exotic fibers or lie beyond the remote terminals we want. We are willing to pay for the fibers ourselves. We are willing to pay for the remote terminals ourselves. We need access to that copper.

REP. LARGENT: Thank you. Mr. Chairman, I yield back. I do have another question to Mr. Mancini I hope to get asked about the seeming incongruity about their complaint about the burdensome regulation at a time when they are getting a 39 percent rate of return on their investment in broadband.

REP. TAUZIN: The gentleman's time has expired.

The chair recognizes the gentleman from Massachusetts, the ranking member of the subcommittee, Mr. Markey.

REP. MARKEY: Thank you, Mr. Chairman. Just a little bit of history. In 1967, the federal government gave the Bell system 50 megahertz to deploy a cellular system. It didn't do anything with it. Nothing. They were able to deploy DSL before the '96 act. They didn't do anything with it -- nothing. They came here in 1995, all seven chairmen from the Bells. They said that if we lift their restriction on their ability to get into cable that they'll compete against the cable industry. What have they done? Nothing. They said that would give them an incentive in fact to deploy. Have they? No.

What has led to the fact that we now have gone from virtually zero of broadband access in 1995 to 52 percent of all homes in the United States now have access to broadband? Paranoia -- the cable industry and the telephone industry afraid that someone else is going to get there before them. Plus, Mr. McMinn, Mr. McLeod and Mr. Gregori -- that's what drives it, paranoia. You give something to the Bells, and they don't have to do anything with it. They won't. In fact, in 1993, this committee, working with the federal government, had to say that the Bells couldn't compete for the third, fourth, fifth and sixth licenses, because they hadn't even gone to digital yet. They were still in analog for their cells. Okay? So we had to actually say they can't even compete in the regions in which they already own cell phone licenses. That's 1993 -- because only the competitors were going digital. Then they moved to digital, the Bells. That's get the little history here straight of the incredible backward way in which the Bells have looked at the deployment of new technologies over the years.

Mr. McLeod, many companies in the telecom market have talked about one-stop shopping, about a bundled package that includes a group of services, including a DSL line, voice, data, local, long-distance and Internet services. How does a regulator know which service it is regulating? How is the state or the federal regulator going to be able to track down voice from video from data to make sure that it is being monitored?

MR. MCLEOD: There really is no way to track it down. On the backbone networks, starting out in the '80s when fiber was deployed throughout the United States, those networks carried both voice and data services. And now as we move forward in the local access arena, voice and data services are integrated on the same copper wire. And so there is no way of separating the two. What is the key element here through all of this is that that network element, that last mile connection, is 100 percent controlled by the Bell companies today, and we need access to it -- equal access to it.

REP. MARKEY: Well, so it will be a regulatory morass that is created if --

MR. MCLEOD: There will be, yeah.

REP. MARKEY: And this bill really doesn't help to clarify that as far as I can see, because it really doesn't even provide a definition that is usable.

MR. MCLEOD: There is no definition whatsoever. And the focus here on data, as compared to voice, is really absurd in the new world of communications.

REP. MARKEY: When Internet telephony explodes over the next five years, will we be back here with a slew of lawsuits, or requests to change the legislation? Will we have people down here saying, You people didn't get it when you acted in 2001. The bill really should have been about Internet telephony. You didn't say anything about it. Are we missing really where it's all heading right now, Mr. McLeod?

MR. MCLEOD: Well, certainly voice over IP over the next five years over Internet protocol technology will be the primary way voice is carried.

REP. MARKEY: Well, let me ask you this -- do you agree -- you and Mr. McMinn -- do you agree that we should not import legacy subsidy models of per-minute access charges or usage-sensitive fees on the Internet, including on IP telephony? Rather than having per- minute charges for Internet traffic -- rather than having flat rates for example universal charges?

MR. MCLEOD: Well, I think eventually access rates -- access rates have been coming down. Recip comp rates have been coming down over time because they are viewed as artificial charges. And some orderly mechanism for bringing those rates close to zero should be in place, and I think that's the direction we are moving in.

REP. MARKEY: Mr. McMinn?

MR. MCMINN: I think in terms of what regulations or what concerns might come up two or three years from now in the regulatory environment, I think that that's indicative I think of the profound forward-looking thinking that was in the Telecom Act. It did not try to predict what type of services were going to be put in place. It opened up the network to a whole host of new services. And in fact no one really could have predicted the rate in which the Internet data use of the network has evolved. That was exactly the beauty of the act.

What we are seeing now is an attempt to roll that back. The ILECs finally realized that they weren't the most innovative forces in the United States. And now that the door is opened a little bit, all four monopoly bodies are slamming against that door to try to shut it down again.

REP. MARKEY: I think, to be honest with you, that this bill is technologically obsolete. I think it creates an image of the FCC or state regulators trying to perform a most futile task, which is chasing ones and zeros down the information superhighway, trying to pull them over to the side, trying to determine whether they are voice or video or data or Internet, whatever. In an era when we are trying to appreciate the fact that it's convergence, not divergence, which is going to be the hallmark of the future.

And I think what we are heading for in this bill is a regulatory retrogression back to an earlier period of time when there were separate and distinct services which were being performed.

So I think that after we've spent a decade educating ourselves as a committee as to the inevitability of convergence, for us to be considering this kind of legislation demonstrates that unfortunately we still need more remedial work as to where the whole future of this technology is heading over the next five and 10 years.

Thank you, Mr. Chairman.

REP. TAUZIN: I would only add that everybody needs a different level of remedial work. (Laughter.) The chair would recognize the gentleman, Mr. Ganske, for -- Mr. Cox has arrived. I believe Mr. Cox has --

REP. CHRIS COX (R-CA): Thank you, Mr. Chairman. I'm sorry, Mr. Tauke, our former colleague, that I was not here for your testimony, but I've read it. But I would have liked to be here just to pay you the courtesy of listening to it personally. And I want to start as basically as I can, along the lines of that old Vince Lombardi talk to the Packers about getting back to basics, where he said, "Gentlemen, this is a football."

I want to ask you, just as a matter of philosophy, is digital voice information, in your view, data?

MR. TAUKE: Digital voice is the same 1s and 0s as any other digital service. I don't know that I'd call it data, because we do have an artificial regulatory structure in place. It's artificial today. I mean, the right thing to do is illuminate all of the distance restrictions that are currently in the act. There should be no local calling area. There should be no toll. There should be no inter-LATA restrictions. It makes no sense in today's world.

But there is, unfortunately, a regulatory structure which drives the way in which the industry develops. It's still in place. Today there is no way for Congressman Markey or any other regulator to know what is and is not voice that's going over the network today. The way in which the current law is enforced is by ensuring that there is no offering, marketing or sale or money collected by a Bell company for an inter-LATA service.

That is the same mechanism that would remain in place for voice services tomorrow. But as I indicated earlier, when you look at what's going over the network, you can't tell what it is. And so when AOL -- when we sell a line to AOL today, we don't know whether AOL is offering to their ISP customer voice, video, data, whatever, that they put over that line.

REP. COX: And when you talk about this restriction that will remain, you're talking about Section 6 of this bill that says that there will be, even if we were to adopt this pending legislation, a continuing prohibition on marketing voice telephone services.

MR. TAUKE: Correct.

REP. COX: So let me explore a little bit about what we mean by voice services, because this really is a dynamic marketplace. It's changing a lot. During the two-week recess, when I was home in my district, I talked to a lot of the tech companies that I didn't even know I represented. It just changes a lot. And, you know, one of them is building a car. They are getting together with Honda. Honda is going to actually build the thing. They started out as a technology company, making the computers for the car, and they decided their computers were so far advanced beyond what's available on the market today that they'd just build the car around it and have it be an intelligent automobile.

When you're driving this car, you can answer your pages hands- free while you're on the road. It does all sorts of fun things. It'd be a fun car to own, the way they described it. But you could answer your pages just by talking. And via the Internet, your voice responses to your pages are delivered. Is that a voice service? And would it be subject to Section 6 of this bill?

MR. TAUKE: It's not subject to Section 6 of the bill because today voice services are not subject to any of the distance restrictions as long as they are via wireless. So when you pick up your wireless phone, Verizon can provide a nationwide wireless service because the inter-LATA restrictions on wireless services were lifted in the '96 act. And so the wireless service, voice, data, whatever that you have in the Honda or On Star at GM, those things can -- a Bell-affiliated wireless company can offer those services because the restriction on inter-LATA does not apply to wireless.

REP. COX: And that would be true also after the enactment of this legislation.

MR. TAUKE: That would be true after the enactment of this legislation. This legislation would lift the inter-LATA restriction on wire-line data services.

REP. COX: All right. And so now let's move away from the automobile and away from the wireless environment to the workplace, and let us say that you answer the same page from your place of work and you use your broad-band connection in your office. Is that a voice service?

MR. TAUKE: It probably would be a voice service, given the kind of service you suggest it is. And as I interpret the act as it's written or the proposed act as it's written, Verizon would not be able to offer that service. Another company could.

REP. COX: So answering the same page in the same way, depending on whether you do it from your car or your office --

MR. TAUKE: Depends on which technology; if it's wire line versus wireless technology.

REP. COX: -- results in two dramatically different regulatory consequences.

MR. TAUKE: That's correct, as today there is a different regulatory consequence between voice over the wireless phone and voice over the wire-line phone.

REP. COX: Without question -- and I think we're pretty much all agreed on this, all 11 panelists -- the reason we're here today is that we have some regulatory models that don't fit the current regulatory environment. And I think in your own remarks, in answering my big-picture question about what's voice and what's data, you made it clear that you're chafing under the restrictions of an old regulatory model.

My concern is this. If we move in the direction of the proposed legislation, aren't we again institutionalizing this very artificial distinction between voice and data, even to the extent of discriminating between voice and voice?

MR. TAUKE: No, I don't think you are, really. I think what you are simply doing is carving off one more piece. Information services, wireless services were carved up in the '96 act. For inter-LATA purposes, you'd be carving off one more piece and you would be saying to the Bell company that if you have the network and the facilities, you can market that service and provide that service and charge for that service if it goes over your network.

But I would observe, because this question has been raised, that the big money still in the inter-LATA market is in the voice market; in Massachusetts, where we just got authority, a $2 billion market for inter-LATA voice services. And that's the big huge incentive that's still out there for the companies.

REP. COX: Lastly, let me finish up on a point that I think that Congressman Markey raised, if not quite explicitly, almost explicitly. Under this Section 6, you would be prevented from marketing, billing or collecting for inter-LATA carried over your broad-band equipment.

MR. TAUKE: Until we got the 271 approval.

REP. TAUZIN: The gentleman's time has expired. He's permitted to finish the answer.

REP. COX: Thank you. To the extent that you're offering in the future, under this legislation, broad-band services to your customers and your customers are availing themselves of Internet long-distance telephony, local and long distance, do you think that you wouldn't feel justified in coming back to the FCC and the Congress saying, "We're being ripped off; these people aren't paying any of the fees that we have to pay in our business; they're competing in ways that we can't; they're using all of our equipment; they're in markets that we should be able to be in; we want a level playing field"?

MR. TAUKE: Well, today, America Online, (if?) they purchase one of our DSL lines, which they do, can off IP telephony over that line if they choose to do so. Verizon Online, using the exact same line, on-line service, cannot offer IP telephony. And it would be the same kind of restriction would remain in place tomorrow, if this act passed, as is in place today. And, yeah, we might think that that's not right, and I've said there are a lot of other restrictions that ought to go away. But I think we would expect that we would adhere to the '96 act and go through the 271 process to get rid of that restriction.

REP. TAUZIN: The gentleman's time has expired. The gentleman -- Mr. McLeod, if you'd like to respond, you're welcome.

MR. MCLEOD: Yeah, just for a second, because I think there's a tremendous amount of confusion here which we could solve very quickly. It's five years after the Telecom Act. It's 2001, and a 14-point checklist has not been completed in 45 states in this country to open up the local networks. So we don't have these issues, so we don't have to define what's going on, whether it's voice or data, so that the Bell companies can be free to operate. It's five years later. When are we going to talk about mandating that these networks be open so there can be competition?

REP. TAUZIN: The gentleman's time has expired. I would only add, as a point of reference, that the 14 points have now been expanded to 1100 by last count. The gentleman, Mr. Boucher, is recognized.

REP. RICK BOUCHER (D-VA): Well, thank you very much, Mr. Chairman. And I want to thank all of the witnesses for a very informative presentation and discussion here this morning and this afternoon.

There's been some discussion recently about what I think is a very interesting proposal to create a new title to the Communications Act, a new Title VII, wherein would reside converged broad-band services. And the purpose of the new Title VII would be to treat the -- (inaudible) -- the providers of substantially similar services the same way from a regulatory standpoint. And that would be, I think, a major and an important departure from current practice.

At the present time, services are regulated not by the character of the service offered but by the company that offers the service. So regulation tends to be industry-specific and not service-specific, and that creates disparities. It creates discriminatory and uneven treatment and competitive disadvantages.

A new Title VII would have the benefit of placing within a new regulatory environment all of the various services where a common platform is used to provide multimedia offerings. And so if some combination of voice, video and data were offered over the platform, this new regulatory treatment would be provided. And telephone companies, cable companies and others would be treated the same way under the regulatory structure.

END OF TODAY'S COVERAGE COVERAGE WILL RESUME UNDER DIFFERENT HEADING

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LOAD-DATE: April 26, 2001