Copyright 2001 Federal News Service, Inc.  
Federal News Service
June 19, 2001, Tuesday
SECTION: CAPITOL HILL HEARING

LENGTH: 10606 words

HEADLINE: PANEL TWO OF A HEARING OF THE SENATE COMMERCE, SCIENCE, AND TRANSPORTATION COMMITTEE
 
SUBJECT: LOCAL TELEPHONE COMPETITION AND U.S. MANUFACTURING
 
CHAIRED BY: SENATOR FRITZ HOLLINGS (D-SC)
 
PANEL TWO LOCATION: 253 RUSSELL SENATE OFFICE BUILDING , WASHINGTON, D.C.

WITNESSES: ROYCE HOLLAND, ALLEGIANCE TELECOM, INC.; MARGARET H. GREENE, BELLSOUTH CORPORATION; C. MICHAEL ARMSTRONG, AT&T; AND CLARK MCLEOD, MCLEOD USA
 


BODY:
SEN. HOLLINGS: The next panel will please come forward: Mr. Royce Holland of Allegiance Telecom; Ms. Margaret Greene, the vice president of BellSouth; Mr. Michael Armstrong, chairman of AT&T; and Mr. Clark McLeod, the chairman of McLeod USA. Good. I'm southern. I'll have to start with the lady. Ms. Greene, we recognize you. And we'll go right across to Mr. McLeod, Mr. Armstrong, and then Mr. Holland.

MS. GREENE: Okay.

SEN. HOLLINGS: We welcome you.

MS. GREENE: Thank you, Mr. Chairman. It's good to be with you today. And congratulations on your chairmanship.

SEN. HOLLINGS: Turn on that microphone or let's get it a little closer, please, so we can all hear.

MS. GREENE: I have a prepared summary, and I'm going to totally abandon it at this point, because what I'd like --

SEN. HOLLINGS: Well, we'll include the entire summary of each of the four on the panel, their full statements in the record. And we'll ask you please to summarize them, because we have another panel following you. And we'd like you to highlight it and then be subject to the questions. Thank you very much.

MS. GREENE: What I'd like to do, sir, is not use the prepared summary, but talk about some of the things where I'm in agreement with what's been said here this morning and where I have disagreement with what's been said here this morning.

BellSouth agrees totally with you that the act was carefully crafted. It was a very well-balanced act. It had four major platforms. Those four major platforms would introduce deregulation -- first, demonopolization and then deregulation into the telecommunications marketplace. The feeling of BellSouth, though, is that only one purpose of the act has been implemented, and that is to encourage competition. The other three remaining purposes that were so carefully designed into the act -- ensuring universal service, making sure that alternative networks were incented, and ultimately moving towards deregulation -- those purposes have not been accomplished.

We also would agree with what's said here today that real service is essential. It is required. And we will have to have economic incentives, and strong economic incentives in place, to make sure that rural high-speed access is placed and we have appropriate rural investments.

We would also agree that regulatory uncertainty has been -- exists in the broad-band market today, and that regulatory uncertainty is what Tauzin-Dingell seeks to address. But as you might imagine, the conclusions that I draw from the facts that I agree with are quite different than what's been put forward today.

First of all, I strongly disagree that we sought to block implementation of the '96 act. In fact, what we sought to do is understand how the '96 act was being implemented. You'll recall on August the 8th of '96, the FCC put forward implementing regulations. And in those regulations, the FCC introduced something called (Telrick?) pricing. What they did is break up our networks. They brought it into piece parts. Then they priced those piece parts looking forward and using technology that doesn't exist in our network today, but a hypothetical most-efficient network.

I would say that probably the single most detrimental thing that's been done to achieve your vision of competition and deregulation in this marketplace is the implementation of Telrick pricing or breaking our network -- not the breaking our network up, but the prices that were put in place. Those prices basically offered our competitors about a 70 percent discount on accessing our business customers.

The second purpose of the act, preserving universal service, would have called for either an increase in residential rates, an implementation of the universal service fund, or some other mechanism that would have put similar economic incentives into the residential marketplace. It wasn't until late '99 or 2000 that any attention was paid to the concept of universal service at all. And so, as a result, you have exactly what the act was -- the way the act was implemented has decreed the kind of competition that we have.

In BellSouth's service territory, we have robust competition in our business market. We have some of our central offices where we have less than a 50 percent market share for business customers today. We have 100 percent of residential rural customers that nobody else wants because our service is priced well below the cost of serving those customers.

In Columbia, South Carolina we have 45 competitors that are competing in our business market in downtown Columbia. They're able to offer service to our customers at a mere fraction at what our business rate today -- how our business rate is set today. And remember that those rates were set intentionally at a high margin, not being cost-based, to encourage universal service and to incent a broad deployment of networks. That universal service piece is what's missing from the economic incentives that we have in place today.

I would also disagree that we sought to delay implementation of the 14-point checklist. As you'll recall, Senator, in '97 we brought an application up to the FCC out of South Carolina. We twice brought applications up in '97-'98 out of Louisiana. In those applications, we interpreted and sought to work with the FCC to implement what we thought was the 14-point checklist. Today we still don't have a successful application in BellSouth, even though we now have proceedings filed in all of our states. And the 14-point checklist has grown in Georgia to be 1800 different performance measures that we are required to report on and to disaggregate and report on a CLEC- specific basis.

By the time this is implemented -- what we've been doing since '96 is, first of all, seeking to understand what will be required for us to get into long distance. We've hired hundreds of people to help implement the solution that regulators are outlining for us, and we've invested $1.6 billion in equipping our network to deliver that solution that the regulators are outlining.

I would also disagree that we have anything that remotely resembles deregulation. I came into this business from the federal government, where I served as a regulator. I served as a cabinet secretary for the governor of Kentucky. I've been in government and outside of government. I entered this business at divestiture, and at no time in my career in the telephone company have we been more regulated than we are today.

Every aspect of our business is micromanaged. Every price that we charge is examined and judgment substituted for the judgment that we put into our pricing models. Our performance is measured and sliced and diced to the millionth part. So we are as far away from deregulation as you could possibly imagine.

The '96 act was carefully designed. It was carefully crafted. We have just implemented one piece of the four-part plan that Congress saw fit to send forth. I would say that we need to stay the course. The '96 act needs to stay in place. It is working in many respects. But we need to fully implement the vision of the Congress that passed the '96 act.

SEN. HOLLINGS: Thank you. Mr. McLeod.

MR. MCLEOD: Thank you, Mr. Chairman. My name is Clark McLeod. I'm the chairman and co-CEO of McLeod USA. We're the largest independent CLEC in the country. We provide bundled local, long distance and high-speed data products in 25 states. We are the company that is truly bringing competition to medium and small businesses, to residences, and to your local communities. We don't just serve large communities. McLeod USA has a presence in 2,250 cities.

Today I'd like to speak briefly about H.R. 1542, since it's come up earlier. H.R. 1542 has no redeeming qualities. It -- (inaudible) -- key open-access provisions of the '96 act and it strengthens the Bells' control over the local network. It moves us toward remonopolization of service that is presently competitive. And finally, it has created incredible uncertainty, which has cut off CLEC access to capital. So I urge each of you, as you already have stated, Chairman Hollings, to publicly oppose H.R. 1542. The tread certainly should come off that tire.

Now let's focus on the key to local competition going forward. And this will go back into the '80s. And I've heard a lot of talk today about long distance, and I think it's very important. The key to local competition is equal access to competitors. Today we are beginning to provide consumers with a choice to local service. Five years after the act, however, all of us together have about 8.5 percent share.

If you contrast that to the five years following the 1984 divestiture of AT&T, the long-distance competitors in the same length of time had gained 30 percent market share, four times the rate that we have gained today. Why has local competition been slow? The answer is that the Bell companies have successfully denied competitors equal access.

What's the remedy? Well, let's look again at long distance. During the '80s, I was the founder of a company that grew to be the fourth-largest long-distance company in the U.S. Equal access to the AT&T network was mandated, and Judge Green was dedicated to enforcing it. Real competition flourished. In the last seven years we've seen about 40 percent reduction in long-distance prices.

The second example is wireless. For the first 10 years, the wireless industry was a duopoly and prices remained artificially high. Then the FCC opened up additional spectrum in the mid '90s, thereby allowing equal access to more competitors, while real competition developed, resulting in a 50 percent reduction in prices to consumers over the last seven years. What do these models have in common? Access to consumers.

So what is the answer for local competition? As Chairman Hollings pointed out, we need to mandate equal access to that local loop and we need to enforce it. Unfortunately, there is not equal access today either in economic terms or in functional terms.

Let's start with economic equal access. For the CLECs today, local access is the equivalent of paying the power company but also having to purchase and operate your own generator to keep and guarantee the lights are on. Competitors pay for 100 percent service from the Bell and receive far less. Accordingly, competitors should be paid damages for the costs they incur as the result of unequal access. Alternately, rates charged competitors should be discounted, like (feature?) group A was in the long-distance industry back in the '80s.

These remedies will result -- will produce results. For example, with Qwest, we have seen positive trends in responsiveness, service delivery, creativity, if you will, all of which have contributed to a significant improvement in our relationship. This result is attributable, we think, in part to the fact that Qwest is paying us penalties directly for misperformance.

Second, functional equal access. This means competitors are able to order, provision and service lines in the exact same way the Bell companies are. It seems like common sense, but we don't have that today. Bell company systems must be blind to who is ordering the service. This eliminates their ability to discriminate.

So to enforce functional equal access, penalties are necessary. Some have suggested fines of $10 million, but that's not enough. Imagine a $10 million fine for a company with a $100 billion market cap. I'm afraid it's equivalent to a parking-meter violation.

Last year the Illinois Commerce Commission fined SBC $60 million. Later one Illinois legislator was told that paying a $60 million fine was simply, quote, "cost of doing business." Progressive penalties must be meaningful.

Functional equal access comes from separating network operations from retail operations. This can be done functionally, and Qwest is currently working with competitors to implement that. But if separation is not done, then regulators must have the authority to structurally separate the Bells' retail and network operations.

So in conclusion, competitors, after spending billions of dollars, have averaged little more than 1 percent market share per year. And if you extrapolate that, there'll be no one in this room alive by the time we have meaningful competition. And, in fact, all current competition may die along the way. We need a mechanism for consumers to receive higher levels of service at lower rates, like they've enjoyed in long-distance and wireless service. Congress needs to finish what was started in '96 by taking action to enforce the act and provide equal access to the local network.

Thank you, Mr. Chairman.

SEN. HOLLINGS: Thank you. Mr. Armstrong.

MR. ARMSTRONG: Thank you, Mr. Chairman. Congratulations. Thank you for holding this hearing. And it's an honor to appear. I know time is limited, but I'll -- (inaudible).

First, AT&T is committed to bringing competitive local telephone service to residential and business customers. We have invested over $100 billion in local telecommunications and cable networks, and we now serve over 2 million local telephone customers. We are fulfilling our part of that bargain of the '96 Telecom Act.

Second, we and other local competitors could be doing even more if the incumbents were living up to their responsibilities under the '96 act. Unfortunately, the Bells have spent five years, as has been talked about, playing their hold cards, mostly price and process, after the delays in litigation.

Even though the Bells are required to lease parts of their networks to competitors at reasonable wholesale rates and with reasonable processes, we all lose money because the wholesale prices the Bells charge and the processes we are submitted to are not reasonable. Where federal and state regulators have insisted on compliance with the act, as appears could be the case in New York now, we have seized the opportunity and entered the local marketplace.

Third, contrary to the incumbent monopoly claims, there is no regulatory barrier to the Bells' deployment of broad band. It's occurring faster today than the deployment of any new technology in memory. The Bells are spending billions now to deploy DSL, but for one reason: Competition. As was mentioned, DSL sat on the Bells' shelf for about 10 years. Now the first places they have deployed it where competitors are most active.

The local monopolies claim that a bill now pending in the House, the Tauzin-Dingell bill, would bring broad band more quickly to rural areas. This is a transparent effort to exploit digital-divide concerns. In fact, the deployment provisions of the bill actually mandate less than what the Bells are already doing. At the same time, the Bells are selling off a lot of rural exchanges.

Far from being necessary to promote competition, the Tauzin- Dingell legislation presents a serious threat to local competition. It would deprive competitors of the ability to purchase access to critical parts of the monopolies' network. And it would allow the Bells to enter the long-distance market without first opening their local market to competition. Eliminating these provisions of the '96 act would preserve monopoly power over local phone service and really allow the Bells to leverage this monopoly into the control of high- speed data services.

Finally, if action is needed to finish the job started in '96, it is to enforce the law. There must be meaningful penalties and damages available to the competitors where their businesses have been harmed by the incumbents' failure to comply. Most importantly, policymakers should consider compelling the Bell companies to create a clear structural separation between their wholesale and retail operations. This will simply help ensure that the Bells provide the same price and the same process to their competitors as they do to themselves.

If a monopoly is not demonopolized before entering a competitive market, it will use its monopoly power to monopolize that competitive market. This is exactly what the Bells are doing in the narrow-band arena with price and process. And it's exactly what they are up to in the broad-band market with the Tauzin-Dingell bill.

Separation of the Bells' network and retail operations will enable the market to demonopolize the Bells' local monopoly. Regulation and enforcement can work. But as we have seen repeatedly, Bell gamesmanship against competitors and the lack of meaningful penalties are defeating the intentions of the act. Structural separation, coupled with stronger enforcement, will let the market do the work.

The hope of competition in local phone service is really at a critical juncture. CLECs and long-distance companies have invested billions, relying on the '96 Telecom Act. Due to a lack of compliance by the Bells, it's not working. Not only does simple fairness argue against Congress repudiating the rules it wrote, now in the middle of the road of the game, it also argues to make sure that the rules are enforced and that local competition results. If this doesn't happen, we will surely face the remonopolization of the consumer/small business communications market in America.

Thank you, Mr. Chairman.

SEN. HOLLINGS: Thank you. Mr. Holland.

MR. HOLLAND: Thank you, Mr. Chairman. My name is Royce Holland, and I am chairman and chief executive officer of Allegiance Telecom. Allegiance is a competitive local exchange carrier, facilities-based, headquartered in Dallas, Texas. We operate in 32 markets across the United States and will be in 36 markets by the end of this year.

Before starting Allegiance, I was president and chief operating officer of MFS Communications Company, one of the first competitive- access providers. And it was said quite often that we were the poster child for the 1996 Telecom Act. Representing MFS, I testified before both the Senate and the House committees in 1995. I felt that Congress was on the right track in structuring what became the Telecom Act of 1996. And to this day, I feel that it's one of the most significant pieces of commercial legislation passed by Congress since the early 1950s.

In 1995, I felt that the weakest part of the bill was its tepid enforcement provisions. This is because an incumbent carrier that merely failed to be responsive to requests of competitors for access to local bottleneck facilities could kill competition by inaction as readily as by overt competitive practices. And I will tell you, four years of battle scars out there competing in the market have done nothing to change that opinion.

I could spend the rest of the hearing citing real-world examples of the consequences to customers and competitors of poor enforcement and inadequate penalties. In the interest of time, I'll just hit two major ones.

First, Allegiance's fastest-growing product is an integrated voice, high-speed Internet and Web hosting service provided to small businesses that desire to upgrade from dial-up Internet service and have a presence on the Web. The bottleneck in providing these services is obtaining the last mile; generally, a T-1 tail circuit or DSL-qualified copper loop from the Bell company, which is the only feasible way to serve these small businesses in over 95 percent of the cases. We have thousands of these small business customers that in many cases have been waiting over two months to have service installed due to the inability or unwillingness of the Bell company to provide the bottleneck loop-to-loop facility.

Now, astoundingly enough, they can usually provide such a facility to their retail customers in a week or two. We will lose at least half of these customers to our competitor, the Bell company, due to the incompetence or duplicity of our bottleneck supplier, also the Bell company. This is totally absurd.

Another malady that plagues the entire CLEC industry today is the deadbeat dominant-carrier syndrome that has infected some of the Bells and their former parent, AT&T. By not paying their bills, absent litigation or threat of litigation, these behemoths have used their market power to bully smaller players into untenable financial positions, thus muffling competition.

The FCC needs much more powerful medicines to effectively stamp out dominant deadbeat carrier syndrome. That is why I am so encouraged by Chairman Powell's recent statement that when companies break the law, he will hurt them and he will hurt them bad. But the chairman also said that his current authority is woefully inadequate to deter the frequency of the incumbents' poor performance. The chairman needs a much bigger stick.

I'd like to highlight a few suggestions for provisioning the FCC with that bigger stick. Number one, I would recommend the maximum fine of 1 percent of a company's quarterly revenues. The dominant carriers have quarterly revenues of $10 billion to $15 billion. A fine of a million dollars, even $10 million, literally gets lost in the accounting accruals. A fine or the potential of a fine of $100 million to $150 million, 1 percent, would impact quarterly earnings and set off alarm bells in the executive suites and make obeying the law a much higher priority. I'm a CEO. I know what gets my attention.

Number two, direct FCC to adopt national performance standards, including penalties that are payable to CLECs as liquidated damages, as suggested by Congressman Markey, when the RBOCs fail to meet the standards.

Number three, adopt measures to combat that deadbeat-dad syndrome from which dominant carriers like AT&T and its offspring seem to suffer.

Number four, significantly accelerate the enforcement cycle by authorizing the FCC to hire 25 special masters to speedily resolve complaints and severely restrict the abilities of the parties to unleash their lawyers to file numerous appeals of -- (inaudible).

And number five, as a last resort, if these enforcement initiatives don't get the job done and the anti-competitive abuses continue, Congress should authorize the FCC to require structural or at least functional separation of the RBOCs into wholesale and retail divisions.

In closing, I would also like to take a moment to comment on the debate going on in the House that we have heard about today. I've listened to a lot of rhetoric about the need to deregulate the Bells so they will deploy broad band. Well, the truth of the matter is that the Telecom Act lets the Bells enter any market they want to out of region. SBC can build in Atlanta and BellSouth can build in Dallas, totally free of regulation.

The Tauzin-Dingell legislation is not about encouraging deployment. It is simply about Bell companies wanting to preserve and extend their government-granted legacy monopoly. Nothing could be more anti-consumer than this.

Stricter enforcement of the Telecom Act is essential if the promise of the act is to be fulfilled. That requires, one, more enforcement powers for the FCC, but two, the resources necessary to use those powers effectively.

Thank you, Mr. Chairman, for allowing me to testify.

SEN. HOLLINGS: Thank you. I want to hold my senators as long as I can. Max. Let me yield to Senator Cleland.

SEN. CLELAND: Thank you very much. I feel like I'm watching live Atlanta wrestling here.

SEN. HOLLINGS: Yeah. Downbeat -- dead -- what's it? Dominant deadbeats?

SEN. CLELAND: Let me just say, I'm an old Army signal officer. And one of the things I learned in Vietnam was it didn't matter what your obstacle was. The objective was to provide service. And that's really the way I come out. It does seem like that we've been focusing on the way to get the service rather than the service itself. It does seem like we've been talking about whether we're deregulated or not regulated or whether deregulation is a good idea or bad idea, whether competition is good or bad, whether people have access to consumers and so forth.

The truth of the matter is that in my state, about two-thirds of the state is rural. We have about 100 counties there. There is plenty of access to consumers. Any of you want to come on down, we'll be glad to take a tour and I'll show you more consumers than you can shake a stick at; even a big stick, Mr. Holland.

We noticed that you're in Georgia, that you're in Atlanta. You're not in Fitzgerald. In Fitzgerald, Georgia, there's a community college there that is anxiously awaiting connectivity of any kind to connect up their little school to the Internet and the Worldwide Web, because their goal is to move from a textile-based pine tree economy, which is declining, to a high-tech, Internet, global marketplace. And they're training information technology leaders there. They just want to connect.

Over in LaGrange, Georgia, in Troup County, the founding fathers there 10 years ago decided to wire the whole town. That means public housing residents and everybody. And I've been there. It's an amazing sight. They just want to connect.

So in a world of globalization, connectivity is the key. Service is the key. And that's really what I'd like to turn your attention to, not whether so much we can regulate it or whatever or be competitive or whatever, but how do we get there? And Ms. Greene, I'd like for you to tell me what plans you have, particularly Georgia, that might be worthy of our attention here to overcome the digital divide, to get more people in play here, to get people, particularly in rural America, in the global marketplace.

It's interesting we've talked about Nasdaq. Nasdaq just went under 2000 for the first time in a while. CLECs in my state are going broke. I mean, I think we focus on how to get there too much rather than the goal. The goal is service. How are we going to provide service to more people at a reasonable cost? And what is it about this whole question of universal service that we're not able to execute? Ms. Greene first.

MS. GREENE: Well, government has two proper roles to play in incenting deployment of technology. They can incent deployment of technology through putting proper economic incentives in place, because competitors will -- we're all running a business here. Competitors will go where the money is. That's why you don't see competition going into the residential market for the most part. You don't see it going into the rural market for the most part.

A second role the government can play is to create investment incentives through tax credits. What's been done in the implementation of the '96 act is the role that government has tried to play is micromanagement and overregulation. What government needs to do is to put the correct incentives in place through proper pricing and then get out of the way, or some combination. Government needs to put proper investment incentives through tax credits, as we've done in Georgia. In Georgia, though a port tax, we've been able to use some tax incentives to greatly expand our roll-out of DSL. And we take our responsibility to our rural areas -- Bell South is a very rural company -- we take our responsibility seriously. We have plans right now to roll-out DSL to 70 percent of our service territory, and we're looking every day to find ways to make the technology more affordable, to find new investment avenues, and also to work with our states to create incentives.

And I'd like to take your point about service just one step further. Bell South takes our service responsibility very seriously. Four out the last five years, we've gotten the J.D. Power award for outstanding service. We're number one in customer loyalty from the Yankee Group. And this year we were picked by the American Customer Satisfaction Index as the number one provider of telecommunications. We take service responsibility very seriously.

Penalties -- we talked about penalties here over -- the last three speakers talked about penalties. The biggest penalty -- the biggest penalty -- there are two big penalties in place for us today besides the federal and the state level penalties that we pay both to government and CLEC. The biggest penalty that we have is any time we pay a fine, our customers read a headline that says Bell South didn't give them good service, and that's not in our best interest. It's not in our best competitive interest. And it's not consistent with our heritage, which is to be a premier service provider. So that, coupled with the fact that we don't have access to a $14.2 billion revenue stream, which is long distance, those are both some pretty big penalties.

SEN. CLELAND: Mr. McLeod, what are some of your plans to provide better service at a lower cost in rural areas particularly?

MR. MCLEOD: We've taken an approach to deploying our network facilities on a regional basis. So, as we build network through Iowa or Illinois, we connect up not only second -- first tier markets, but second, third and fourth tier markets. So that has been our plan, and we have now about 30,000 miles of fiber network that we either own and control in our area.

Now, of course, in a marketplace where we have access to capital, we can deploy network like that. In today's market, we don't have access to capital. And basically we have stopped the deployment of additional facilities of this type. Even with those facilities that we have today, once we bring our fiber line into a community, and it might be a community of a thousand people or five thousand people, we're still dependent on getting access to that very last mile of connectivity -- the copper line, if you will, in some cases it's a combination of fiber and copper -- and on that last mile line, we can put high-speed Internet service.

So, the key to us is getting access to the last mile, so that we've already interconnected hundreds of cities with fiber -- the key is to get to the consumer, and that's what the '96 act was all about, the last mile. In the rural areas where you have small telephone companies now -- there are really two areas, there are the areas covered by the Bell companies -- 85 percent of the country -- and then you have the small telecos, the co-ops and so on and so forth. We've actually found in our markets a lot of the co-ops have done a very good job of deploying DSL services in their market and aren't necessarily behind the rest of the areas.

So, where you have a monopoly, a local telephone company -- and by the way, local, small telephone companies are highly profitable, if you've ever looked at a P&L, they have money to invest -- so that smaller company, it's dependent on them to deploy some of those profits that they have. If you want to encourage it through tax incentives, tax incentives would be great for little telephone company monopolies, and they would be great for large telephone company monopolies, but for the CLEC industry, there is not one CLEC in the United States that is making a profit to offset taxes against, tax credits against. So, in our case, incentives of some other sort is needed, at least in the near term, like our rates being too high that we're paying for that last mile connection, and areas like this that will cause us to better service customers.

SEN. CLELAND: Mr. Armstrong, can you tell us a bit about AT&T's plans for interconnectivity with -- in a global marketplace?

MR. ARMSTRONG: Yes, Senator. I'll speak to that from a variety of technologies, since AT&T has been and is investing in several technologies to bring all forms of communications to consumers and business.

I think first, of course, enforcing the telecom act is going to create the most competition out there across all the technologies. And I think second, understanding the build-out plan so we don't go solve yesterday's problem when it's not tomorrow's problem.

For example, we took a cable system that was analog broadcast video, just doing limited entertainment, and we converted it from low- capacity to high-capacity, we converted it from analog to digital, and we converted it from broadcast to interactive so that it could do all voice, video and data applications. We spent about six billion last year on that capital program to upgrade it across the country, where we have the homes pass. We're spending $4.5 billion this year.

As I testified this morning, we're about 74 percent of our homes pass complete, which means we can bring digital video, and we can bring interactive data. And we're going to be spending in 2002 and '03 capital to complete that, so that in small towns, big towns, every town that we're in, where we can afford that, we will be upgrading it to bring those services.

We're doing the same thing with fixed wireless. This is using bandwidth could have been mobile applications, but in this case the fixed application, and we're deploying it in communities for both telephone service and online, high-speed data services as well. That will roll-out over the next four to five years to pass some 11.5 million homes.

Also for the rural area, in my prior career with Hughes in the satellite business, when we implemented the direct TV, we also implemented something called direct PC, and that enables a geo- synchronous satellite with the same KU band transponder capacity to actually beam a broadcast signal down for download of Internet data of about 400 kilobits in using the backhaul of the telephone infrastructure so that they could reach all of rural America with a broadband solution.

But there's still, to take your point, may be some who are under- served or not served at all. AT&T has been, I think, very supportive of universal service. We're, I think, the largest collector of that and pass it on. If the Congress deemed, through any of the alternatives, that to those can be untouched in the future by broadband, that a policy change in subsidization incentives or tax breaks is necessary, we would support that as well.

SEN. CLELAND: Thank you very much, sir. Mr. Holland.

MR. HOLLAND: Yes. Let me take a look at my home state of Texas, one that I'm familiar with. I grew up in a small town there. In fact, my mother was the office manager for the small independent teleco that operated in that town, and it's something that I've always been very interested in. Texas is a state -- and I know Illinois, where I've also lived, also is typical of this -- where the 20-80 rule applies very well. The RBOC and Texas SBC serves about 80 percent of the population and about 20 percent of the land area. And with the independents, the 80-20 rule works the other way. In fact, you can get in your car in Austin, Texas and drive to El Paso, which is 600 miles, and you pass through ten miles of SBC territory through West Texas. And those are the rural regions that are very tough to serve. The further west you go, the more remote they are. As you get to New Mexico and Arizona, it's even worse.

We serve typically a lot of small schools, churches, barber shops, beauty parlors, retail stores, real estate brokerages, things like that. That's our bread and butter type customer. We don't serve the large customer. To try to go into the rural areas, though, would be very difficult not only for us but for SBC.

For instance, the Tauzin-Dingell bill says that it's going to provide broadband deployment to rural areas. Well, SBC could go build, except for that one ten miles around Fort Stockton, 600 miles of facilities where they're not the ILEC and have no regulation at all in the State of Texas in the independent areas. That's not going to happen.

I agree with Congressman Markey. The only way to make that happen is really through tax credits, subsidies, or through leveraging the buying power. I know this committee was very instrumental in the telecom act of '96, and I think that they got it right, because to a large extent they set up a system that protected a lot of the small, independent telecos, which I fully agreed with. It prevented companies from going in and just taking the big industry, or the school in town, away from the independent teleco and leaving everything else there. I think that was a good system, but that is a barrier to anyone come in there because you can't interconnect. I think the tax credits, the subsidies, financial incentives, like as an -- I've even suggested in Texas, in where I'm on the e-government task force -- is that the State of Texas use its buying power, as one of the biggest telecom users in the state, to attach conditions on its suppliers to go provide services to rural areas. I really think government has to play a big role in that area.

SEN. CLELAND: Thank you all very much. Thank you, Mr. Chairman.

SEN. HOLLINGS: Thank you. Senator Dorgan.

SEN. DORGAN: Mr. Chairman, thank you. Mr. Holland, does your company market to individual telephone users in the home?

MR. HOLLAND: To the home? No sir. We serve small businesses. Over half of our customers are one, two and three-line customers. That is, in fact, the most neglected part of the market today. The dynamics of serving that customer, of execution, are very similar to serving the one, or two, or three-line homeowner. The problem gets down to the competitive landscape. When we go serve a small business, you know, the barber shop with two lines, we're competing against one monopoly. That's the teleco, the ILEC. And we have been able to do that successfully, and have done quite well in -- we've installed over 750,000 lines in the last three years. If we go to the home with the same type of service, we have got to compete with two monopolies -- the RBOC and the cable TV company. I will tell you, every DSL player out there today has either gone bankrupt or has been given this going concern tattooed on their forehead by their accountants, which puts you in the chapter 11 waiting room, because they've tried to go in, even in urban areas, and compete with those two behemoths and they got squeezed. And it cannot be done without better enforcement. With better enforcement, you can go in and be successful. But it would take a lot better enforcement --

SEN. DORGAN: Mr. Holland, I've heard you say that, and Mr. McLeod and Mr. Armstrong all talked about better enforcement. Let me ask about that for a minute. Mr. McLeod, you said on page six, "The Bell companies have successfully denied competitors equal access to their entire local network, both economic and functional." I assume you take that complaint to the FCC repeatedly, is that correct? I mean, that's the -- that's the referee here, so it --

MR. MCLEOD: Sure. I mean, we would take it to the state commissions --

SEN. DORGAN: State commissions, and then --

MR. MCLEOD: -- and then go through a process there. And then eventually we could get to the FCC, where we would wait maybe a couple of years to be heard there. So, yes, there is an administrative remedy, but it's very long and very involved. A rocket docket is a two-year plan, not a one-month plan.

SEN. DORGAN: So back up 24 months from today, and you have -- 24 months ago you have a vista of new enterprises, new companies out there having accessed the capital market with a great deal of new capital. They've got plans. They've got business plans that are exciting, they're going to go compete, right? Twenty-four months later, to the extent that there are some left that are hanging on by their financial fingertips -- many have fallen by the wayside, many are in chapter 11 -- those that are left are hanging on by their fingertips. You, Mr. McLeod, said that they are not making a profit at all, not a penny of profit. So what happened in the intervening 24 months?

MR. MCLEOD: Two things happened, and it wasn't just the 24-month period. We actually began our expansion back in 1996. The two areas are, one, getting access to that local network in an equal fashion to our competitor. Let me give you an example. I've got one here that I want to just run through just to show you not only functional access but economic access.

We had a travel agency here last fall that wanted to move eight blocks, about 14 telephone lines. Already a customer of ours in Illinois. We sent an order to the local telephone company -- in this case SBC -- and we get a firm order commitment from them -- firm order commitment. Now that sounds like we're going to get something on a specific day.

So, we go to do the cut over on that specific day. The travel agency, who depends totally on telephone services, moves to the new facility. On that day, we're told by SBC that there are no facilities available. So, we start the process of trying to hold on to this customer of ours, and the first thing we do is we go out and buy cell phones for all of the people in this operation and send that. And we call-forward their old number into a cell phone. Then, we also have a policy of giving refunds to a customer that would damaged. We paid the neighboring business to use one of their telephone lines in this case. And then we finally had a settlement with the customer. This was a $500 a month customer, and eight months later we get service from the local telephone company. We paid $4,500 out of our own pocket just to keep this one customer.

Now, the problem is that we're supposed to have access to this customer -- to this network to service these customers. If we can get access to that network, we can provide great telephone service to the customer. But this kind of access, the competitive industry can't survive long.

Now, when the -- when the financial markets are wild and crazy and saying '96 act, we're going to open up all of this to competition -- sure, they're going to pour funds into it. But then the footzie (?) bill, the Tauzin-Dingell bill came in last year, and everybody started wondering whether or not the '96 act was going to be overturned. That was the start of it. There's been a study done to show the effect on people's stock prices every time the Tauzin-Dingell bill has been talked about. So, you've got inferior access going on through this whole period of time, and then you get the stock market nervous about Congress, and now the stock market is saying, "make a profit, CLEC." Well, we won't make profits when we're making up $4,500 credits to customers that should be just typical small business, barber shop kinds of customers.

So, we have an economic and a functional unequal access to that local network, and we need to get that resolved through enforcement and mandating equal access. The '96 act is just fine.

SEN. DORGAN: Mr. Chairman, I -- Mr. McLeod told a fascinating story here, and I'll follow-up with you later about what you did with respect to that specific situation. I understand all of you have talked about the need for enforcement. And I think you'll find members of Congress, perhaps the chairman, myself, and others, sympathetic to wanting to do something that is real with respect to enforcement and penalties.

MR. MCLEOD: Could I just add one thing, though, to that?

SEN. DORGAN: Yes.

MR. MCLEOD: During that same year, SBC was fined $60 million in this same state for some of these same kinds of occurrence. And, of course, we're one of the damaged parties. We got none of it. So, there were penalties in this case, but in this case, the Bell companies viewed it as cost of doing business.

SEN. DORGAN: I'd like to ask just a brief question of Ms. Greene and Mr. Armstrong. Ms. Greene, you indicated that your company's intention is to build-out advanced services to 70 percent of your territory. I'm wondering whether that's like the Blackberry, Palm (?) Seven (?), say they serve 94 percent of America, but you can't operate them in North Dakota. They're talking about population verses territory. A substantial amount of the territory of this country is not -- is not territory where you can carry a Blackberry, for example, and get that kind of service, but they still advertise that they're somewhere in over 90 percent of the -- tell me about the 70 percent, would you.

MS. GREENE: We have actual plans to equip 70 percent of our lines. So it will be an actual retrofitting of the lines to be able to carry DSL. Our goal is, of course, to achieve as close to 100 percent as we can because we view that as our responsibility, and ultimately it lets us build a platform that creates economic growth for everybody. We don't have the financial wherewithal right not to see our way clear to building out to 100 percent.

But something about this act is working, and I think that Mr. McLeod tells and interesting story, but I've got a couple of charts here that if I could just show you in one second -- you know, we're hearing a lot -- we're hearing a lot about the demise of the CLEC industry, and Mr. McLeod says we'll all be dead by the time it really takes off. I'll show you this chart just to really show you the slope of the line, even though we're talking about the CLEC industry being under duress. If you were to put slopes on those lines, which is the number of operational CLEC, and also the number of CLEC facility based lines, those are pretty steep curves.

And I think what you're seeing here in this marketplace is you're seeing a huge technology challenge. A lot of the money that we could have spend equipping DSL we've had to spend on retrofitting our network to be able to break our network up into pieces and do things that it was never designed to do. Our network was built to serve a telephone number that was identified with a specific geography. Now it has to be made available to your competitors and be targeted -- the telephone number goes with a specific person, not with a specific geography. We've had to totally rebuild out systems to do that.

And so what I think you see in the slope of that line is not that we're finally getting around, or we've got the threat of penalties. What you see in the slope of that line is we've done the heavy lifting that it takes to make our network do something that it was never designed to do. We've looked forward to when have made that investment, and we can then turn our attention to deploying DSL lines.

SEN. DORGAN: Mr. Chairman --

MR. HOLLAND: Senator Dorgan, could I just add something to what Ms. Greene said? One thing I've heard a lot of the ILECs talk about, especially the RBOCs, what they're going to do, this and that. We're going to build to this amount of the population and that and so forth. What I have never heard them say is we're going to go out of territory, where we can't leverage the monopoly to do any of that.

Like Bell South could have been in North Dakota four years ago building anywhere it wanted to with absolutely no regulation whatsoever. It could have found out what it was like to be a CLEC. Despite the number of lines increasing, this time last year there were about 45 publicly held players -- CLEC, DLEC, ISPs, that type of thing.

Today, most of the Wall Street analysts will tell you that Clark, myself, and Time Warner Telecom, and a handful of others will probably survive the shake-out, probably less than 10. In fact, since last July, between 15 and 20 emerging telecom providers have gone bankrupt, representing $35 billion of invested capital. That's not market cap; that's actually checks written and put into play.

Now, a lot of these wounds were self-inflicted. There were a lot of bad business plans. There was a lot of poor execution. Some of them tried to bite off more than they could chew financial. But the intransigence of the incumbent telecos in complying with the law and implementing the telecom act and the inability, unwillingness and lack of tools of the regulators to act as policemen and make them obey the law, and give competitors the same access to the local bottleneck facilities as they provide to themselves -- equal parity or equal access, as Clark says -- has produced that problem. The ILECs should walk in our shoes before they start talking about what a bed of roses it is.

SEN. DORGAN: Mr. Armstrong, one of the interesting sagas in recent years has been to watch AT&T. You took a big old sleepy company and gave it an industrial strength vitamin B-12 shot, and we're not sure where all this takes you and it. But it's been a very interesting thing to watch. The population of companies and entrepreneurs and interests to get into this business and do interesting things goes from the very small to the very large. And Mr. Holland, in fact, calls you a behemoth. So, tell me, if you will, from the perspective of a very large company involved in this issue as opposed to Mr. Holland and Mr. McLeod that are smaller -- well, Mr. McLeod is a pretty good sized operation these days in our part of the country -- but give me your perspective from a very large company doing business in the same set of circumstances. You have all of the issues dealing with opening the systems and trying to deal with the FCC and the local regulators and so on. Give me your perspective on what's happening here.

MR. ARMSTRONG: Senator, I'd be happy to. Three-and-a-half years ago when I started this journey with AT&T, we quickly realized that we were left with the remnants of Judge Greene's order, as Congressman Markey was so eloquent in describing. That is, the middle of a phone call. A thing called long-distance was never born out of the marketplace, regulation, or legislation. It was born out of Judge Greene's break up of the Bell system in 1984. It is not a bad place to be. We got to be kind of a behemoth. But two things happened along the way. The first is that the networks went from analog to digital, and that meant the whole access regime that was really the predicate of the judge's decision regulating monopolies, originating and terminating, and having something in the middle be an industry or a market called long-distance. And, of course, the telecom act, which then set a 14-point checklist can let the originators and terminators complete the call. So, we set out to do two things. One is to rebuild and transform our company by transforming three networks -- a wireless network, a data network that would not only be domestic but global, and a cable in the structure that would make a fiber infrastructure. That was the first challenge.

The second challenge is we had 60 million consumer long-distance customers. And what they engaged with, with us, was long-distance, and it was going to go away, because completing the call is the natural act -- whether it's a technology statement, a human statement, or a cost statement connecting the call, completing the call. So we had to have access to the only thing that connected our 60 million long-distance customers -- the twisted copper pair local loop. And the enforcement and interpretation of the Telecom Act of '96 was fundamental to AT&T being able to connect the call, to complete the call, because that's all that connected our 60 million ubiquitous customers throughout the United States. We started it -- this is our third foray -- we started it back in 1997 with a thing called TSR. That was Total Services Resale, which was taking a platform from the Bells in six states and reselling it. After six months, we shut it down because we had gotten 400,000 orders and after six months had only been able to provision 200,000 of them. We had to incent the other 200,000 to go back to the Bells because we just couldn't get them through the Bell systems. We shut down the operation. It cost us $3.2 billion.

Then, New York opened. And we pleaded with the commission as well as the FCC that it was not operationally ready, nor was it economically viable for UNI-P (?), unbundled network element platform or loop. It still was enacted. We showed up. It was important for three reasons. One, to prove, to demonstrated to this town as well as to this country that if a market opened, AT&T would provide consumer choice and competition in that market for local exchange service. The second reason is that we could take share, that the choice would not be showing up, it would also be taking share. And third, to demonstrate that it was not economically or operationally viable. Unfortunately, we proved all three. We have about 800,000 customers. We lost several hundred million dollars. We have stopped our marketing activities.

No one is showing up of any significance in other markets, however, that are opening. Mr. Markey's market of Massachusetts, nobody of significance has shown up. In Oklahoma and Kansas, nobody of significance has shown up. Why? Because we know we'll lose lots of money if we go in there under the conditions that are being presented. It is not being interpreted or being enforced to be either operationally or economically viable.

Now we have just bought $135 million worth of Northpoint assets to co-locate in 1,900 service offices for DSL, and Tauzin-Dingell would like to take the loop back so that nobody can provision broadband services competitively. So, our experience, Senator, has been from '97, attempting with TSR and losing billions of dollars, to the UNI (?) situation today, to the DSL situation tomorrow. This act can work with the right interpretation and enforcement.

SEN. DORGAN: Mr. Chairman, you've been very patient. And if I have other questions, I'll submit them to the panel. Thank you very much.

SEN. HOLLINGS: Very good. Ms. Greene, Mr. Holland says that Bell South can go to North Dakota without any regulation or restriction whatsoever in a totally open market -- no '96 act or anything else -- no 271. You got ready, willing and able according to the law. Why haven't you gone to North Dakota?

MS. GREENE: We choose to invest our money in our home territory of the nine states that we serve. We invested --

SEN. HOLLINGS: Well, wait a minute, now you're in some 7 or 11 countries. When I go to Buenos Aires, they congratulate me on my company making a heck of a lot of money down there in Buenos Aires. I get up to Lima, Peru, they congratulate -- you can get down to Peru and Argentina and these other countries, but you can't get to North Dakota?

MS. GREENE: Well, why I am not surprised that we have ended up at this point? Let me talk a little bit about the amount of money that we invest in BellSouth. Last year we invested five and a half billion dollars in our nine states. We --

SEN. HOLLINGS: How much money have you invested overseas?

MS. GREENE: Well, we've --

SEN. HOLLINGS: I'm paying the rates down in my home, the BellSouth rate. And my -- profits that you make from my paying the rate going to Argentina, Mexico, New Zealand?

MS. GREENE: Actually we have invested more in South Carolina over the last four years than we invested last year in Latin America. And that's in South Carolina alone. And, in addition to that, we have invested 165 percent of the net income of our domestic communications group back in domestic communications in the South --

SEN. HOLLINGS: But you're regulated in South Carolina, but you're not regulated in North Dakota. Why don't you go to North Dakota?

MS. GREENE: Because there's not enough money to build out a network everywhere that we go, everywhere in this country. And we have chosen.

SEN. HOLLINGS: But there's enough money to build a network out down in Buenos Aires?

MS. GREENE: Well, we would like to serve our customers with DSL, and we'd like to make sure that we are honoring 251 and 271 of the act. And that's how we have chosen to spend our money.

SEN. HOLLINGS: Well, now, you say that the regulatory uncertainty -- you know, that sort of gets me, because you wrote it. And it's just like Plato's famous couplet, that the politician makes his own little laws and sits attentive to his own applause. Here you rate the regulation and then you talk about the uncertainty of it, and that you are trying not to block all these court proceedings and everything else but to understand it, and the fact that Senators McCain and Brownback, they ask for interpretation, and then when they get it out of the FCC you say the 14-point checklist is expanded to 600, 800, 1,000, 1,100. It hasn't been expanded. Telecommunications is highly technical, very complex, and you and I can paint any kind of picture you want. But for the understanding and knowing, you wrote the 14-point checklist. There wasn't any difficulty understanding it at the time you wrote it and said, Vote on it. You asked me to support it.

MS. GREENE: I think what we have to do here is to separate the implementation of the act with the act itself. The act was clearly designed and was tightly woven to put forward a balanced platform. When the act was implemented, I'll give you an example of what happened -- when the act was implemented back in '96, there were at that point about a dozen piece parts of our networks. Today we are up over 300 piece parts that our network has been broken into. And the uncertainty that the Dingell-Tauzin seeks to clarify is how the FCC's authority about how many piece parts it needs to break the network into is unbridled and unclear. When the FCC itself tried to scale back its breaking up the network, they did so in SBC's merger. The court told them, No, there is no real authority under the act for you to restrict your actions in this way. So what Dingell-Tauzin would seek to do is to give clear policy direction to the FCC about what they can and can't do to facilitate broadband services going forward.

SEN. HOLLINGS: Well, you --

MS. GREENE: And the 14-point checklist -- actually the 1,100, 1,800, 600 -- whatever you want to call it, it doesn't make any difference -- those different categories have come in under four of the points under the checklist. And so when we came out of South Carolina, when we came out of Louisiana, seeking to provide long distance and felt we had opened up our network, the reaction that we got back from the FCC was, No, in these four areas we want to break those down into thousands more subparts. That's not the fault of the act; it is the fault of incomplete implementation of the act.

SEN. HOLLINGS: Well, the implementation has got to be done by the company itself; it can't be done by the FCC. In fact, I followed your application. I was interested in BellSouth. In fact, having been one of the principal authors of the act itself back in 1996, I thought it would be fine if my own RBOC could comply. And I learned from the FCC that the Public Service Commission order was 69 pages, practically word for word as a typical order, a model order that you submitted at the time. And of course the FCC sounded -- legally it sounded pretty, but you didn't have factual substance. That's why it was refused. It wasn't anything to do with the implementation and the uncertainty.

But let's get to the confiscatory pricing. You appealed that all the way to the United States Supreme Court. The Business Week schedule showed last year BellSouth increases their profits 22 percent, and the court refused this confiscatory pricing that you're talking about, about you being penalized or going out of business.

MS. GREENE: Well actually it's still pending at the Supreme Court, the whole issue about tailored pricing is still pending at the Supreme Court. And we did win that pricing at a lower court on appeal, because the court said that the way the FCC implemented the act they looked at a hypothetical network and not at an actual network, and that that was not appropriate to do.

SEN. HOLLINGS: Why is it being appealed to the Supreme Court if you've won it?

MS. GREENE: Well, we're not the only -- there are two sides, and one side doesn't like what's happened here. So the point being -- I mean, if you did step back and look at hypothetical pricing, what happened is the FCC took our network, which was a legacy network that was designed in a cost-plus environment, and they transformed us on paper into being the most fleet, efficient competitor, how can companies like -- one of the big mysteries to me in this whole policy debate is how companies like Mr. Holland's or Mr. McLeod's can view that as being a positive situation for themselves, where our network is priced at a cost that is so low, no matter how modern a network they build they are not going to be able to effectively compete with us on a price basis.

In addition --

SEN. HOLLINGS: What would be wrong with -- it's been suggested that since there's been this intermural now for five years -- courts appeals, rulings, and yet very little compliance over the entire country. And for example Pennsylvania has said what we need to do is have some restructuring, operational restructuring -- not to have separate subsidiaries. When we wrote the '96 act we required a separate subsidiary for manufacture -- buy wholesale retail rather than arguing about the price and everything else like that -- what's the matter with this listing your wholesale price and your resale price separately?

MS. GREENE: Well, sir, we do list our wholesale price and our retail price separately today. Structural separation --

SEN. HOLLINGS: Wait a minute, let me understand that, because I've heard differently. I can come and look at the BellSouth books and find out how much you wholesale to BellSouth and how much you wholesale let's say to a CLEC like Mr. McLeod's?

MS. GREENE: Let me give you a couple of examples, because I have some actual pricing. All of our rates are published, and all of our rates are set by regulators. Our retail rates are set by regulators; our wholesale rates are set by regulators. In Columbia, South Carolina, for example, the FCC has determined, and the state PSC has determined that the rate competitors are going to pay in Columbia is $18.48. They have set our retail rate for business customers at $42.75. The $24 difference there is known to our competitors, and known to our customers. And that's why all the competitors are flocking to the business market, because they know exactly what the wholesale price is. They know exactly what our retail price is. They also know exactly how close to parity we are giving them and how we are treating them from a service standpoint compared to our retail, because we have to report 1,800 measures, desegregated by CLECs, posted to the Internet, fines assessed already by each of our state jurisdictions against our performance. Structural separation is an answer looking for a problem. There is not a problem today that requires structural separation.

SEN. HOLLINGS: And therefore you wouldn't object to functional separation or a requirement thereof?

MS. GREENE: Sir, we operate under functional separation today. And this detailed checklist and report card that we have in each of our states serves as functional separation. It is very clear --

SEN. HOLLINGS: So you wouldn't object to it, since you're already doing it, I take it?

MS. GREENE: Structural separation, mandated separate structural separation, does nothing but drive up costs for consumers. So the devil is in the details. Today we functionally offer parity and functionally separate out our networks today. To have that structurally mandated or legislatively mandated, we would disagree with, because the ultimate person that gets cheated out of that is the consumer.

SEN. HOLLINGS: Well, I appreciate it, and I -- the committee really is indebted to each of you here and your appearance this morning. I am sorry that we haven't had more of the senators present, because as I explained earlier we don't have roll calls today, and so they're doing a lot of work at home. But thank you all four very much. The record will be opened for questions, and any other comments that you folks might want to add. Thank you a lot.

END

LOAD-DATE: June 20, 2001