SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5427 words

COMMITTEE: SENATE JUDICIARY

SUBCOMMITTEE: ANTITRUST, BUSINESS RIGHTS AND COMPETITION

HEADLINE: TESTIMONY TELECOM LAW ISSUES

TESTIMONY-BY: DAVID DORMAN , PRESIDENT,

AFFILIATION: AT&T CORPORATION

BODY:
May 2, 2001 STATEMENT OF DAVID DORMAN PRESIDENT, AT&T CORP. on the State of Competition in the Telecommunications Industry Subcommittee on Antitrust Senate Judiciary Committee Thank you, Mr. Chairman and members of the Subcommittee, for inviting me here today to share AT&T s views on the state of competition in the telecommunications industry. Since 1996, AT&T has been a leader in developing competitive alternatives to the incumbent telephone monopolies. We have invested tens of billions of dollars in local telecommunications and cable networks and now serve over 2 million local customers. Unfortunately, our efforts and the efforts of other local competitors have been resisted at every turn by the incumbents. And now the incumbents seek changes in the law that would repeal the rules that are essential to local competition and remove the incentives put in the statute to encourage them to open their local markets. If enacted, such changes would exacerbate the current financial crunch and extinguish the prospects for competition that seemed so bright only five years ago. My message today is straightforward: Congress must reaffirm its commitment to the market-opening provisions it created in the 1996 Act if the local competition created by AT&T and others is to survive. Congress must resist efforts by the Bell companies to weaken that commitment through unwarranted legislation that would relieve the incumbents of the very obligations on which local competition depends. And Congress must demonstrate its renewed commitment to the principles of the Act by sending a clear signal that the goals of the Act can only be realized through vigorous enforcement of the provisions designed to end almost a century of monopoly control over the local telecommunications market. The Telecom Act promised to spread the benefits of competition across all segments of the communications industry. To keep that promise, Congress made a simple deal with the Bell companies: Open your monopolies to competition - real competition - and then you ll be allowed into long distance. The incumbents were not given a choice. Congress said in no uncertain terms that monopolies must be opened. And that regulators should make sure that it happened, and that it happened quickly. The 1996 Act provided three pathways to local competition: A competitive local exchange carrier ("CLEC") could purchase local telephone services at wholesale rates from the incumbent and resell them to local customers; a CLEC could lease specific pieces of the incumbent s network on an unbundled basis, using what the industry calls unbundled network elements ("UNEs"); or a CLEC could build its own facilities and interconnect them with the incumbent s network. In return for opening their markets to competition, the Bell companies would be allowed into the long distance market. This Subcommittee played an instrumental role in crafting the procedure by which the Department of Justice, the State commissions, and the FCC review a Bell company s application for long distance entry. Just the promise of competition spurred billions of dollars of investment in new telecommunications networks. Competitive local companies sprang up to compete with the Bells. Long-distance companies began making plans to offer local service in every state. AT&T and many others eagerly commenced efforts to offer local telecommunications services. We are discouraged to report, however, that the 1996 Act has not functioned as Congress intended. The flaws are not in the Act; they are in the implementation of the Act. For five years, the Telecom Act has bounced from legislation to regulation to litigation. Although subscribers have responded positively to the competitive service offerings of AT&T and others, and although it is now clear that there are no technical impediments to local competitors seeking to deliver service over the incumbents facilities, the Bell companies are on the verge of remonopolizing the telecommunications industry. Due primarily to the anticompetitive behavior of the incumbent telephone companies themselves -- and magnified by the recent market downturn -- the CLEC industry has virtually collapsed. To finish off the job, the incumbents are now calling on Congress for massive deregulation that would exempt most of their network facilities from the market-opening requirements of the 1996 Act and permit them into the long distance market even though local competition has not yet emerged. The incumbents requests for government-sanctioned remonopolization would be a defeat for the pro-competitive impulse that led to the enactment of the 1996 Act. Five years ago, this Subcommittee and Congress concluded that more, not less, competition would best protect consumers and spur broadband deployment. We ask you today to reaffirm that commitment by considering ways to make the 1996 Act more, not less, effective. I will address each of these concerns in turn. AT&T is Committed to Local Competition Soon after the enactment of the 1996 Act, AT&T realized that it could not rely solely on the incumbents for the network facilities it needed to offer local service. After all, we are the competition and the incumbents have little reason to cooperate in giving us access to their networks in a timely and reasonable fashion. We realized we could not be solely dependent on our rivals for essential facilities. As a result, we began to acquire our own local networks. In 1998 we purchased Teleport for $11 billion to serve business customers. Then, in 1999 and 2000, we spent nearly $90 billion to buy the cable companies TCI and MediaOne so that we would have a line into the homes of residential customers. We spend billions more each year to upgrade those networks, lay fiber, and create data centers. These investments have paid off: we ve gone from about 50,000 cable- telephone customers a year ago to nearly 600,000 today, and AT&T has local business customers in 71 major markets around the country. But our own local networks do not reach everywhere. Until recently, for instance, FCC rules limited us to serving only about one-third of all cable subscribers. The incumbents are under no such restriction, as the reduction in the number of Bell companies from 7 to 4 in the last few years dramatically illustrates. To bring competitive choices to more Americans, we must rely on the market-opening requirements of the 1996 Act to lease facilities from the incumbents and resell their services. Even in the fact of grudging and spotty compliance with these requirements, the results have been dramatic: nearly 2 million local residential customers in 18 states have chosen AT&T as their service provider. Earlier this year, AT&T committed more than $130 million to acquire the assets of the now-defunct NorthPoint Communications. The assets include collocations in 1920 locations, 3000 DSLAMs and other DSL networking equipment, 153 ATM switches, and the associated systems (hardware and software) that support provisioning, engineering, testing and maintenance functions. However, without access to the incumbents facilities, as contemplated by the 1996 Act, AT&T s ability to put these assets to use for consumers will be substantially diminished. As I explain below, the incumbents unceasing efforts to undermine the Act have impeded the availability of competitive alternatives for American consumers. Anticompetitive Behavior By the Incumbents Has Hindered the Development of Local Competition Back in 1996 the Bell companies pledged to support the Telecom Act. Then they went to court to stop it. They challenged Congress authority to pass it, the FCC s authority to implement it, and just about every meaningful interpretation of it by the states. The 1996 Act established a sound framework for opening up the local telecommunications marketplace to competition, but the incumbent local exchange carriers have resisted and challenged nearly every attempt to implement the pro-competitive provisions of the Act. Their strategy of resistance, delay, and litigation, and their control over the prices and processes upon which competition depends, has enabled them to maintain their dominance of the local telephone market, while dozens of their competitors are forced to scale back service plans, and many others go out of business entirely. Incumbents Eliminate Competitors By Refusing to Comply with Unbundling Obligations. Competitive local exchange carriers seeking to lease elements of the incumbents networks to provide competitive service have been frustrated by the incumbents insistence that their obligation to provide UNEs is limited to the most basic services. They will supply competitors with the elements necessary to provide voice services (at inflated prices designed to eliminate competitors), but will not supply the elements used to provide the advanced data services that are the economic heart of today s telecommunications industry. Competitors also find that incumbents mishandle or delay their service requests. Last year, Verizon admitted to mishandling more than a quarter of a million competitive requests. And an FCC report for Pennsylvania shows that while Verizon always fills orders for its own customers in under five days, 80% of competitive customers must wait longer than five days. Where regulators adopt policies to promote competition, the incumbents respond by withdrawing new services rather than complying. That happened recently in Illinois, where SBC announced it would halt its digital subscriber line deployment program rather than comply with an Illinois Commerce Commission order allowing competitors access to its fiber optic technology at cost-based rates. There is no better indication of SBC s monopoly power than a unilateral decision to cease providing service. As Illinois Commerce Commissioner Terry Harvill aptly observed in a letter to Speaker Hastert, "if the market were competitive, SBC/Ameritech would not be able to unilaterally halt the deployment of DSL infrastructure and deny these Illinois customers advanced telephony services." AT&T agrees with Commissioner Harvill that " w ithout competitive guidelines like those SBC objects to, it is unlikely that millions of customers in Illinois will ever see the intended benefits of the Act in the form of lower prices, many choices for broadband services, and better customer service." And if this happened in Illinois, it could happen in Ohio, Wisconsin, or any other state served by SBC. Incumbents Thwart Competition By Making Interconnection Difficult. Although CLECs are entitled to obtain dedicated space in an incumbent s central office or at other of their locations (such as remote terminals) and to place equipment there to interconnect with the incumbent s network, the incumbents have taken every possible step to deny CLECs this right, including challenging the FCC s rules implementing these requirements in court. In the meantime, the incumbents have attempted to restrict the type of equipment and facilities that CLECs may collocate at their central offices, and they are refusing to permit CLECs collocated in the same central office to connect to one another. Incumbents Wholesale Rates Would Eliminate Competition. Although competitors seeking to enter the market by reselling the incumbent s service are entitled to buy that service at the wholesale rate, incumbents have virtually eliminated resale as an option for new competitors by offering wholesale rates for local network capacity that are too high for competitors to make a profit on the resold service. In some cases, the wholesale rates offered to potential competitors exceed retail rates. In New Jersey, for example, the average retail rate is $8.19 per month, while the wholesale rate offered to competitors is $25 per month. After paying the "wholesale" rate, there is no margin between the cost of service and what competitors can charge for its services, including retail local exchange and exchange access services. As a result of litigation brought by the incumbent monopolists, the FCC lost its wholesale pricing authority for local telephone services. Although the Supreme Court eventually restored this authority in 1999, the FCC now appears unwilling to override state commissions that have permitted the incumbents to charge anticompetitive rates. In the face of these types of behavior, many competitors have been forced to stop offering local telephone service. AT&T has warned that because it is losing money on local telephone customers, it may have to stop offering service in New York and Texas. Sprint has left both those markets, and the Georgia and California markets as well. And where competitors leave the market, price increases follow. In Texas, SBC has announced a ten to thirty percent price increase for long distance service. The same is true for advanced services, where the incumbent carriers now control approximately 90 percent of all residential DSL lines. Analysts at Legg Mason have noted that "with numerous DSL providers exiting the playing field . . . DSL pricing appears to be on the rise." SBC, for example, raised its residential DSL rates in February by about 25 percent and Earthlink followed suit. Facing Resistance by Incumbents, Local Competitors Will Not Survive the Downturn in the Financial Market The recent downturn in the financial markets has further punished competitors who faced incumbent-imposed technical, legal and procedural hurdles to getting the access to services and facilities mandated by the 1996 Act. Numerous competitors, including Winstar, Actel, e.spire, Picus, Jato, OpTel and many others, have declared bankruptcy or shut down operations. Even NorthPoint, which was widely considered the type of major competitive player created by the Act, is now defunct. For those that continue to struggle in operation, stock prices have plunged, and the capital market has virtually dried up. While telecommunications companies captured an average of two billion dollars per month in initial public offerings over the last two years, they raised only $76 million in IPOs in March, leading numerous companies to withdraw their IPO plans.1 The difficulty in entering local markets has also caused nearly all competitors to scale back their plans to offer service. Covad, originally another success story, is closing down over 250 central offices, and will suspend applications for 500 more facilities. Rhythms has cancelled plans to expand nationwide. Net2000 has put its plans for expansion on hold. Numerous other competitors, such as DSL.net, have resolved to focus on a few core markets. Each of these decisions has been accompanied by hundreds of eliminated jobs. CLECs dismissed over 6500 employees in the last year, attempting to remain in business. The repercussions of these events on consumers is significant. CLECs reinvested most of their 2000 revenues in local network facilities. CLECs declaring bankruptcy in 2000 had planned to spend over $600 million on capital expenditures in 2001. Those competitive networks will not be available to consumers. Further, as CLECs leave the market, the incumbents raise their prices, and lose incentive to deploy advanced services. Indeed, we could well return to the environment that existed before the 1996 Act, when the Bells kept DSL technology on the shelf, feeling no pressure to deploy it in the marketplace. Regulatory Relief For The Incumbent Monopolists Is Unwarranted In 1996, there were eight major providers of local phone service. Those eight have become four today, thanks to a series of mega- billion dollar mergers. All four are still monopolies. The only difference is that today they are much bigger monopolies. And they aren t eager to compete against each other. Verizon made a loud media splash last year when they said they would compete against other Bells for local service in nine states. They were a lot quieter just before the New Year when they said they were pulling out of all nine of those states. Despite the remonopolization of the industry, incumbent telephone companies are now seeking changes in the law that would weaken regulatory oversight and make it even harder for new entrants to compete. Current legislation in the House would create broad exemptions from the incumbents unbundling and resale obligations for high speed data facilities and services. It would deprive competitors of the ability to purchase access to crucial aspects of the incumbents networks in order to gain a foothold in the market and provide advanced services. Indeed, the House bill confers an unbundling exemption so broad that competitors would probably not even be able to lease the facilities they need to provide basic voice service in competition with the incumbents. It would effectively close off one of the three competitive pathways forged by Congress in 1996. The Bell companies also seek the ability to provide high speed data services across LATA boundaries without meeting the pro- competitive requirements of the 1996 Act. As this Subcommittee is well aware, in order to foster local competition, the 1996 Act permits a Bell company to gain in-region interLATA authority only after it has opened its local market to competition. This incentive-based approach takes full advantage of the long distance restriction to provide the Bell companies with a reason to open their local markets for the benefit of all consumers. And the ability to provide high speed data services across LATA boundaries is a powerful incentive: currently, the majority of traffic traveling over long haul networks is data traffic, not voice, and analysts predict that data traffic will make up 90 percent of all traffic within four years. The pending proposal is a fundamental abandonment of the incentive-based approach embodied in the 1996 Act. The incumbents claim that these changes will spur investment and increase rural deployment, but history belies this claim. After sitting on DSL technology for years, the incumbents finally deployed it only in response to competitive offerings of CLECs and cable companies (specifically, AT&T). Under this competitive spur, they have made substantial investments in broadband. Verizon, for instance, will spend $18 billion this year on capital investment.2 SBC is spending more than $6 billion on its heavily-promoted "Project Pronto,"3 and Qwest will spend $9.5 billion this year to build out its facilities.4 BellSouth "invested over $33 billion ... during the 1990 s," and expects "total DSL revenue of approximately $225 million this year and $500 million in 2002."5 Tellingly, the BellSouth chief executive acknowledges that the regulatory challenges BellSouth is facing "are unlikely to slow down the momentum of the marketplace."6 What is clear is that this investment will slow dramatically without the competitive spur that the 1996 Act makes possible. Further, these investments are producing significant revenue for the incumbents. SBC has boasted to investors that " t he network efficiency improvements alone pay for this Project Pronto initiative, leaving SBC with a data network that will be second to none."7 Beyond those savings, of course, SBC and the other incumbents will earn substantial revenues from the new services made possible by the deployment of advanced facilities. And when SBC makes advanced facilities available to competitors as unbundled network elements, they earn yet another revenue stream from competitors who must pay the costs of these elements plus a profit. There also is no assurance that the incumbents would use regulatory relief to deploy broadband facilities any faster or to historically underserved areas like rural communities or inner cities. Their arguments that new legislation will give them the incentive to bring high-speed access to rural areas ring hollow when you consider the fact that the Bells have already divested 10 million rural lines, and there is little evidence that the incumbent monopolists have used the last five years to extend broadband to unserved communities. To accede to the incumbents requests for relaxed regulation would be a retreat from the competitive goals of the 1996 Act. Although they argue that such an approach would stimulate a renewed commitment on their part to deploy advanced services, this approach already has been tried and failed. There is no justification for allowing the incumbents to evade their unbundling responsibilities, or creating a loophole in section 271 s balance of incentives designed with this Subcommittee s participation to protect the public interest. The CLEC industry is at a critical juncture. If we don t succeed now, it will be a long time before others are willing to invest the billions of dollars needed to try again. If local competition is to succeed, Congress should send a clear signal of its renewed commitment, both by rejecting the incumbents self-serving requests for deregulation, and by encouraging vigorous enforcement of the pro-competitive provisions of the Act. Senators Hollings, Inouye, Stevens and Burns recently emphasized in a letter to FCC Chairman Michael Powell that there is a tremendous need for "strict adherence and strong enforcement of the 1996 Act s market opening requirements," and that " m eaningful exercise of section 271 authority is needed in light of the current precarious state of the competitive carriers, which is due largely to their inability to obtain affordable, timely, and consistent access to the Bell networks." AT&T agrees with the Senators that what is needed today is not a rewrite or even abandonment of the principles embodied in the 1996 Act, but rather a rededication to those principles in the form of vigorous oversight and enforcement. We remain optimistic that with the assurance of "strict adherence" to its requirements, the promise of the 1996 Act can become reality. Thank you again for the chance to present our views.

LOAD-DATE: May 4, 2001, Friday