Copyright 2002 Federal News Service, Inc.  
Federal News Service
May 22, 2002 Wednesday
SECTION: CAPITOL HILL HEARING

LENGTH: 18905 words

HEADLINE: HEARING OF THE SENATE COMMERCE, SCIENCE AND TRANSPORTATION COMMITTEE
 
SUBJECT: TELECOMMUNICATIONS COMPETITION AND BROADBAND DEPLOYMENT
 
CHAIRED BY: SENATOR ERNEST HOLLINGS (D-SC)
 
LOCATION: 253 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: REPRESENTATIVE CHRIS CANNON (R-UT); LORETTA LYNCH, PRESIDENT, CALIFORNIA PUBLIC UTILITIES COMMISSION; REPRESENTATIVE EDWARD MARKEY (D-MA); ROBERT B. NELSON, COMMISSIONER, MICHIGAN PUBLIC SERVICE COMMISSION; PAUL B. VASSINGTON, CHAIRMAN, MASSACHUSETTS DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY; SENATOR MARY JO WHITE, PENNSYLVANIA STATE SENATE;
 


BODY:
(Note: This hearing was fed in progress.)

SEN. HOLLINGS: (In progress) -- has been fined 20.5 million. Qwest has been fined, for violations of these opening-up sections, 878.7 million. SBC has been fined 639.1 million, and Verizon, 300.4 (million). You can understand why they treat their fines casually when, for example, with a 300 million fine, Verizon actually has a net -- a -- income of 67.19 billion. So even Chairman Powell has said we've got to increase the fines.

We think there's a better approach, perhaps, than increasing the fines. Let's see if we can get order out of chaos with a functional separation. If that's not adhered to or obeyed, then we might have to move to structural separation. That's provided in S. 1364, that I introduced last August, and this is the first discussion of it.

Otherwise, we can understand that broadband services are really available in 85 percent of the homes in America. Actually, the Bell companies have had it since the early '80s, and they're only now deploying it.

I was very interested in Mr.Whitacre of SBC coming to the office earlier this spring and said, for the first quarter, he's got 183,000 broadband -- he's put on in the first quarter 183,000 broadband customers. Well, we know there's no prohibition. There's no restriction whatever. But the various bills -- namely, Tauzin-Dingell -- you would think there was some restriction or prevention to it. It's a matter of demand.

With that said, let me yield first to Senator Burns.

SEN. CONRAD BURNS (R-MT): Mr. Chairman, thank you for this hearing. And I appreciate our witnesses today and especially the first two.

I'm giving a quiz after you make your statement. And I'll put my statement in the record and look forward to hearing from the witnesses. Thank you very much.

SEN. HOLLINGS: Thank you.

Senator Breaux?

SEN. JOHN BREAUX (D-LA): I'll do the same.

SEN. HOLLINGS: Thank you very much.

Congressman Cannon and Congressman Markey, both -- the committee is indebted to you both for being with us this morning. And Congressman Cannon, I understand you've got momentarily a markup over on the House side, so we welcome you and -- be glad to hear from you at this time.

REP. CANNON: Thank you, Mr. Chairman, Senator Burns, Senator Breaux.

I was interested to see, when I saw my draft of the statement this morning, that my staff had characterized this as one of my favorite subjects -- broadband. And I guess, in a way, it really is. I believe that broadband deployment by telecommunications carriers and cable companies and broadband adoption by businesses and consumers has the potential of bringing amazing things to our economy, our communities and our homes. Whether we're talking about the potential for broadband to help improve the way the lesson plans are developed and delivered to students of all ages; the potential of -- for patients to remotely access the best that our health care system has to offer, both here in America and for folks abroad; the potential for businesses of all sizes to improve their efficiency and tap new markets; or the potential for residential customers to access new forms of entertainment, it seems that we pretty much all agree that broadband access is something that we want to encourage.

It might be the best way for us to do that is to do two things: First, we should tread carefully when it comes to altering the basic framework of the 1996 act. And second, we can take steps to reduce the gap between broadband availability and broadband adoption. With regard to the first point, since the act was signed into law at the Library of Congress, we've seen a parade from the Jefferson Building to the FCC and from the FCC to the courts all over the land. In just the last two weeks, some six years after the act became law, we finally saw the U.S. Supreme Court issue a decision in Verizon versus FCC, in which the Court voted overwhelmingly to uphold the FCC's authority to adopt forward-looking, pro-competitive pricing rules. Hopefully, that will be the last word -- I hope, that is -- and I urge that we now give the industry time to digest that opinion and take advantage of the certainty it should provide.

I'm not suggesting that we, the FCC and the states should never ask questions about the pace at which local competition, long-distance entry and broadband competition are progressing. But I am suggesting that when we ask questions merely for the sake of doing so, the industry and the financial committees take notice and probably say "There they go again down there in Washington, changing the rules in the middle of the game." If we want companies to invest, they need to know they can do so with a reasonable expectation of a stable legal framework. If our questions suggest a radical alteration of that framework that picks winners and losers like the Tauzin-Dingell bill or, rather than leaving that to the marketplace, we destabilize investor confidence and risk driving capital away from this critical sector at exactly the time we should be encouraging capital investment.

While legislators are, by our nature, impatient, we must acknowledge that in spite of the uncertainty wrought by the overhang of litigation, there's been a tremendous amount of progress toward making local markets competitive and broadband access available. In the face of legal uncertainty wrought by the bill, ceaseless lawsuits, and despite the daunting task of competing against entrenched monopolists, CLECs have raised and invested 65 billion in the investment that would be wasted if Congress changes the rules of the game without basis. The U.S. Supreme Court said last week, "A regulatory scheme that can boast such substantial competitive capital spending over a four-year period is not easily described as an unreasonable way to promote competitive investments in facilities.

New entrants aren't the only ones who have made big investments. In spite of the repeated arguments, they can't or won't make broadband available under the current regulatory regime, the incumbent local telephone companies have made very real progress toward making DSL available to their customers. From a standing start in 1997, when the Bells had yet to make any significant commitment to broadband, the majority of Bells' central offices are now equipped to offer broadband access.

Just how pronounced this progress has been, given the nature of the regulatory yoke under which the Bells claim they operate -- according to publicly available documents, most often the materials the Bells provide the financial community, BellSouth announced its first deployment in May 1998. Today BellSouth is capable of offering DSL to 71 percent of their households. SBC first offered commercial DSL in the fourth quarter of 1997, and today DSL is available to 25 million of its subscribers, or 60 percent of its customers. Verizon has a similar story, as does Qwest, which has a total of about 32 percent of its customers with access to DSL lines.

What is clear is that in spite of their willingness -- in spite of their wailing about the current regulatory regime, the Bells are four of the 10 largest broadband providers in the country. If you look only at the market for T1 and T3 services, they are the largest providers of those services. Each of the Bells has told the financial community that they are benefiting from strong double- and even triple-digit growth rates in the broadband markets. They deserve credit for bringing broadband to the majority of their customers in just over four years, but we must also take note of the fact that they did so under the current statutory and regulatory regime.

Again, quoting the Supreme Court, "The incumbents' investment of more than $100 billion since the act passed affirms the commonsense conclusion that so long as --(inaudible) -- brings about some competition, the incumbents will continue to have incentives to invest and improve their services to hold on to their existing customer base."

In the face of these facts, we hear that Congress should act to level the playing field and do more to promote broadband deployment. I want to comment on both of those notions.

We're all for fairness and even application of law, but this claim I keep hearing about the need for regulatory parity when it comes to broadband strikes me as something of a canard or sham or a red herring. There may come a day when regulatory parity will be appropriate, but I believe that before we seriously start considering regulatory parity, we should insist first on parity of situation, and parity of situation does not exist today in the telecommunications industry.

No one would seriously argue that we should have absolute parity between the ILECs and the CLECs because even though they both offer telecommunication services, they have very different levels of market power. Similarly, both cable and satellite companies offer video services, but we haven't regulated them in exactly the same way because of differences in their relative ability to leverage their market power. We should recognize that this difference also applies to the broadband market where the ILECs have the ability to leverage their ratepayer-funded, bottleneck facilities, particularly the local loops between their central offices and consumers' premises, access (to the last mile ?) between the central office and a business or residence is every bit as critical to a CLEC as access to programming is to satellite companies.

Deregulating the ILECs (last-mile ?) facilities in the name of promoting broadband deployment would threaten the ability of other parties to lease access to those (last-mile ?) facilities, to offer consumers innovative broadband services, as well as traditional telephony. Put another way, deregulating, as proposed by Tauzin- Dingell and Breaux is akin to a riverboat gamble. If we pull the states who had a role in telecom for the past 70 years out of the process and we tie the FCC's hands, and Tauzin and Breaux are wrong about the effect that deregulation will have, where does that leave us? Under both bills it leaves us with little recourse other than a subsequent act of Congress, and that's a very high standard.

Let's be clear, the real result of the regulatory (period ?) mandate in Senate 2430, would relieve the Bells of the market-opening requirements of the 1996 Act and turn our backs on 30 years of government policy that has in that timespan opened the entire telecommunications industry to competition. In its effect, it is no different than the Tauzin-Dingell Bill. Enacting S. 2430 would drive companies like Covad out of the market, and that is exactly contrary to what we should be trying to do.

Additionally, deregulation of the sort proposed in S. 2430 would leave many consumers, including many of my constituents who live in rural areas beyond the reach of cable, with but one choice of broadband service. I believe that leaving consumers with a choice of a single, unregulated monopoly provider in any market is a bad idea.

So what can we do as policymakers to encourage this broadband revolution? First, we can commit to enforce the 1966 Act and the antitrust laws, which provide a solid framework for the deployment of competitive broadband. We should stop attempting to bifurcate the market into broadband and narrowband voice and data segments. Time and technology are rendering these distinctions obsolete. They act as a good template by which to open markets, encourage investment and competition, and when appropriate, deregulate. All the tools necessary to do those things are found in the act.

Second, to the extent that there remain pockets of the country where broadband is not available, some action may be necessary to help ensure that service does become available. There's a big contrast, however, in the various mechanisms that can be used to incentivize deployment in high-cost, hard-to-serve areas. Loan guarantees, universal service support and targeted tax credits all help make high- cost service more affordable. And as policymakers, you know what you're getting. Companies don't get the support unless they use it to make service available. In contrast to the type of deregulation proposed by Tauzin and Breaux, you get a promise of deployment without any guarantee, and high-cost areas are still high-cost areas. Deregulation doesn't change the fact that there are some areas where economies are tough, economics are tough, and the notion that deregulating either by eliminating TELREG (ph) or by eliminating unbundled access to loops will solve the problem is wrong.

Third, we can take steps to alleviate the growing demand gap between broadband availability and broadband adoption. Consumers will adopt broadband if the price is moved down closer to the prices consumers now pay for dial-up service. The way to drive prices down is to encourage as much competition as possible across and within the various service platforms. Consumers want broadband, but there's probably a limit to the number of consumers who can afford to pay $45 or $50 a month for broadband access. As price comes down, adoption rates will rise, just as has been the case in markets like wireless telephone service. Additionally, we can take steps to address critical issues like copyright protection, privacy, and music licensing that will make both consumers and content creators more comfortable in the broadband space. Consumers want access to a myriad of products, and content producers want to be able to benefit from their creativity. We should make sure that copyright privacy and music licensing statutes written in the 20th century make sense in the 21st.

You, Mr. Chairman, have certainly been active on the cutting edge of these issues. If we can find solutions in these areas, and content and content creators, from the single entrepreneur to the largest movie studio, begin making compelling content available to consumers on line, we will see broadband adoption rates grow at exponential rates.

Thank you again for the opportunity to share my views with the committee. I apologize, but I have to run to a markup in the Resources Committee, but I truly appreciate your willingness to accommodate my schedule.

SEN. HOLLINGS: Well, we are very grateful to you, sir.

Are there any questions? Have you got any?

SEN. : No, sir.

SEN. HOLLINGS: Congressman, we really appreciate your appearance here this morning, and you can excuse yourself, if you wish --

REP. CANNON: Thank you, Mr. Chairman.

SEN. HOLLINGS: -- because I think Congressman Markey will take you past your time. I hope so.

Congressman Markey.

REP. MARKEY: Thank you, Mr. Chairman, very much. And I thank all the committee members for the invitation to be here today.

Just a brief review of how we got here today. When I arrived in Congress in 1976, we were still in an era where, in my house and, I think, in your houses as well, when you were on the phone making a long-distance call, if it went over two to three minutes, somebody in the house used to yell, "Hurry! Hurry to the phone to talk to Grandma. It's long distance! You know, we can't afford to be talking any longer than another minute."

Now, AT&T had had a hundred years to figure out how to bring down long-distance rates, and then somebody named Bill McGowan started to visit our offices to explain how you could actually have competition in long distance. That was a difficult concept, that there could be another company providing phone service, since one company provided all of our phone service and it had 1.2 million employees. And the idea was difficult for me, at least, to grasp because in my mind initially, I saw like a three-foot telephone pole going down the street competing against the tall telephone pole that AT&T had. How can you compete in long distance?

And as McGowan explained it to Congress and to the regulators and to the courts, it became clear that if AT&T was forced to share its switches, its wires, you could actually have competition. And beginning on January 1st, 1984, with the decision to break up Ma Bell, all of a sudden, once the local Bells no longer had a stake in long distance, they gave access not only to MCI but to Sprint and dozens of other companies. And across the country, criss-crossing the highways and byways of our country, we saw multiple fiber-optic networks being built by all of these companies, and finally AT&T decided to invest in its first square foot of fiber optic. But that was 1984. Fiber optic had been invented by Corning decades before.

Now, what forced them to do that? It was, without question, the paranoia that someone else might now deploy a new technology and take their business. They didn't have a monopoly.

And once all these competitors got into the market, the price of long distance plummeted.

The same thing happened when Congress and the regulators in the early 1990s decided to move over 200 megaHertz of spectrum for cell- phone competition. There had been a duopoly, two companies, that had cell-phone service in each region of the country, but prices still were very high. It was an analog technology. There was very small penetration of the marketplace.

We, as a matter of policy, decided that we would introduce a third, fourth, fifth and sixth license into each marketplace. And the first two incumbents for that one market could not compete for those new licenses.

Well, what happened? Well, the new licensees deployed digital. The old two licensees were still stuck in analog with very high prices. By 1994-95, the prices of cell-phone service started to plummet until we reach a point right now where 90 percent of the people sitting in this room have a cell phone in their pocket, walking around, with some kind of monthly pricing package that AT&T, the Bells, could never quite figure out how to provide to us before there was actual real competition, because the monopoly was broken up.

The same thing is true when it came to equipment. AT&T was the only real manufacturer of equipment. It had a monopsony. It sold to itself. So you can imagine that it was no surprise that we all still had black rotary-dial phones in our houses in 1980, because they didn't have an incentive to develop the new technology. But once it was broken up in 1984, boom, out into the marketplace comes all of this new equipment from Northern Telecom, from Siemens, from all the rest of the companies that now had an opportunity to sell into the marketplace.

That's our legacy. It's a very brief legacy. It's only 25 years. But it has transformed our nation and has made us the global leader in these technologies., this committee, and on the House side, decided that they were going to take on the last monopoly -- local telephone service. How do you provide the incentive to have that kind of a competition breakout and to force the deployment of broad band?

We know, going into 1996, that the Bells already had DSL, digital subscriber line service, in their laboratories. Remember, for each one of these inventions, the Bells had already won Nobel prizes for basic research, but never for applied research, getting it out to consumers, because why would they? They always had monopolies in each one of these fields., in its wisdom, the Congress decided that it would mandate that the Bells could now get back into long distance, because we now had so many companies providing long distance and the prices had plummeted, if they would open up their local marketplace and there would be a 14-point checklist that would prove that they had opened up their marketplace. And maybe, just maybe, if they felt the paranoia of more competition in the local marketplace, they would finally deploy DSL. Paranoia.

Well, what has happened? Well, since 1996, when there was no broad band to anybody, we now have somewhere between 70 and 85 percent of all American homes, depending on how you want to analyze it, with broad band going down their street.

Is that a crisis, or is that a remarkable event that you go for 100 years, make no progress in providing broad-band services to Americans, and then in six years you create a situation where the new competitors spend $60 billion and the Bells, in response, have to spend $100 billion?

Now, what's the crisis? The crisis is, in fact, for consumers that they can't afford it. The Bells are charging or the cable companies are charging $60, $70 a month. For what, e-mail? To get your local newspaper online? Well, you can still have narrow band for 25 bucks. So there is a crisis, but it's a crisis in price and in the content.

Now, some people argue that the answer is to remove the protections which the competitors have been given so that they can get into the marketplace, and somehow or other we will have even greater subscription to broad band. I think it's just the opposite. I think we should put our faith in competition. It worked for cellular. It worked for long distance. It will work here as well. The more competition is the lower the prices and the greater the increase in technological innovation.

So, yeah, the CLECs, the DLECs, they have a tough marketplace right now. Part of it is the legislative cloud which has been created over it. Part of it is the collapse in the capital markets. Part of it is that there was an overbill. There's a whole myriad of reasons why it has occurred.

But let's not kid ourselves for a second. This is a huge success story. Now, we're waiting for the public -- only 12 percent of the public subscribes to the broad band going down the street right now, although 70 to 85 percent could subscribe if they wanted to because it was available.

So Bill Gates says people will only subscribe to broad band when it's at $30 or $35 a month. Now, how do you get it to $30 or $35 a month? Do you remember competition and hope that the Bells will lower the price, or do you try to create more competition so that the Bells have to continually try to beat their competitor? Which is the smarter way of going?

Now, if you've got a problem out in rural America, we can deal with that. If there are, in the most rural parts of the United States, just absolute impossible-to-overcome logistical obstacles in deploying broad band, let's talk about that. We could have tax policies, universal-service policies, state-federal government cooperation to deal with that. But let's not take away, out of urban, suburban, and for a good chunk of rural America, a policy that is already working six years.

And, by the way, for most of those six years, the Bells were in court. Their first action after the '96 act passed was, one, "We're going to the Supreme Court to say we don't want to comply with the requirements to open up the local market." That took all the way up to 1999.

And two, in the state courts and at the FCC, "We're not even going to provide for any of these market-opening opportunities," so that New York, in December of 1999, almost the beginning of 2000, was the first state where the Bells had actually complied with the 14- point checklist. In other words, it's only been in place now for two years at the first state. We're up to 13 states right now.

So let me say this in conclusion. One, the bill is unnecessary. We have a policy which is working. It's in place. Broad band is out there. People aren't subscribing, though, because it's too expensive for the services which are being provided. If there's a rural problem, let's deal with rural, but no more than that. Competition is where we should place our faith.

Two, it's unfair. We have dozens, scores of companies who have gone to the capital markets, risked their economic lives to get out there into the marketplace in now very difficult economic times. It would be wrong to just pull the rug out from underneath all of these people who have, in fact, given the incentive to the Bells to finally go out and deploy broad band themselves.

And thirdly, it's undigital. You can't separate voice and data from a regulatory perspective. The world of 0s and 1s would create an impossible regulatory burden upon the state or federal regulators. There is a mechanism in place that has already been satisfied in 13 states for the Bells to get into voice and data simultaneously.

We should continue to stay the course. It is not a crisis. In fact, it is quite remarkable what has happened since the Telecommunications Act has passed in 1996, despite the Bells' first four years of foot-dragging.

I thank you, Mr. Chairman, for allowing me to testify here.

SEN. HOLLINGS: Thank you. Senator McCain. Senator Burns.

SEN. CONRAD BURNS (R-MT): I don't have any questions. I congratulate you and appreciate your remarks this morning, Mr. Markey.

I have a question with regard to the parity bill that's been offered by our good friends, Mr. Breaux and Mr. Nickles. Would you care to -- and if you don't have all the information on it, I understand that too -- would you care to comment on that and how that impacts what you believe to be a non-crisis?

REP. MARKEY: If, by parity, you mean that the Bell companies don't have any responsibilities to open up their markets, their switches, their wires, because the cable companies don't, I don't think the answer is to move in that direction but rather to more fully implement the '96 act, which said that all telecommunications services should be regulated in a way that guarantees equal access.

And we should wait for the California federal court decision that's looking at whether or not the cable companies have to open up to competitors, so that ISPs and CLECs can gain better access to the cable wires rather than shutting down the access which ISPs and CLECs and DLECs have to the telephone wires, because if you move in the parity direction, you basically are creating once again a duopoly.

And we know that when the cable guy and the telephone guy coexist in a community, all you wind up with -- and we're seeing it right now -- is higher and higher broad-band prices, higher and higher phone rates and higher and higher rates for every other service. You need the third, fourth and fifth competitor in the marketplace.

We saw it in cellular. We saw it in long distance. And we're seeing it here as well. As the CLECs flounder in economic difficulty, we're seeing the reduction of the pressure on the existing duopoly, and as a result, prices are going higher and ordinary people can't subscribe.

So I guess my answer would be that in almost all instances we'll see the cable guy and the telephone guy having a stake in some kind of digital detente where they both kind of coexist, getting a huge share of the market, and knowing that there isn't going to be anyone else coming down the street. In the long run, that stifles job growth, it stifles innovation and it stifles the kind of environment which will lower prices and increase services to consumers.

SEN. BURNS: Is it your opinion that either bill, either Tauzin- Dingell and the Breaux-Nickels approach, would not get us to where we want to be?

REP. MARKEY: Well, again, we have a success story in the deployment of broad band, but we don't have a success story in the adoption of it by consumers, whose streets these wires now go down, where the switches have been deployed.

So I think the only way in which that is going to happen is if the price, as Bill Gates says, drops down to 30, 35 bucks a month. If you can get narrow band at 20, 25 bucks, but you have to spend 70 bucks a month for broad band with no really significant additional services right now, you're just not going to have a success story.

So, yeah, I think it's critical to ensure that the declining cost base of these new technologies continues to be given an incentive and that each one of these companies be forced to deploy it in a way that benefits consumers. The consumer should be king here. And unfortunately, I think two industries have a stake in trying to continue to increase the charges for consumers. And that's completely ahistorical in terms of what's happened in every other area of telecommunication services.

SEN. BURNS: I thank the congressman.

SEN. HOLLINGS: Senator McCain.

SEN. MCCAIN: Congressman Markey, what would be the immediate effect of the passage of Tauzin-Dingell, in your view?

REP. MARKEY: I believe that whatever is left of the competitive telecommunications marketplace would suffer such a serious blow that we would wind up with a de facto duopoly in the country and we would have lost the benefits for the next five to 10 years of this paranoia that drove both of those industries to deploy.

SEN. MCCAIN: I thank you. And I thank you for your rather eloquent testimony today. Thank you, Mr. Chairman.

REP. MARKEY: Thank you, Senator McCain.

SEN. HOLLINGS: Very good. Senator Breaux.

SEN. JOHN BREAUX (D-LA): Thank you, Mr. Chairman. I thank our colleagues from the House for being with us. How are you doing with Tauzin and Dingell over there? (Laughs.) Do you all talk?

REP. MARKEY: Oh, no, no. We love each other over there. (Laughter.)

SEN. BREAUX: Well, we had the pleasure of having both of them over here a little earlier. I would just use, Mr. Chairman -- I thank Ed for his statement. It is eloquent. He obviously knows his subject matter very well. We differ on the conclusions, but his intelligence in this matter is unquestioned.

Congressman Cannon was not here -- I almost said Senator Cannon, former chairman of this committee -- and he used the term Tauzin- Dingell and Breaux-Nickels almost interchangeably. And while Congressman Dingell is a great friend of mine and Tauzin is like a brother, the legislation is not. And I would just say very quickly, our bill is only three pages, if you take out the findings, which I'm always happy to do. Findings are laudatory and sound good, but they don't really have a legislative effect.

So the bill that we have, Breaux-Nickels, is only three pages long. It basically just says that the FCC, the independent regulatory body, is instructed to come back with regulations and rules within 120 days to establish parity between the providers of broad-band services, whether it's a telephone company, whether it's a cable company, whether it's a wireless company or whether it's a satellite company. That's it.

It tries to take the politics out of it. It tries to take the politicians out of it, so that the decisions on this new and very exciting type of technology is, in fact, made by an independent regulatory agency and not politicians, and making political decisions based on our constituents.

I think that's probably the only way we're going to resolve this issue. I don't think that we're going to be able to do the nitty- gritty, sentence by sentence, paragraph by paragraph, word by word, have the ability to establish a level playing field. So we say to the regulatory body to do it within 120 days. That's it -- three pages.

What the bill does not do and why I wanted to point this out because of what Congressman Cannon was saying that they're all the same -- they're not. Our bill, for instance, does not affect Section 271, which has been mentioned here this morning. The regional Bells will still be required to obtain FCC approval after getting approval from their respective states to provide any type of inter-lata data or voice services.

The bill will not affect the 271 checklist, the 251 provisions that are required. It will not affect that at all. The bill does not relieve the Bell operating companies of their obligation to open their local telephone markets to competition as a condition precedent to receiving the inter-lata approval. It does not affect e-rate which Senator Rockefeller has worked on so long to require that schools and libraries be able to have access. It does not affect the universal service obligations.

So, I mean, if you look at what Tauzin-Dingell attempted to do and passed the House and what our bill, that simply instructs the FCC to come back with rules creating a level playing field among the people that provide broad-band services, that's it. And I think that there's a vast difference between the two, and I just wanted to raise that since Congressman Cannon had sort of implied that they were the same bills. I mean, I don't know how many pages Tauzin-Dingell was, but I'll bet it was a little bit more than three, and ours is not.

Thank you, Mr. Chairman.

SEN. HOLLINGS: Well, the chairman then will take his time right now. What happens -- and Congressman Markey, I think you and I agree on this parity, as Senator Breaux -- but I'm reminded of Adlai Stevenson's comment. He says, "It's not a question of whether I'm a liberal or whether I'm a conservative but whether I'm headed in the right direction."

Now, that's exactly what's wrong with the Breaux bill. It heads us in the wrong direction. I think you and I are trying to open it up to competition. And Tauzin-Dingell categorically does away with 251 and 271, the access and the requirements for the opening up in order to get the parity -- everybody open, everybody competing. And I'm ready to move at -- it's a timing matter, with respect to cable. Cable's giving the only competition. That's why they're putting out the DSL. I don't want to kill off the little bit of competition to what? To the monopoly, because they've got 90 percent of that last line.

Now, looking at the reality and where it all exists today with that monopoly, when you go in the Breaux bill of parity, then what you do is you bring in and by gosh tell the cables they can have a monopoly too. And one has about 70 percent of the business, I think Bell on broadband, and I think cable has got about 70 percent of the home or domestic personal use. And what we're trying to do is get competition into both.

This committee has just won out with the administration relative to the Federal Trade Commission. I think -- and you can comment on it -- that yes, when the Federal Trade Commission approved the merger of AOL-Time Warner, they put in there an opening up requirement, not a close down requirement. And similarly, ComCast has opened up voluntarily some of it -- not all of it -- but as a move, they've been opening up. And that's the direction, as I say, we want to go in. And there's a difference between the Justice Department anti-trust looking for crime and the Federal Trade Commission, which has a broader mandate, looking for the public interest.

So, if you want to comment on that, I think that's the fundamental difference, and we agree with Senator Breaux on parity, but not a parity of a monopoly unless everybody have a monopoly. I mean, on the contrary, we're trying to open it up and get the competition. Do you have a comment?

REP. MARKEY: Well, it all depends on how you see the revolution. If you see the revolution as being the same two companies that have had wires doing down the street over the last 50 years, in the telephone company's instance, the last 100 years, then parity between the two of them is -- sounds fair. But if you see the revolution of being hundreds, thousands of smaller companies whose names we never heard of before 1996, that all went out into the marketplace, raised some capital, had a new technology, took some risks and changed this country, then that notion of parity will ultimately stifle innovation. If you believe that parity means that all these young people with these great ideas who are out there have an equal shot of reaching all of the customers in the United States and as a result they can convince some people to invest in their concepts, then that's a concept of parity around which I think our country can grow and thrive.

So, this ISP, CLEC, DLEC revolution is really what the future is about. The Bells have been laying people off for the last 30 years, and they are going to continue to do so. That's not where the job growth is. The job growth is going to be in these thousands of smaller companies that are in Virginia, they're in Oregon, they're in Massachusetts -- they're in every state now all across the country. And they're the ones that have really transformed the country. And only by ensuring that these smaller, newer companies, whose names we don't know today but will in the future, will we make a difference.

We made a decision as a government in 1987 to protect a little company called AOL, you know, along with CompuServe and the other couple of other information service companies so that they could not be put out of business by the Bells, which is what they were trying to do. Now, today, only 15 years later, look what happened because we made a decision we were going to not just allow the large single companies to control information services.

So, that's where I think we have to plant our flag. It's with the future. It can't be about the past. The past -- the past is a duopoloy, parity between two old monopolies. The future is parity in which thousands of companies can compete, and I think that's really what our country has to be all about.

SEN. HOLLINGS: Senator Rockefeller.

SEN. JOHN ROCKEFELLER (D-WV): Thank you, Mr. Chairman. Congressman Markey, that was superb testimony, but I expected no less from you.

REP. MARKEY: Tribute from Caesar, thank you.

SEN. ROCKEFELLER: Yes, that's right. That's right. As John Breaux indicated, I am obsessed by universal service. And, I -- I'd like to get some of your views on this. And it's obviously because of E-Rate, but it's a lot more than that. And it has to do with, you know, subsidization of -- (inaudible) -- poor states by bigger states, and it gets into many aspects. It's not just K-12 and E-Rate -- it's a lot more than that.

Now you -- you commissioned a GAO study which said in part that Internet technology may eventually become, I'm quoting, "an attractive alternative to voice service and could affect the revenue base from which universal service programs are funded." Can you kind of walk us through how that happens, number one? Number two, can you describe what happens as you get a combining of voice, video and interactive, and it's effect, you know, just using a plain old phone? And can you describe what the FCC can do without -- if they can, in your judgment -- can do without any congressional intervention at all through rules and regulations, to undermine universal service, which I hold to be very sacred?

REP. MARKEY: Thank you, Senator. The concept of universal service, going back to the 1930s, was originally thought of as good social policy so that the most rural parts of the country would be connected to the most urban parts, and the urban parts would connect the rural by subsidizing.

Now, it turned out to be not only good social policy but good economic policy as well, as we created national markets for all companies to reach all people in the country. And it turned out to be quite a brilliant policy, as did rural electrification and other policies of its sort. So, we all have a stake. And, obviously, if you come from Boston, we have been subsidizing the rural parts of New England for the last 60 or 70 years. It's been good for us as well.

The question here now, as the Internet develops, is whether or not, as voice migrates over to Internet, there can be a way in which there is an escape from the responsibilities of ensuring that there is a contribution made to the universal service pool. And that was the reason that I asked for the GAO report, so that we could measure the time frame over which this is likely to happen, and then the impact of the -- of the quantitative size of that migration.

I think that for our purposes we have to make sure that there is no escape from the responsibility of contributing to the universal service pool. As I said earlier, making these distinctions in zeros and ones between voice and data is not going to be easy, but where companies are committed to providing voice service that can be clearly identified as those that historically would have been levied with the universal service charge, I think that we have to begin now to have the discussion before the revolution really unfolds so that the FCC is clearly instructed by Congress to extract the levy from them so that the schools, the libraries, the rural medical services and rural phone service continues to be subsidized.

SEN. ROCKEFELLER: Congressman --

REP. MARKEY: Yes --

SEN. ROCKEFELLER: We had all -- we had the commissioners before us for confirmation and for a hearing, and in each case I asked them individually would they pledge to do nothing to undermine the universal service fund and they all said, you know, Powell, all of them said they would do absolutely nothing. I don't trust that. And I'm very -- it makes me very nervous because of the power of rules and regulations, and because of what I think I see as their intuitive disposition towards this.

REP. MARKEY: Well, here's what I would say -- that I don't think it's the fear of God which motivates the FCC. I think it's the fear of the Senate on universal service. (Laughter.) And it was my observation during the 1996 Telecom Act deliberations that the wonderful compromise which Massachusetts, and Virginia, and Pennsylvania made in 1787 in allowing for each one of these smaller states to have two senators apiece has now emerged as something which is a powerful protector of universal service for all of those rural states that are so well represented, I might note, on this committee. So, if I were a member of the Federal Communications Commission, I would move forward with only the greatest of caution in undermining the historical commitment which our country has made for 70 (?) years to that concept. So, I just don't think it's likely to happen. What I would fear is that there was a legislative effort to remove the responsibility for contribution to universal service. I don't think the FCC has the nerve, apart from a congressional mandate, to -- to allow for a depletion of the universal service pool.

SEN. ROCKEFELLER: Can I get one more question?

SEN. HOLLINGS: Sure.

SEN. ROCKEFELLER: A quick one. Thank you, Congressman. I've got the data before me which is put out by companies, and it shows that there's 16,697 users of high-speed lines in West Virginia. I -- that is mind boggling to me, if it's true. We have to accept those figures in the sense that those are the only ones that we have. But you indicated that 85 percent of -- and you phrased it nicely, but you know, that right down the middle of the street, 85 percent of American streets --

REP. MARKEY: Seventy to 85 percent.

SEN. ROCKEFELLER: Yes, it's not even close to the fact. Not even close to reality. And in West Virginia, they sort of picked the five most populous counties, which all happen to be contiguous and say this is what we're going to do, and then they shoot an occasional thing up to a university or maybe up to some other place, you know, to sort of keep happy -- to keep people happy like railroads do with captured shippers, they'll pick out an individual person who could cause some problem and settle with them and then ignore the rest of the Staggers Act.

So, my question to you is this: In order to have that more effective, Senator Hollings has a bill which would do grants, and I have a bill, a broadband, which would -- which would do tax credits -- 10 percent, 20 percent, depending upon what you are uploading or downloading, and, you know, how fast it was and all the rest of it. And it just occurs to me as I sit here that if -- that maybe neither one of them does it by itself, but joined they might. And I'm interested in your view.

REP. MARKEY: They might. I mean, I'm not an expert on rural America, but here's what I do know -- that in urban and suburban America where it is deployed and it is available, only 12 percent of those who have access to it actually subscribe to it. So what have we really gained, in other words, if we do have a tax bill or a grant program that then deploys this wire out into the most remote parts of our country, and then only 12 percent subscribe to it? I don't think we're going to see a move here in the Congress to subsidize it like it was electricity or phone service. And so you get into, again, into this market situation, where I'm willing to be very open, as we've always been on telecommunications policy, in kind of acceding to what the rural members of the House and Senate want for their 10 percent, the rural part of the country. I just don't want a policy to be put in place which affects the other 90 percent, where the success story is quite palpable.

So, I don't know the answer. And again, I would have to rely upon your expertise, looking at analogies in other areas that may have been used to deploy other types of services in rural America. But just understand that at $70 a month, we don't see anyone -- we see very small percentages subscribing in urban and suburban, so don't expect it to perform a miracle out there unless we have some way of getting the price down to the 30 to $40 range.

SEN. ROCKEFELLER: Thank you, Congressman. Thank you, Mr. Chairman.

SEN. HOLLINGS: Thank you. Senator Smith.

SEN. GORDON SMITH (R-OR): Thank you, Mr. Chairman. I wonder if I could have included in the record my opening statement?

SEN. HOLLINGS: By all means.

SEN. G. SMITH: Congressman Markey --

SEN. ROCKEFELLER: Same here?

SEN. HOLLINGS: Same Senator Rockefeller.

SEN. G. SMITH: -- thank you for your testimony. I share Senator Rockefeller's concern about getting the rural places. I'm from a rural part of this country. And I guess my question was first, what do you think of his bill? And I think you've already answered that. But let's -- if we stay the course, as I believe you're testifying that we should, what forces are in play to get more than 12 percent to sign up?

REP. MARKEY: The forces were in place to get more than 12 percent to sign up at the point at which, I'll be honest with you, the NASDAQ hit 5,000 in March of 2000. We had companies that could raise capital. There was an incentive to continue to deploy by multiple competitors to the Bells and the cable companies.

The question is, given the success story that we did have in making it accessible, at least, if not affordable, for 70 percent, at least, of the country, do you want to pull the plug, or do you want to pull tight, let the companies that are still out there know that we're not going to remove their legal right to gain access to all of these companies at affordable rates, while compensating the Bells for their reasonable -- for the reasonable use of those wires. Otherwise, I'm just afraid that the vision of the future becomes the past.

So, a lot of these companies are in bankruptcy. Some of them are not but a lot of them are. They're coming out of bankruptcy with new management, new owners. They're committed to continuing along and staying course, but I think they're looking for some regulatory certainty that the rules under which they're paid played over the last six years, notwithstanding the Bells going to the Supreme Court for the first four years. And, by the way, last week the Supreme Court basically upheld the '96 act, two decisions. They said it was right on the money in terms of the way in which those rules are being implemented. We've won every single decision so far on the act, and I think we must keep the course if we want to be successful.

And, again, I'm willing, Senator, and I think every urban member is willing to defer to the rural representatives in the Congress on the best way of dealing with that issue. But it's unlikely to produce a good result if all we rely upon is one company to go out there, because you won't get the lower enough price that a rural American can subscribe to.

SEN. G. SMITH: It truly is an enigma how we get that done when you've only got 12 percent signing up in the urban places of our country. But it does seem to me that if broad band is the way in which much of our communication will occur in the 21st century, that it, in fact, is closer to electricity than we might think. So that is a factor that is governing my sentiments on this whole issue in coming to a conclusion.

REP. MARKEY: Can I say, Senator --

SEN. G. SMITH: Sure.

REP. MARKEY: -- here in Washington, you know, I have narrow band at home. It costs 25 bucks. You can do your e-mail. I can pick up the BostonGlobe.com and read the Globe online. I have a few other prosaic uses for it. But if I went to broad band, it'd cost me 75 bucks a month. I'd better get a lot more than that. And right now it's hard to identify what those additional services are that really makes it a desirable service.

So at 35 bucks, maybe I'll pay for the extra speed. You know, maybe there are some little extra, you know, gilded edges to it that make it worthwhile. But at 70 bucks it's just really not a realistic option for a family making $40,000, $50,000. That's a big additional expenditure per month.

SEN. G. SMITH: Thank you, Mr. Chairman.

SEN. HOLLINGS: Thank you. Senator Brownback.

SEN. SAM BROWNBACK (R-KS): Thank you, Mr. Chairman. Thanks for holding the hearing. Congressman Markey, thank you very much for being here. You've answered all the questions elegantly and quite well, even though we may disagree on some of the conclusions that we come to on this point. The broad-band issue, I think, is critical for our future growth as a country, so how we wrestle with this legislative issue is going to be very important.

Mr. Chairman, I want to use a brief bit of the time that I have to talk about an equally, I think, important issue -- that's the wireless equivalent of broad band; it's 3-G services -- and just make a quick observation, if I could, about an auction that we have coming up in six days on a number in the 700 megaHertz area that is being put forward.

There are competing bills that have been put forward in the Senate. Senator Stevens has a bill to proceed forward with the auction now. Senator Kerry and Senator Ensign have bills to delay the auction. The House has passed a bill, virtually unanimously, to delay the overall auction. And you've got an issue that I think is very key for us for the future of these types of services.

And the reason I raise it, Mr. Chairman, is I think there's a compromise there to be had, where I think Senator Stevens is looking at the rural interests, which I'm a part of, as well as a number of other groups or members on this dais are, to try to get this moved forward for rural deployment of some of these future services and getting this spectrum out there. And I think that's laudable.

I think, as well, Senator Ensign and Senator Kerry are saying we need a future plan. We need an overarching architecture for the deployment of these megaHertz, these services. And to do that, we're going to need some time to do that.

I think there's a compromise to be had here where you would allow a certain portion of the auction to go forward on certain of the megaHertz and delay the rest of it so that the deployment in this spectrum could be allocated in the rural areas but not in others, while we're developing the overall architecture of the future of where should these spectrums go to.

I understand some of the parties to the different bills are trying to work through this compromise effort where they would auction, as I understand, the C-block licenses, the 734 RSA and MSA licenses contained in the lower 700-megaHertz band, as well as possibly the unencumbered E-block licenses.

Now, this seems to me to be a pretty attractive sort of option that we could move forward with to where you get some of the spectrum out here and deployed, but yet you maintain the bulk of it that people are interested in for an overarching plan of how we deploy this. It's a big issue. It's an important issue. It has a rural component to it that's very important, as well as a very important national component to it.

And I sit in a spot of being both a representative of a rural state and then chairing the wireless caucus or co-chairing the wireless caucus, both of which have some competing interests on this. That's why I'm interested in trying to weave through this in a way that we could make this work.

Mr. Chairman, I would urge us to take this up, if we could, and maybe work on pulling something together that could get these interests pulled together. In six days the auction is supposed to occur. It has been delayed previously a number of times. It could be delayed again. But I think maybe there's a compromise that could be had to where most interests could be met with this and yet maintain this generally for the future deployment in the 700-megaHertz area.

I didn't mean to take your time up with this, Congressman, but this is an issue that's in front of us and it does involve the future.

SEN. HOLLINGS: Senator McCain.

REP. MARKEY: Could I just say --

SEN. MCCAIN: Could I have Congressman Markey respond? Then I'd just like to make one comment.

REP. MARKEY: Could I just say, in one minute, I think we should be open to compromise on that issue, and it's something that I think we have to be flexible on. And I haven't seen it, but I think it is something that is very important in terms of our ability to resolve it in a way, though, that creates the right policy. But I think that we should be open to it.

But in a larger sense, you just have to keep focused on the fact that because the digital TV transition has not occurred, that every one of these television stations in America has six additional megaHertz that is locked up. And you can't move to a 3-G revolution until you get back that six megaHertz from every television station.

So what you've got is a failed digital TV strategy and a failed 3-G strategy simultaneously. The one impacts the other. So we've just got to get, you know, moving on a policy with the broadcasters, the cable industry, the television set manufacturers, the satellite industry, to resolve this digital television transition, because it is delaying the return of all of the rest of that spectrum into the 3-G revolution.

SEN. BROWNBACK: Undoubtedly it's doing that. What I was putting out in front of you is what I thought was a narrow possibility --

REP. MARKEY: Right. No, I agree with you. And I can compromise on that. On that I can compromise.

SEN. BROWNBACK: -- because you put your finger on the point. We haven't got the digital -- HDTV is not -- the deployment's not out there to the degree that is required under the act. And we need to maintain most of that spectrum before it's -- it shouldn't be allocated until we get it back and we can do it in a national architecture policy. But there are some of these rural areas in some of this that I don't think would be competed on broadly that we could --

REP. MARKEY: I agree with you.

SEN. BROWNBACK: -- move forward with now.

REP. MARKEY: I agree with you, Senator.

SEN. MCCAIN: Mr. Chairman, just briefly, as we know, the revenues were supposed to be realized by September of 2002. The auctions have been delayed five times. I wrote a letter to Chairman Powell asking him not to delay and not to do it but to make the decision that he believed was in the best interest of the taxpayers of America.

We have a commission, the FCC, in which we place these responsibilities, and we placed these responsibilities. And I think the burden of proof is on those who would overturn Chairman Powell's decision to move forward, after five delays, with the auction.

I don't know what the right thing to do is, to be honest. I'm not sure. It's a very complex and difficult issue. Will we realize more revenues if it's delayed in the future? What's the future of the telecommunications industry as far as the value of the spectrum is concerned?

The fact is, it has been delayed five times. There has to be the transition not only with the analog, but there also has to be the auction take place. There are legitimate concerns about rural America, and I think your concerns are very well-founded.

But the chairman of the FCC has made a decision. And I hold him in very high regard and with great respect. And so before we overturn that decision of the chairman of the FCC, I'd like to see some very strong evidence that this just wouldn't result in another delay and another delay and another delay. But I am open to those arguments. And I hope -- and I think we should all be.

But to just arbitrarily overturn a decision which was certainly well thought-out by the chairman of the FCC, the burden of proof then lies on us, I think, to make the case that that's necessary at this time.

I thank you, Mr. Chairman.

SEN. HOLLINGS: Senator Allen.

SEN. BROWNBACK (?): Mr. Chairman, could I just, in brief, quick response on that. I've spoken with Chairman Powell about this, and maybe it'd be worthwhile to ask him to come up to see if he would address the topic; perhaps not. But I think there's a window and an issue -- and I spoke with him just about this type of proposal. It might be worthwhile to look at, because this is a current issue that's on us.

SEN. HOLLINGS: Senator Allen.

SEN. GEORGE ALLEN (R-VA): Thank you, Mr. Chairman. I want to associate myself with the remarks of Senator McCain on the previous issue, and I'm not going to use my time on that. But obviously, if any legislation is going to come forward, obviously we should have the chairman of the FCC, who I think is, for those of us who like judicial restraint and people following the laws rather than making laws, I think he's almost compelled by the law to make the decision he did, based on evidence but also on the statutes. And clearly these statutes and this auction needs to be looked at.

Now, here we're talking about broad band, broad-band Internet capabilities, which are so important to education, medical services, health care, commerce, entertainment and government services, and it's obviously very important.

Looking at this landscape -- and some have mentioned it already -- you see that 11 million people subscribe to broad-band services of some type. Two-thirds of them get it from cable modems. Usually those are the ones at home, whereas the others get it from DSL, and that's obviously usually another approach than cable.

The fact is, only one out of eight households that have access to broad band currently subscribe. Now, I'm mindful of the competitive carriers and the states' concerns regarding S. 2430. The regulatory parity for DSL services can potentially create a monopoly for virtually all local telecommunications and voice services, as well as a monopoly in small to medium-size business markets where cable modem services do not have a presence.

We see that about 70 to 75 percent of Americans have access to at least one type of broad-band service, yet only 10 to 12 percent actually subscribe. This would indicate a significant lack of either corporate or business or even consumer demand, and I think that has to be addressed if there's going to be the investment needed for future broad-band deployment.

This is not simply a question, "If you build it, they will come." We're eager to find ways to build out broad-band capabilities. And there are a host of complex issues beyond S. 2030 that we have to address, such as the availability of compelling content, spectrum allocation reform, and also copyright protections. We'll disagree on how those ought to be done. But those, I think, are all very much related.

I'm chairman of the Senate Republican High-Tech Task Force, and we're all grappling with how best to do this. I agree -- I'm sorry he's gone -- with Senator Rockefeller's bill. The Broad-Band Internet Access Act, I think, is a good step of the government providing incentives to rolling out broad-band services in a technology-neutral manner.

I also think there are some creative ways of marketing and innovative approaches of doing this, to encourage subscriptions to broad-band services. In Scott County, which is in rural southwestern Virginia -- it's on the Tennessee border -- a large portion of the county has access to broad-band services, which it's cable or DSL. However, very few subscribe; only 5 percent.

The Scott County Telephone Cooperative has developed a price- packaging bundled marketing approach for their customers to increase broad-band penetration and use, and it comes down to only $5 more. Now, for $5 more, I think a lot of us would like to have that, even if all you are doing is reading the newspapers and getting scores and stock updates and all the rest. And so they're coming up with a creative way of doing it.

Now, your bill, Mr. Chairman, is similar to the thrust of the Rockefeller bill and to help fund a broad-band approach or build out a broad-band. And it utilizes, for a five-year period, one half of what I always refer to as the luxury tax that was put into effect to finance the Spanish-American War.

I have made promises during my campaign that we won that war and that Spanish-American War tax ought to be repealed altogether. Beyond the issue of whether this is really fair to this measure, as far as the RBOCs to, you know, try to help out certain areas and certain governmental agencies to be running broad-band services, maybe if you repealed the other half of that tax, the Spanish-American War luxury tax, and then your half-tax ends in the year 2007, which is the 400th anniversary of the founding of Jamestown, the cradle of American liberty -- (laughter) -- there'd be a confluence of all sorts of historical approaches, and it might be much more attractive to me.

But my problem is I think that Spanish-American War tax ought to be repealed. And maybe a partial repeal of it would be better, and maybe we could work out some of the other differences. But the point is, there are a lot of interests here. We do need to work together as best we can to determine the best approach to encourage deployment of broad band, whether that's rural, suburban or urban.

And I would only ask our very articulate and knowledgeable witness here, could you comment whether DSL or cable-modem services, as far as what you would see happening in small and medium-size markets? Would we be -- would some of these measures be creating monopolies in those markets?

REP. MARKEY: If I may, Senator, first I would like to respond. And this is a very serious point on this historical debate between Jamestown, Virginia and Plymouth, Massachusetts. (Laughter.) I can't allow that to go uncommented on here.

SEN. ALLEN: Yeah, one of the Pilgrims arrived 13 years later. And the Mayflower compact, if you'll read it -- (laughter) -- they thought they were landing in northern Virginia. (Laughter.)

REP. MARKEY: Let's go back to John Cabot in 1501 coming down into New England and planting the flag right there in --

SEN. : The Vikings.

SEN. ALLEN: This was the first permanent English settlement.

REP. MARKEY: So the -- I don't want to -- Mo Udall used to say that everything's been said, but not everyone has said it. So I've got to be careful here, since I've already said it myself now twice. So for the third time, I do believe that unless we find ways of creating incentives for DLECs, CLECs, wireless-based companies to get into the marketplace, that we won't see an adoption of broadband technologies by consumers because there won't be enough competition in price and new services that will command their attention. We already know that out in the marketplace, and my own opinion is that the answer is more, not less, competition.

SEN. ALLEN: I'm in agreement with you there, but we don't also want to be creating monopolies in some of the smaller markets. Competition is important whether in rural, suburban, or urban.

REP. MARKEY: Monopoly is a rear view mirror view of the telecommunications marketplace. It's taken us a long time to get over this notion that it is a natural monopoly to have only one telephone company. Having done that, having moved through this very difficult period, it would be an historic mistake to move back towards the model which did not lead to technological innovation or price competition. We should move in just the opposite direction, and I agree with you, Senator.

SEN. ALLEN: Thank you. Thank you, Mr. Chairman.

SEN. HOLLINGS: Senator Dorgan.

SEN. BYRON DORGAN (D-ND): Mr. Chairman, thank you. It won't surprise, you Congressman Markey, that I agree with you. I missed your presentation, but since you recited it at least three times in answers to questions, I've certainly picked up most of it this morning.

MR. MARKEY: Coming around again on Memorex, right now.

SEN. DORGAN: I think, just to make a comment and then ask you a question, in areas where there is robust competition, I think we all understand that you don't need regulation. Robust competition is not in need of regulation. But in areas where there is monopoly or near monopoly, you must have some kind of effective regulation. On the next panel is Ms. Loretta Lynch, who testified before this committee or subcommittee last week dealing with the issue of California electric prices. In that area we had the development of near monopolies and no regulation, and the fact is there was price fixing and price rigging to the tune of billions of dollars in my judgment. And if we ever get to the bottom of that, I think it will represent one of the largest business scandals in this country's history. But, having said that, it makes the case for effective regulation until we have the forces of competition that allow us to back away some.

Now, in North Dakota, we have an incumbent Bell company. They serve 24 exchanges. They have in fact sold most of their local exchanges, the rural ones. They have 24 remaining, most of them in our cities. And in four of their 24 exchanges, they're offering DSL service. Only four. Why? They choose not to offer DSL services in the others and don't seem to care much about it. And so our -- our experience here is not a very happy experience with the incumbent carrier. And my feeling is they either ought to serve these exchanges or sell these exchanges -- one or the other -- because in fact most of our local co-ops and independent telephone companies that are serving areas in the state that are less densely populated are moving much more aggressively to try to deploy broadband and advanced services.

And we're -- you know, I have a Black Berry with me today, as many of us do, and this works great most of the time. But when you get on the airplane in Minneapolis and go to North Dakota, or South Dakota, or places like that, there's no service at all -- none. And they'll advertise they serve 94 percent of the country. Well, that's not true, not in terms of geography -- perhaps population. But in most of the country, you can't get Black Berry service.

So, in terms of the deployment of broadband, advanced services and other kinds of things, much of the country is being left behind. And -- let me frame this question this way -- isn't it the case that in '96 we decided there are conditions under which you have to meet checklists in order to go and serve inter latta with long distance and those conditions are described as conditions that we want to be met that describe local competition. What kind of competition in local exchanges exist today in the country? Does it exceed or -- or in any way exceed your expectations, or have we fallen fall short of having robust competition in local exchanges?

REP. MARKEY: That's an excellent question. Again, the '96 act was not a deregulation bill. It was a de-monopolization bill. So, counter-intuitively, in order to break up a monopoly, you actually need more regulations so that the new competitors have some confidence that the government is going to open up the marketplace so they can reach customers which they historically have never been able to reach. That is the famous 14-point checklist that would be put in place that competitors could rely upon going to the regulators and the courts in order to pry open these markets., and after the three or four-year battle by the Bells at the Supreme Court and other federal courts to delay implementation of that law, and beginning in December of 2000, unfortunately, when the New York was certified as the first state which has been opened, we have moved to a point now where perhaps seven, eight percent, nine percent of the lines in the United States are now controlled by competitors. And that's a hell of a move after 100 years of zero. Now, it's not as far, I'll have to admit, as I wish we had gone, but I could not have predicted that the first resort of the Bells would be to try to first consolidate amongst themselves, that would be their corporate plan to go from seven down to four, and then to go to the courts to try to block the implementation of the act. But given the fact that they did do that, 13 states are now open, seven, eight percent of the lines are controlled. If we hold the line, I could envision a day five and 10 years from where we've got it up to 10, 15 percent of the lines and every place that that happens, the consumer is going to be a beneficiary.

SEN. DORGAN: In your judgment, what happens if the Congress adopts Dingell-Tauzin, for example -- or Tauzin-Dingell -- whatever it's called these days?

REP. MARKEY: I think that it would largely stop the current revolution in its tracks, and we would have to await some perhaps wireless or satellite based competition to manifest itself, but that is something that is now in the long distant future. It's not anything that's just over on the horizon. And I think that consumers would be the loser.

SEN. DORGAN: Well, at least they've stopped advertising. You know, every morning on television here in Washington, D.C. you hear Tauzin-Dingell this -- Dingell-Tauzin that, and you know, if you don't know much about it, you think it's either a law firm or a foot powder. (Laughter.) I, frankly, am a little tired of the ads. So, my feeling is, as yours, that if we were to proceed with legislation of that type, we will slow down the ability to see more and more competition in local exchanges.

Well, Congressman Markey, as always, the Senate is advantaged by having you appear. And I only regret that I missed your presentation, but I think I've been advantaged by hearing his response to questions.

SEN. HOLLINGS: It was the best, Senator Dorgan. I -- and I'm not a bit surprised. I've been here going on 36 years, and that's as good as I've ever heard. And we -- not just the committee, the entire Senate is indebted to you because you've given us a sense of history and understanding of where we're headed and how far we've come. I can't thank you enough. If there are not any further questions, we've got a very important panel here to follow on. Thank you very much, Ed --

REP. MARKEY: Thank you, Mr. Chairman.

SEN. HOLLINGS: -- we really appreciate it.

REP. MARKEY: Thank you, Mr. Chairman. Thank you, Byron.

SEN. DORGAN: Thank you.

SEN. HOLLINGS: We'll now have panel number two. Ms. Loretta Lynch, the president of the California Public Utilities Commission; Mr. Robert B. Nelson of the Michigan Public Service Commission; the Honorable Mary Jo White, the senator from Pennsylvania State Senate; and Mr. Paul B. Vassington, the chairman of the Massachusetts Department of Telecommunications and Energy.

And while they're taking their seats, the committee would just note that the hearing really is on competition, how they got us off on broadband, that there was something wrong with it, that there was some legal barrier to getting into broadband, there was so prohibition or otherwise, it's just the economics of it -- it's just the lack of local competition. That's how to get more broadband, and that's why we've got these distinguished members of the panel here today.

We welcome you, and we'll start over with Mr. Vassington. We'll start from left to right.

We have your full statements in the record, and they'll be included, and you can summarize them as you wish.

MR. PAUL VASSINGTON: Thank you, Chairman Hollings, members of the committee, for the opportunity to testify before you on the important topics of local telephone competition and broadband deployment.

My name is Paul Vassington, and I am chairman of the Massachusetts Department of Telecommunications and Energy. My testimony will focus on the following three points. First, there is no crisis in competition or broadband deployment. Second, Massachusetts has had both competition and investment. And third, investment does not require limiting or eliminating unbundling, but access to new infrastructure should be priced at market rates.

Some have recently said that there is a broadband crisis. I don't agree. Broadband is widely available, but there just aren't enough valuable services to justify the higher cost for most customers. In terms of competition, the bankruptcies of a number of competitive local exchange carriers and the closing of capital markets to telephone companies has been seen as demonstrating the failure of competition. I don't agree with that assessment either. The number of CLECs in business may have shrunk, but market share of CLECs has continued to increase. Broadband services are available to a large majority of households, but subscription rates among that group are just over 10 percent. What we are talking about is not market failure. It is the situation where customers aren't willing to pay more for the services they're offered, and that's perfectly normal.

All of this doesn't mean that the government can't or shouldn't do anything for broadband policy, but it does suggest where the policy focus should be. Government should focus on removing barriers to efficient investment. That is the appropriate government role.

Our experience in Massachusetts demonstrates that there is no crisis in competition or broadband deployment. The Massachusetts Utility Commission has been promoting competition in all telecommunications market since just after the break-up of AT&T, more than 10 years before passage of the Telecommunications Act of 1996. Competition has been present to some degree in Massachusetts since divestiture, and has continued to grow. Massachusetts was the fifth state in which the FCC authorized the local Bell company to offer long distance service, and at the end of 2001, CLECs served just over 20 percent of all telephone lines in Massachusetts. And of these CLEC- served lines, over three-quarters are facilities based.

In terms of investment in broadband availability, Massachusetts has more high-speed lines per 1,000 residents than any other state. The vast majority of customers in the commonwealth have access to either DSL or cable modem service. Verizon has invested almost $4 billion in its Massachusetts network from 1996 to the end of 2001, and cable companies in Massachusetts have invested well over $1 billion in their Massachusetts networks.

The policy debate about broadband investment and competition is too often framed as a choice. If you want more investment, you can't have as much competition, or if you want more competition, then you can't have as much investment. There is no need to choose between competition and investment. And open competitive market driven by decentralized decisions of consumers and suppliers should and will determine the most efficient pace and level of investment in broadband technologies.

Unbundling should not lessen the incumbents' incentives for investment. There should not be any objective from incumbents about sharing any facilities, as long as they earn a return on those facilities commensurate with the risk of that investment. Attempts to eliminate unbundling requirements in the name of providing incentives for investment are solutions to a nonexistent problem.

There is not a problem with competition and investment for voice services, and what is currently viewed as high-speed services. There is a legitimate concern, however, about the next generation of broadband services, most likely fiber based. Unless the prices charged for access to this new infrastructure adequately cover the risk of the investment, network companies will be reluctant to provide next generation broadband services. There are no legacy inefficiencies or monopoly profits association with next generation broadband infrastructure, so it would be appropriate to price access to that infrastructure at market rates.

Maintaining unbundling requirements but allowing incumbents to charge market rates for new infrastructure is a compromise that could form the foundation for a policy that truly promotes local telecommunications competition as the means to greater broadband deployment.

I thank you all for your consideration of my testimony.

SEN. HOLLINGS: And we thank you very much. Ms. White.

MS. MARY JO WHITE: Thank you, Senator. By the way, I'm not the Mary Jo White who is U.S. Attorney from Manhattan. That's my disclaimer.

In my testimony, I note that several years ago when Pennsylvania was looking for a catchy slogan, someone suggested "Two big cities with a lot of trees in between," and that's because Pennsylvania is largely known for Philadelphia and Pittsburgh, but I'm here to tell you that in those trees is the largest rural population of any state in the country. I represent about a quarter-million of those people in the Pennsylvania Senate.

I don't have to tell you here how important the Internet and broadband capability is to people. However, I'm not really talking about just reading the newspaper or using your computer for your e- mail. I'm talking about small business, economic development -- the kind of thing that is really the lifeblood to a community such as the one I represent. I live in the former GP service area now called Verizon North. We do not even have reliable telephone service much less affordable access to broadband technology. And this is particularly frustrating because Pennsylvania has been a leader in promoting utility competition.

Now, I myself am a free-market type person, so this is a rather unusual role for me. We were one of the early states to successfully deregulate electricity and natural gas. And in 1993, well in advance of the federal telecommunications act, the Pennsylvania general assembly enacted the Alternative Form of Regulation of Telecommunication Services -- fortunately we call it Chapter 30 -- and the intention of that act was to foster, and I'm quoting here, "the accelerated deployment of the universally available state-of-the-art interactive public switched broadband telecommunications network in rural, suburban and urban areas of the Commonwealth." The incumbents were offered an alternative form of regulation if they committed to the construction of a broadband network.

Unfortunately, the legislature made a few mistakes. We let the companies set the time line, and they picked 2015 as their final date for compliance. I mean, we may all be using brain waves by then. We also neglected to set interim milestones and timetables for the reports.

Competitive pressures have accelerated the progress in the profitable urban and suburban areas, while rural improvements are proceeding at a snail's pace. Chapter 30 did not specify a technology, merely a performance standard. Currently, the chairman of the Pennsylvania Public Utility Commission has instituted a proceeding to determine whether Verizon has repudiated its obligations by substituting DSL.

In March of 1998, our PUC held a hearing on the state of local competition in Pennsylvania, and they found, not surprisingly, that the incumbents, the ILECs controlled 97 percent of the lines within their service territory. There were complaints by would-be competitors that they were being denied access to lines and services, and there was a log-jam of cases. Virtually every issue was being appealed at the commission or before the courts. Competition was stalled. Consumers, who switched to competitive service experienced service interruptions, billing nightmares, and some even found their business numbers left out of the telephone directory.

The commissioners attempted a global settlement, but after several months, the process collapsed. They then began -- and this was very innovative -- they wanted to consolidate all of the myriad of cases that were out there just miring us down -- in a global proceeding, we had six days of unbound testimony, 32 bound volumes, almost 10,000 pages of testimony, cross-examine, and exhibits. The global opinion and order which was issued in September 1999 resolved 19 proceedings before the commissions, but generated 12 state and federal court proceedings. ong other things, the PUC found in their findings that Verizon had a virtual monopoly in the local exchange market, and had abused its market power by providing competitors with less that comparable access to its network or engaged in other discriminatory conduct that deterred customers from switching. As a remedy, it ordered structural separation. It concluded that for purposes of this docket, structural separation is the most efficient tool to ensure competition where a large incumbent monopoly controls the market.

Now, I can't possibly describe the course of that ruling in the time here -- it's been through the courts -- and ultimately our state supreme court upheld our commission's power to issue such a structural separation order. Nevertheless, after a massive advertising campaign and a change in commission membership, the commission reversed itself and adopted for what it is calling functional separation, a code of conduct, and fines for noncompliance. I'm here to suggest that that isn't a particularly effective method of changing behavior when fines are regarded as the cost of doing business.

I remain convinced that structural separation makes sense. Before you can allow free market forces to work, you have to deal with the de facto monopolies which we still have in our local telephone markets.

Listening to the discussion of parity, Representative Cannon very eloquently talked about something he called parity of situation, that you have to have parity of situation. And I'm reminded of a quote -- I believe it's Anatol France who said, "The law, in its majestic equality, forbids the rich, as well as the poor, to sleep under bridges." I suppose that's a sort of parity.

I think it's too much to understand or to believe or hope that companies that learned monopolies at Ma Bell's knee will cooperate with their competitors to benefit consumers. I think we need effective regulation until we have real cooperation, and I would urge you to hold the course.

Thank you.

SEN. HOLLINGS: Very good. Mr. Nelson.

MR. NELSON: Thank you, Mr. Chairman, members of the committee. I want to thank you for calling this hearing and inviting me to testify on behalf of the National Association of Regulatory Utility Commissioners, as well as my own state of Michigan.

My name is Robert Nelson. I am a commissioner with the Michigan Public Service Commission and co-vice chairman of the Telecommunications Committee of NARUC. As you know, NARUC is the association of state utility commissioners that has supported the goals of the 1996 Telecommunications Act since its inception six years ago.

NARUC believes that the essential provisions of the 1996 act are working and that neither Congress nor the FCC should make wholesale changes in them at this time. After six years of arbitrations, (contested cases?) and costly court battles, local competition is beginning to flourish because of the vigorous enforcement of the act by the states. Now is not the time to tinker with this act.

A recent report of local competition in Michigan shows that the number of access lines provided by CLECs almost doubled from year-end 2000 to year-end 2001. In Michigan, we are approaching, if not exceeding, 20 percent CLEC access lines in Ameritech, Michigan's territory. Approximately 70 percent of those lines are provided through leasing of unbundled network elements, as specifically provided for in the 1996 act.

Moreover, the percentage of the Ameritech service lines provided by CLECs dwarfs the percentage of those in the territory of the other Michigan RBOC, Verizon, where less than 1 percent of access lines are provided by CLECs.

This, in my judgment, is due to the leverage provided to the states in Section 271 of the act, which requires Ameritech to seek state approach to provide inter-lata long-distance service in Michigan, but does not apply to Verizon, which does not need such approval in my state.

As you know, NARUC strongly opposes the Breaux-Nickles bill, S. 2430, and the Tauzin-Dingell bill. It has serious concerns with several proceedings pending before the FCC. These proposals are intended to undo the work of state commissioners in facilitating non- discriminatory access to the public telephone network.

S. 2430, for example, preempts states for asserting their jurisdiction over facilities and equipment used to provide broad-band services. Although the purpose of this provision is intended to promote regulatory parity between DSL and cable-modem service, it relies on the false presumption that voice and Internet traffic and the facilities on which they travel can be easily distinguished and regulated differently. The truth is they can't.

The same facilities used to provide DSL are the same facilities and equipment used to provide voice service. Preempting state jurisdiction over these facilities would, in my view, reverse the efforts of states to implement the 1996 act and raise a myriad of cost allocation and universal-service issues.

Federal legislation or rules which so clearly favor just one class of providers does not reflect the even-handed public-policy heritage which we tend to depend on in this country. It runs counter to the sense of fair play which permeates our public and private character and it disseminates the balance of interests that were crafted into the 1996 act.

Instead of the preemptive approach of these bills, NARUC fully supports the use of loans and tax credits to spur demand and investment in broad-band services in a competitively neutral manner, which is the approach of S. 2448, the Broad-Band Telecommunications Deployment Act of 2002, sponsored by Chairman Hollings. This is similar to an approach that was just taken in Michigan to provide low- interest loans and tax credits for broad-band deployment. It's also similar to Senator Rockefeller's bill.

Incumbent carriers argue that it's too costly to make the necessary investments in the network to deploy fiber to the home. If the deployment barrier is crossed, many of you on this committee have wisely responded to this claim by creating a broad-band loan program that was included in the recently-enacted farm bill. We appreciate all your hard work to make our U.S. broad-band program a reality.

NARUC does not believe that Congress or the FCC will achieve the desired goal of stimulating demand in the broad-band market through state preemption or deregulation of the bottleneck facilities, but rather through creative policies like the Hollings bill.

Again, on behalf of NARUC, we applaud your efforts, Mr. Chairman, as well as many of your esteemed colleagues, for their leadership in crafting a sensible, pro-competitive bill that promotes investment in all broad-band platforms, not just DSL. It complements and does not undermine the 1996 act.

The U.S. Supreme Court recently affirmed policies for pricing unbundled network elements and combining those elements for competitors. The goal of those policies are now being realized, with 13 states having received 271 approval and increasing numbers of residents and businesses enjoying the benefits of local competition in the form of carrier choice envisioned by the 1996 act.

The telecommunications industry has suffered through two years of extraordinary financial distress and our nation's economy has been adversely affected as a result. Investors need certainty before they will provide the capital necessary for this industry to recover. That certainty is available now in the existing policies of the FCC and the enforcement of those policies by the states.

Now is definitely not the time for Congress and the FCC to change the rules of the game. As someone who is in the trenches presiding over arbitrations and pricing decisions and doing the hard work of implementing the act, I can tell you that we do not need six more years of costly and time-consuming litigation, six more years of uncertainty, six more years of foot-dragging and six more years of waiting for the promise of widespread broad-band deployment.

Thank you for this opportunity to address you.

SEN. HOLLINGS: Very good. We thank you. And we welcome you again, Ms. Lynch. You're getting to be a regular here before our committee, and we're indebted to you.

MS. LYNCH: Thank you, Mr. Chairman and senators. I appreciate the opportunity to testify about telecommunications competition with a view from California. Over the past year, we have seen a variety of initiatives, both in the form of proposed legislation and in the form of new rules proposed by the Federal Communications Commission, that have, as their stated purpose, to increase the deployment of broad- band telecommunication services. I think we all agree that that's a good goal.

But many of these proposals have a common theme which I don't agree with, which is that to spur broad-band deployment, we need to deregulate DSL and the other high-speed services offered by incumbent local companies. I believe that deregulation is the wrong way to go to promote broad-band deployment. Deregulation will have dangerous consequences, certainly for the residents and businesses in California, and I believe also in other states.

Deregulation would provide a license to monopoly or, at best, duopoly, broad-band providers who are going to run roughshod over their customers through poor service quality, inflated prices, anti- competitive conduct, and violations of basic norms of consumer protection.

I'd like to focus on the serious consequences of preempting the states in the federal legislation, particularly from the perspective of a state that is still reeling from the debacle of the electricity deregulation.

I don't know if you received the color copies of the charts that are attached to my testimony, but if you look at chart one -- I'll just hold it up; it's a green and red chart -- it shows that in California, only a small portion of the state, 13 percent of the state, can choose between DSL and cable-model service. The remaining red -- all the people in the remaining red only have either one choice or no choice at all.

Of course, broad-band deployment, as you can see from the map, has clustered in urban areas. But even so, only half the population or over half the population in California must take broad-band service (that is?) available from a monopoly.

But unlike in other states, California has many more DSL customers than cable-modem customers. Based on the latest FCC data, DSL has 57 percent of the market compared to 43 percent for cable modem. So DSL is doing well in California. And the company, of course, that has most of these DSL customers in California is SBC- Pacific Bell.

There is now only one significant competitive DSL provider in California, and that's Covad Communications. But SBC owns a stake in that company, which is hardly a prescription for vigorous competition. In SBC's service territory, which is most of the state, SBC has 85 percent of the DSL line. So in California, deregulating DSL would confer additional advantages on SBC, the company that already successfully dominates the broad-band market.

But the thing that I'm most concerned about is that deregulating monopoly broad-band providers will leave consumers unprotected from a number of abuses, some of which I list in the second chart. Deregulation under both Tauzin-Dingell and under Breaux-Nickels means that there is no ability for the state regulators to restrain prices. And once broad band has become a tool that customers cannot live without, deregulated providers, I believe, will hold their residential and business customers over a barrel and charge truly exorbitant prices.

Deregulation also means the state regulators will be precluded from serving their traditional role of ensuring reasonable service quality. Under these bills, state regulators could not either make or enforce fundamental consumer service protections; for example, the time it should take to install or repair a service or the quality of data transmission over broad-band networks.

Deregulation under these bills would prevent California from taking basic steps to prevent mistreatment of customers. Under these bills, California could not stop fictitious DSL-related charges on bills. California could not stop intentional and unintentional overcharges on bills. California could not mandate and enforce full and fair disclosure of rates and terms and conditions of service in marketing material. And California could not prevent providers from disconnecting service without notice.

Let me tell you what the impact is. The California PUC has received over 750 customer complaints against SBC-Pacific Bell for fictitious charges, overcharges and misleading promotions. And as a result, we've opened a formal investigation to look into those charges.

In addition, the California PUC's requirement to give fair notice before you get disconnected to customers, I believe, has provided an important customer protection in this era of bankruptcies and troubles with certain communications providers. In fact, as DSL providers have pulled out of the California market, they have threatened to leave their DSL-dependent customers, who are often small businesses, without any Internet access service.

California's rules about fair notice have been crucial to those small businesses to make sure that they did (no?) business harm in transmigrating from one company to another. Of course, the harm from deregulation increases when we recognize the likelihood that deregulation would apply not just to broad-band services, but in the future also to traditional voice telephone service. Tauzin-Dingell and Breaux-Nickels provide incumbent local telephone companies the incentive, in fact, to migrate these services from circuit-switch networks to deregulated broad-band services.

Unfortunately, I speak with first-hand experience of the dangers of deregulating markets where the market participants retain significant market power. Of course, I'm referring to the electricity deregulation nightmare that California has experienced. The architects of deregulation in California gave away the state's authority to regulate wholesale prices and protect their consumers. But like electricity deregulation in California, both Tauzin-Dingell and Breaux-Nickels forces the states to give up their ability to regulate services that are essential to the state's economic well- being.

Tauzin-Dingell, I think, is even worse, because it prevents both the states and the FCC from regulating most aspects of DSL services. But both bills would force all the states in the nation to learn the lesson that California does not need to learn again. A market should not be deregulated where the firms in that market retain significant monopoly power. And I would urge you, Senators, to make sure that the states can protect their own businesses and families.

Thank you.

SEN. HOLLINGS: Very good. Senator Burns.

SEN. BURNS: Ms. Lynch, I'm interested in your map of California. I notice you have competition in the Los Angeles area, San Diego area, moving on up into the San Joaquin; I would imagine around Kern County and on up to Fresno and Stockton, and then I see Sacramento, then the Bay area. I would imagine the northern reaches -- what is that, Redding and Red Bluff and --

MS. LYNCH: Chico.

SEN. BURNS: -- Chico, those areas up there. I'm interested in if we deregulated, who is providing in those areas wireless services in the green areas or in the red areas or both to the wired lines?

MS. LYNCH: You know, I would need to study that for those particularly geographically-based areas. Certainly there are wireless services. But the red represents places where people may have access to broad-band service but they have no choice. They have no competition.

SEN. BURNS: Well, that wasn't my question. I mean, does wireless direct compete with wired lines, telephone?

MS. LYNCH: You mean, cell-phone companies compete with land-line companies?

SEN. BURNS: Uh-huh.

MS. LYNCH: Sure, although I don't know if we have entire cell- phone coverage throughout California.

SEN. BURNS: It would seem to me that we've got new services coming along in the wired area and it won't be long that we'll have broad-band wireless. In fact, we're going to take a look at that through broad-band legislation. And it seems to me that if the wired companies want to deploy broad band through DSL or VDSL, then you also have a cable company that offers a modem service, and then you also have the wireless services that I can get in my car and dial up a computer in my car on the wireless services. Would you hold the regulatory burden on that telephone company?

MS. LYNCH: Well, that may occur in the future. But the point is, that's not the California experience today. And just as electricity deregulation, where we all assumed the deregulation would then spur competition, with telephone regulation, where you have primarily one choice or no choice, and certainly the predominant choice is from your monopoly provider, I'm concerned that you'll kill competition by deregulation.

SEN. BURNS: Tell me, do you -- would you subscribe to the thought that even though we're all very supportive of universal service, that there is a point of diminishing returns as far as the deployment and development of new technologies?

MS. LYNCH: I'm sorry, Senator, I don't understand your question.

SEN. BURNS: Well, I mean, if I've got a company out here and I'm very complacent in what I do and I receive universal service, what incentive do I have to invest in or deploy new technologies such as DSL and VDSL?

MS. LYNCH: I'm sorry to be so dense. But for us, Pacific Bell would receive --

SEN. BURNS: I'm not communicating very good here. Let me see; how do I do this? I'm starting to develop an idea that -- I'm the only telephone company here, right here in Washington DC, right here in this 17 square miles of logic-free environment. (Laughter.) And I'm receiving universal service, no matter what my wildest competitor may be doing.

But I'm pretty comfortable. I can make my little 8 to 12 percent return for my investors and I don't have to deploy new technologies or new devices or I don't have to do anything in order to turn a profit, because I'm under your regulatory commands, so to speak. So I'm not going to develop anything.

Now, they can, and they may have to get a return. But whenever you take that regulatory regime off of them and I've got to compete with them, am I going to take a look at deployment of new technologies and maybe bring down the prices in the marketplace rather than make the appeal? Because I can come to you and say, "Okay, my taxes went up. I've got to have a return." So you're going to grant them an increase in charges.

MS. LYNCH: Well, I don't know how it works in Washington D.C., but in California we have a new regulatory framework which provides the incentive for the monopoly to have as low a cost as possible so that they essentially share the profits between the shareholders and their rate-payers, so that the monopoly has incentive to keep their costs low so that their shareholders get more of the profit.

SEN. BURNS: I still don't -- go right ahead; drive on. Make a fool outa -- Well, I'm kind of coming down on the other side of the track on that. And we're not going to talk about your electric deregulation, because you did it and you didn't do it, kind of like that light bulb deal.

But anyway, thank you very much, Mr. Chairman. I'll listen to the rest of this. Then I'm going to go vote. I went to vote a while ago. I thought we had one light. We got a bulb out.

SEN. HOLLINGS: Yeah, we're going to vote in a minute. Go ahead, Senator.

SEN. BREAUX: Thank you, Mr. Chairman. I thank the panel members. Let me ask Mr. Nelson, who I guess represents an association of state regulators. I note that in your testimony, obviously you point to the Breaux-Nickels bill, the section that says that "Broad- band services shall not be subject to the jurisdiction of any state" and object to that.

Would you be all right if the Breaux-Nickels bill, instead of saying that broad-band services shall not be subject to the jurisdiction of any state, that instead of saying that, the bill would say that states would have exactly the same jurisdiction and authority to regulate cable-modem services and DSL services in the future that you have today?

MR. NELSON: Well, I think we'd have to consider that, Senator. The language in the bill now is very disturbing because it says, "Notwithstanding any other part of the law -- "

SEN. BREAUX: Suppose we -- suppose we just said you have the same regulatory authority on broadband services that you have today, would that be okay?

MR. NELSON: Well, again, we would want to consider that in the context of the rest of the bill, obviously, but that would be an improvement, in my view, over the language in 262-B right now.

SEN. BREAUX: So, if we said that you have the same regulatory authority to regulate broadband services today, what does that mean to you? What authority do state regulatory agencies have in the area of regulating cable modem or DSL services?

MR. NELSON: Well, I think it varies. I think some states, like California, have gone further than states like Michigan and other states, but I think for most states what's important is that right now we have under section 251 of the act the ability to add unbundled network elements to the list that the FCC has developed --

SEN. BREAUX: Yeah, but you're talking about voice transmission, not broadband.

MR. NELSON: Well, in some cases that states have added access to broadband as part of that list.

SEN. BREAUX: Let me ask you this question: didn't the FCC determine in 1998 that DSL was an interstate service and should be regulated by the FCC?

MR. NELSON: That was their initial determination, that has been challenged in court, that's correct.

SEN. BREAUX: And didn't in February of this year they also tentatively concluded that the (Wildland ?) broadband Internet access services were also interstate information services?

MR. NELSON: Yes. And that is still a tentative conclusion on their part that we are challenging --

SEN. BREAUX: And didn't in March the 14th of this year the FCC determine that the cable modem services were also to be considered interstate information services?

MR. NELSON: They did, and I think that is subject to court challenge.

SEN. BREAUX: Okay. So what I think we have here is -- (inaudible) -- association, that you object to saying that the states do not -- would not have jurisdiction to regulate broadband services. I can't find out any real place where you have that authority, because the FCC on several occasions have ruled that broadband services, or Internet services, both DSL and cable modem -- and I'm fine with saying look, you have the same authority you have today -- I don't think you have any authority today because it's interstate. I mean, you can't regulate radio stations in the states -- that's interstate service. You don't regulate television stations, even though they may be located in one state, that's interstate in nature and you have to have a national policy.

MR. NELSON: Well, the FCC did, Senator, say in 1999 that the incumbent carriers had to provide line-sharing to competitive carriers.

SEN. BREAUX: I understand that. That's the FCC saying that.

MR. NELSON: And let the state implement those policies.

SEN. BREAUX: Well, yes, the FCC said you had that authority, but that's -- the FCC, right now, as we sit here today, I mean, you can say well, we're appealing, we're negotiating and everything else, but the fact remains that today, broadband Internet services have been determined by Congress and through the FCC that it's an interstate service and it's to be regulated by the FCC. I'm fine with saying look, you have the same authority that you have today -- I don't think you have a lot of authority today. And you object to legislation that says states shall not be subjected to -- broadband services shall not be subject to the jurisdiction of any state. I'm saying, look, let's say okay, you have the same authority to regulate broadband services that you have today. Is that not all right?

MR. NELSON: Well, and the other problem with that is the way the language reads in the bill today, and again, if you change it, it might differ this, but it says any facilities and equipment used for broadband, which would includes facilities that are also used for voice, and if you preempt that, you preempt our ability to even regulate the voice network as well. And that undermines all of our ability to create competition.

SEN. BREAUX: Well, do you -- you have jurisdiction over intra- state voice telecommunications --

MR. NELSON: That's correct.

SEN. BREAUX: But you don't have it over interstate voice telecommunications, do you?

MR. NELSON: No, but this -- this provision goes to section 251, which does provide us the ability --

SEN. BREAUX: Okay. Say we say we're not doing anything to affect 271 or 251 requirements, period. Does that make it all right with you? Because what I'm thinking I'm hearing from you, you want more authority than you already have.

MR. NELSON: No, that's not the case.

SEN. BREAUX: Well, if you are satisfied exactly what the authority you have and we say that in the bill?

MR. NELSON: And I would -- I would dispute the fact that we don't have any authority over DSL --

SEN. BREAUX: Okay. If I say in the legislation that the states are going to have the same jurisdictional authority over broadband services that you have today, is that not all right?

MR. NELSON: Yes, assuming the rest of the bill doesn't change, yes.

SEN. BREAUX: Thank you.

MR. NELSON: I think Commissioner Lynch may disagree with that, though.

SEN. HOLLINGS: Senator Nelson.

SEN. BEN NELSON: Thank you, Mr. Chairman. Back in my state, the Florida Public Service Commission has said that FCC analysis of the national unbundling requirements might benefit from state specific evidentiary hearings. And I'd like to know what you think and would you support such a process? Any of you? Go ahead, Ms. Lynch.

MS. LYNCH: Well, certainly I think that it would benefit from state specific evidentiary hearings because the states are different and the way both broadband and telephone services are deployed are different.

MR. NELSON: And I would agree with that.

MR. VASSINGTON: We have the same position in Massachusetts.

SEN. BEN NELSON: Okay. Now, according to the most recent advance services report, the FCC determined that, quote, "Advanced telecommunications is being deployed to all Americans in a reasonable and timely manner." End of quote. From your perspectives as a state commissioner, would you agree with the FCC's assessment?

MR. VASSINGTON: Well, the only -- the only word in there I'd object to is "all," because I do hear from some of the few customers in Massachusetts who can't get either DSL or cable modem are real unhappy about it. So, I would say it's not being deployed to all customers, but I think for the vast majority of customers it is reasonable and timely.

MR. NELSON: And I would add to that that in Michigan we have a situation similar to California in that most of our DSL is not provided by the incumbent, and so there's not real competition in the DSL market. And so that's why I think in part the prices are higher than they should be and why people are not signing up for it.

MS. LYNCH: While it may be being deployed, if the various providers just carve up the various states and you only have one choice, that's not much for consumers. It certainly doesn't protect consumers. But I do think for certain areas, and certainly the rural areas of California, Senator Hollings' S-2448 will be helpful to spur additional deployment.

MS. WHITE: I think in most of Pennsylvania, outside of the urban and suburban areas, we have the typical situation where you have either one or no provider.

SEN. BEN NELSON: Some have advocated identification of local economic development initiatives and public-private partnerships that have been effective in spurring broadband demand at the local level. Tell us about your experience in your state and whether or not there have been any local initiatives to spur that broadband deployment.

MR. VASSINGTON: I can tell you in Massachusetts we've had a very successful initiative that started out in the most rural part of the state, the Berkshires. This initiative was called "Berkshire Connect," and it was a public-private partnership that was designed to aggregate demand of small and medium-sized businesses, so that to the suppliers they wouldn't like small and medium-sized businesses -- together they'd look like one big business. And that gave them a lot of leverage to go out and do a request for a proposal and get some competitive bids to supply them with broadband services in a way that they might not have had if they had stayed separate as just their own sized companies. And that -- that initiative has been copied now in several parts of our state, including Franklin County and on Cape Cod.

MR. NELSON: Yes, Senator, in Michigan we have just passed legislation which allows both public and private entities to take advantage of low interest loans through the state. This is intended to help under-served areas, because there is a provision that makes it easier for under-served areas to take advantage of this fund. And so we think that's going to be a very big boom to broadband deployment and could be copied by other states as well.

MS. WHITE: I am aware of some individual success stories within Pennsylvania, and in fact to give Verizon credit, I have a meeting set up next week with a consortium of businesses and with a consortium of providers, which they have graciously taken the lead to convene.

MS. LYNCH: California has taken a wide variety of approaches. California has a -- it's called the California Teleconnect Fund, which provides specific grants and subsidies for schools, and hospitals and public entities. And also, we have several public-private partnerships, most notably one in the Silicon Valley that was spearheaded by Sun Microsystems. And then last year, the California legislature passed a few pilot programs specifically targeted to rural development.

SEN. BEN NELSON: Mr. Chairman, we have a vote, so I will cease and thank you for the opportunity.

SEN. HOLLINGS: Yes. And I don't want the commissioners to think that their brief appearances will only be given brief consideration. On the contrary, let me thank each of you for the state commissions holding the line with respect to trying to develop competition. There's no question that, as Congressman Markey pointed out, it wasn't a deregulation bill, it was a de-monopolization bill.

You see, we had the experience of so-called deregulation of the airlines, and at the time, we did away with the CAB, and I just had the new chairman of USAir that serves in my particular area, and I had the secretary in the next room, and I said, and I just call up -- and not this weekend, that's too quick a notice, but next weekend, get a round trip ticket from Washington to Charleston, go leave on Friday and come back on Monday -- $1,048. That's just coach class. It's dreadful. I had way better service 35 years ago, or 36 years ago when I first came. The service has gone down, the price has gone up, and the airlines have all gone broke. And they keep babbling around in the Congress here that deregulation worked. Look at all the people traveling. That's not the measure at all.

What happened is that we tried to de-monopolize on the one hand, and yet you folks to implement on the other hand, and had you not held the line with respect to these combining rather than competing Bells, we would be in dreadful circumstance. You can see their arrogance. I mean, they come across -- (inaudible) -- and with the tricky questions trying to equate data and disregarding the regulations with respect to price and everything else of that kind. It's just unforgivable, almost, of what they have attempted to do. And had it not been for the state commissions, we would be in a heck of a soup.

So, our committee is really indebted to you. And we'll keep the record open for further questions by the members, who had to go to that roll call.

Thank you very, very much.

The committee will be in recess subject to call.

END

LOAD-DATE: May 23, 2002