SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4160 words

COMMITTEE: SENATE JUDICIARY

SUBCOMMITTEE: ANTITRUST, BUSINESS RIGHTS AND COMPETITION

HEADLINE: TESTIMONY TELECOM LAW ISSUES

TESTIMONY-BY: REED E. HUNDT , MEMBER OF THE BOARDS OF

AFFILIATION: ALLEGIANCE TELECOM, INC.

BODY:
May 2, 2001 Statement of Reed E. Hundt Before the United States Senate Committee on the Judiciary Subcommittee on Antitrust, Business Rights and Competition Mr. Chairman and Members of the Subcommittee: Thank you for inviting me to testify today on the state of competition in the telecommunications industry five years after enactment of the Telecommunications Act of 1996 (1996 Act). It is a pleasure to appear before you to address this topic. I want to commend you for holding this hearing to examine our progress toward the goal of the 1996 Act - the goal of a fully competitive, deregulated telecommunications sector. The focus of today s hearing underscores the vital importance of the telecommunications sector and of competition policy to the overall growth and health of our nation s economy. My testimony today reflects my personal views and not necessarily the views of any of the companies with which I am affiliated. I currently serve as a member of the boards of directors of Allegiance Telecom, Inc., a facilities-based provider of telecommunications services; Novell, Inc., a manufacturer of computer software; Brience, Inc., a provider of platform software for extending e-business applications to wireless devices; and Gemini Networks, Inc., a new facilities-based provider of high- speed, broadband services to residential customers. I also serve as Chairman of the Board of Sigma Networks, Inc., a broadband telecommunications provider. In addition, I am a Senior Advisor at McKinsey & Company, Inc., an international management consulting firm, and also serve as a consultant to venture capital firms. I am pleased and honored to appear on this panel with my distinguished colleague, Pat Wood, Chairman of the Public Utility Commission of Texas. When I was Chairman of the Federal Communications Commission I enjoyed and greatly benefited from many discussions of telecommunications policy issues with Chairman Wood. He has been a steadfast advocate of pro- competition policies in the State of Texas. As you know, last year Texas became the second state in which the FCC concluded that the incumbent Bell Operating Company had opened its local markets to competition, in accordance with Section 271 of the Communications Act of 1934, as amended (1934 Act). That decision is testament to Pat s relentless efforts to carry out the mandates of the 1996 Act. Five years ago, in a dramatic ceremony held at the Library of Congress, President Clinton signed into law the first major overhaul of the nation s communications statute since passage of the 1934 Act. The 1996 Act reflected a sea change in telecommunications policy. Where monopolies were once presumed and protected, the 1996 Act required the FCC, in partnership with the state commissions, to foster the development of competition for all telecommunications services. The 1996 Act: Bringing Competition to Local Telecommunications Markets The dominant themes of the 1996 Act can be described in two words: competition and deregulation. Congress set forth in this landmark legislation an extremely innovative plan for achieving these goals. It gave new competitors in the telecommunications industry the tools they need to enter the market quickly and establish their presence. In addition to eliminating regulatory barriers to such entry, the 1996 Act required the incumbent telephone companies to interconnect their networks with the networks of new entrants. It also required incumbents to provide access to their networks for lease by new entrants. Congress gave the FCC and the state public utility commissions the critical job of implementing these market-opening provisions of the 1996 Act. The FCC is charged with establishing policies to facilitate new competition as well as deregulating as soon as competition rendered regulation unnecessary. While I was Chairman of the FCC, I worked with Chairman Wood and many others in state commissions to fulfill the pro-competitive mandate of the 1996 Act. We put in place what I believe were strong and fair policies that, consistent with the FCC s statutory mandate, sought to promote competition in all segments of the telecommunications industry and deregulate as soon as competition permitted. Explosive Economic Growth in the Late 1990s By embracing competition instead of monopoly, the 1996 Act unleashed unprecedented expansion in the information and telecommunications sectors. In our great nation of innovators and entrepreneurs, a multitude of brilliant technologists and creative businesspersons seized the opportunities created by the new statute. They launched new businesses that brought competition to markets previously dominated by a single firm. With the 1996 Act, we changed our legislative and regulatory policies in an attempt to throw open the doors to competition. Congress opened markets to new entrepreneurs and innovators. The 1996 Act provided the catalyst that resulted in hundreds of new companies entering the telecommunications industry and the net creation of hundreds of thousands of new jobs. New and existing firms invested tens of billions of dollars in facilities, services, and research and development. These investments in turn resulted in enormous productivity gains for American businesses, increased capacity on our telecommunications networks, the deployment of new technology, and the rollout of advanced communications services. As a result, the United States is the world s clear leader in the Information Economy. According to a report issued by the Department of Commerce last year, the productivity gains, investment rates, and real wage growth the U.S. experienced in the five years ending in 2000 were all higher than they have been in decades; unemployment and inflation were lower than thought possible; and the expansion set an all-time U.S. endurance record. Information technologies and the Internet are the driving forces behind this record growth. Consider the following: Although Information Technologies ( IT ) industries account for a relatively small share of the economy's total output -- about 8 percent -- they contributed nearly a third of real U.S. economic growth between 1995 and 1999. The prices for IT goods and services have declined at an accelerated rate -- from about 1 percent in 1994, to nearly 5 percent in 1995, and an average of 8 percent for the years 1996 to 1998. Declining IT prices have in turn reduced the overall rate of inflation for the years 1994 to 1998, by an average of 0.5 percent a year, or from 2.3 percent to 1.8 percent. Between 1994 and 1999, U.S. R&D investment increased at an average annual (inflation adjusted) rate of about 6 percent -- up from roughly 0.3 percent during the previous five-year period. The lion's share of this growth -- 37 percent between 1995 and 1998 -- occurred in IT industries. In 1998, IT industries invested $44.8 billion in R&D, or nearly one-third of all company-funded R&D. U.S. Dep't of Commerce, Economics and Statistics Administration, Digital Economy 2000, page vi (June 2000). The dynamic growth created by the Information Technology industries prompted the Department of Commerce to conclude that the U.S. economy may well have crossed into a new era of greater economic prosperity and possibility, much as it did after the development and spread of the electric dynamo and the internal combustion engine. Just as the Information Economy has played such a large part in driving the growth of the broader economy, so have new entrants driven the success of the Information Economy. Fueled by an entrepreneurial spirit and robust capital markets, new entrants invested over $30 billion dollars in new telecommunications infrastructure. This prompted incumbent telecommunications carriers to renew their own infrastructure investment. Investment by incumbent local telephone companies, while flat in the early 1990s, grew by 19 percent between 1995 and 1998. The Slowing Economy and Reduced Competition The economic benefits conferred by the 1996 Act were immediate and substantial. Competition in the telecommunications industry produced extraordinary economic growth. New technologies were developed and deployed, offering a tremendous array of new services to business and residential consumers. The Internet Economy boomed, and many consumers enjoyed more choice, better quality and better prices. The burst of economic growth has slowed significantly in the past year, however, particularly in the telecommunications sector. The slowing economy, falling stock prices, and credit squeeze have made it difficult for businesses to raise money. The debt markets are providing little capital, and venture capital financing is down. U.S. telecommunications companies that were able to raise an average of $2 billion a month in initial public offerings over the past two years raised only $76 million in IPOs this past March. This is having a domino effect on the rest of the economy, as demonstrated by one example described in a recent news article: Last year, Sycamore Networks Inc. was white-hot, with a soaring stock price and booming sales as telecom players scooped up its cutting-edge communications equipment. But on Apr. 5, CEO Daniel Smith told Wall Street analysts that his largest customer, Williams Communications Group Inc., and other telephone companies were slashing their spending. Smith said the company s sales for the current quarter would be only $50 million to $60 million, about $100 million less than analysts expect. . . . The next day, the company s stock plummeted 20%, to $7.25 - a far cry from its 52-week high of $172.50. Worse, Sycamore s troubles will trickle throughout its hometown of Chelmsford, Mass., about 25 miles northwest of Boston. The company will lay off 140 of its 1,100 employees, cut back its spending, and delay construction on a new corporate campus in nearby Tyngsboro. Sycamore is just one example of how the meltdown in the telecom industry is rippling through the economy. Peter Elstrom, Telecom Meltdown, Business Week, April 23, 2001. Reinvigorate the Telecommunications Sector By Promoting Competition Until the recent downturn, the telecommunications sector resembled a runner with boundless energy. It now looks more like a sprinter who has paused to catch his breath. As the economy catches its breath, it is important that we adhere to policies that will fuel competition, innovation and growth in the local telecommunication industry. Much of the credit for the extraordinary economic growth in the telecommunications industry belongs to the scores of innovators and entrepreneurs who took the risks to seize opportunities in the marketplace. But we should also recognize that many of these opportunities would not have been possible nor would they have been apparent to investors without the firm commitment to competition articulated by Congress in the 1996 Act. At least part of this economic downturn can be traced to the barriers new entrants continue to face in trying to compete in local telephone markets, and the need to have policymakers underscore their belief in pro-competitive principles. Incumbent local telephone companies have little, if any, economic incentive to open their networks to competition. It will take steadfast implementation and enforcement of the 1996 Act s market-opening provisions to overcome the incumbents economic incentive to resist new entry. If the new entrants lose the foothold that they established during the past several years, we risk losing the competitive dynamic that prompted the extraordinary economic growth and innovation the industry experienced in the late 1990s. Incumbent carriers will face no competitive threat, and we will return to monopoly telecommunications markets, undermining our ability to remain the world leader in broadband communications. As a recent New York Times article observed, the local phone companies have networks that cannot be duplicated. That is why . . . unfettered deregulation will not lead to more competition. If competition and lower prices are the goal, pro-competition oversight is required to ensure that the companies with essential assets do not use them to stifle others. Seth Schiesel, Sitting Pretty: How Baby Bells May Conquer the World, The New York Times, April 22, 2001. The most important aspect of these essential assets is the local loop - the copper wire that connects the consumer to the local telephone network. New entrants must be able to gain access to this local loop, which is typically owned by the incumbent telephone company. The 1996 Act requires incumbents to give competitors access to the local loop and it will be essential that policymakers enforce that obligation. The FCC must be guided by the 1996 Act s objective of opening up the local telephone market to new entrants. Only in this way can we transform the local telecommunications marketplace from a regime of heavily regulated monopolies to one characterized by competition. Competition policy will also be a large factor in determining who will benefit from broadband technology. Data networks are revolutionizing the way large businesses operate and we should be proud that our nation has led this revolution . These networks offer not only the prospect of delivering innovative telecommunications and information services, but also a realistic potential for creating facilities-based alternatives for traditional voice services. But we should not be satisfied if only large enterprises reap the benefits of broadband deployment. Pro-competition policies will encourage all sectors of the industry, incumbents and new entrants, wireless and wireline, to develop and deploy broadband networks to medium and small businesses and residential consumers. Conclusion If we are to reinvigorate the telecommunications sector and to encourage investment in broadband technology, we need to have a clear commitment to pro-competitive policies. Competition policy has had, and will have, an enormous influence on economic growth and innovation. A Princeton University study has found, for example, that countries such as the U.S. and Finland that have government policies fostering free competition in telecommunications have a significantly higher Internet penetration than countries that continue to have monopoly telecommunications services. E. Hargittai, Weaving the Western Web: Explaining Differences in Internet Connectivity Among OECD Countries, 23 Telecommunications Policy 701 (1999). This is why Congress s enactment of the 1996 Act, and the steadfast implementation of the Act s pro-competition goals, are so important. Reviving competition is essential to reinvigorating investment and economic expansion in the telecommunications industry. Vibrant competition will advance the promise of the 1996 Act: innovation and deregulation in a telecommunications industry shaped by competitive market forces. With firm pro- competitive policies, the promise of the 1996 Act, the exceptional economic growth and consumer benefits it has nurtured, and America s leadership in broadband can be sustained. Alan Greenspan has said t here is . . . little of a truly old economy left. Virtually every part of our economic structure is . . . affected by the newer innovations. Alan Greenspan, Remarks at the 18th Annual Monetary Conference: Monetary Policy in the New Economy (Oct. 19, 2000). The New Economy, as we know, has suffered a downturn in recent months. We need a strong commitment to competition to return it to robust health. An essential element of ensuring strong economic and job growth, technological innovation, and America s leadership in a broadband world will be policies.

LOAD-DATE: May 4, 2001, Friday