Copyright 2001 Federal News Service, Inc.  
Federal News Service
May 22, 2001, Tuesday
SECTION: CAPITOL HILL HEARING

LENGTH: 25086 words

HEADLINE: HEARING OF THE HOUSE JUDICIARY COMMITTEE
 
SUBJECT: BROADBAND COMPETITION
 
CHAIRED BY: REPRESENTATIVE JAMES SENSENBRENNER (R-WI)
 
LOCATION: 2141 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:
 
TERRY HARVILL, COMMISSIONER, ILLINOIS COMMERCE COMMISSION;
 
BILL BARR, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, VERIZON;
 
JEFF BLUMENFELD, PARTNER, BLUMENFELD & COHEN;
 
JOHN MALONE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE EASTERN MANAGEMENT GROUP, BEDMINSTER, NEW JERSEY
 


BODY:
REP. JAMES SENSENBRENNER (R-WI): The committee will be in order.

Today the committee holds a hearing on H.R. 1698, The American Broadband Competition Act of 2001, also known as the Cannon-Conyers Bill, and H.R. 1697, The Broadband Competition and Incentives Act of 2001, also known as the Conyers-Cannon Bill. Last week, Speaker Hastert denounced his attention to refer to this committee, H.R. 1542, The Internet Freedom and Broadband Deployment Act of 2001, also known as the Tauzin-Dingell Bill. Shortly after the recess, we will hold a hearing on that bill.

We are considering all of these bills because of our jurisdiction over the antitrust laws. On this committee we do not look to regulations to solve economic problems; rather, we believe in removing road blocks to open competition so that markets will solve economic problems. It is with that in mind that we turn to the problem of broadband. I want to ensure that all Americans get high-speed broadband service as quickly as possible while at the same time maintaining competition and choice in that market.

Both of the bills before us today, as well as the Tauzin-Dingell proposal, seek that same goal. The question is which of any of them will work. Contrary to what some have suggested, I have not decided that question for myself; rather, I want to hear all the evidence. In the last couple of months I spent a full day at AT&T headquarters in New Jersey and a full day at SBC headquarters in Texas trying to learn more about this question. I have scheduled these two days of hearing and am still learning.

Above all, whatever legislation we pass must lead us to a work in which individual consumers with choices freely decide market outcomes. At a minimum, we must reverse the Seventh Circuit recent decision in the Goldwasser (ph) case. That decision directly contradicts the clear congressional attempt that antitrust laws should continue in force in this industry. Goldwasser simply reads the antitrust savings clause out of the law, and it must be corrected.

All who follow this issue should be on notice that the Judiciary Committee has always exercised its jurisdiction in this area and will continue to do so vigorously this year. This sector of our economy achieved its current vibrancy because of the application of the antitrust laws, specifically in the AT&T break-up decision of the 1980s. Only through the continued application of the antitrust expertise of this committee, the Justice Department and the FTC will that free-market vibrancy continue, and I fully intend to see that it does.

With that I will turn to Mr. Conyers for his opening statement, and in doing so, I would like to thank him and his staff for their contributions to our jurisdictional efforts in this area.

The gentleman from Michigan.

REP. JOHN CONYERS (D-MI): Thank you, Mr. Chairman, and members of the committee and witnesses and friends. I start off by thanking Chairman Sensenbrenner for calling the hearing, for exercising excellent leadership in protecting the committee's historic jurisdiction over competition in the telecommunications industry.

If you don't like the unregulated monopoly control of your local telephone market which leads to high prices, shoddy service, less innovation, then you hate the Tauzin Bill which will create a mirror image of that exact same monopoly control in DSL broadband. A little history-- the Bell system was created intentionally as a monopoly by the government protected against competition. And it was sued by the Justice Department three times for antitrust violations and was judged to be an illegal monopoly by the federal courts in 1984.

When it was broken into seven regional Bells plus AT&T, in 1996 Congress, again, found the Bells to have monopoly control over the essential facility of the local loop. A Republican Congress then said that it was critical to competition that the monopoly facilities be open to competitors. Five years after passage of the 1996 law, we've seen the fruits of competition in almost all areas of telecommunications with the notable exception of local telephone service.

What was seven Bell companies and GTE have been reduced by merger to four behemoths. These companies now control in excess of 90 percent of the wires into our nation's homes and businesses. While innovation has flourished and prices have been slashed in the area of long distance, exactly the reverse has occurred in the local network. The road to local competition has been littered with scores of bankrupt companies and tens of thousands of lost jobs. The other bill would effectively transfer, effectively duplicate the monopoly over local telephone service into broadband DSL services.

That's why I say, if you don't like the unregulated, monopoly control of your local telephone market which leads to high prices, shoddy service and less innovation, then you will not like the Tauzin Bill because it effectively eliminates the 1996 requirements in Section 251 and Section 271 that the local monopoly facilities be open to competitors. It's a license to monopolists to exclude. Therefore, the bills introduced by myself and my colleague, Mr. Cannon, take a different approach. It says that the monopolists don't get the right to exclude if they control over 85 percent of the market, market control that would be sufficient for most any court in an antitrust case utilizing the essential facility analysis.

They reiterate the bipartisan consensus that emerged in 1996 that antitrust laws are preserved, that a liberal, regulatory apparatus will not insulate a monopolist from antitrust scrutiny. And the bills provide greater incentives not found in the Tauzin approach to broadband rollouts, and the bills provide for a rapid resolution of dispute.

Competition should be almost our religion in telecommunications. It should be our (creedal ?). It is the touchtone for lower prices, better services and for unleashing the innovative creativity that has built our new economy from the ground up. And historically, it has been the role of this committee to preserve those basic rules of competition. And I welcome the testimony of all the witnesses.

Thank you, sir.

REP. SENSENBRENNER: Thank you.

Our panel today consists of four distinguished witnesses. The first witness is Commissioner Terry Harvill of the Illinois Commerce Commission. Commissioner Harvill has a bachelors and a masters degree from Illinois State University. Before being appointed to the commission he served on its staff as well as on the staff of Governor Jim Edgar of Illinois. He was appointed to the commission in 1998 and serves through 2003.

Our second witness is Mr. Bill Barr, the executive vice president and general counsel of Verizon. Mr. Barr has a bachelors and masters degree from Columbia University and a law degree from George Washington University. After law school, he clerked for Judge Malcom Wilke (sp) of the D.C. Circuit. He has a long and distinguished career in public service, both at the Central Intelligence Agency and the Department of Justice, culminating with his service as attorney general of the United States from 1991 to 1993. Before coming to Verizon, he was with the GTE Corporation and also in private practice with the Washington law firm of Shaw, Pitman, Potts & Trowbridge.

Our third witness is Mr. Jeff Blumenfeld, the partner in the Washington law firm of Blumenfeld & Cohen. Mr. Blumenfeld is a graduate of Brown University and the University of Pennsylvania Law School. After serving as an assistant United States attorney and an attorney in the antitrust division, he founded his own law firm in 1984. In that capacity he represents a wide variety of clients in the telecommunications field and also serves as an adjunct professor at the Georgetown University Law School.

Our fourth witness is Mr. John Malone, the president, chief executive officer of the Eastern Management Group, a telecommunications consulting firm. He holds a bachelors and MBA degree from the University of Dayton. He spent 10 years with AT&T before founding his current company in 1979. The firm consults with all types of telecommunications companies, and Mr. Malone is recognized as one of the leading consultants in this are.

Gentlemen, would you please all stand and raise your right hand, and take the oath?

Do you and each of you solemnly swear that the testimony that you're about to give to this committee will be the truth, the whole truth and nothing but the truth, so help you God?

Let the record show that each of the witnesses answered in the affirmative. Without objection, the chair is granted authority to recess the committee at any time during this afternoon's meeting, and without objection, each of your written statements will be included in that part of the record where your testimony appears. I would ask each of you to summarize your testimony in about five minutes or so. And first up is Commissioner Harvill.

MR. TERRY HARVILL: Good afternoon, Mr. Chairman, Ranking Member Conyers, and other distinguished members of the committee. Thank you for inviting me here today to discuss H.R. 1697, The Broadband Competition and Incentives Act of 2001 and H.R. 1698, The American Broadband Competition Act of 2001. I appreciate the opportunity to provide a state-commission perspective on this important issue.

My name is Terry Harvill, and I'm a commissioner with the Illinois Commerce Commission. The Illinois Commerce Commission is the state of Illinois' public utility agency which is responsible for several financial service aspects of investor-owned electricity, natural gas, telephone, water and sewer utilities. I'm also an economist, and as a general premise, I prefer competition to regulation. I believe that markets should be defined not by regulators but by consumers. I believe that markets should be free from government interference. However, I also believe that regulation in the absence of fully-developed, competitive markets, and when consistent with the public interest, should be permitted to function as a substitute for certain aspects of competition. These two beliefs are not inconsistent.

Congress showed tremendous leadership when it passed The Telecommunications Act of 1996-- a landmark statute to balance the concerns of consumers with the competitive interest of many competitive telecommunications companies. The act considers the deployment of telecommunication services in a competitively and technologically neutral manner. Rather than designating monopolistic providers with specific technologies, the act allows consumers to choose providers and technologies for their telecommunications needs. In addition, the acts requires incumbent local exchange carriers, or ILECs, to grant competitors access to their networks and lease the components of that network at reasonable prices. After demonstrating their networks are sufficiently open to competition, the ILECs would then be allowed to enter into the long-distance market.

Unfortunately, the progress over the past five years has been slow. Explanation for this slow progression vary according to industry interest. Competitive local exchange carriers, or CLECs, claim that the ILECs are unwilling to abide by the market-opening provisions of the act, utilize the regulatory and legal process to delay their market entry, and limit their ability to compete. Conversely, ILECs argue that the lack of robust competition is due, in part, to the CLECs' defective and inadequate business plans. While a combination of the two positions is more likely the case, we're faced with the reality of sparse and sporadic competition. Lost in the cacophony, however, is the fact that the act is working. Over the past several months the FCC has granted inter-LATA (ph) relief to certain ILECs in four states, and a fifth application is pending.

Competition for business consumers is beginning to emerge for large consumers throughout the cities in the United States. Although the pace is below the level for which we had hoped, the fact remains that the act is functioning as intended. This progress should be allowed to continue. I ask that you not confuse frustration regarding this slow pace with the misinformed conclusion that the act has become counterproductive to its intended goals.

Today I call upon you to allow the markets to develop and leave the act as written. In my opinion, government intercession is not necessary at this time and would create more harm than good. Specifically, any major modification to the act, or to the competitive safeguards contained in the act, would diminish the vital incentives for the ILECs to meet their obligations to open their local markets. Equally important, major modification would also jeopardize the ability of providers to provide competition to the ILECs. However, if any modification to the act could be justified, it would be to emphasize and provide additional incentives for continued infrastructure improvements by adding broadband capabilities to existing networks.

One such area for modification is the enforcement provisions intended to induce competitive behavior from the ILECs. H.R. 1697 and 1698 would not only maintain the core market-opening requirements of the act, but they would also offer effective incentives for the deployment of advance services. Specifically, H.R. 1697 would prevent any ILEC from entering the long-distance market for either voice or data until its market share reached 85 percent or below. Correspondingly, 1698 would enhance the antitrust remedies available to both the Department of Justice and telecommunication carriers seeking to avail themselves to competitive opportunities created by the enactment of The Telecommunications Act.

The nation's competitive telecommunications market, as envisioned by The Telecommunications Act of 1996, should be allowed to develop as Congress intended. To the extent that broadband services continue to be provided over the voice network, the opportunity for unfettered competition should continue. Without competitive guidelines it's unlikely that millions of Americans will ever experience the intended benefit of the act, and that would be an unnecessary travesty.

Thank you, and I'd be happy to answer any questions you may have.

REP. SENSENBRENNER: Thank you, Commissioner.

Mr. Barr?

MR. BILL BARR: Good afternoon, Mr. Chairman, Ranking Member Conyers. It's a pleasure to appear before this committee today. I'd like to focus my comments on H.R. 1697 and 1698. I believe that these proposals are unwarranted and would be destructive, both of the fundamental principles in the antitrust laws and our telecommunications policy.

Now, The Telecom Act created special duties and imposed special duties on the incumbent LECs that go far beyond the requirements in the general antitrust laws. We have to facilitate the business operations of our competitors in countless ways that are summed up in thousands and thousands of FCC rules. This has required a massive investment on our part in an effort to completely redo the systems, the software and the processes that are used to operate our networks so that it can serve as a platform for countless numbers of retailers. And what is truly remarkable, in my view, about this very substantial IT project that dwarfs what we've had to expend, for example on Y2K, is how successful it has been in a relatively short period of time.

Now many competitors have been quite vocal in suggesting that the ILECs, or the incumbents, are not living up to our obligations to provide wholesale service, and they claim that some kind of substantial change in law is necessary to deal with this alleged misconduct. The undisputable and objective facts, though, I think belie these claims.

First, in our long-distance application proceeding -- the so- called 271 proceedings -- all these claims have been levied by our competitors, and they've been painstakingly reviewed by state commissions, by independent auditors, and ultimately by the FCC. And in these proceedings they've been rejected. Our petitions have been approved. We've been allowed to go into long distance. We've been found to be living up to our obligations and not to have engaged in foot-dragging. On the contrary, we've been getting high marks for working cooperatively with competitors. And indeed, just two days ago the FCC put out the latest competition data, which shows that it is surging in states where the Bells have been admitted to compete in long distance, far outpacing the other states.

Now, the second point is that the FCC and the states have put in place specific objective standards and measures that we have to meet in providing our wholesale obligations. We have to keep 2 million approximately -- a matrix -- to demonstrate that we are meeting our obligations. SBC has said that they have to keep 3 million. And the reason why you keep all these objective standards is precisely to avoid subjective bickering about whether you're doing your job or not. The numbers are there. Either we're meeting the criteria or we're not. And largely, those show that we are meeting the criteria require by the FCC, where we're not on the margin, we pay no full penalties, and we quickly cure those problems.

Moreover, there are already comprehensive enforcement schemes to deal with any potential misconduct in these wholesale obligations. I've already mentioned the performance assurance plans that are no fault in nature. If you don't meet the standard, you pay. And the FCC has determined in adopting these plans that these payments are sufficient to ensure compliance with the act and to deter misconduct.

Moreover, the FCC is free beyond these automatic no-fault payments to impose specific sanctions for any misconduct, including substantial fines and taking us out of the long-distance market. So for example, in New York when we had some failure in third-party supplied software, which resulted in some notifications not going to the CLECs that their order had been received -- 10 percent of the notifications did not go out because of this software glitch -- we were fined $13 million in excess of the mandatory payments we had to make under the Performance Assurance Plan. It was unintentional, but it was remedied properly by the FCC. Beyond this level of enforcement, any aggrieved party can bring claims and obtain remedies from state commissions, from the FCC and the federal courts specifically under The Telecommunications Act.

I think it's wrong to immediately give credence to all the complaints made by competitors that we're dragging our feet. There's a forum for those to be heard, they've been heard. Our long-distance applications have been approved, they have many remedies to demonstrate these claims. And what these claims largely boil down to -- what many of them are -- are policy disputes that are being presented as claims of foot dragging.

For example, reciprocal comp, which most of you know has been a big issue, they come in and say, you have to pay for Internet-bound traffic as if it's local traffic. We say, no, it's interstate traffic, it's not local traffic. We don't owe reciprocal comp on it. They say, yes, you're do; you're not meeting your obligations. That brings a policy issue. It goes to the FCC, and the FCC adopts a national policy. And guess what? We won that one. It's interstate, and they've change the compensation rules on Internet-bound traffic.

These issues come up all the time. What kind of co-location is required? Do you have to let competitors in 24 hours?

REP. SENSENBRENNER: Do you think you could wrap it up since the red light is flashing?

MR. BARR: I'd be glad to.

These policy issues are presented all the time. And what this act does is unprecedented. What it says is, that these issues are -- that claims of violation of regulatory statute are automatically per- se antitrust violations. That's never been done before. And they're automatic per-se violations of antitrust, and then it would throw all these issues out into litigation brought by customers and brought by competitors and to be decided by federal juries willy-nilly around the country.

It's exactly for this reason that we have a telecommunications act, so we have expert agencies setting a comprehensive, coherent policy. Thank you, Mr. Chairman.

REP. SENSENBRENNER: Thank you, Mr. Barr.

Mr. Blumenfeld?

MR. JEFF BLUMENFELD: Thank you, Mr. Chairman, Ranking Members Conyers, members of the committee. We appreciate the opportunity to address these issues today. I would like to devote the time of my oral testimony to two fundamental issues. One is the historical role that antitrust has played in creating competition in the telecommunications industry, and the second is the relation of antitrust to regulation both in the '96 Act and in the legislation that is pending before the committee at this time.

As the chairman pointed out in his opening remarks, antitrust has historically played a crucial role in opening this industry to competition. That was true through a series of private lawsuits in every segment of the industry, from ordinary telephones, through telephone equipment used to provide services, through the services themselves including long distance. It was true also in the historic government case, which I had the honor of being able to serve as a senior trial lawyer in. And in that case, also, the antitrust laws were the gravamen of the government's complaint and the basis on which ultimately relief was granted, which created the competition that we now see in this industry across all of its segments.

The heart of the antitrust laws is to create obligations for companies to deal fairly with each other. The ILECs are fond of quoting the holding of the Colgate case, which recognizes that one economic freedom every company has is the freedom to refuse to deal with certain customers. But they're not fond of quoting what is actually the contrary of that, which is that for a firm with market power, the right to refuse to do business is sharply bounded. Specifically, where a company with market power refuses to do business with a competitor with the purpose and effect of injuring competition -- that is engages in predatory, exclusionary conduct -- that conduct is illegal under the antitrust laws. Read in the converse, what that means is the antitrust laws do create an obligation on the part of companies with significant market power to deal with their competitors where the refusal to do so would be anticompetitive. And where it creates that obligation, it creates the obligation in two parts. It creates an obligation to deal with them on reasonable terms and reasonable conditions.

In the networking industries what that has always meant is that a firm with market power that is a network based firm must allow access to its network -- connection to its network -- on reasonable terms and condition. And there again, for a network company there are two facets of reasonable terms and conditions. They must be technically reasonable and they must be economically reasonable. A technically reasonable interconnection must mean the ability to connect with the incumbent's monopoly network at points that make technical sense both from the competitor's point of view in terms of their business and technology and the point of view of the incumbent.

These are exactly the kind of obligations that are tracked and specified in Section 251 of the act. Similarly, there's an obligation to deal on financially reasonable terms.

Everybody in the telecommunications industry has agreed for at least the last decade that financially reasonable terms for monopolists to deal with a competitors means at prices that resemble incremental costs. In fact, the telephone companies themselves, in the 10 years or so that they spent successfully and appropriately fighting to change traditional regulation from rate-base regulation to price-cap regulation, argued mostly with the support of their competitors and with the acceptance of regulators, that where faced with competition they should be able to charge prices at incremental costs because prices at incremental costs are the prices that prevail in the competitive marketplace. These are, obviously, akin to the obligations that are tracked in Section 252 of The Communications Act.

So the relationship between the antitrust laws and The Telecommunications Act, both historically and in the '96 Act, could not be more different than the Goldwasser court described them today. And in ruling as it is, the Goldwasser court was exactly wrong. The bills that are pending before the committee today would simply sharpen the relationship between the antitrust laws and The Communications Act to make it clear, as must be above the law and the policy in this country; that a course of conduct that violates specific federal regulatory scheme -- which itself was designed to open markets to competition -- cannot possibly be a defense to an antitrust case, and are more appropriately regarded -- as they have been regarded for decades in the antitrust law -- as clear evidence of antitrust violation, an integral part of that case.

I commend both of these bills to the committee for preservation of competition in our industry. Thank you.

REP. SENSENBRENNER: Thank you, Mr. Blumenfeld.

Mr. Malone?

MR. JOHN MALONE: Thank you, Mr. Chairman, Ranking Member, members of the committee.

For 20 years I have been president of a management-consulting company working in the communications sector exclusively. All of our firm's 400 clients are either carriers, including CLECs, ILECs, inter- exchange carriers, or manufacturers or software companies. Our business is to help our clients compete effectively in a crowded telecommunications market. I'd like to share with you some insights about the CLEC market today, based upon our experience.

Right now there are 150 CLECs operating in the United States according to NPRG. In each of the 15 largest markets in the United States, there an average of 15 competitive, local-exchange carriers working within those markets. Frankly, I think that's too many. The next 150 markets boast an average of three CLECs per market. I think that's closer to the right number. Lots of CLECs have targeted these smaller markets and found far less competition-- companies like KMC, Commonwealth, smart business thinking as far as I'm concerned.

CLECs right now are bulldozing through the ILEC marketplace. The FCC just reported that CLECs now have 8 percent, or 8.5 percent, share of all the access lines. They've captured 15 percent of the marketplace for small and medium business sized customers. CLECs have 20 percent market share of business customers in many cities and 20 percent total market share of all customers, including residents, in some non-major areas.

Interestingly, one-half of all businesses who either start up and procure telephone service or are relocating are passing those orders to competitive local exchange carriers. Let me repeat that. One-half of the businesses who are putting in service are giving the business to CLECs.

So if this industry is so great, then why isn't anybody making money? I think that's a really good question. I'd like to share with you, based on my experience working with CLECs, three reasons why.

Number one. There is far too much competition in this marketplace. Venture capitalists know when they put money into companies that about one out of every seven investments will work. Behind every one of the 150 CLECs there's a good venture capitalist. And these venture capitalists if you polled them would say, with one- seventh of the investments expected to work long term, we figure this marketplace ought to hold about 21 profitable CLECs, not 150. Not every CLEC can be expected to survive, and we can't make them.

Reason number two, bad business plans. I've seen a lot of CLEC business plans. They don't reflect competing against anybody except the phone company. Every major city I indicated has an average of 15 CLECs. Think of Reagan National Airport, 15 shuttles, all competitors, departing every hour on the hour for LaGuardia. If that sounds preposterous, imagine that each one of them thought that the only competition they would face would be the Amtrak Metroliner.

Tampa's a fairly typical CLEC target. It's not in the 15 largest cities, it's a little bit smaller than that. It's got 36 CLECs operating in the city. Each CLEC has an expensive network that they put in place. Each CLEC must sign up about 6,000 business customers in order to hope to break even on their investments or they risk extinction-- 6,000 business customers. But Tampa doesn't have 6,000 business customers for each of 36 CLECs. That would be over a quarter of a million businesses. Tampa's got about 5 percent of that number of businesses. That's an example of bad-business planning.

Problem number three, operating problems with businesses. Many CLECs face enormous amounts of employee turnover. Two hundred percent employee turnover is not uncommon. If your employees are turning over every six months, think of it as every six months all the employees take their passes and hand them in and walk out the front door. You can't build a business that way. It doesn't surprise me that CLECs find that one-quarter to one-half of their customers leave each year. And it's not because the telephone companies are messing around with the CLECs; it's because the CLECs are messing around with themselves. A funny thing-- many sales reps leave a CLEC, and then take their customers with them.

In conclusion, the CLEC industry is robust. It does have problems of course. I make a living solving them. But CLECs report to us that the problems that they have are well within their control, and they'd like to be able to be left alone, at least on the operating level, to solve them.

I just would like to finish by saying that it would please me if I might enter into the record as part of my testimony a piece within this morning's Wall Street Journal. It's headlined by Yokie Draysen (ph), the writer, "Bell Rivals Double Local Market Share," based on a report that came out from the FCC reporting CLEC penetration last year.

REP. SENSENBRENNER: Without objection, the article will be included.

MR. MALONE: Thank you for your attention.

REP. SENSENBRENNER: The chair has noted the arrival of the members on both sides of the aisle, and, as has been done in the past, will recognize the members in the order of arrival, alternating between the Republican and Democratic side, and will enforce the five- minute rule vigorously on everybody, including himself, given the number of members who have appeared. So let me start out.

I'd like a yes or no answer, Mr. Barr and Mr. Malone. Do you agree that the Goldwasser case was wrongly decided insofar as it reads the antitrust savings law out of The Telecom Act of '96?

MR. BARR: I think it was rightly decided and it does not read the savings clause out.

REP. SENSENBRENNER: Okay. Mr. Malone?

MR. MALONE: I am not an attorney, and I would really have to defer to somebody else who's much smarter in that subject than I.

REP. SENSENBRENNER: Well, Mr. Barr, do you want to market in this area where antitrust laws don't apply, or do you think that antitrust laws should apply in this area?

MR. BARR: Which area?

REP. SENSENBRENNER: The area of telecommunications, both --

MR. BARR: The antitrust laws generally apply to that area. I think that a lot of the discussion is based on a misunderstanding of the Goldwasser case and the relationship between antitrust law and specific regulatory regimes.

REP. SENSENBRENNER: Mr. Harvill, Goldwasser was a Seventh Circuit case that applies to Illinois as well as Wisconsin. Would you like to add to this?

MR. HARVILL: Once again, I'll take the same out as Mr. Malone. I'm not an attorney, so I probably should consult with counsel.

REP. SENSENBRENNER: Okay.

Now, the Bell companies argue that their local networks are sufficiently open to allow competing local-exchange companies to compete for local service. If that's true, why haven't the Bell companies themselves become competitors for local service outside of their region on a major scale?

Mr. Barr, I think that Verizon pulled out of local phone service in certain parts out of their local area. Why don't we see more competition between the big Bells versus the little ones?

MR. BARR: Because I think we need a business model that's profitable and where we will make a sufficient return. And I believe that right now our emphasis is trying to pursue broadband.

REP. SENSENBRENNER: Well, don't you think that a Verizon with its assets is better able to establish competition in the Midwest, which is SBC-Ameritech, than somebody who Mr. Malone is describing as somewhat undercapitalized and not able to attract venture capital?

MR. BARR: In some areas, yes. In fact, GTE because it was able to do inter-LATA, was able to put facilities across the country and have a national network. And that would provide an excellent platform for us to move out of franchise, as the expression goes. That's one of the reasons why this data-relief provision, the inter-LATA part, would contribute to competition around the country by allowing us to put core facilities.

REP. SENSENBRENNER: But GTE isn't around anymore.

MR. BARR: GTE is part of Verizon.

REP. SENSENBRENNER: I know.

MR. BARR: Yes, but we're not allowed to own Genuity or own those facilities which were nation-wide network because of the inter-LATA restriction on data.

REP. SENSENBRENNER: Commissioner Harvill, can you tell us a bit about the Illinois experience with the deployment of DSL with SBC, and where does that matter stand now?

MR. HARVILL: As it stands right now, the Illinois Commerce Commission entered an order a couple of months ago which required Ameritech Illinois to unbundle what's been termed Project Pronto by SBC-Ameritech. Project Pronto, for all intents and purposes, according to the commission order, is essentially an upgrade to the network that's already in place. What we've required them to do on an unbundled, network-element basis is to unbundle the components that are necessary for the competitors to purchase to provide advance services or high-speed access to consumers. The response we saw from SBC from that order was that they stopped deploying Project Pronto for data, and I reference data only. They continue to deploy Project Pronto for voice under the argument that it would cost too much to share that network with their competitors.

REP. SENSENBRENNER: Now, to all of you, if there's no change in the current law, how long do you expect it to be before the Bells get into the long-distance market in all of the states? I know the Bells are in the long-distance market in some states. How long do you think it's going to be without Tauzin-Dingell before the Bells get into the market in the rest of the states?

MR. HARVILL: As it relates to Illinois, we had a previous 271 proceeding in Illinois some years ago before Ameritech Illinois was acquired by SBC. My understanding from that case was they had met a clear majority of the 14-point checklist. As it stands right now, the one major burden that they have to overcome is, obviously, their operational support systems that facilitate the CLECs and consumers from switching from one company to another. That process is on track in Illinois. I would expect probably within 12 to 18 months you will see decision from the Illinois Commerce Commission either supporting or not supporting that order, but they are on the right track.

REP. SENSENBRENNER: Does anybody else wish to respond to that?

MR. BARR: We plan to complete the 271 process, or hope to, by the middle of next year.

REP. SENSENBRENNER: Mr. Blumenfeld?

MR. BLUMENFELD: Mr. Chairman, I would say probably within a year.

If I can just make one comment on that. The pace at which they get 271 permission has always been completely in their control. The pace that we've seen is not because they don't know how to do this; it's because they're hoping they won't have to. When my children were young, we had a requirement -- my wife and I -- that you had to practice piano for an hour before you went out to play. And, of course, about 10 minutes in the kid is saying, can I go out now? And we'd say, no, you have to practice for an hour. So they'd come back five minutes later and say, can we go out now? We'd say, no, you have to practice for an hour.

Well, pretty soon you realize three things. One is, you're never going to last an hour. No one can hold out that long. The second is, that after about two more tries, they're going to your spouse. There's got to be a better forum somewhere. And the third is, if they spent as much time practicing piano as they did trying to get out from practicing piano, they'd be pretty good piano players.

REP. SENSENBRENNER: No concert pianists in the Blumenfeld family.

(Laughter)

Mr. Malone?

MR. MALONE: Mr. Chairman, I'd just like to make a couple of comments here. It will probably take a year to two years. The FCC has indicated they expect 10 applications this year. I talked to a lot of regional Bells in different states, and it seems to be going a heck of a lot faster than that.

The second point, I would strongly urge a regional Bell operating company -- and a few of them are clients of mine -- not to do anything in terms of interstate competition until they receive 271 relief. These companies within their own territory have a leveragible brand. It's less leveragible when they go outside their territory. If they can sell long distance -- in the entire United States you can take one marketing cost and spread it across all 50 states, but what they have to do is they have to distribute that marketing cost. The same dollar of marketing is going to be spent if they're outside their territory, but they're going to pick up far fewer customers. It's just not good economics to be selling it all over the country. But I argue that once they receive 271, they'll all be in each other's backyard.

REP. SENSENBRENNER: The gentleman from Michigan, Mr. Conyers.

REP. CONYERS: Thank you, Mr. Chairman. I appreciate all the witnesses' testimony. But it's always especially good to visit with the former attorney general. We go back 20 years. And you're as good as ever.

The only thing I can't understand is, if your companies and the other Bell companies are complying with the 1996 Telecommunications Act, and its provisions are working, then there'd be no reason for you to want to roll back 251 regulations and sanctioning the enforcement that guts Section 271, right?

MR. BARR: Well, that's not what we're trying to do.

REP. CONYERS: Oh, okay.

MR. BARR: We're not entirely happy with the access regime that has been adopted with respect to our local-exchange facilities, but we are working through that process under the 251 and 271 process.

But we are seeking two changes. One is the application of the long distance or inter-LATA restriction to data traffic. In our view that is taking an old category that existed with respect to long-distance voice and applying it to a different marketplace. And there is competition that's suffering in that marketplace now. The FCC has said that a little while ago there were 30 backbones; now it's probably around four or five. It's becoming highly concentrated, and there is concern over the degree to which that is concentrated.

REP. CONYERS: But isn't that gutting 271? I mean, maybe my language is not as smooth as yours. But you're talking about changing 271.

MR. BARR: We're talking, I think, about clarifying 271 so that it does not apply to data. Now, the incentive-- the extent to which the entry into long distance is perceived as a carrot, which still exists. The long-haul data market right now is 6 billion compared to 100 billion.

REP. CONYERS: Okay, okay, okay, okay, okay.

MR. BARR: So it's still very important to enter the voice, long- distance market.

REP. CONYERS: Okay. Now, do you agree that the Bells have, in effect, in real time, monopolistic control over the local loop, the essential facility for the provision of DSL broadband?

MR. BARR: Not today, I don't believe that.

REP. CONYERS: You don't think so.

MR. BARR: No. In fact, I --

REP. CONYERS: Do you agree that the Bells ever had monopolistic control over local phones?

MR. BARR: Oh, yes, of course.

REP. CONYERS: But not DSL. You're going to use the same lines, but you'll be good guys this time.

MR. BARR: Well, FCC has found -- I believe that the FCC has found that broadband is a discrete and separate market. And some of the providers of broadband do use Spectrum on their facilities. Cable was a monopoly and telephones were a monopoly, but the fact that they're both competing in this new market doesn't make them monopolies. They were both essential facilities --

REP. CONYERS: Let me sleep more comfortably tonight. Will you be nice guys and non-monopolistic even though you have 90 percent of the market?

MR. BARR: Which market?

REP. CONYERS: The one you have 90 percent of.

(Laughter)

You've got more than -- you've got several --

MR. BARR: Well, in New York, for example, I think we have below 80 percent of the market.

REP. CONYERS: Okay, all right.

MR. BARR: In the local-exchange market, in the broadband market, we're the insurgent. Cable has over 70 percent of the market.

REP. CONYERS: We're not making much progress this afternoon.

MR. BARR: Excuse me?

REP. CONYERS: Mr. former Attorney General, we're making little progress this afternoon, me and you.

MR. BARR: Facts are stubborn.

REP. CONYERS: Yes.

Okay. Maybe you can just help me with this disconnect about the facts that are so stubborn. The Atlanta Constitution, April 4th of this year, "Once Mighty Telecom Competitors Fell Far Fast; Boston Globe, "Ringing in a Year of Opportunities: Bell Companies have Won Recent Regulatory Victories but Face Big Tests for Bigger Gains," "Revamp of Telecom Act;" Business Week, "Don't Let Telecom Competition Vanish;" CBS Market Watch, "The Death of Competitive Telecom?"; Chicago Tribune, "Consumers Yet to See Benefits of Telecom Act;" Interactive Week, "Carrier Retreat Bashes Gear Vendors;" Los Angeles Times, "Ma Bells' Arrogance Multiply." It goes on and on.

What don't we me and them understand about your approach that leads to this flood of material that's available to everybody?

MR. BARR: When you look at the local-exchange market -- traditional-switch telephony, which is how people tend to measure competition, I think wrongfully so, but that's how they do it -- competition goes where the money is. And because of regulation the margins are in the business customers and in certain narrow segments of the consumer market-- basically, the high-value, big-spending individuals and communities. That's where competition is directed.

Most people, or a very large segment in many markets, do not cover their costs of service. So people rarely come in to compete for customers who have no margin. And I think that's one of the principal problems. Competition is focused on the business market.

REP. CONYERS: You know, that's one of the most non-responsive answers you've ever given me in over 20 years, Bill Barr.

REP. SENSENBRENNER: The last happy note, the gentleman's time has expired.

The gentleman from Florida, Mr. Keller?

REP. RIC KELLER (R-FL): Thank you, Mr. Chairman.

Let me direct my first question to Mr. Blumenfeld.

Mr. Blumenfeld, I don't pretend to fully grasp all of this. The one thing I have grasped is I want to make this decision based on what's best for the consumer here. And I'd like for you to address how you see both bills, Cannon-Conyers and Tauzin-Dingell, affecting the average consumer.

MR. BLUMENFELD: Thank you, Mr. Congressman.

I think that the effect of each is fairly clear, and the effect of Tauzin-Dingell is, obviously, radically different from the effect of Conyers-Cannon. It was interesting to hear Mr. Barr say that he thought that his company no longer had market power in the DSL market. As you know, for four years -- almost four years -- I was general counsel of Rhythms Net Connection, one of the three nation-wide DSL competitors.

To the extent that his statement can be true, it can be true only because the unbundling provisions of The Telecommunications Act required his company and others like it to unbundle elements of their network, and the act was focused on elements of the network, not on the services, to allow competitors like Rhythms and others to provide whatever services they want and to deploy, in the words of Congress and the purpose of the act, new technologies to do so.

That's exactly what DSL was. DSL was a technology that was invented by the Bell companies almost 20 years ago. When they saw that the only way that they could deploy it as a customer service at the time was by undercutting their much higher-priced existing services, they took it downstairs and locked it in the basement. The '96 Telecom Act gave Rhythms and other companies like it the keys to that closet in the basement. And we went down there, and we unlocked that DSL technology. We bought unbundled network elements, we bought co-location space, we paid through the nose to do it. And we deployed DSL for the first time ever to consumers. And to hear those companies now talk about the disastrous disadvantage they have compared to cable companies, when they had this technology for almost 20 years -- could have deployed decades ahead of the cable companies ever even thinking about data, could be deploying it out of region now and don't do that -- is kind of a surprise.

So to me, here is the difference between the bills. The Tauzin- Dingell Bill would eliminate the obligation of telephone companies to unbundle network elements that are relied upon, that are necessary, that are essential for data competitors to exist on the telephone network. And so, it would eliminate competition within the telecom sector for data, allowing only competition between a telephone monopoly and a cable monopoly.

Where I got trained in antitrust, competition between two monopolies is not enough. The Cannon-Conyers Bill, by preserving the antitrust laws and by sharpening their focus, would provide consumers with a greater variety of choices, a greater variety of providers, better price and services not only between technologies but within each technology. That's what competition is about in this country.

REP. KELLER: So Cannon-Conyers would be good for consumers, and Tauzin-Dingell would not be good for consumers.

MR. BLUMENFELD: Without question, Mr. Congressman.

REP. KELLER: Mr. Barr, you may have a different take on that same question?

MR. BARR: 1697 would be a disaster for consumers because competition -- the difficulty, as I mentioned, is that competition has been focused on the business market. The competitors have not been interested in going into the residential market because margins are low. And that's why it's very significant that once the Bells get into long distance, there's a big jump in residential competition, as the FCC just reported and said in their press release. That's where the surges come in. However, if this bill were passed, then the IXCs could keep the Bells out of long distance and continue to focus on the business market because the trigger of 85 percent in the consumer market would never be met. So I think it's a bad idea.

Tauzin-Dingell I think is very pro consumer. I never talked about the DSL market. That would be talking like the Delta shuttle market. The FCC has said there's a broadband market, and the two products right now that are the biggest contenders in that market are cable modems and DSL. The cable companies are completely deregulated, and as they said with wide approbation, that in order to invest, they need to be able to derive revenue other than transport revenue, and that's all we're seeking.

The current rules say that if someone wants to just do broadband and not serve in the local-exchange market -- which is what the bill was all about -- they can take our pipe, take our investment, and derive all the value and leaving us just mere transport at telerate (sp) prices. And no one's going to invest under that regime. And people are saying that it's going to cost around $200 billion ultimately to get the kind of infrastructure we need in this country in broadband. That's a large investment.

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

The gentleman from Virginia, Mr. Boucher.

REP. RICK BOUCHER (D-VA): Thank you very much, Mr. Chairman. And I want to join with you in thanking each of the four witnesses for their testimony here today.

Mr. Barr, under H.R. 1697, the Bell companies would be barred from utilizing the benefits of any new legislation that gives them the right to offer new inter-LATA services until such point in time as both their business and residential markets have competitors serving 15 percent or more of those markets. And the assumption of that provision would seem to be that in some way the Bell companies have acted to keep competitors out, to have their markets closed. And I'd like for you to comment on that general assumption and on several facts with respect to the relative share of the local-exchange market that is held today by competitors with respect to the business market on the one hand and the residential market on the other.

So several questions. First of all, are the markets open? Secondly, is there an identical right of access for both the business market and for the residential market by competitors? Third, what percent of the small-business market do the competitors have? I'm told it's something on the order of 35 to 40 percent, which would suggest that it is fully open and competitive. And what percent of the market on the residential side do the CLECs have? I'm told it's something like 5 percent. And why is there this difference? I mean, why, if the markets are open -- as I'm assuming you're going to say -- and if the right of access is the same -- as I also assume you will say -- is there such a difference between the presence of competition in the business market on the one hand and the residential market on the other?

REP. SENSENBRENNER: Before the witnesses answer, let me say that there are two votes scheduled. And then the next round of votes will be about 4:30. We've got about three minutes left in Mr. Boucher's time. I would appreciate you all wrapping it up in three minutes. We'll then recess the committee and come back right after the votes.

Who would like to answer first?

REP. BOUCHER: Mr. Barr?

MR. BARR: Obviously, we believe the market is open and certainly has been certified as open in the states where we've gotten long- distance approval, such as Massachusetts and New York, and we're moving rapidly in that direction in the other states. But as I mentioned before -- and I don't think there's anything wrong with this, it's just that competition goes where the margin and the money is. And because of the pricing system in the retail market that's mandated, the margin is in the business market. So that's where the competition has been drawn.

SBC says that in their major cities 40 percent of the business market has been lost to them. The reported competition in New York is up. Over 20 percent of the business market has been taken from us. The figures are much lower in the residential market. And what the FCC recently reported is, that when the Bells are admitted into long distance, then the residential competition really takes off, and substantial benefits go to consumers as a result.

REP. BOUCHER: I'm told that across the nation, approximately 40 percent of the local-exchange lines going into residences are at rates that are actually below the cost of the telephone company in providing the service to that resident. Is that true?

MR. BARR: I'm not sure about the national picture, but in some states for us it is higher than that, and in other states it's there, and in other states it's not. That doesn't surprise me. In some states over half of our lines are below cost.

REP. BOUCHER: And so, would you agree that there's very little incentive on the part of competitors to serve a market where you can't charge even as much as the cost of providing the service?

MR. BARR: Absolutely. And I understand that two weeks ago before the Senate Judiciary Committee -- I wasn't there, but I understand that Reed Hunt, the former chairman of the FCC, and Pat Wood, the chairman of the Texas commission, identified the primary problem as precisely what you're driving at, which is these local, low-cost retail rates. I think that was described as the primary problem that competition faced.

REP. BOUCHER: And so, it would be, then, an explanation for why only 5 percent of the residential market is in the hands of competitors, that they would rather stake their claim and make their investment in the much more lucrative business market where higher margins can be earned; would that be correct?

MR. BARR: We think that's exactly what's happening.

REP. BOUCHER: And so the bill really is requesting the impossible. That is, that competitors be found in a circumstance where competitors simply don't want to make the investment. Is that a proper conclusion?

MR. BARR: That's right. I think what is triggering residential competition is precisely the Bell entry so that the long-distance companies have to offer packages and have to start selling that local element to consumers. And if that is blocked, until you reached 85 percent in the residential market, that's just not going to happen.

REP. BOUCHER: Thank you very much, Mr. Barr. You've been a terrific witness.

(Laughter)

Thank you, Mr. Chairman.

REP. SENSENBRENNER: The gentleman's time has expired, and the committee stands in recess.

(Recess)

REP. SENSENBRENNER: The committee will be in order. Let me say that the chair has still got his list of who appeared in order, and we will not prejudice anybody for coming back late. But the one person who is ready and eager to ask questions is the gentleman from North Carolina, Mr. Coble, who is recognized for five minutes.

REP. HOWARD COBLE (R-NC): I thank the chairman.

Gentlemen, good to have you all with us. Let me catch my breath.

Mr. Barr, it seemed like one of you all said four states. And I was thinking five states had already received 271 authority. Is that right, five states?

MR. BARR: That's my understanding, three from SBC; two from Verizon.

REP. COBLE: I see. Having said that, a number of other applications are scheduled to be approved in the next year. Many would say, what's the need for legislative action by the Congress today. Some would argue that The Telecom Act in its current form is working.

Let me put this question to you, Mr. Barr. Does the Tauzin- Dingell Bill offer other benefits to the industry in addition to allowing the RBOCs to offer long-distance data services prior to receiving 271 approval?

MR. BARR: Yes, Congressman. There are two parts to that bill. One is the inter-LATA data relief, which you've referred to, which would allow the box to provide long haul for data traffic. The other part deals with broadband access, essentially, the last mile. And what it seeks to do is make the rules that govern cable and the DSL broadband pipe more equitable, more on the same playing field, thus allowing investment to be recovered and for there to be some opportunity to profit from the investment.

REP. COBLE: Well, now who would suffer detriment from such a proposal, if anybody, if anyone?

MR. BARR: I don't think anyone would suffer detriment. I thin it would lead to greater competition and more rapid deployment and wider deployment of broadband.

REP. COBLE: Commissioner Harvill, the competitive industry has complained that the Bell companies are able to use their control over the local loop to hinder their competitive efforts. A) Do you think these complaints are valid; and if so, how about giving us some specific examples of what is occurring?

MR. HARVILL: I think in some instances, as I mentioned in my prepared testimony, that the truth lies somewhere in the middle. Yes, there probably are instances where the ILECs, or the incumbents, are not providing the services that they're required to, and there are probably other instances where the CLECs are overstating the problem. As I said, it's somewhere in the middle.

I would say this. In Illinois we have a continuing problem with regard to the orders that we pass, actually having the companies implement what we've ordered. An example of that is -- and it doesn't matter what the service is, but in this case it was shared transport. The Illinois Commerce Commission ordered a particular product or a particular service to be provided by Ameritech Illinois on five different occasions. The first instance, it took 11 months to reach that decision. Ameritech made a compliance filing. It took another 11 months to actually get to a conclusion on that. Ameritech filed a tariff but refused to actually provide the service. So it was litigation and delay, and that was a particular problem. That problem wasn't actually solved until SBC acquired Ameritech and we made it a provision of the merger approval. So I think that's one specific instance.

REP. COBLE: Mr. Blumenfeld, would you or Mr. Malone want to add to either one of those questions I've put?

MR. MALONE: Yes, thank you. I'd like to just make a comment.

271 relief in any state probably is a free ticket to about a billion dollars of additional revenue for a regional Bell. This is very important to a regional Bell. I don't know if you know, but the average regional Bell figures that in any given year, 70 percent of the growth in revenue that they'll experience over the prior year will come from one service. Think of call-waiting features, think of caller ID. These are ideas that in the years they were introduced generated about 70 percent of the growth in revenue. 271 relief long distance will do that. Look what occurred at Verizon when they introduced it in New York, and you're seeing the same kind of thing up in Massachusetts. No regional Bell in their right mind would trifle with a CLEC as part of a corporate plan in order to try to stifle the competition when you've got the 271 opportunity there in front.

Now, does that mean that out of 500,000 employees spread amongst the regional Bells that there isn't some nut out there? Maybe there is, but it certainly doesn't seem like it passes the red-face test in terms of the concentrated effort to jeopardize that position.

REP. COBLE: Blumenfeld?

MR. BLUMENFELD: Mr. Congressman, again, I think that the issue is not so much is there a concentrated effort as that a company acts on what it believes to be its rational economic incentives to preserve the monopoly it has, rather than to get into a market where they're not competitive. I think the post-divestiture AT&T company shows us how much harder it is to be a competitor in a competitive market than it is to be a successful player in a monopoly market. And I think that, while I have heard others as distinguished as Mr. Malone argue that the rational economic incentive is to give up control of the local monopoly in order to get into long distance, I'm afraid, unfortunately, that most of the Bells believe, in the heart of their business planning, that the rational incentive is to keep the monopoly as long as possible and give us as little as possible, and still get permission to be in long distance.

REP. COBLE: Mr. Chairman, I see that red light --

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

The other gentleman from North Carolina, Mr. Watt.

REP. MELVIN WATT (D-NC): Thank you, Mr. Chairman. It looks like I jumped the line here.

REP. SENSENBRENNER: Promptness pays.

REP. WATT: I should take advantage of it.

Let me do a little poll here so I know where everybody is. I take there are two people on this panel who think these bills are good bills. Raise your hand if you think these bills are good bills.

(Messrs.

Harvill and Blumenfeld raised hands)

There are two people on this panel who think these bills are terrible bills, but think that Tauzin-Dingell is a good bill. Raise your hand if you think that.

But everybody thinks that The Telecommunications Act was a good act. All four of you. And shouldn't be changed?

So two of you think that it ought to be changed when it's one way, but it shouldn't be changed the other way. Two of you think it ought to be changed the other way, and shouldn't be changed the other way. Am I right?

MR. BLUMENFELD: It may appear that way, but I think -- at least speaking for myself, which I'm safest doing -- that the reality is that the heart of the Cannon-Conyers legislation is to clarify that Congress really meant what it said in preserving antitrust jurisdiction-- a point that the Goldwasser court got exactly wrong.

REP. WATT: I take it, Mr. Barr's argument would be that the heart of Tauzin-Dingell would be to clarify not to change.I right? Maybe I'm wrong. I don't want to put words in Mr. Barr's mouth. Am I misstating what your position is?

MR. BARR: No. I think The Telecom Act did not fully anticipate the Internet market, and I think that the Tauzin Bill tries to accommodate that new market.

REP. WATT: So you think Tauzin-Dingell clarifies, and Mr. Blumenfeld thinks Cannon-Conyers and Conyers-Cannon clarifies. But everybody's satisfied with The Telecommunications Act, just not clear.

MR. BARR: I agree with something that you said earlier, I think last year. I think it was your position in connection wit the Boucher-Goodlatte Bill. The Cannon-Conyers Bill changes the antitrust laws. And it does so by incorporating a very complex code of conduct for one industry and making those per-se violations within the antitrust laws. And I believe your position last year was, you were very concerned about taking the general rules that are applicable to everybody and start packing it with industry-specific codes of conduct. And I think that's my concern.

REP. WATT: You remember where I was last year better than I remember where I was last year --

MR. BARR: I think that was your position.

REP. WATT: -- (Laughing) which is not unusual.

So would a credible position be from all four of your perspectives to leave both ends of this alone and let the telecom bill work itself out for a few more years? Is there something wrong with that?

Mr. Malone?

MR. MALONE: I'd like to make two comments, Representative. The first comment, The Telecommunications Act is a great voice act. And as Mr. Barr has just mentioned, it really was not designed to cover data.

REP. WATT: Well, there's some dispute about that, though, isn't it?

MR. MALONE: Well, there is dispute, yes.

REP. WATT: Yes, okay.

MR. MALONE: The second point that I would like to make, though, goes to the Conyers-Cannon piece about 15 percent of the residents market being in the hands of competition before the regional Bells would be allowed to pursue inter-LATA services.

The practical matter is that the competitive, local-exchange carriers really don't want to play in that residents market.

REP. WATT: That actually brings me to the final point. And my red light's getting ready to go off, so let me try to ask the final question.

Is there something that we can do to incentivize all of these players to get into the local residential market as opposed to the local business market?

MR. MALONE: It's a wonderful question. Relative to the competitive, local-exchange carriers, forget about it. They don't want to play in that marketplace. They don't want to play in it for a very good reason. It's not --

REP. WATT: I understand why they don't want to play in it. I'm trying to figure out what can we do to change that.

MR. HARVILL: If I may, I think The Telecommunications Act of 1996 is very clear. And if anything, this is proof that The Telecom Act is working. In the states where the RBOCs have opened up their markets, you're starting to see competition for both business and residential consumers. If it wasn't working, you wouldn't see competition at all. And I think this is testimony to the fact that the act as written is working. And by removing incentives from that act, you're going to see this go in the other direction.

REP. WATT: Well, for whatever reason --

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

The gentleman from Pennsylvania, Mr. Gekas.

REP. GEORGE GEKAS (R-PA): Thank you, Mr. Chairman.

General Barr, the answer you gave to the chairman puzzled me a little bit when he alluded to the fact that antitrust could apply, even under current law. But your fear is that, if one of these bills had been adopted, or would be adopted, there would be an add mixture of the antitrust and regulatory jurisdictions; is that correct? Well, let me back up. Under current law, there are instances, are there not, when antitrust can apply?

MR. BARR: Yes. I think that current law was well described by Goldwasser. I disagree with those who feel that Goldwasser was a departure from the mainstream. What Goldwasser said was I think the three traditional approaches to how you deal with the general competitive statute, like the antitrust laws, and then specific regulatory regimes. And the three principles are these.

One, the existence of the regulatory regime does not in itself exempt the regulated industry from the application of antitrust laws. The case specifically says that, and it specifically says we are not saying there's any implied immunity. So today, even though we're regulated, and ILEC can be liable for price fixing, market allocation, predatory conduct, and it would be a violation under the antitrust laws.

Principle number two. The fact that an industry may violate a regulatory statute that's specific to its industry does not, and never has been, deemed to be necessarily a violation of the antitrust laws. The basic principle is, you violate the antitrust laws if the action would be a violation apart from the regulatory regime. 1698 changes that and says it's a per-se violation, which would mean that under the antitrust laws, you're bringing a host of regulatory disputes.

The third principle is where the real rub is I think. And the third notion, what the court says, is it focuses on a specific claim; that is, the claim of the essential facility. And Mr. Blumenfeld made my point essentially, because what he says is, the antitrust law says that under the essential-facilities doctrine you need reasonable access. And what the court said, was when Congress has passed a specific law tasking an agency to determine precisely the same issue -- what is reasonable access, how should it be given, on what terms, what are reasonable terms -- and the agency has a comprehensive scheme where it's addressing those questions, then it must be given precedence over courts and juries deciding the question otherwise. And saying, well, we don't think interconnection should take place in 90 days; we think it should be 45 days. You can't have two hands on the steering wheel.

REP. GEKAS: So that if an action were taken under current law against your company or a company like yours on antitrust, you could interpose a defense that under The Telecommunications Act and the regulatory scheme, that's covered in a separate jurisdiction.

Is that what you're saying?

MR. BARR: No. I'm saying, some claims we would not have any kind of defense on; we would be subject to it just like everybody else. On the other hand, if we were doing something because we were told to do it by a federal regulatory agency acting under a congressional enactment, then we would have --

REP. GEKAS: Like The Communications Act.

MR. BARR: Well, no, the specific act. In other words, price fixing, for example, we're regulated, but that's an act that's not authorized. But on the other hand, if we're charging an UNE price that's specifically approved by the FCC, we shouldn't be liable for that.

REP. GEKAS: And under the proposed law you would be subject to that liability; is that what you're saying?

MR. BARR: Yes. You could read the proposed law that way. But the main problem under the proposed law is that these policy disputes as to what reasonable access is -- which is supposed to be decided by the FCC on a coherent basis; that's why the act was partially adopted -- is not going to be kicked over to juries and plaintiffs' lawyers and customers to decide piecemeal in the hodgepodge of litigation. And you can't have a coherent policy if you have two hands on the steering wheel.

And this is the basic doctrine in what's called primary jurisdiction, where Congress has an expert agency, tasks it with doing something, sets up a specific enforcement mechanism. That should take precedence over other remedies. Now, Goldwasser did not deal with a suit by a competitor; it dealt with a suit by a customer. And what the court said was, a customer has a much higher hurdle wading in here, because ultimately their claim is that the rate is wrong; that the rate should be lower. And under the filed-rate doctrine of the Supreme Court, which has been Black-letter law for a long time, the court's right.

REP. GEKAS: I have no further questions.

MR. BLUMENFELD: May I respond briefly to that comment?

REP. GEKAS: Yes, certainly.

MR. BLUMENFELD: And I'll try to stay within my time.

I recognize that Mr. Barr was the attorney general. And I hate to say this, but he has, unfortunately, just overturned many decades of antitrust law, for several reasons. First of all --

REP. GEKAS: First time.

MR. BLUMENFELD: (Laughing) And this is the place to do it, certainly. But first of all, it has always been true under The Communications Act, even before the '96 Act was passed, that a person who felt that a regulated carrier had violated The Communications Act had a choice of enforcing that act either in the courts or at the FCC. So that's always been the law; that's nothing new.

Second of all, throughout the history of antitrust litigation in this industry, it has always been litigated against the background of telecommunications law being formulated by the FCC with very specific regulatory requirements, including those about interconnecting networks. Nevertheless, the antitrust courts have always been free to conclude, as every court that's looked at it, including the Supreme Court, have repeatedly said -- have always been free to conclude that a company is violating the antitrust laws even though it's regulated.

One of the better wits on our staff when I was trying the AT&T case used to describe this defense by the Bell system as the defense of "regulation means never having to say you're sorry." But what the courts have correctly said is that, what you're doing is violating the regulatory commandments. You can hardly say that that regulatory commandment takes precedence over the antitrust law. And that itself should and is evidence of the anticompetitive activity.

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

The gentleman from New York, Mr. Weiner.

REP. ANTHONY WEINER (D-NY): Thank you, Mr. Chairman.

General Barr, will you help me with a philosophical issue? If we assume for a moment that our nation's policy should be to encourage competition, both competitions in the DSL market and competition in the global broadband market -- so you're the giant in the DSL market, but you're relatively small in the overall broadband market. But if we look at the '96 Act, aren't you guys the perfect example for why we shouldn't touch anything? You've gone through the process. You've done it well, an arduous process admittedly. You've done your checklist. You've come to states like my home state in New York and shown people that you're willing to compete, although it was difficult and expensive to do it. As a result, according to the Wall Street Journal piece that Commissioner Harvill just held up, there is increased competition for DSLs. There are cable companies throughout the country who have a big advantage of you, admittedly, of passing many more homes who are delivering broadband. In some areas like mine, I've got broadband choices. I've got yours because you hit my block first, and now I'm going to try out the one from my local cable company.

Why is it that this is not exactly the way things should be working? I mean, as it is, you're all going to get your butts kicked when satellite gets its deal in order. We are notoriously bad in this House of deciding who the big guy is. In the '80s, the big guy was the phone company who was going to squash the not so big guy cable company, and now the cable company is the phone company.

So I guess what I'm asking is, don't we have an opportunity now to kind of look at the way things have played out? Because you know what? All things being considered, it kind of worked the way we hoped it work, with some glitches, but it's kind of worked the way we'd hoped it work.

MR. BARR: I think that this is a dynamic marketplace, and a lot depends on what market we're talking about. And looking at this from an antitrust standpoint, that's the first question-- what's the market? And I would agree with you generally philosophically as to the voice market; that is the local-exchange business that these rules were initially adopted to deal with. I'm not happy with them. I think the FCC went overboard. I think a lot of what's happened is that they were subsidizing competitors, and I'm not happy with the regime. But I agree that it's chugging along, results are starting to be achieved, and I'm not here suggesting that that be fundamentally changed.

But looking ahead to the telecommunications market of this century where there's convergence going on and a different market is taking shape, where content and telecommunications is going to merge into a high-bred market so that people will be offering content with a telecommunications component, I think it's very important not to distort that market at the beginning and give undo market power to any player. I agree, you should be neutral as to technology. Let the telesatellite people come in, let the fixed wireless come in, let the cable people compete, even though they're coming in with major advantages in market share at this point. But don't handicap the local telephone company in that emerging future market.

I view this somewhat as the wireless market. We originally had two players coming in. It was a duopoly initially, third, fourth, fifth. Look what's happened-- an explosion of new services, prices have dropped dramatically from the early days. It was that early concern that somehow the local company if was allowed to go into wireless would somehow leverage that. That didn't happen.

REP. GEKAS: But isn't there a pretty good argument, looking at the Verizon example, that there isn't anything about the '96 Act that is inherently tying your hands and constricting you so much. You have the ability to go deliver DSL service. The only question is, do you help along these other guys who, frankly, couldn't exist -- I mean, is it fair to say, a lot of the players in the DSL market, besides yourself, would cease to exist if they didn't have the advantages or the leveling of the playing field that was granted to them in the '96 Act?

I mean, for Verizon, of all folks, who've learned to do well -- and maybe you're, for the purpose of this question, a victim of your success. If you look at the five states that you've gone through the process, well, in fairness, everyone has benefited.

And it's caused you a little more aggravation than anyone else, but it has worked. So I'm talking about the broadband marketplace; I'm talking about the telephony.

The problem is -- it seems to be making the argument that you're hamstrung by this process so much, yet, when the process does play out -- and within a year, according to testimony, it's going to be played out nationwide -- we'll have all worlds. We'll have the Bells, we'll have the Bells' competitor for DSL, we'll have cable that's going to continue to have its penetration, and we're going to have technological investments going on in satellite, and then everyone benefits.

MR. BARR: Well, let's ask ourselves the question. Why isn't cable, when it comes to the Internet right now, why isn't it an essential facility? Why aren't there courts where people are saying, gee, you have to carry it? The reason is because the telephone exists.

Now, our point is we're not an essential facility when it comes to the broadband market. Either we both are or neither are. And we're not; we're competitors. And yet, the rules that apply to us say that we cannot make a profit on any investment. This is not like the local-exchange business where you have a relatively stable, legacy, network structure. We have to make a lot of investment. And to make that investment, that's a persuasive argument.

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

Gentleman from Arizona, Mr. Flake.

REP. JEFF FLAKE (R-AZ): To those of us who are afraid of applying antitrust to even more places, we're told that this is simply a stick, and it will likely not be applied here, just threatened, and that that will carry the action needed.

Mr. Blumenfeld, can you address that? How often do you think you foresee antitrust actually coming in and actually being enforced here or just threatened?

And them, Mr. Barr, if you could give your opinion as well.

MR. BLUMENFELD: That's a very good question. I mean, first, I think it's important to recognize that what the bills before the committee are talking about looking specifically at antitrust enforcement where the conduct violates The Telecommunications Act. So the bills are not attempting to say that even conduct that complies with the act might violate the antitrust laws. Although, frankly, the antitrust laws do say that because they're independent jurisdiction. So the bill does nothing to change the antitrust status of conduct that complies with The Telecommunications Act.

Secondly, antitrust law is a very effective remedy both where it is brought, but even more than that, where there is a possibility of it being brought. Firms are more likely to conform their conduct to the antitrust requirements than they are to the regulatory requirements because the penalties are so much greater. The history of regulation in this industry is that you cannot enforce regulations enough to create competition. Commissioner Harvill talked about that to some extent. And even where fining is involved that's true. I know that Chairman Powell proposed increasing penalties to $10 million for violation. Not to pick on Mr. Barr's company, but they reported Year 2000 revenues of roughly $63 billion. That's roughly $173 million a day. A ten-million dollar penalty is something like less than two hours revenue. Put another way, for a family with a $63,000 income, that's a $10 fine.

So the regulatory process is not enough. It takes antitrust exactly because not the fact of an antitrust inquiry, but the effective remedies that are available on the antitrust laws do provide a strong incentive for compliance. That's why the antitrust laws have always been a significant part -- the most significant part perhaps -- of creating competition in this industry. That's why as a proponent of this I think it is important to ensure that the antitrust laws continue to apply. And that's, frankly, why the ILECs are not pleased about the notion that they would still be exposed to antitrust liability, even with the existence of the '96 Act.

I don't think it would be frequent in actual lawsuit terms, but I think it will be effective because of the remedies that are available, both the government remedies of further divestiture and of specific conduct requirements, as well as the threat of trouble-damage actions from private plaintiffs.

MR. BARR: I think that the exposure to the trouble damages and the per-se rule that would be adopted in this -- per-se violation of the antitrust laws -- would be highly destructive of competition in The Telecom Act-- three specific ways.

These claims, as I say, come up in policy context. Gee, you're not obeying the law because you're not giving us 24-hours access. Gee, you've run out of space. You have to add new space; it's your obligation. Gee, you have to add new space. It's your burden to go and get the zoning permit, not ours. It's unfair competition to force us to do it.

All these issues come up, and they're resolved by the FCC in a coherent way. This will make those decisions decided by juries all over the country; and therefore, we'll have a hodgepodge.

Second, it will disrupt the expeditious process for resolving these things and getting on with life on a no-fault basis that the FCC has put into place. Currently, as I say, we have to meet certain criteria. If we miss, we pay a fine. And while our overall revenues are very healthy -- obviously, as you know -- the net revenues are what count; it's the profit that counts, and these have a major impact on our net revenue.

Now, what this would do is cast the whole thing into a litigious, fault-finding blame game instead of the way the FCC has it, which encourages cooperation. We are a wholesale provider. We have a customer relationship, and these people are trying to shove it into a contentious, litigious relationship.

The third way it will hurt is just the burden of litigation risk it exposes us to. Moving to new technology, putting in fiber raises a host of new questions on unbundling. How do you unbundle fiber? Fiber's inherently different than cable. It's hard to sequest (ph) through a piece of the fiber and say this is going to be unbundled. There are all these new issues that come up when you put in new technology and new capacity. And yet, these are precisely the issues that claims come in. Oh, gee, you're not following act because you haven't followed this, or you should apply this rule to this. So any change in the way we do business, especially into these new, riskier technologies, will create massive litigation risks and destroy the incentive that the act was designed to achieve.

REP. SENSENBRENNER: The time of the gentleman has expired.

The gentlewoman from California, Ms. Lofgren.

REP. ZOE LOFGREN (D-CA): Thank you, Mr. Chairman. I first wanted to thank the chair for scheduling this hearing in such a prompt fashion as soon as the referral was made. I think it's very healthy that this committee is looking at these important and I think somewhat complicated issues.

I was thinking listening to the debate and the questions from my colleagues that we're all really believers in the free market, but markets can be defeated in a lot of ways. I mean, you can defeat markets by over-regulating, but you can also defeat free markets by the accumulation of market power in the private sector and the use of that power in a way that is unfair to competitors. And we don't want either extreme; we want actual free markets.

So I guess the question I have listening to this is that everyone agrees that -- at least if I'm hearing it correctly, no one is saying that the '96 Act was a mistake; that we shouldn't have gone forward with that. But it hasn't quite done everything we wanted to do. And the question is what to do about that fact.

I remember when we looked at the act -- the Judiciary Committee had a role in it -- and then antitrust whiz, Ann Bingamen (sp) argued very strongly to us that the Justice Department should have a much bigger role in the act then was ultimately concluded.

I'm wondering, Mr. Harvill, if you believe -- I mean, obviously, we have not had the kind of competition that we'd hoped we would.

And I heard and listened with great interest to Mr. Malone's comment about some of the start-ups, and maybe they weren't such good business people, and they had turnover. And I think there's some truth to some of those comments. But we've also heard -- not on this panel today so much, but we've heard in real life and seen that some of these companies have litigation departments as big as engineering departments, and the Covads and NorthPoints are really limping today, and they really had a hard time getting the act complied with.

So I'm wondering, Mr. Harvill, if Ann Bingamen's suggestion of a greater role for the Justice Department Antitrust Division had been included, would that have assisted in the efforts to bring competition -- especially broadband -- in your judgment.

MR. HARVILL: Thank you for the question. It's a very good question.

The Telecom Act, as I said previously, I think created clear paths for the ILECs to get into the long-distance market. I believe that, obviously, the pace is not quite what we had expected. We're on that path, and we're going to get there. We're going to get there in Illinois, and I'm assuming we're going to get there across the country eventually. One of the nice things about the '96 Act was the fact that it provided incentives for the ILECs to open their markets, and that us, obviously the carrot of getting in the long-distance market.

The problem is, as we sit here today, there's no penalty if the ILECs choose not to comply with that. If the ILECs choose not to open their local markets, obviously, they don't get into the long-distance market, but there's no real penalty.

So I think anything that you can do to increase the incentives -- and I'm big on incentives here. You try and put incentives in place as opposed to penalties. But anything you can do to incent them to open their markets up to their competitors is one of the best things that you can do. Hindsight's 20/20. Obviously, maybe if you would have done that, things might have been different. But we deal with the reality of what we have today.

REP. LOFGREN: The second question is really for Mr. Barr. And that has to do with the incentives for deployment in rural as well as inner-city areas for broadband. In the Conyers-Cannon Bill there is a provision that has a loan scheme that would assist or make available the roll out of technology in those underserved areas. And my understanding is that Mr. Dingell had an amendment that required build out in the Commerce Department Bill.

Which of those two approaches do you think is preferable, and will either one of them actually work in your judgment?

MR. BARR: I think the best way to approach it is through a technology-neutral approach; that is, not take any one type of provider, such as a telephone line or a cable line, but try to have the most proficient provider address these areas. In some of these communities -- for example, rural -- satellite would be more efficient.

So I think a carrot approach involving loans, tax credits --

REP. LOFGREN: I don't want to interrupt you. But actually, the Conyers-Cannon Bill I don't think is specific technology. It talks about providers of broadband, not a specific type of provider.

MR. BARR: Right. And therefore, I think that that is a good approach. I also think there should be an examination of the use of the excise-tax revenues and other things to provide a carrot to have, really, a race to get those kinds of benefits out to those communities.

REP. SENSENBRENNER: The gentlewoman's time has expired.

The gentleman from Georgia, Mr. Barr.

REP. BOB BARR (R-GA): Thank you, Mr. Chairman. I'd like to begin by thanking you and the staff for putting together an outstanding panel today. The witnesses have provided both a broad policy and legal framework within which to consider this legislation, and all four of them have demonstrated a very keen grasp of the specifics and the legal and mechanical issues involved. It really is one of the very best panels that we've had on this or other legislation.

I am particularly intrigued by the back and forth between Mr. Barr and Mr. Blumenfeld. And it really does, as I think Mr. Barr indicated, illustrate that what we're talking about here are policy differences. I think you can see in the two witnesses different approaches of different administrations with which they have been associated. And we really are talking about fundamental policy differences.

And I share some of your concerns, Mr. Barr, that if you look at the areas in which both H.R. 1697 and 1698 take us in tandem, they would seem to expand the power of the Department of Justice in several areas, including the antitrust area, with the per-se violation provision that you've dealt with. And in both of these areas, 1697 and 1698, expanding the power of the attorney general in areas involving decisions regarding market power as well as in the per-se violation, that these are at the expense of the proper role of Congress in setting the policy and the laws.

And I'd like your thoughts with regard to whether or not these are unique forays by legislation, are these unique areas, are these unique approaches, as this is the first time in any industry that is regulated by the Congress that we would be seeing this per-se rule and the ability of the attorney general to override, basically, congressional power, and where you see that taking us in, perhaps, some other areas as well in terms of its precedent-setting value.

MR. BARR: Yes, Congressman. I think it is unprecedented in several respects, and one of them is the finding that violations of regulatory regime are per-se violations of the antitrust laws. Per-se violations of the antitrust laws are very rare. They are reserved for Section 1. There are no per-se violations for Section 2. And this basically trivializes the antitrust laws by taking any regulatory violation, including technical violations, and treating them as per-se violations of the antitrust laws.

Also, I think what is unique here -- and I may be wrong on this, but certainly in my memory -- Congress passed this law against the backdrop of antitrust enforcement. The industry was run by an antitrust consent decree administered by Judge Green. So there had been a history of antitrust enforcement, but Congress was specifically trying to substitute a coherent regulatory regime run by an expert agency and have a coherent national policy. So that's why the MFJ -- the antitrust results of all this antitrust enforcement -- was removed and the legislation was substituted along with a very specific regime that involves process, that involves coordination with the states, that involves an expert agency. And what this does, essentially, is with a sweep of the hand, turn this all over, not to a Judge Green, but to 850 Judge Greens around the country. And more importantly, because these are frequently fact questions, turns it over to juries all over the country.

What Congress did in the act was it took certain fact finding and turned it over to be legislative fact finding by an administrative agency. We all know the distinction in administrative law between adjudicative facts and legislative facts. And what Congress did was say, we want an expert agency to give a coherent policy through this fact-finding process. What this does is turn it all in to case-by- case, adjudicative fact finding by juries. It is a complete retreat. It will lead to a throttling of the progress that has been made to date under The Telecom Act, which I would not underestimate.

I would urge the committee to go back and look at the progress of competition in the long-distance market and compare it to the progress of competition here. I would urge the Congress -- this committee -- to go back and look at competition in cable, and when was cable deregulated. What was the level of competition that led this body to deregulate cable from soup to nuts? There's a lot of competition out there right now in the local market.

REP. SENSENBRENNER: The gentleman's time is about ready to expire. And I'm afraid that if we wait until after the 4:30 roll calls, nobody's going to come back.

Gentleman from Massachusetts, Mr. Delahunt.

REP. BILL DELAHUNT (D-MA): I thank the chairman, and I probably won't use my full time. So if the gentleman from Georgia wants to ask that final question, I'll yield to him the balance of my time.

Mr. Blumenfeld, Mr. Barr makes a point about the issue of competition and the progress -- the apparent progress -- that has been made. I think it's by the Year 2002 -- I've seen it somewhere in some memorandum -- it's likely that there will be some 20 states that the Bells will be allowed to provide long-distance service. I mean, what implications does that have in terms of the Conyers legislation, in terms of what position we should take?

MR. BLUMENFELD: Thank you, Congressman. I think, actually, it has important implications for our understanding of what's going on here. Mr. Barr said earlier that where ILECs obtain competitive entry, competition flourishes. I think he has reversed the cause and the effect.

The point of 271, and the reason that process has worked as well as it has, is not, I think, as originally envisioned because it provides the ILECs a strong incentive to open their markets. As I said, I think their incentive is to open their markets as little as possible and still get long-distance authority. has worked in practice is because of the process that it sets up. It sets up a process under which, first, the local regulators, and then the FCC, with the participation of the Justice Department, have to make very close determinations of whether the companies have opened their markets to competition enough. And in the course of that process, all of the states have adopted, and the FCC has adopted, a set of processes to look into that.

REP. DELAHUNT: And you're satisfied with those processes?

MR. BLUMENFELD: Yes, exactly. And those processes are working. Those processes produce market-opening behavior, which in turn frees the ILECs as it should to go into long distance and opens the markets to competition.

REP. DELAHUNT: And you're suggesting that Conyers-Cannon would be that spur, if you will, in this situation?

MR. BLUMENFELD: That's right. And most certainly, we should not eliminate the requirements that are embedded in 271 or 271 itself.

REP. DELAHUNT: Taking back my time, Mr. Barr, do you want to --

MR. BARR: Well, I think this proves my point. Conyers-Cannon isn't the law. And yet, in state after state, despite all these complaints of misconduct, the authorities are saying, you're meeting your obligations and letting us in. Moreover, after we're let in, contrary to the supposition there would be backsliding -- I saw Pat Woods said there hasn't been backsliding; if anything, it's been improved performance by the ILECs after they're let in, and competition takes off.

Let's look at for us tax. A lot of people in New York, they never hear from the IXC. They don't know they have a choice. Anyone in New York -- anyone in Massachusetts -- can pick up the phone today and have an alternative carrier, anybody. But they never hear that.

REP. DELAHUNT: The fact that competition opens up, what is the impact, therefore, in terms of the RBOCs as it relates to the Tauzin- Dingell Bill?

MR. BARR: Well, I think that there's a superseding market that is developing, and that's broadband. And that's where a lot of the value is going to be. As the voice market is commoditized over time and prices are drive down to their incremental cost, no one invests money just to get their incremental cost back.

REP. DELAHUNT: No. But in the case of telephony -- of that's the correct term -- I mean, really, what we're talking about is a lost leader. I mean, I wouldn't think that Verizon is going to complain substantially about having market share in terms of the traditional telephone because it presents opportunities to promote and market other services-- DSL, all the Internet services that would be embodied in broadband activity.

MR. BARR: I thought you were talking about moving into the broadband market.

REP. DELAHUNT: Right.

MR. BARR: And that is where margins should be higher and returns should be higher because it's a riskier new business, it requires more investment-- new products, content. There's a host of things that people demand that we can supply in competition with cable. And we think that's going to be the marketplace of the future. A lot of companies are not going into providing local telephone competition; they're looking ahead, and they're leapfrogging, and they're putting their investment in broadband and new technology. And we want to be competitors in that market, and we think that's the right policy for the country, to have maximum competition. We think that if you distort it now, and the market is turned over to the cable companies, which we think there is a risk of, then three years from now you'll be sitting around trying to figure out what to do with the cable companies.

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

The gentleman from Michigan?

REP. CONYERS: Unanimous consent to include these several articles in proceedings.

REP. SENSENBRENNER: These articles will be included in the record if no objection.

Without objection, so ordered.

The gentleman from California, did I interrupt you in the middle of a sentence, Mr. Delahunt?

The gentleman from California is recognized for five minutes.

REP. DARRELL ISSA (R-CA): Thank you very much, Mr. Chairman.

Mr. Barr, you know, when I was a kid growing up, I always was told be careful what you ask for. And I think what I'm seeing here is what you want to do is have it both ways. You want to have the advantages of retaining your monopoly. You want to tell us that there isn't enough market to support lots of CLECs; that clearly there can't be enough, so we're going to have to have more or less a monopoly or duopoly or something akin to it, with very little competition. And then at the same time, if I understand what's been said here, you want to say that you have this incredible competitor over on the other side called cable, and if we don't help you, if we don't essentially free you up very quickly, you're going to have your clock cleaned by cable. And it's somewhat interesting because I hear there's not enough market, and then I hear, but on the other hand we're in a competitive market because of one other monopoly of some sort that exists in each of your markets.

Which is it? Is there enough market, that aggressively all the 280 million Americans who want broadband will use, what should logically be one-plus speeds? Is that a market we're going after at $39 a month, or isn't it?

MR. BARR: Well, you, obviously, misheard me. And it's probably because I wasn't clear enough. What I was saying -- CLECs and other companies can come in and compete for local-switch telephony. I don't know how many competitors, the right number of competitors -- I don't know how much the market will support; that's for the marketplace to decide. And there are hundreds of CLECs out there all trying to make their plans work. And we are meeting our obligations to the extent that they want to rely on our facilities.

So I'm not suggesting -- first, I don't think we have a monopoly anymore. And second, I'm not suggesting that it has to be a monopoly or duopoly or that there's not enough business there to attract new entrants who can be successful.

What I'm saying is, that the market and technology have a funny way of moving. And that the marketplace is evolving.

And what's taking place is I think a superseding technology where cable and telephony are really sort of blending into the same offering, which is a broadband offering, very rich in content, video offering where telecommunications will be an embedded functionality-- voicemail conferencing, videoconferencing, voice telephony and so forth. And this is all going to be part of a unified offering, and that this is naturally a competitive market. Today, it's a competitive market, and they are promising technologies that will mean it's even more and more competitive over time. And we want to participate in that marketplace, and I think it's good policy that we be allowed to do so.

REP. ISSA: To the extent that you say you want to participate, I'm a little confused because Verizon has recently pulled out of the California market. What would be your reason for wanting to put out of the richest market in America?

MR. BARR: Are you talking about selling the video business?

REP. ISSA: Yes.

MR. BARR: Yeah. Well, that, you know, please focus on this. What I am saying is precisely that you have a convergence of technology. To compete against cable it would be prohibitively expensive for us to come in and overbuild -- that is, build a new cable system from scratch -- when we already have a wire into the home. That's why we invented DSL so we could compete with cable. And so, how we want to compete with cable is to fit our system to compete with cable over our system. Cable wants to compete with us by doing the same thing.

REP. ISSA: Okay. Well, if I can --

MR. BARR: So that's what we want to do. We want the telephone to compete with cable and cable to compete with telephone. That's the way I think everyone anticipated it when the act was passed. That's the way it should be, and the rules should allow both to happen.

REP. ISSA: And if I can follow up with another question since my time is so limited. Would it surprise you -- and this happens to be in California where you have chosen not to compete --

MR. BARR: No, we want to compete. We just don't want to compete by building an analog video system; we want to have a broadband offering.

REP. ISSA: I understand. Would it surprise you to know that within a two-mile area DSL is not available even though T-1 lines are available in large amounts. The cost of an Internet connection at T-1 speed is about $800 a month. Well, the cable companies are supplying two -- roughly twice T-1 speed for $49.

Would you say that a market in which a consumer is paying $49 for T-1 times 2, and a business next-door is paying $800 for T-1 is a dysfunctional market at this time?

MR. BARR: Well, you're sort of making my point, which is we want to configure our network through investments, substantial investments, so we can offer a broadband offering at the most efficient price. That requires massive investment. The reason cable has made that and can make that investment is because they get it back. The rules are that we don't get it back.

REP. ISSA: Back to my original question. If I heard you correctly -- and I think I have for a second time -- you're really arguing that you'd like to go back, at least in broadband, to being a monopoly and able to compete one monopoly against another --

MR. BARR: How --

REP. ISSA: Wait a second. This is my question. My time is expiring. I think you are clearly saying that cable is your competition; you need to have a monopoly to compete. Is that correct, yes or no?

MR. BARR: It is a complete and utter nonsequitur to say that two monopolies are competing with each other.

REP. ISSA: I'll take that as a nonresponsive answer, Mr. Chairman.

MR. BARR: If two companies are competing with each other, by definition it's not a monopoly.

REP. SENSENBRENNER: The gentleman's time has expired. The gentleman from Florida is recognized for five minutes.

REP. ROBERT WEXLER (D-FL): Thank you, Mr. Chairman.

To Mr. Blumenfeld and Mr. Barr, I just want to acknowledge that, at least from my point of view, it's been actually wonderful to listen to both of you and learn from both of you. You're both excellent advocates for your cause, and I really do appreciate what you've been saying.

Mr. Blumenfeld, I was struck by your analogy that you gave at the beginning with respect to your children and playing the piano, and you setting up the standard of practicing for an hour and so forth. But in fairness to your analogy in the context of your advocacy for the bill that you're here about, wouldn't the more appropriate analogy be -- you said the standard for an hour for your kids to play the piano, and then they can go out and play. Forty-five minutes into their practicing your wife comes in the room, maybe doesn't like what she hears and she says, an hour's not going to be good enough; practice for an hour-and-a-half.

It would seem to me that would be a closer analogy to the bill than your original analogy. And if I could just follow with that. I'm privileged to represent the state of Florida. If I understand the facts in Florida correctly, Bell South has lost upwards to 900,00 people in terms of local customers. That suggests to me -- if I understand the standard in the act -- it's open; there's competition. Not figuring out a specific percentage, but that suggests to me it's open.

Understanding that you and Mr. Barr have a different view of the past behavior of the Bell Souths of the world in terms of why or why not there's competition, would you agree with Mr. Barr's assessment that once the Bells are able to get into the long-distance business that at least at that point then, competition in the local market increases?

MR. BLUMENFELD: Congressman, I believe that competition in the local market increases because the Bell has finally complied, by and large, with the requirements of the act, which have resulted in the marketing opening and have also resulted in the Bell getting into long distance. If the question is, does their being in long distance introduce another long-distance competitor, obviously it does.

REP. WEXLER: Okay. So following that, then, if under the current law when the Bells comply, and then they are allowed to get into long distance, and then competition in the local business gets greater, then why would you be here advocating for, yet, another hurdle for the Bells to get into the long distance? If open market is enough, then why do we want to have a specific market-share requirement as well?

MR. BLUMENFELD: I think that is a difficult question under the act. As I understand the provisions of the Conyers-Cannon Bill, the point is to say -- the way that I read the provisions acting together, the point is to say that the determination of market opening is based on a sort of a traditional analysis of whether or not a market is open. But that if the Bell retains a share of 85 percent, that that would prohibit a finding that the market is open. That 85 percent, I should note, is a higher number that has appeared in a number of antitrust cases that have looked at market share.

It is certainly not crucial in the antitrust laws to have a particular market share, but market share is meaningful. It is hard to believe that you have a structurally-competitive marketplace if one provider has virtually all of the customers because in a structurally- competitive marketplace one would envision customers making choices among providers over time. And so, that share should logically come down over time.

But the most important thing is to not gut the exact provisions that have created the opening in the marketplace. That is, you can't say, as I think Mr. Barr would like to, once we've opened the market we can get rid of the rules, and once we've opened the market -- or actually before -- we can get rid of the antitrust laws so long as it's something in the jurisdiction of The Telecom Act because that way we have a nice orderly regime. That I don't see at all. And that will not create competition.

REP. WEXLER: Mr. Malone?

MR. MALONE: May I just make one comment. I spend a lot of time in Florida dealing with CLECs and customers there. A very important point that we found. We interviewed 30 competitive, local-exchange carriers to find out both before 271 and after 271 did the CLECs feel that the regional Bell operating companies were encumbering their performance. Now, we didn't talk to lawyers, lobbyists or people like that. What we talked to, was we talked to the operating managers, the CEOs and the top officers and the workers inside the company. And here's what they said.

Twenty-eight out of 30 companies said that the regional Bells are not the problem with running their business. They don't have performance issues with the regional Bell at the rank and file level. What they have is they have problems inside their own company, and they're working their way through them. And that's both before 271 and after 271. The facts seem to suggest that the regional Bells are not running roughshod.

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

Now, let me ask for a show of hands of how many members wish to come back after these votes and ask questions? One, two, three, four, five.

I would ask the members to come back promptly, because I believe these will be the last votes of the day. The committee is recessed for the votes.

(Recess)

REP. SENSENBRENNER: The committee will be in order.

The chair recognizes the gentleman from California, Mr. Schiff, for five minutes.

REP. ADAM SCHIFF (D-CA): Thank you, Mr. Chairman.

I'd like to pose a question for Mr. Barr and also for Mr. Blumenfeld.

Mr. Barr, looking at the Goldwasser decision there seems to be some internal inconsistency in the court saying on the one hand that our principal holding is not that the 1996 Act confers implied immunity on behavior that would otherwise violate the antitrust law; such a conclusion would be troublesome at best given the antitrust savings clause in the statute. And yet the court goes on to say, nevertheless, when one reads the complaint, all these allegations appear to be inextricably linked to the claims under the '96 Act. And even if they were not, such a conclusion would force us to confront the question of whether the procedures under the '96 Act for achieving competitive markets are compatible with the procedures that would be used to accomplish the same result under the antitrust laws; in our view, they are not.

So on one hand it says, we're not finding that they're incompatible, and on the other hand it says, we're finding that they're incompatible. And I wonder if you could address that.

And if I could pose a question to Mr. Blumenfeld at the same time. Assuming that the court erred, isn't the remedy to provide that an antitrust claim is not otherwise superseded rather than going beyond that and saying that any act that would violate the '96 Act also constitutes an antitrust violation. Is that what the bill does, and doesn't that go beyond remedying any flaw in the court decision?

MR. BARR: That's an excellent question about these paragraphs that deal with what I call the third point in Goldwasser. And I think the key to it are the paragraphs that begin, the only question that remains under the antitrust law, and then goes on through the ensuing paragraph. Because what the court's doing there, is after it's making its first two preliminary points, which are, there's no general immunity, and what's a violation of a regulatory regime is not necessarily a violation of antitrust, then it's focusing on the specific claim that there's a violation of essential facility doctrine. And the ensuing two paragraphs are all focused saying, look, your remaining claim is the essential-facilities doctrine under which the argument is that there has to be reasonable access. But the statute we're dealing with is specifically designed by Congress to define that reasonable access.

Therefore, the statute is addressing exactly the same subject matter, and Congress has made a decision that the FCC shall determine what is reasonable access and on what terms. And where you have precisely the same subject matter being addressed -- and that's what they say at the end of that second paragraph I pointed to -- it's in that situation that you have to give precedence to the specific scheme; otherwise, who decides? I mean, that's fundamentally what the court's saying here-- who decides what's reasonable access?

REP. SCHIFF: Are you reading the act then in the savings clause to mean that whenever you're dealing with a telecommunications issue outside of the parameters of the '96 Act, the antitrust laws are not superseded, but when you're within that area, they are superseded?

MR. BARR: No, I'm even being a little bit more generous to the antitrust law than that. What I'm saying is, there is no general exemption from the antitrust laws, even on matters that are subject to The Communications Act. However, when a specific matter, such as the reasonableness of access, has been addressed in the statute and the FCC has been charged with making that determination, then that has to be given precedence over a general directive of the antitrust law. All the antitrust law says is, that if it's an essential facility, there has to be reasonable access. Well, that's not very enlightening. That doesn't tell you whether it's 45 days, 90 days and what the scope of that obligation is.

Where Congress has specifically said, Section 251 is all about what is reasonable access. The FCC should go not only up through the essential-facility requirements but beyond them if it wishes. And it shall make those determinations and shall do so in consultation with the states, and have one national policy that when you have a specific, later-enacted regime that is directed at precisely that question that's addressed in the antitrust law, then it has to be given precedence. That's all the court was saying.

REP. SCHIFF: Mr. Barr, if I can interrupt you for a second because I do want Mr. Blumenfeld to address the second half of the question.

That is, if there's a problem in the court decision; does the remedy go too far?

MR. BLUMENFELD: Thank you, Congressman. I think in addition to the two pieces of language you read, you have to look at the ending of the first paragraph -- I'm sorry. The ending of the paragraph you were reading from, the '96 Act in short. There's more specific legislation that must take precedence. This is Mr. Barr's theory that the '96 Act has somehow displaced the antitrust laws on specific conduct that's subject to the act. That is the essence of an implied immunity, which is just flat wrong under the antitrust law.

If it goes too far -- and I have no question that the Goldwasser case is wrong -- it is certainly correct that paragraph 28 of the proposed legislation specifically addresses that issue. It's paragraph 29, as I understand it -- which is the gist of your question -- do we need the additional paragraph 29 to say not only that, but where there is a violation of the act, that is a per-se violation of the antitrust law.

And I think if the committee wants to consider whether the additional provision of paragraph 29 is necessary, or whether, perhaps, the committee might want to restate it in terms of shall be considered, shall be presumptively admissible, shall be taken as indicative of unreasonable conduct, I think that any of those approaches would certainly be consistent with what the antitrust laws would.

REP. SENSENBRENNER: The time of the gentleman has expired.

The gentleman from Utah, Mr. Cannon.

REP. CHRISTOPHER CANNON (R-UT): Thank you, Mr. Chairman.

First of all, I would like to apologize for being late and would like to unanimous consent that my opening statement be included in the record.

REP. SENSENBRENNER: Without objection.

Also without objection, three articles -- newspaper editorials -- requested by Mr. Conyers will be included in the record. And also without objection, members may send written questions to the witnesses which will also be included in the record.

Now I'll reset the clock, and you're recognized for five minutes.

REP. CANNON: Thank you.

I have a couple of passions in life. The dissemination of broadband is one of them and political debate is another. And I must say that in an area of great obscurity with only a few facts that we can see with clarity, we've had some marvelous weaving of the reality that we are dealing with or trying to fumble with as politicians in this case. And I couldn't help but notice that today, in this obscure area we have some poignant things happening. "Teligent filed for Chapter 11, interestingly, below the fold; "Verizon Hikes Charges." And in this case it's for national 411 service, but a couple weeks ago that was for DSL service. But I hasten to point out here that it's not the urgent problems that some companies are having but rather the larger issues that are important here. So I appreciate your time.

I'd like to just clarify a couple things that Mr. Barr said. First of all, you talked about voice data. One of the problems we have here is we've got two competing bodies of law, and over time we have changes here. I just want to be clear that when we have this bundled package that we're moving toward, there's not going to be much difference between voice and data. You cannot segregate those out. So if the RBOCs get data relief, they will effectively get voice relief, I believe.

Do we agree on that?

MR. BARR: No, the proposal is merely for the ability to do long- haul carriage of data bits, including voice bits. However, as I understand it, the ILEC will not be allowed to make a voice offering to the customer. In other words, they cannot offer a product to the customer that's a voice substitute, which creates another incentive --

REP. CANNON: But this is one of those areas that maybe you've obscured a little bit by language. But if a person has a long- distance data capability -- he has the ability on the other end to get out of an IP protocol -- he can use that long distance for voice-over IP, even now, right?

MR. BARR: Not for his own voice-over IP. That's the point. There's two separate markets.

REP. CANNON: They merge, right?

MR. BARR: I believe that they will largely converge. But the relief being sought in the Tauzin Bill is for the back-end, long haul of data, but the ILEC would still be prohibited from offering a voice- over IP that would be a substitute for its own retail voice product.

REP. CANNON: Would you like to comment on that, Mr. Blumenfeld?

MR. BLUMENFELD: Yes. Thank you, Mr. Cannon.

One of the concerns that I have in this debate is that Mr. Barr always talks about the inter-LATA relief portion of Tauzin-Dingell, but the other portion of Tauzin-Dingell specifically removes the existing obligation of telephone companies to unbundle network elements, where those networks will be used by competitors to provide any of the services that are covered by this new deregulation-- data services using that term generically. In other words, what the legislation does is the exact opposite of the point of the act, which was to force the unbundling of the network in order to encourage the deployment of new technologies and advance services, both of which are the essence of the act.

Because of the convergence that you have described, and that Mr. Barr has described, and which I completely agree with, the effect long term of the second part of Tauzin-Dingell, which eliminates the obligation to unbundle existing network and new-network elements for use by data competitors will eliminate entirely competition over the telephone network; that is, competition within the telecom sector that in any way requires access to the existing telephone network. And the more there is convergence, the more that will be true, leaving the situation that Mr. Barr does explain of him and his colleagues competing against the cable companies as if it were true that the cable companies are today capable of providing that bundle of services, which they are not.

At my house I have DSL service from Rhythms Net Connections. When I go on the Verizon web site, I can't get DSL service from Verizon. I tried to get DSL service from my cable company, Star Power; but they can't provide it to me either. So if we were in the situation of two competing monopolies -- I live in Northwest D.C., on the D.C. side of Chevy Chase, I wouldn't have DSL service at all. That's why two competing monopolies is not enough.

REP. CANNON: Thank you.

In situations of obscure areas, Mr. Chairman, I think we need 10 minutes of question time. But seeing that we have only five under the current rules, I yield back what remains.

REP. SENSENBRENNER: Which is none.

(Laughter)

The gentlewoman from Texas, Ms. Jackson-Lee.

REP. SHEILA JACKSON-LEE (D-TX): We need days.

Mr. Chairman, let me thank you for holding this hearing and the authors of the legislation that is before us. Particularly, I am gratified that the Judiciary Committee has carved out its stakeholder's position on these very important issues.

I would hope that as we deliberate -- and I understand that the clock is ticking very fast, and so we'll probably have a short span of time to review these issues -- that we do not get characterized as a good cop/bad cop, and that, in fact, we can find some way to address the multitude of concerns and still wind up walking the same pathway together. In particular, I think that's important when we talk about the 1996 Act that we all thought was going to put us in the right focus and right direction.

What I'd like to do, Mr. Blumenfeld, is come directly to you. And you note that members have been coming in and out. There have been hearings in various parts of the House, all over today. And so, you may have gone over this, but if you would indulge me.

What went wrong with the 1996 Act from your perspective? And I certainly do not expect for you to give us a treatise, but just as we are focusing on these issues.

MR. BLUMENFELD: I think, first of all, the '96 Act was about as good a cut, frankly, as was possible at a legislative solution to these issues. And I think that the FCC and the states have done a remarkable job in an area of great complexity and difficulty. At the same time, I think it has always been true that the regulatory tools and the regulatory processes by themselves are slightly too blunt as instruments to be entirely effective in convincing companies to open up their monopolies; that is, convincing them to act in a way that they strongly believe is contrary to their economic incentives. And that we need the additional incentive provided by the antitrust laws to be able to do that.

The AT&T case resulted in a divestiture because of the government's belief that you will not successfully write rules that force a vertically-integrated monopoly to open up its network to its competitors because it would be forcing them to act in a way that's contrary to their own interest. Therefore, the only way to accomplish it is by divesting the company with the network from the company that is, in that case, in long distance and equipment manufacturing.

The '96 Act tried to say, let's try not to have to do that. The logical next divestiture would be the network company on the one hand and a services company on the other. The services company would have competed against other service companies. That would be an analogous divestiture.

The '96 Act tried to say, if the problem is that a vertically- integrated company has the incentive, because it's in competitive markets, and the ability because it owns the network, to disadvantage its competitors, let's write rules that prevent them from exercising that ability.

REP. JACKSON-LEE: If I might, this sort of tracks the administrative-law process versus the court process.

MR. BLUMENFELD: Exactly.

REP. JACKSON-LEE: And you think that there are missing elements to get where we need to go because there is not an incentive to do this voluntarily?

MR. BLUMENFELD: Exactly.

REP. JACKSON-LEE: Can I go on to the next?

MR. BLUMENFELD: Yes.

REP. JACKSON-LEE: You see the frightful position we are in with this shortness of the time.

Opponents of the present legislation, 1697 and 1698, suggest that it conflicts with Goldwasser, which suggests that violations of the act did not constitute violations of the antitrust laws. And it goes on.

Can you just give me a response to that, please?

MR. BLUMENFELD: Yes. Very briefly, the point is that Goldwasser is exactly wrong in its fundamental premise, which is that the obligations set forth in the act could not possibly be found from the antitrust laws themselves.

REP. JACKSON-LEE: Let me pursue that with you because I've got to get a question in for Mr. Barr. This is terrible that the time is short, but we're respectful to the chairman at this point.

Mr. Barr, first of all, let me say that we understand the value that the baby Bells have in our prospective communities, and we're very appreciative of their long history. But tell me this. What would you do to make 1697 and 1698 palatable? Aren't you aware of the fact or comment on the fact that we are losing a lot of the upstart companies on broadband, and so competition is decreasing-- a lot of bankruptcies. And so broadband access is sort of going in your direction.

How do you respond to that? And also with the bill dealing with Dingell-Tauzin, any comments on how it impacts closing the digital divide?

REP. SENSENBRENNER: Twenty-five words or less because the gentlewoman's time has expired.

REP. JACKSON-LEE: I thank the chairman. Your change is the 1697, 1698 and digital divide.

REP. SENSENBRENNER: The gentlewoman's time has expired.

Mr. Barr?

MR. BARR: First, on the build-out, Tauzin-Dingell has a mandatory build-out. I don't think that's the best way of assuring broad access, but it does address that situation. The other two bills, 1697 and 1698, I don't think the case has been made for them. And I think that the provisions that try to make it a per-se violation of the antitrust laws, to have regulatory violations would be very destructive. And I think the market-share test would lead to less competition for residential customers.

And I think Mr. Blumenfeld has essentially said that he believes that the Bells are going to continue to get into long distance, that there is competition in the states where we've been permitted to enter long distance because we've gotten our system. So the process is working, and I don't think the record of the act is that bad. I think competition is taking hold faster than it did in long distance and faster than it did in the cable market.

REP. JACKSON-LEE: Thank you. We look forward to sending questions.

Thank you, Mr. Chairman.

REP. SENSENBRENNER: The gentlewoman's time has expired.

The gentleman from Virginia, Mr. Goodlatte.

REP. ROBERT GOODLATTE (R-VA): Thank you, Mr. Chairman. And I thank you for conducting this hearing today, and I hope it's one of many on this very, very important issue.

REP. SENSENBRENNER: Well, as you know, we have 30 days, so there are only so many hearings we can hold.

REP. GOODLATTE: Well, there may be other opportunities. But I do have an opening statement I'd ask be made a part of the record.

REP. SENSENBRENNER: Without objection. Without objection, all members opening statement may become a part of the record.

REP. GOODLATTE: Thank you. And in addition, earlier an article cited by Mr. Malone from The Wall Street Journal, "Bell Rivals Double Local Market Share," was made a part of the record. I have the actual Federal Communications Commission release of the data on which that article was based. And I'd ask that that be made a part of the record as well, showing the --

REP. SENSENBRENNER: Without objection.

REP. GOODLATTE: -- dramatic and rapid increase in competition in the local voice market.

It's my view that what we have here is a conflict between the Conyers-Cannon Bill, which is re-regulatory in nature, takes us backward, takes us into the old economy, and the opportunity to move forward and to continue to deregulate. Deregulation was the hallmark of The Telecommunications Reform Act of 1996. Unfortunately, it didn't go as far as it needed to go in terms of freeing up everybody to compete in these areas.

We've seen that there is competition in the local market. In fact, the fact that 40 percent of residential users being effectively subsidized, that part of the market is really off the table. Nobody's going to go in and compete with somebody when they're losing money in that portion of the market. And in the area where all the money is -- the business market -- the competition is now up to 35, 40 percent. That's a pretty hefty chunk when you consider that the Bells have to use that market to subsidized those other 40 percent. But where we don't have that competition is in the roll out of broadband services. And it seems to me that it is deregulation that we need, and I have a good example of that here today.

Mr. Harvill, you wrote a letter to Speaker Hastert and Congressman Hyde -- in fact, the entire Illinois congressional delegation -- in which you opposed the so-called Tauzin-Dingell Bill because it puts at risk the requirement that incumbent local telephone companies share their lines with competitive, data, local-exchange carriers. As a member of that commission you helped write the order regarding the line co-location and unbundling; is that correct?

MR. HARVILL: That's correct.

REP. GOODLATTE: In addition, your letter states that local competition is the fastest and most effective way for consumers to obtain broadband services at competitive prices. I certainly agree with that statement.

Would you argue that your order regarding co-location and unbundling is a critical part of ensuring that competition?

MR. HARVILL: Very much so.

REP. GOODLATTE: All right. Well, I have an affidavit here, which, Mr. Chairman, I would also ask be made a part of the record --

REP. SENSENBRENNER: Without objection.

REP. GOODLATTE: -- from Dr. Neal Ransom (sp) of Alcatel USA, Incorporated, filed in the Illinois court by Alcatel, which is the manufacturer of the line-card equipment used in Illinois' phone system.

REP. SENSENBRENNER: Let me ask Mr. Harvill, are you familiar with this affidavit or do you wish to have Mr. Goodlatte furnish it to you?

MR. HARVILL: I'm not familiar with it.

REP. GOODLATTE: We'll be happy to furnish to the gentleman.

REP. SENSENBRENNER: Somebody run it down for Mr. Harvill to look at.

REP. GOODLATTE: Their affidavit states that the order of the Illinois Commission -- your order that you claim is so critical to ensuring fast and low-price, broadband service, which is an admiral role, is not technically feasible. So I have to ask, if the maker of the equipment says that they can't do what you order them to do because it's technologically not feasible, how do you expect broadband service to be delivered at all, much less fast and at low prices? And doesn't this regulatory requirement that you've imposed, in fact, delay the roll out of high-speed Internet services while companies attempt to redesign their systems? And wouldn't that result in higher costs to the phone company and ultimately to the consumer?

MR. HARVILL: Let me begin by stating that this is four pages, and I haven't had an opportunity to look at it.

REP. SENSENBRENNER: Mr. Harvill, would you prefer to answer Mr. Goodlatte's question in writing, which we can put into the record?

MR. HARVILL: I will do that, but --

REP. SENSENBRENNER: Without objection, Commissioner Harvill's written answer will appear.

REP. GOODLATTE: Thank you. That being the case, we will move on to Mr. Barr and give him the opportunity for my few remaining seconds to comment any further on the Blumenfeld decision.

MR. BARR: The Goldwasser decision?

REP. GOODLATTE: Goldwasser, I'm sorry.

(Laughter)

REP. GOODLATTE: The Goldwasser decision criticized by Mr. Blumenfeld.

MR. BARR: As I say, Goldwasser is not an outlier by any stretch of the imagination. It represents the Black-letter law in this area. Recently, specifically on the issue of The Telecommunications Act, three district courts have reached the same result. The issue is being considered right now in the Eleventh Circuit. If there's a difference there, the issue will ultimately go to the Supreme Court, and I'm confident that they will agree with the Goldwasser court.

Again, on the third prong of what Goldwasser was talking about, the fundamental issue is who decides. When the antitrust law says they want some kind of reasonable accommodation or access -- and Congress has passed a statute to provide that and said the FCC should make those rules through a legislative rulemaking process -- the idea of throwing that to 800 judges is just preposterous.

I'm pretty familiar with the antitrust laws. I don't see anything in there that says 45 days in mandated by the antitrust law. But if the FCC says 90 days is reasonable, I just don't see throwing that out to judges in the country and juries to come up with different rules as to what's reasonable or not.

REP. GOODLATTE: Thank you, Mr. Chairman.

REP. SENSENBRENNER: Will the gentleman yield?

Mr. Barr, since we have son of Goldwasser coming up from the Eleventh Circuit, do you think that the prudent thing for Congress to do is to hold back on dealing with this entire subject until we do have a determination by the Supreme Court on exactly the extent to which the antitrust laws apply?

MR. BARR: Well, I think it would be imprudent to address Goldwasser and the relationship between antitrust in 251 at this stage. But I don't think that all telecommunications legislation should be held up for that.

REP. SENSENBRENNER: But the crux of this entire debate is whether The Telecommunications Act does require antitrust considerations being used in the determination of whether or not telecommunications activities are monopolistic or not. I think you're right -- I agree with you -- that having 850 federal courts reach differing conclusions on this will be hodgepodge that flies directly in the face of the 1996 Act, which was designed to have a uniform playing field in this area. But I think this committee felt that implicit in the 1996 Act was not a preemption, the standard antitrust considerations, in determining what was monopolistic and what was not. And carrying this on to the whole issue of broadband, the RBOCs have got monopolies that are regulated over their local phone service. State-public utility commissions get involved in that.

They're attempting to use their assets that are regulated, meaning the phone wires into all of our houses, to go into an area that is unregulated. And I think the complaint by the long-distance carriers and the cable carriers is that that's not fair and that's monopolistic. So it's up to Congress to determine that question one way or the other. Tauzin-Dingell have one solution to the problem; Cannon and Conyers have another solution to the problem.

But incumbent on that, isn't a determinative ruling by the United States Supreme Court -- which is binding on all federal courts, at least those that decide to follow precedent -- a way of attempting to give Congress a road map on what our legislative options are rather than speculating on what courts would do?

MR. BARR: I don't think so. I think that we're talking about two different markets. I think you put your finger on it, which is we have discovered Spectrum on our pipes that can be used in a different market. And that market is already competitive market, and it's a market that people should be encouraging competition in. And I think Congress could move in that direction. And I think that the issue here that's being discussed is looking through the rearview mirror at the 251 obligations on the local-exchange assets and trying to impose an additional layer of enforcement on the theory that things aren't working now, and that these poor CLECs don't have any redress. And it's nonsense.

Their claims have been looked at. The ILECs are getting into long distance. They have plenty of forums to go to get these claims resolved. There are millions of objective measurements out there as to whether we're performing our job. This should not be in dispute. Look at the numbers. If we fail, we pay. And I think that there's no case that has been made for the approaches that are being taken in this legislation that would just open the floodgates of litigation.

REP. SENSENBRENNER: The gentleman from Alabama has been very patient and is recognized for five minutes.

REP. SPENCER BACHUS (R-AL): Thank you, Mr. Chairman.

First let me say that, if Congress had not wanted the Bells and the long distance service, they wouldn't have passed legislation to allow them in. And at the time that we did that, we put requirements on them. And a year ago we could be having this hearing and wondering if they're working.

Can we all agree that the market's opening today?

MR. BLUMENFELD: I think it is certainly right that the markets are opening gradually under the auspices of the act, particularly the processes that have been put in place to give reality to this Section 271.

REP. BACHUS: Mr. Blumenfeld, I agree with your opening. You say gradually.

Now, they doubled this last year, did they not?

MR. BLUMENFELD: Yes, they have. But going from two to four is also doubling, and --

REP. BACHUS: I mean, doubling is -- can you think of anything that's growing faster than the doubling of a market in a year?

MR. BLUMENFELD: I think that new markets can tend to grow very quickly, but you still have --

REP. BACHUS: And it is growing very quickly.

MR. BLUMENFELD: I think there's no question that local competition is much more significant now because of the act.

REP. BACHUS: Right. And if it's growing, and yet we add another procedure -- I mean, I think it would be more honest for us, if we didn't want the Bells in it to just take them out.

MR. BLUMENFELD: I don't think, Congressman, that we're adding another procedure. All that we're saying is that Congress meant it when it said that the antitrust laws continue to apply. And that the Goldwasser court, when they said the act is more specific legislation that must take precedence over the antitrust laws was just wrong. The antitrust laws are independent obligations that always apply whether or not there's an act.

REP. BACHUS: Let's go into that. You've raised that.

Legislation 1698 deems violation of Sections 251, 252, 271, 272 as violation of the antitrust laws. Now, you know who enforces The Communications Act, don't you? Who is that?

MR. BLUMENFELD: Well, it's actually enforced by a combination of the FCC, the district courts and the state commissions, depending on what provision we're talking about.

REP. BACHUS: No, but the FCC enforces whether an entity is complying with the act or not.

MR. BLUMENFELD: It's one of the agencies that enforces it, yes.

REP. BACHUS: Well, I mean, at least now with the court's interpretation, they said that Congress legislated and set up this regulatory thing, and that was the FCC.

MR. BLUMENFELD: Yes. That's correct. And it was true under the '34 Act, that is prior to the '96 amendment, that the FCC regulated, among other things, interconnection among carriers in 201, 202, 203, 204. But the antitrust laws always applied there. No one ever thought -- well, the Bell system always argued that they didn't, but the courts always found that the antitrust laws still applied, despite the fact that there was a regulatory regime that also applied. Just the same way that in any body, the securities laws apply to certain conduct even though the criminal laws also apply to some of the overlap in Congress.

REP. BACHUS: Let me ask you this. FCC, they're not the enforcement agency for the antitrust laws.

MR. BLUMENFELD: That's correct.

REP. BACHUS: Let me switch gears with you. What about the data market? Cable serves 75 percent of the market. The remaining 25 percent is split between DSL, wireless and satellite.

Shouldn't all the providers of broadband be regulated in the same manner? I mean, you've advocated we regulated the Bells.

MR. BLUMENFELD: I've advocated that we continue to enforce the act, which contemplated that among the other new uses to which the network would be put would be data and Internet related. CompTel has previously submitted an indication that in their study the terms "Internet" and "broadband" or "data" were mentioned no less than 500 times during the floor debates on this act. The Verizon -- then Bell Atlantic -- annual report of 1996, the chairman's letter, spends probably a quarter of its time talking about the growing importance of data and --

REP. BACHUS: Oh, I understand that. The growth is in data; we all agree on that. And the cable is supplying 75 percent of that service.

MR. BLUMENFELD: But I have to say that the Bell companies argue that they're at a huge disadvantage against this giant cable --

REP. BACHUS: That's their argument. My point to you is that cables are unregulated.

MR. BLUMENFELD: Well, cable is actually not unregulated. Cable is regulated at the local level. So if we want to talk about 850 different regulators, there are probably several thousand regulators.

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

REP. BACHUS: Could I just ask, do you disagree that they ought to be subject to the same regulations?

MR. BLUMENFELD: I think that the telephone companies should be subject to the rules that are in the '96 Telecom Act even if they compete for some services with cable companies, who are subject to a completely different regime of regulation but also at both the federal and the local level.

REP. SENSENBRENNER: I have one other series of questions in order to have the record complete.

We've heard a lot today and elsewhere that the RBOCs do not make a lot of money on residential service, and this is one of the reasons why CLECs and other competition do not wish to offer residential service to consumers. I have also been told that most state-public utility commissions do not allow a phone company to find out whether a person who has applied for Lifeline type service is actually below the poverty level. And in California, 32 percent of the total residential phone lines are on the Lifeline, low-rate service.

I assume, while the percentages might be a little different than Illinois, Mr. Harvill, the lowered revenue as a result of Lifeline service being provided by Ameritech there is taken into account by your commission in terms of determining what type of rate of return Ameritech gets on its regulated services. So they're still guaranteed their rate of return on their regulated services even if a lot of people who really shouldn't be paying the Lifeline rate because their incomes are high have applied for it, and they can't be questioned on whether they're really poverty-stricken folks.I correct in that assumption?

MR. HARVILL: Let me clarify that in one way. Ameritech Illinois has been subject to alternative regulation for six years. As such, they've been subject to price-cap regulation as opposed to rate-of- return regulation. I think right now we're in the process of reviewing the alt-reg case before the Illinois Commerce Commission and its question as to whether or not it will continue or stop. More than likely I'm assuming it will continue. I have no reason to believe that it wouldn't.

At the same time I think it's very clear that under that alternative regulation program that Ameritech has been under for six years both the company has done extraordinarily well. We're talking returns on equity of close to 40 percent and consumers have done pretty well. There have been numerous annual rate reductions associated with the formula that's been utilized. So we don't really look at it in terms of that. Ameritech only has argued that, yes, there should be some rate rebalancing done in the context of this review. That's something we're taking under consideration. And if there are in-deep services that are below water, more than likely the commission will be very cognizant of that fact and raise them to where they are actually above water.

MR. BLUMENFELD: Mr. Chairman?

REP. SENSENBRENNER: Mr. Blumenfeld?

MR. BLUMENFELD: If I may just make one comment. I have litigated rate cases and cost cases against the ILECs in numerous states throughout the country, in all of which this claim is made that there are many services provided below cost that are subsidized by other services.

There are two things that are important to recognize. First of all, if you look at the history of telecommunications, every time, going back four years, there's been an effort to enter any segment of the market, the incumbent provider always argued that that happened to be the exact segment of the market that was providing a subsidy to all of the other segments that were below cost. And then as a different segment came up for competition, that became the exact segment that was providing a subsidy for all of the other segments that were below cost. So this is a constantly-shifting target.

Secondly, when you look at the telephone companies' own cost studies -- their own incremental cost studies, which in the context of these alternative regulation cases -- they submitted in order to show what price floors they would have for each of these services, their own incremental cost studies showed in almost every single case across the country -- that I was involved in at least, and therefore, where I know the data -- that none of their services are being provided at prices that are below the incremental cost of the service, which includes a reasonable return; that is, the return that's attainable in a competitor's market.

REP. SENSENBRENNER: And that includes Lifeline service, Mr. Blumenfeld?

MR. BLUMENFELD: Lifeline service is different in that, frequently, there is a subsidy from a public-fund source back to the telephone company that makes up the differential between the Lifeline charge and the total charge. And the California example that you mentioned is interesting because California did a controlled study on this cheating question, and that is, since their self-certification, how much cheating is there. And they found that with the two control groups that there turned out to be a remarkably small amount of cheating. That is, the number of families that qualified under a rigid screen were essentially the same as the number of families that self-reported. So they concluded to continue with self-reporting because, in fact, sort of the social opprobrium of self-reporting yourself as being below the poverty line was an effective check at keeping people from getting Lifeline service who didn't merit it.

REP. SENSENBRENNER: Mr. Barr, you look like you're suppressed.

(Laughter)

MR. BARR: (Laughing) Thank you, Mr. Chairman.

Even the FCC and the Supreme Court recognize that this is a serious problem, and that there are substantial cross-subsidies in the marketplace. and that unless they're addressed, competition will go where there's margin and "leave the ILEC holding the bag," as the Supreme Court said.

Now, I didn't understand what Mr. Blumenfeld was talking about, because, obviously, when someone goes in to compete for a particular product, they're looking for margin. And if there's margin in a local product, it is subsidizing a product in which there is no margin. So the fact that it's moving around, the subsidy can be found in products that have margin, shouldn't be a surprising fact. That is the nature of cross-subsidy.

The notion that we somehow are compensated for this in the rate of return simply doesn't exist as the market is opened to competition. Where do we get that recovery? As the FCC pointed out, being able to assure a rate of return becomes nonviable and nonsustainable as the market is opened to competition. Where do we pick up that revenue? If they try to add it to a product, all that does it make it more an attractive product for somebody to come in and cherry pick. So we're not compensated for this. And this is one of the major problems of The Telecom Act.

MR. BLUMENFELD: If I may, just very briefly, Mr. Chairman.

Now we're the nub of what makes a monopoly a monopoly because now we're not using subsidy in the economic sense of providing a cost shifting to a service that would otherwise be below cost. Now what we're saying is some services are more profitable than other services.

MR. BARR: Excuse me. I'm talking about the low-cost --

MR. BLUMENFELD: I am saying that the FCC itself --

REP. SENSENBRENNER: Should I flip a coin on who gets the last word?

(Laughter)

MR. BLUMENFELD: We can just speak simultaneously I think.

REP. SENSENBRENNER: I've noticed that.

(Laughter)

Well, I think it's time to shut this hearing off. I'd like to thank you all --

REP. BACHUS: Mr. Chairman?

REP. SENSENBRENNER: Yes, Mr. Bachus?

REP. BACHUS: Could I ask one follow-up question as a result of your question?

REP. SENSENBRENNER: If you do not tip over the beehive.

(Laughter)

REP. BACHUS: Mr. Blumenfeld, you mentioned you're an antitrust lawyer or your firm handles antitrust legislation.

MR. BLUMENFELD: Yes, sir.

REP. BACHUS: So actually, you're not a disinterested witness.

MR. BLUMENFELD: I don't think that anyone is knowledgeable enough to appear before the committee entirely disinterested.

REP. BACHUS: I see.

MR. BLUMENFELD: I never portended to be disinterested.

REP. BACHUS: I'm not accusing you of representing that. I just pointed out that this legislation, as many of us said, would result in a lot of lawsuits. And that would certainly benefit antitrust lawyers.

REP. SENSENBRENNER: Let me state that, first of all, I'd like to thank all four of you for your patience and your excellent testimony and answers to our questions. You were not selected as disinterested witnesses. I think if we wanted someone truly disinterested, we would get somebody from the Federal Communications Commission, in which case I would hear about that from the chairman of another committee.

(Laughter)

But I think that you have shed an awful lot of light on a lot of the questions that we have had. This debate will resume in a couple of weeks with four other witnesses who are equally interested in the outcome of this debate. And if there's no further business to come before the committee, the committee stands adjourned.

END

LOAD-DATE: May 25, 2001