Copyright 2001 Federal News Service, Inc.  
Federal News Service
May 2, 2001, Wednesday
SECTION: CAPITOL HILL HEARING

LENGTH: 13761 words

HEADLINE: HEARING OF THE SENATE ANTITRUST, BUSINESS RIGHTS AND COMPETITION SUBCOMMITTEE OF THE JUDICIARY COMMITTEE
 
SUBJECT: TELECOMMUNICATIONS ACT AND COMPETITION
 
CHAIRED BY: SENATOR MIKE DEWINE (R-OH)
 
LOCATION: 226 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:
 
PATRICK WOOD III, CHAIRMAN, PUBLIC UTILITY COMMISSION OF TEXAS, AUSTIN, TEXAS;
 
REED HUNDT, SENIOR ADVISOR, MCKINSEY AND COMPANY;
 
JAMES ROBBINS, PRESIDENT AND CEO, COX COMMUNICATIONS, ATLANTA, GEORGIA;
 
DAVID DORMAN, PRESIDENT, AT&T, BASKING, NEW JERSEY;
 
LARISSA HERDA, PRESIDENT/CEO, TIME WARNER TELECOM, LITTLETON, COLORADO;
 
JAMES ELLIS, SENIOR EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, SBC TELECOMMUNICATIONS, INC., SAN ANTONIO, TEXAS
 


BODY:
SEN. MIKE DEWINE (R-OH): Well, good afternoon. Let me welcome all of you to the Antitrust Subcommittee hearing on the state of local telephone competition, five years after the implementation of the 1996 Telecommunications Act. Our subcommittee has examined the competitive status of this industry on numerous occasions since 1996. Over that time, we've seen some improvement in the competitive environment as a result of the Act. However, we still have a long way to go.

Candidly, after five years, growth and competition among local carriers has been disappointing. Though no one expected immediate miracles upon the Act's implementation, competition is far from where it could and where it should be. On the positive side, the most recent FCC data available shows that between the end of 1999 and June 2000, the competitive local-exchange carriers increased their market share from 4.4 percent of local telephone lines to 6.7 percent. This competition is particularly strong in the local business sector, where the competitive local exchange carriers have gained 17.5 percent of the market.

We've also seen some progress under Section 271 of the Telecom Act. The Bell companies now have satisfied FCC and Justice Department conditions for opening their local markets in five states, including three since the beginning of this year. Another positive trend is the movement among some cable companies to begin providing residential phone service over their cable systems.

As many of you know, one of the guiding principles behind the Telecommunications Act was that cable would serve as a so-called second wire into the home, providing facilities-based competition to the local phone companies. It is encouraging to see promising developments in this area. At the same time, however, there are many reasons for concern. Incumbent telephone providers still have over 93 percent of the overall local market, and the competitive picture in the local residential market is even worse. Competitive local- exchange carriers have only 3.2 percent of the residential market. With competitive providers serving just over 3 percent of these residential customers, it seems fair to say that most residential phone customers continue to have really only one choice, one choice for local service. And we must be careful how we're not to consider market shares as an exclusive indicator of whether or not competition actually exists.

The Act does not set market-share benchmarks because it recognizes that sometimes even markets that are open will be dominated by one company. Nevertheless, after five years, it's hard to argue that a 3 percent market share by competitive carriers and local residential markets is an acceptable result.

Even worse, many of the companies that have tried to provide competitive service have suffered financial setbacks. We already have seen some go out of business as the capital markets begin to reevaluate the financial prospects of the market for competitive telecommunication services. If this trend continues, competition and the consumers will suffer.

Some within the industry argue that the struggles competitive providers have suffered recently are part of a national market evolution. Others argue that many of the problems have resulted because the 1996 Telecom Act has not been properly enforced. These are issues we need to discuss with our witnesses today.

Further, while see many competitive providers struggling, there are some that believe the Act should be reopen to allow the Bell companies to begin immediately providing long-distance, data services. It is not my intention to focus on this specific legislative proposal during our hearing today; however, that specific issue is related to the broader question of whether we need to revisit the Telecommunications Act to provide a different balance between the incumbent, competitive providers of local telephone service. For example, some have suggested we should consider additional legislation to improve the access of local providers to residential buildings. This is one of the important policy issues that we will discuss here today.

Now let me say, I look forward to our examination of these very complicated issues, and I remain committed to ensuring a competitive environment in this very important industry.

Now, before I turn to Ranking Member Herb Kohl, I would like to note for the record that as a rule, the Antitrust Subcommittee usually receives testimony from industry witnesses who are responsible for the business operations of their respective companies. We have found that those who are responsible for the day-to-day operations and the big- picture strategic thinking have been able to give us the most insight in the competitive issues that we face and that we focus on in this particular subcommittee.

In this instance, however, Mr. Ed Whittaker (sp), the CEO of CBC Communications was unable to be here today because of scheduling conflicts. So Mr. Jim Ellis, the general counsel of SBC, is here in his place. We appreciate Mr. Ellis being here today, and we anticipate that his testimony will focus on the business environment and challenges facing SBC rather than on any legal battles that may be ongoing. We anticipate that our other witnesses on the second panel will have a similar focus.

And one final note before I do turn to Senator Kohl. As some of you may be aware, Senator Kohl's basketball team, the Milwaukee Bucks, successfully advanced to the second round of the MBA playoffs just last night. We all want to congratulate Senator Kohl, and in his honor we are all using Milwaukee Bucks pens. And I'm sure that if any of you want to see the senator afterwards -- I see our witnesses are. That's very good, Mr. Wood. We're glad you're doing that. If anyone would want one, I'm sure that Senator Kohl has a few more.

Senator Kohl, congratulations.

SEN. HERB KOHL (D-WI): Thank you very much, Senator DeWine. We appreciate your holding this hearing here today.

More than five years have passed since the Telecommunications Act of 1996 became law, so this is a good time to see what progress has been made to bring true competition to telecommunications. The main goal of the Act was to bring real competition to all aspects of communication services, particularly to local telephone service. But with the regional Bells still controlling about 93 percent of the local phone market and rates remaining steady over the last 10 years, no one can claim that the Act has been a roaring success. We've been waiting for local phone competition for five years, and we are still being kept on hold.

So as we look back on the five years of the Act, it is time to try to learn some lessons. With the AT&T about to be broken into four companies and most of the potential competitors to be to the regional Bells in serious, financial trouble, the biggest lesson seems to be this-- Congress cannot mandate competition. And if competition doesn't make business sense, then laws like the Telecom Act will not really work.

Now that doesn't mean that we shouldn't consider fine tuning the Act so that it is a more effective tool of remote competition. For example, one major stumbling block to competition has been building access. If the owner of a big apartment or an office building has a sweetheart deal with the phone company, then building residents are often prohibited from shopping around for a different phone company. As a result, the telecom competitors are denied access to a large, important pool of potential customers, and people are locked into an expensive service because the building owner has a special deal.

This is a recurring problem that we've observed in our recent cable hearing also as well. But despite the need for fine tuning, most Americans probably look at the telecommunications field today and stand in awe of the innovated explosion over the last five years. From cell phones to the Internet, from email to DSL lines, consumers can communicate with each other quicker, faster and more efficiently than ever before. Competition for long-distance telephone service is vigorous with rival providers engaged in the fierce competitive battles and inexpensive rates of 5 cents a minute and lower common.

Cellular telephone use continues to grow with more than 80 million users nationwide. With prices dropping, cell phones are changing from a luxury item to a true mass means of communications used for everyday needs. And that's the good news. But local residential service is still the bread and butter of the telecommunications field, and competition to provide that service is still the Holy Grail. We have not gotten there yet.

Maybe we need more time. But with the first round of competitors dropping out of the field, maybe we need to tinker with the Act. We need to ask whether the Act needs more enforcement authority through antitrust laws or by the FCC. And we also should ask whether we need to give the regional Bells more of an incentive to open up their networks. And finally, we need to keep a vigilant eye on another potential round of mergers where our antitrust laws and principles will play a very important role.

So we look forward to hearing from today's distinguished panel of witnesses, and we thank you all for your willingness to testify.

Thank you, Mr. Chairman.

SEN. DEWINE: Thank you, Senator Kohl.

Let me turn to our first panel. Pat Wood is the chairman of the Public Utilities Commission of Texas -- a three-member panel -- which regulates the state's telecommunications and electric power industries. He has served on the commission since 1995. He also has been nominated by President Bush to be a commissioner on the Federal Energy Regulatory Commission. We congratulate him on his nomination and are certainly glad to have him with us today.

Thank you, Mr. Wood, for joining us.

Reed Hundt served, of course, as chairman of the Federal Communications Commission from 1993 to 1997, where he presided over the implementation of the Telecom Act of 1996. Prior to his work on the commission, Mr. Hundt was a partner in a Washington, D.C. law firm. He is a senior advisor on information industries currently to McKinsey & Company. Mr. Hundt has testified before our subcommittee many times in the past, and we welcome here back.

Mr. Wood, we'll start with you. We have both your written statements which will, without objection, be made a part of the record. We would ask you to proceed for about five minutes or so, then we'll have more opportunity to ask questions.

Mr. Wood? Thank you.

MR. PATRICK WOOD: Thank you, Senator DeWine, Senator Kohl, a pleasure to be here.

I view that the states are the front line for implementing the Act that you all passed in 1995, and working with our colleagues at the Federal Commission, I think I'd like to provide some, I guess, real-world check on the perception, perhaps, that the Act is not working. I think in states like ours, where we've taken the challenge from the Congress and the mandate from our own state legislatures and governors to get the competition, the tools that were given were quite sufficient. They may not be in years to come, but certainly the tool of 271 -- which I mentioned at some length in my testimony -- and I should add that the end stages of that 271 were negotiated with Mr. Ellis and some of his colleagues, so his strategic business acumen I will attest to from personal experience.

But the key take-away from us, I hope, is that the Act can work. It's not necessarily predestined to work. 271 being one aspect -- certainly the one that is most fresh in my mind because it was in the '98-99, early 2000 time frame that we worked with the industry, with the company, with the competitors, with customers, with our own staff, to try to craft a 271 approval process that, in fact, got us from a relatively highly-regulated world for Southwestern Bell Telephone to a wide-open world that was inviting to competitors, that had sufficient, bristling enforcement tools available to incentivize good business practices. And quite frankly, you're turning a business relationship that was adversarial between competitors into one of being a wholesale supplier and a wholesale customer.

And I don't know what the analogy to divorce would be, but I think it's similar to putting together a marriage that's been irrevocably broken into one that now has a parent-child relationship. Incest and all those wonderful things come to mind, but it's a difficult relationship to monitor just trust me; as the frontline, it has been difficult. But we do try to use some tools of our own making, working with the Federal Commission-- some tools. Quite frankly, a lot of this has been make it up as you go. Regulators in the state level have historically kind of looked at things, run them through a typical procedural time frame that's way too long for competitor markets, and try to come up with outcomes.

Today we do a work 'em, throw 'em docket; that is, roughly can be from a 72-hour decision to a 14-day decision, or a slow decision is viewed to be a 60-day decision. That requires kind of a different mind-set. And it's been as difficult for us as it has for the affected companies to adjust to this new world, but it's one that we're slowly getting comfortable with.

I can speak for my sister states when I say that certainly the 271 carrot, which was, if you open your local markets, then you get to get into that guy's long-distance markets and data markets, is a great incentive in the states that have used it. And I think a number of us are using it still. Even after it's over, it still works.

I get data every week from the company as to how well they're performing under a series of some 100 performance metrics on every aspect of their business relationship with their wholesale customers. That allows me, and my colleagues, and our staff, and the industry to track Southwestern Bell's performance. And I will say, everyone appeared that once they get into long distance, they'll say, great, they'll never take it away from us, let's just do what we need to do anyway. They've done a better job. It's not been backsliding. In fact, it's gotten better in the Texas market, and I would venture to say in the other markets as well. So you can have a company come to the table, decide that the old world is something they want to leave behind as well, and move forward into the new world.

I'd like to point out briefly before I close two things that are in my testimony that I would like to call the attention, based on your comments.

In 1995, Texas passed the Building Access Law that Governor Bush signed and has just been on the books kind of quietly, quite frankly, for the past five years. We put in some implementing rules to make sure if there was ever process, the commission could handle it. But I would like to call the attention that, at least in our state, we have had a rule that allowed the last foot to be -- not just the last mile, but the last few inches of it to be opened at a customer's request in these multi-tenant buildings.

And finally, one thing that I've mentioned recently as a good aspect of our Texas law was we standardized how municipalities, how local governments interface with telephone companies. And that has been, quite frankly, something that facilities-based competitors tell me is the best thing Texas could have ever done for its local markets. It's to standardize the way that you deal with, in Texas, 1,200 municipalities. It's one thing to win a decision at the PUC, but another to have to go slug it out at the different cities of Texas. And so, that is something that doesn't cause for federal solution, but is of interest.

Finally, residential rates. Residential rates are low. I believe in your states they are as well. They may even be lower than cost. I mentioned in my testimony some numbers there. It will be difficult for competitors to ever come into the Texas market -- just as it would be difficult to get into the California electricity market -- if you can't sell for the proper price or compete with the proper price what you just bought for $10 more. And that's a reality that I think we're going to have to face. Again, it is probably a state issue, but as federal decision-makers that are lamenting -- as I think is fair -- the lack of residential competition, it's important to know that residential rates were purposely subsidized for 80 years. And business rates and long-distance rates are kept high to make up for that.

Those are attractive markets for competitors. There's great market entry. The Texas statistics that I provided you show there's plenty of entry into the business market. There in some entry into the residential market as well, but to the broad market, it's going to be a long time until there is a comprehensive competition due to the fact that the residential rate has been largely subsidized to a below- cost offering over the last 80 years. And I'm not urging that something be done for that. I think it is difficult politically and on a policy basis to go there, but please understand that that is one issue that is really our fault, but it impacts the statistics that you all look at.

SEN. DEWINE: Good. Thank you, Mr. Wood.

Mr. Hundt?

MR. REED HUNDT: Thank you very much, Mr. Chairman and Senator Kohl. Thank you very much for inviting me back. I would like to, if I might, compliment this committee and these two senators for your continuing stewardship and monitoring of the information sector in the development of competition in this sector. And I think that the world should know that your attention to developments in this sector is of particular significance because there's now no doubt that this is the most important sector of the American economy. It's not the biggest sector of the American economy, but it's clearly the most important sector of the economy as the events of the last five years are demonstrated.

In the last five years, this sector, while accounting for less than an eighth of the total economy, is responsible for one-third of all the economic growth in the economy. It's responsible for more than 10 million new jobs in the economy. And most important of all, this sector, and no other sector, is responsible for the record productivity gains that all parts of our economy have enjoyed.

There's probably never been a law passed by not only this Congress but any Congress or any legislature in any country that has been so complex as the Telecommunications Act of 1996. I doubt that there's every been a law that has had such aspirations. And there are few of any laws that have represented such a radical departure from precedent.

The precedent, as you certainly know, senators, was to have regulated monopoly in the information sector and in all dimensions of that sector, whether it was the media, or telephony, or any part, at the very most to allow carefully controlled oligopoly and in most cases regulated monopoly. The 1996 Telecom Act is the first law passed by any significantly large country in the world that repealed that entire idea, and said instead that it was the law of the land; that we would promote competition and investment and innovation. And there's so much in this law that any single piece of it can justly be criticized, litigated and debated, but I think it's wise to take a step back, and if you'll permit me as former seventh-grade school teacher to attach a grade, if you will, I think the Congress should give itself an A on this law. And here's why.

There's no question whatsoever that in the aggregate, consumers have benefited. Consumers now spend about twice as much as they used to spend of disposable income on communications services, not because they're paying twice as much for the same things, but because prices have gone down in so many areas, and there's been such a flourishing of choice and alternatives in so many areas, that they're just spending more because that demand was previously constrained by a regulated environment.

Number two. There's been a fantastic investment boom. The entire business world in the United States purchased in 1995 about $250 billion of communications stuff-- equipment, software services, et cetera. That number doubled in just four years from 250 billion to 500 billion between 1995 and 1999. That is an astounding increase. In fact, all manufacturing output growth in five years -- all manufacturing output growth in those five years -- two-thirds was driven by the information sector alone.

The productivity gains that have come out of this sector have doubled all of the caps that economists said were absolutely inconcrete and limited expansion possibilities for the American economy. And Dr. Greenspan has, in a variety of different ways, somewhat obliquely, repeatedly pressed the same point over and over. None of these productivity gains are going away. They are structural. They are locked into our economy. We will benefit forever from these productivity gains.

Now, an awful lot of people in this sector are wringing their hands, and an awful lot of people have lost a lot of paper value -- and now that I'm in this sector, I could even talk to you about that myself -- in the last six to nine months of stock-market downturn. But let me make sure that in the face of all that negativism, I at least speak out in, say, for long-term confidence, because these assets that have been installed are not disappearing. And as long as we stick with the policies of the '96 Act, promoting competition and innovation in investment, we will get through this stock-market downturn, we will get through the inventory reduction, and we will go on to even greater heights in terms of economic growth and productivity gains. We did the right thing in 1996; we have to stick with it. Thank you very much.

SEN. DEWINE: Well, we appreciate, Mr. Wood and Mr. Hundt, your testimony. Let me start off a question for you, Mr. Hundt.

We often hear that competition in the local telephone market is moving forward, and we simply need to stay the course. At the same time we hear for calls to step up enforcement of the 1996 Act. What specific enforcement measures do you believe need to be implemented or adjusted that would improve the competitive environment, if any?

MR. HUNDT: Well, I'm not prepared to be a critic of any enforcement efforts that may be existing at the present time. I would just say this. Probably the single most important feature in the communications sector, or the telephony section of the Act, was the provision that required that the incumbent telephone companies -- for the most part, Bells -- unbundle the local loop, and do so at forward pricing.

Now, these provisions, the various words around them, have been among the most intensely litigated provisions of any statutes ever passed. The Supreme Court has already granted cert. Here's a litany, and two cases out of two sections, out of Section 251, 1254, 1252 and 1224. The point is that all these core sections which are about unbundling have repeatedly been the subject of litigation. In the faith of all of that, the most important thing is that all of the enforcement powers at the AFC and at the state level stick with one basic philosophy, enforce it, and talk about it all the time, which is that the local loop will be unbundled and will be made available to rivals at forward-looking prices.

There are many debates about methodology. I'm certainly eager to stay away from the arcane details of them. But forward-pricing is critical to the competitive model, and it is critical that these loops be make available.

It is the way that the promise of the Act will be delivered in years to come.

SEN. DEWINE: Mr. Wood, any comment on that?

MR. WOOD: Enforcement from, again, the front line -- we have traditionally taken the promise of 251 -- which requires, among other things, what Mr. Hundt just mentioned, and a number of other obligations that the companies have to their competitors -- incorporated those in the business contract, and then served as the body that people could come to, to resolve matters in that business contract if performance was not sufficient under that contract. So rather than going to a district court and going on those timetables, people could come to the commission -- again, under that up to 72- hour, up to 60-day time frame, depending on if it was customer- affecting or not. Our general philosophy has been, provide the service now, so that competition won't be delayed by a litigation tactic, and we'll work on the price as fast as we can so that customers are not affected.

So in a real way, enforcement is -- a lot of these issues are about money, how much money are you going to charge. I mean, it's no surprise to you all. And it's a fair request of the company to get compensated for what they do. I think as Mr. Hundt pointed out, there is a philosophy which the state of Texas has also adopted, to use forward-looking costs on pricing these very important parts of the network. As long as that's got a forum -- and I would venture that probably closer to the problem is better, not necessarily because of the state's rights argument, which I would probably be glad to make, but just convenience for the parties. Rather than having to come up here and litigate that before a commission that's got plenty of work to do -- not that we don't -- come before the state who knows the parties, make the cut, get on with it and go on to the next problem.

So enforcement might need some other aspects that I'm not as familiar with from what I don't deal with. But when you do an interconnection agreement, those tend to have an enforceability to them that we can handle pretty well.

SEN. DEWINE: A question for Mr. Wood and also possibly Mr. Hundt.

Consumers have benefited from increased competition in the long- distance market and have received lower rates as a result. However, the rate of return in the market has declined at the same time. And this makes the long-distance market less attractive to the Bell companies, and therefore, provides less incentive for them to open their local markets to competition.

Do you agree with that or not?

MR. WOOD: Well, I can just say, I'm glad we were the second state in line. If I were their 20th or 25th, it may not be as an attractive place when rates go from 12 cents on average a minute as they had, where in Texas down to 8 cents a minute.

SEN. DEWINE: What did they go from? What was that again?

MR. WOOD: Twelvish on average down to eight. So I mean, when Bell entered into long distance, we suddenly had single-digit, long- distance rates. That starts to make the gravy a little thinner than it was when you put it on the potatoes, but they still taste good. But I'm assuming with other aspects of long-distance entry that are availing -- data, for example, and others -- it's still a pretty tasty plate, but it has changed its flavor.

SEN. DEWINE: A lot of food on the table here, Mr. Hundt. Do you have any comment?

MR. HUNDT: Well, I'm going to pass up the food metaphors to not get into a competition with my colleague.

Return on investment capital has gone down for every player in every sector of the information sector for five straight years. It's gone down in long distance; it's gone down everywhere. That is because of two things. It is because there's been so much more invested capital put in, and the revenue has not kept pace with that. And number two, there's so much competition. From a policy perspective, actually, it is a good thing to put the pressure on industry and to not have guaranteed returns on investment capital, which correlate to regulated monopoly as your paradigm.

Now what do you expect people in industry to do under those circumstances? And the answer is, they need to move into new business models, and they will seek consolidation.

So I think what we're going to see for sure over the next couple of years is the incumbent local telephone companies confront the necessity of making a strategic decision about vertical integration, about moving into the long-haul network. That is not a bad thing. That is part of the working out of the Act. In Texas, that is the way that Pat approached the issue and he laid the groundwork for that move. I'm not talking about when; I'm talking about the inevitability of this particular trend.

We now have in the country at least 15 different long-haul networks. It was not that way just a few years ago. There is room to have integration here between local and long distance. And it should happen. It should not be the case that government abandons scrutiny and runs away from the issues, but we should expect these issues to be presented.

SEN. DEWINE: Senator Kohl?

SEN. KOHL: Thank you very much, Mr. Chairman.

There may be some redundancy in my questions, but I'd still like to get at them a little bit more fully.

Mr. Hundt, in the past five years -- since the passage of the Telecom Act of 1996, the purpose of which was to jump start competition in the telecom industry -- we've seen an explosion of communication technologies from cell phones to Internet satellite, television, just to name a few. Yet, at the same time, most of the consumers have seen little, if any, competition in the most basic of all telecommunication services, which is local telephone service. Last year, the FCC reported that competitive telephone companies had a market share of less than 7 percent of local telephone lines. And while we have all seen sharp declines in long distance and cell-phone rates, the average local phone rate has not declined in a decade since 1990.

So why have consumers not seen more competition for their local telephone service in five years since the Telecom Act? Is there a flaw in the Act that needs to be fixed, or is there anything that we as policymakers can do to encourage and to see that, in fact, more competition exists in local telephone service?

MR. HUNDT: Well, if I might, let me first mention some things that consumers definitely need to chalk up as benefits. There's much more competition at last in video coming down from satellites. It's because Congress passed the Satellite Home Viewers Act and has changed the structure of this particular industry in a very positive way. There's infinitely more competition in wireless. Prices have dropped. There's service available in many more places. Prices per minute are going down. There is, in fact, tremendous competition in all kinds of equipment that attach to the network, and there's also a lot of competition in terms of Internet access. We do have some emerging big players. We still have several thousand Internet-access providers in the country.

In terms of residential, voice, telephone service, as Pat knows from Texas in detail, roughly speaking on a nationwide basis, about 40 percent of all consumers are paying less than the cost to provide a service. Maybe Mr. Ellis at SBC has a different number for his region, and I wouldn't want to debate the specifics, but it's a big number. And there's no way that someone else is building an overlapping network to repeat the experience of offering a below-cost service.

What will happen -- and I'm so confident of this if we just stick with our competition policies. What will happen in about four to five years -- actually very soon in terms of how long it takes to do these massive investments -- we will see the cable networks and the telephone networks delivering broadband to more than half the homes in America. And around that time period -- somewhere around 2005, maybe a little later -- we will see that routinely when someone is buying broadband or high-speed access to the Internet, they're getting along with it a voice service. It substitutes for today's voice service.

What I'm saying is, that that will be the experience of about 40 million homes in the United States by 2005. By the end of the decade, if we stick with our competition policies, it will be the experience of 80 to 75 percent of all homes. That environment, the broadband competition between cable and telephony networks, that's the environment in which we will see the kind of competition for the residential consumer in what today is called voice, and then will be a bundled service with data. That's the way that's going to work, I believe.

SEN. KOHL: So you're saying, in terms of the local telephone service business, it's a huge money-losing business, and that's why there's no competition.

MR. HUNDT: I'm saying it is for 40 percent, maybe 50 percent of homes. It isn't for the other percentage. But the only real way to have competition, just on the residential side, is to have it be that you have two competing delivery mechanisms or infrastructures, and we have them. One is cable and one is telephony. They're going to be competing with high-speed access to the Internet, and along with that will come voice.

I know that we all are impatient for it. Everyone can tell a story of how they tried to order it. But the reality is that this is happening. Cable has already built, I believe to more than 70 percent of its homes, the capability to do what I'm talking about. We're talking here about tens of billions of dollars that needed to be invested and people who were doing it out of their own pocket in the face of good and markets. But it really is happening, and we really should stick to our policies because they actually are working out.

SEN. KOHL: Mr. Wood, you have a comment?

MR. WOOD: The only thing is just to give a number reference, Senator Kohl. In Texas, the all-in price for just a residential line -- no call waiting, no caller id, which a lot of people actually in Texas have those. But if you don't, it's about 17 bucks, taxes included. For those that want to compete against Southwestern Bell, if they want to buy that underlying line from Southwestern Bell or even build it themselves, we calculate it, and I think the rates on our end are pretty low, actually. And the calculated rates to buy that $17 line is $21.

So you can't sell at a $4 loss and make a lot of money, and that's where I think the rub is. If you get the customers that want the caller id, want the call waiting, add some long distance minutes on the network, add a broadband product -- DSL, for example, which you would buy from one of the Bell companies or Ameritech -- then you get above that 21 bucks pretty fast, the company can make a return from coverage cost and make future investments.

We're stuck, quite frankly, with our rate-design errors in the past. And as I admitted to you, all that's really a state problem. But it does explain why I think the figures for residential are relatively dismal, and I think will stay so until the bundle platforms of cable-type products -- or I would even add wireless-type products to those that Reed mentioned -- as well as what the phone company can offer will be kind of salvation. But there's always going to be what we call the grandmas who just want to get the basic dial tone, make maybe two long distance calls a month, and that's all they want. They're never going to be profitable people. And it's been a public policy in our state, and I believe in you alls as well, to keep the rate for those folks low and affordable. So we will face that music one day. We're not there yet.

SEN. KOHL: Okay. Mr. Chairman?

SEN. DEWINE: Well, we appreciate your testimony. Mr. Hundt, it's always good to have you.

Mr. Wood, we appreciate your testimony very much. You both have been very helpful. Thank you.

Let me invite our second panel to begin to come up, and I will introduce you as you are coming up.

David Dorman is president of AT&T. His responsibilities include the consumer business and network services groups, international ventures and AT&T labs. Prior to becoming president of AT&T, he served as chief executive officer of Concert (sp) and president of Sprint business. He was also the chief executive of Pacific Bell.

James Robbins is the president and chief executive officer of Cox Communications. Mr. Robbins joined with Cox as vice president of the company's New York operations in 1983. He also has served as a chairman of the board of the National Cable Television Association. He has testified before our subcommittee in the past, and we welcome him back.

Larissa Herda is the president and chief executive officer of Time Warner. She rose to that position three years ago after serving as the company's senior vice president of Sales and Marketing for a year-and-a-half. She serves on the Executive Committee of the Association of Local Telecommunications Services.

James Ellis has been the senior executive vice president and general counsel of SBC Communications since 1989. His Bell system careers extends back some 29 years and had included the position of Southwestern Bell's vice president, general counsel and secretary. We look forward to his testimony as well.

Thank you all very much for joining us. I guess we've got the name plates sorted out here, and we're rolling. Again, the same rules apply as the last panel. We appreciate your testimony. We have written testimony which we will, without objection, make it a part of the record. And we would welcome you are here.

Mr. Dorman?

MR. DAVID DORMAN: Thank you. Thank you, Mr. Chairman and Senator Kohl for inviting me here today to share AT&T's views on the state of competition in the telecom industry. Since 1996, AT&T has been the leader in developing competitive alternatives to the local incumbent monopolies. And I know that our time here today is short, so I will just try to make a couple of points.

First, the market-opening provisions of the '96 Act can work. It's now clear that despite the incumbents' arguments to the contrary, there are no technical impediments to local competitors seeking to deliver service over the incumbents' high-speed facilities. And in response to the passage of the Act, AT&T and dozens of companies invested tens of billions of dollars in no telecom facilities and services.

AT&T itself has spent $11 billion to purchase Teleport (sp) in 1998, and since that time invested another 8 million in that business to expand it. We spent nearly $90 billion in 1999 and 2000 to buy the cable companies TCI and Media One. And earlier this year, we committed more than $130 million to acquire the assets of the now defunct Northpoint Communications. We spend billions more each year to upgrade these networks, laying new fiber and interconnecting to local customers. These investments have paid off. Today we serve over 2 million local customers, and we have local business customers in 71 markets around the country.

Secondly, although the '96 Act established a sound framework for opening up local telecommunications to competition, the continued viability of local competition is in trouble. The incumbents' local exchange carriers have resisted and challenge 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 phone market. Incumbent local- exchange carriers have refused to comply with the Act's unbundling obligations, have made interconnection as difficult as possible, and they charge wholesale rates that are in many cases, as been noted earlier, higher than their own retail rates.

The anticompetitive behavior of the incumbent local telephone companies, magnified by the recent market downturn, has caused the competitive local exchange industry, or CLECs, to virtually collapse. Numerous competitors, including Windstar, Northpoint, Actel, Eastspire (sp) and others have declared bankruptcy or shut down operations altogether. Each of these decisions has been accompanied by hundreds of eliminated jobs. The CLECs as a group dismissed over 6,500 employees last year attempting to remain in business and viable.

For those that continue to struggle in operation, stock prices have plunged, and the capital market for emerging competitors has dried up and become difficult for competitors like AT&T.

The repercussions of these events on consumers is significant. CLECs reinvested all of their revenues in 2000 in local network facilities. The CLECs declaring bankruptcy in 2000 had planned to spend over 600 million on capital expenditures this year. Those competitive networks will not be available to customers. Further, as CLECs leave the market, incumbents raise their prices and low incentive to rapidly deploy advance services.

Third, even though the Bell companies are on the verge of remonopolizing the telephone industry, they are now calling on Congress for further deregulation. Current legislation in the House would create broad exemptions for 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' network in order to gain a foothold in the market and provide advance services. Indeed, the House bill confers an unbundling exemption so broad that competitors would probably not even be able to lease the facilities that they need to provide basic voice services in competition with the incumbents. Further, it permits the incumbents into the long-distance market even though local competition has not emerged.

The incumbents claim that these changes will spur investment and increase rural deployment, but history belies that claim. After having DSL available for years as a technology, the incumbents deployed it only after competitive offerings sprung forth from the cable companies and CLECs. And their arguments that new legislation will give them 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-access lines.

Finally, Congress must reaffirm its commitment to the market- opening provisions it created in the '96 Act if the local competition created by AT&T and others is to survive. Congress must resist efforts by the Bell companies to weaken the commitment through unwarranted legislation that would relieve the incumbents of the very obligations in 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 this century of monopoly control over the local telecom market.

Five years ago, this subcommittee in Congress concluded that more, not less competition, would best protect consumers and spur broadband deployment. We ask that you today reaffirm that commitment by considering ways to make the Act more, not less, effective. We remain optimistic that with the assurance of strict adherence to the requirements of the Act, that the promise of the Act become a reality. Thank you, again, for the chance to represent AT&T's views.

SEN. DEWINE: Mr. Dorman, thank you very much.

Mr. Robbins?

MR. JAMES ROBBINS: Mr. Chairman -- and Senator Kohl, thank you for pen, incidentally. Congratulations on your ball team last night.

SEN. KOHL: Thank you.

MR. ROBBINS: I'm here to tell a straightforward story and make one simple promise. Cox is committed absolutely to the provision of competition in the local telephone-exchange marketplace. This has been, and will continue to be, a highly capital-intensive and extremely complex undertaking. Going up against the entrenched incumbent local-exchange carriers is decidedly not for the faint of heart, but Cox is succeeding, and Cox is in it to stay. In the process, Cox will have spent about $10 billion on such necessities as network improvements, incremental equipment, infrastructure hardening, call centers, and billing and collection systems. This year alone we will spend about $2 billion. In addition, we have had to employ and train the people to operate this network with some reliability and quality of service, and it's the best in the business.

How are we doing? Our let our performance to date speak for itself. By the end of this year, Cox will be able to provide residential telephone service to 75 percent of our customers in eight, initially-targeted market clusters. These markets comprise nearly half of our 6.2 million customers. As of the end of March, we had 300,000 residential customers and 410,000 residential access lines. We handle about 1.2 million telephone calls each day. Cox's telephone is growing at an annual rate of 118 percent and is adding 4,000 new residential customers per week. We already have deployed 20,000 route miles of bundled fiber, 10 telephone-network switches and backup power supplies.

The service that Cox is providing is a Lifeline telephone service, and we are making payments to the Universal Service Fund on all of our telephone revenues. In California, for example, we have been certified as a carrier of Last Resort. By 2004, almost 70 percent of our customer base will have access to Cox local telephone service. On the business side, we now have 1,250,000 voice-grade equivalent lines in service. Of three new digital services -- video, high-speed data and telephony -- our new telephone offering is by far the most challenging and time consuming to deploy, market and operate, but we are inextricably moving forward.

Mr. Chairman, the next question then becomes, what do Cox customers think about our telephone service? They love everything about it. First and foremost, they love the price-- 10 percent less than the incumbent local-exchange carrier service for the first line and about 50 percent off for the second line in most markets. Enhanced services are up to 30 percent less expensive. Moreover, Cox customers like our state-of-the-art technology, our quality customer service and the reliability of our network. In fact, 7 percent of our telephone customers take only telephone service from us, but the vast majority of our telephone customers also take data and/or our video product.

I should take a moment to comment about the future promise of Internet protocol cable telephone, or IP telephone. Next year, we will begin to test this new technology. There are questions to settle about scalability and powering of IP networks, but Cox is confident that IP telephony will add great value for our customers, particularly in smaller systems where circuit-switch systems are not as economic to deploy. We envision circuit-switched and IP services will co-exist in all of our networks.

The final question, then, Mr. Chairman, is what should be the government's role in fostering the speedier deployment and development of local-exchange competition. I have five suggestions.

Number one, encourage regulatory certainty in the marketplace by allowing the 1996 Act to work. Number two, shift the FCC's focus away from CLEC resale and UNI models, which are failing in the marketplace, and toward facilities-based competition which is succeeding. Dramatically increase penalties for repeated ILEC litigiousness, which is setting an all-time record. Number four-- provide facilities-based competitors with special fast-track enforcement and much more aggressive economic sanctions against entrenched, ILEC, anticompetitive behavior. And finally, number five-- prohibit abuses of pole-attachment right-of-way in franchise requirements and local tax gouging.

Mr. Chairman, the prospects for telephone local-exchange competition is in its infancy. Entrenched incumbents, as you've heard, still control 97 percent of the residential marketplace. But if Cox is any example, the cable industry is poised to ensure that robust, facilities-based competition will become a reality. Consumer choice will usher in a new era of better service, lower prices and technological innovation.

SEN. DEWINE: Mr. Robbins, thank you very much.

Ms. Herda?

MS. LARISSA HERDA: Thank you, Chairman DeWine and Senator Kohl for the opportunity to speak to you today. Before I tell you who we are, I'd like to tell you who we are not. We are not Time Warner, Inc., we are not Time Warner Cable. We have nothing to do with movies, entertainment, Bugs Bunny or Road Runner. AOL-Time Warner is a large shareholder of ours; however, they do not provide funding for our business, and they do not run our business. We are a separately- managed, separately-traded public company.

We have built large fiber-optic networks in 39 markets across the U.S., and we will have 44 active markets operational by the end of this year in 21 states. We've also built a national IP backbone network. Our local networks are large.

They average 400 route miles per city. We take that fiber all the way to the customer's building, providing them with a completely diverse and separate network from the RBOC. As a result, we've been able to put 80 percent of our revenue stream, 100 percent on our fiber networks.

We've spent over $2 billion to create these networks, we generate positive operating cash flow, and we are fully funded. We provide Internet, voice and data telecommunications services to over 5,000 diverse customers consisting of small, medium and large businesses, as well as public schools, government agencies and hospitals in both of your districts. In fact, this service touches all the members of Congress, since our network serves the Defense Mega Center in Columbus, which does the payroll for Congress and the White House.

When I started with Time Warner Telecom four years ago, we had around 500 employees. Today we have 2,500, so we've grown significantly. My response to the question of the Telecom Act promoting competition is a qualified yes. We are precisely what the Telecom Act envisioned. To put it in terms that I am familiar with, however, the Telecom Act is a good business plan, but the execution of the plan needs improvement, and where improvement is needed is in enforcement.

In each state that the RBOCs obtain 271, or long-distance relief, it is critical that the RBOC had performance standards and meaningful financial penalties for noncompliance of those standards. The RBOCs have no financial incentive to cooperate with us. When they cooperate, they lose customers. So it's in their best interest not to cooperate. But in order to transition from a monopoly environment to a competitive environment, this cooperation is critical. The only way to ensure this cooperation is to give the RBOCs a financial incentive to cooperate. The financial incentive is provided by clearly outlining the standards the RBOCs must meet as a wholesale provider and interconnecting carrier, and then imposing meaningful financial penalties for noncompliance with those standards.

The best example I can give you from our perspective is interconnection trunking. Interconnection trunks are the facilities that connect our switches to the RBOC switches. They're the facilities that allow our customers to make calls to the RBOC's customers and vice versa. When Southwestern Bell filed for its 271 application in Texas, Time Warner Telecom was experiencing major problems to get interconnection trunks installed in a timely manner. Not only does an insignificant amount of trunking impair the service quality to existing customers, but it also prevents us from adding new customers to the network.

The solution that the Texas PUC devised and the approach that's being adopted by many other states was to create specific performance measures relating to how fast Southwestern Bell had to respond to our request to add additional trunking facilities and require financial penalties for failure to meet those measures. By clearly outlining the responsibilities of both parties and providing for penalties for noncompliance of those responsibilities, the Texas PUC and the FCC created a mechanism that works. If Southwestern Bell cannot fill orders for a forecasted need, they know that they would be forced to pay. If Time Warner Telecom does not forecast properly, the fines won't be imposed, and we won't be able to get interconnection trunks we need to provide quality service to our customers and grow our business.

I'm pleased to report that this is working in Texas for interconnection trunking; however, there are other services like special access which still need a lot of attention. Interconnection trunking is only one component of the 14-point checklist, but the theory I've described applies to the entire list.

Another measure of the way the Act is promoting competition is by considering what I would like to call barriers to construction. In order to recognize the goal of true, facilities-based competition, companies must physically construct the network. Two obstacles to Time Warner Telecom's ability to construct networks are one -- which was mentioned by Senator Kohl -- the failure of building owners to open their buildings to competitors, and number two, the failure of municipalities to approve quick entry on a competitive and neutral basis.

Chairman Pat Wood of the Texas Public Utility Commission coined one of my favorite phrases. "Access to the last foot." In order to serve customers with our own facilities, we must obtain access to the buildings where they conduct business because we take our fiber directly into the customers' buildings. The incumbents were given access in most cases without having to contract with the building owners for the rate, terms and conditions. Last October, the FCC adopted an order that prohibits exclusive contracts between carriers and building owners. This order sent an extremely important message to building owners; however, the order falls short because the FCC didn't take the next step of imposing penalties on building owners that deny and delay access to their buildings.

With regard to access to right-of-ways, I simply say our competitors who purchased unbundled network elements from incumbents talk a lot about the last mile. Time Warner Telecom also needs access to the last mile, but rather than leasing it from the incumbents, we prefer to build it to the customer. We're willing to pay for this access and to comply with reasonable rules for access to the right-of- way, but too often municipalities tend to charge unreasonable rates and put unreasonable terms and conditions on us.

In closing, I'd like to leave you with some thoughts to give you some perspective. Last year, Time Warner Telecom had $487 million of total revenue. It took Verizon 2.8 days to bring in the same revenue. It took Bellsouth 6.9 days. It took SBC 3.5 days to bring in the total revenues that we brought in 2000, and keep in mind we're one of the larger CLECs out there. Honestly, I can't quite understand why they keep looking to Congress for more help.

Now, if you ever question whether or not the RBOCs would use this market power, remember time and money are on their side. Their weapon is the way. They can call it process delays; I call it strategic incompetence. Either way, it really doesn't matter because it still serves them well to hurt our business. And this has all been contributed to the near downfall of an entire sector. RBOC provision on delays and the regulatory agency delays in responding, precisely, in my humble opinion, are one of the leading factors that have hurt the DSL industry. The RBOCs were able to delay provisioning and dramatically decrease pricing to their end users, which resulted in higher costs, lower revenues and margins that were choked for the DSL companies. They really didn't have a chance. And now that competition has been stifled, the RBOCs are raising their rates. Time and money are on their side but not on ours.

So once again, I'd like to stress the importance of compliance with the 14-point checklist of the Telecom Act, objective performance measures, and cumulative penalties for failure to meet those performance measures. The entire competitive sectors's ability to meet the goals of our business plans are dependent upon vigorous enforcement of the Telecom Act. Thank you.

SEN. DEWINE: Ms. Herda, thank you very much.

Mr. Ellis?

MR. JAMES ELLIS: Mr. Chairman, Senator Kohl, thank you for the opportunity to appear and testify.

There are many subjects of the Telecom Act that would certainly be worthy of discussion today, but I'm going to focus on what I think from my perspective is one of the most important. That is, whether my company has met its obligations to open the local network to assist our competitors getting into business and ultimately taking part of our business. And that's exactly what SBC has done.

You've heard today suggestions that we've interfered, our market's not open. Some of the testimony is to that effect. Numbers have been quoted as to the extent of competition. But I think if we look at the basic facts -- and I speak only for SBC's territory -- it demonstrates we've opened our markets. We've spent billions of dollars to comply. We continue to spend millions of dollars to comply.

We started with a wholesale organization that had six people in 1996. We now have 6,000 employees. Their sole purpose and being is to serve the growing needs of our competitors in the wholesale business. We have 2,000 -- or almost 2,000 -- contracts with competitors. Those contracts let them lease parts of our network, they let them resell our services, exchange traffic with us. We have another 500 contracts in the process of being negotiated.

We have 10,000 co-location facilities -- arrangements -- in which our competitors come into our central offices, put their facilities, and compete with us. We have 8 million OSS orders of our competitors that were processed last year, 8 million. We have exchanged 200 billion units of traffic. We have provided almost 3 million trunks to our competitors for them to provide their services. We've seen so- called UNI-P (ph) in some markets grow by 500 percent last year alone. We have hundreds of competitors, large and small, operating in virtually everyone of our markets.

And I think perhaps most telling, we started with an industry that had zero exchange lines in 1996. Today in our territory they have obtained 10 million lines, 10 million. By any stretch of the imagination, you can't say our markets are not open. If competitors want to come in and compete, they can, where they choose and when they choose, which brings me to the second point.

We've heard a lot about residential competition or the lack thereof, and that's correct. About 80 percent of those 10 million lines are business. But to any observer of our industry -- and you've heard it discussed here today -- that's not surprising. Mr. Dorman goes where the money is. For a hundred years, the name of the game in telecom in this country was to subsidize and to keep affordable the local rate, and the Telecom Act didn't change that. The day before, the basic rate in Texas, for example, was about $10 before taxes and the universal service charges-- about $10. And it is still $10 after a hundred years-- hasn't changed. The competitors go where their money is. They go after the more lucrative markets, and I don't blame them.

But the Act anticipated that. It recognized that problem that the old system of implicit subsidies was not sustainable. The Act recognized it and directed the FCC to address that and make those subsidies explicit. They gave them 15 months. And you can say whether to complete the whole thing in 15 months or get it started, but we're over five years from the passage of the Act, and nothing significant has happened in that regard. We still have the same system of implicit subsidies. And as long as we do, as long as we do, they will be disincented to go after the residential customer. The one exception is where we have entered the long-distance market. When that happens, they come in. The statistics are in my testimony and Chairman Wood's. They enter the market to go after that bundle and to hold that long-distance customer.

The other thing I would tell you, the exact systems that are used, the facilities, the wholesale group, the processes are equally available for whether you want to use them for business or residence. But they follow the money, and that will continue until the subsidy. So if somebody says there isn't sufficient residential competition, urge them to call the FCC. Ask them to move and make those subsidies explicit. Level that playing field.

One other thing I'd like to mention is on advanced services. I'm hearing the last few days -- I've seen nothing but television ads on both sides in that. It's an important subject.

Advanced services. I'm not talking about the legacy network of the telephone company; we're talking about four ways to get to the high-speed Internet. That's what it's all about, fast access to the Internet, not the dial-up, fast access. There are four ways to get there-- cable modem, DSL, wireless and satellite, four technologies offering the same service. That's the reality of the world today. Each of those technologies require spending new money. It's not about the old. It's new money, investing, competing for who's going to win that customer. And you didn't know it from the ads, and you didn't know it from Mr. Dorman's, but today, AT&T and its cable-modem compadres provides 75 percent of that high-speed access, 75 percent. The other three technologies -- DSL, wireless and satellite -- are 25 percent.

Every analyst will tell you there is one market; it's high-speed access. They are the dominant provider. And it is the future. I agree with them on that. But what they want is to have a system of asymmetric regulation where the only provider that is subject to regulation is DSL. They have absolutely no service regulation on cable modem, none whatsoever. And they want to extend the legacy network regulation on to DSL. And I'm here to tell you, whether it be as a lawyer or a business man, no incumbent is going to invest in DSL and enter a market where they have the burdens of regulation and our direct competitor is totally free of regulation.

It doesn't have to be that way. We have a model that's been alluded to, and that's the wireless model. We have four or five competitors who spend their own money, invest their facilities, operate independently, not dependent on nobody's network. And they compete head to head with minimal or no regulatory intervention. And we have the most competitive wireless market in the world. I hope that the commission will follow that. And if they don't, that model, I hope that Congress will grant that relief. Thank you.

SEN. DEWINE: Mr. Ellis, thank you very much.

Mr. Dorman, you want to respond?

MR. DORMAN: Oh, to the point about DSL?

SEN. DEWINE: Yeah.

MR. DORMAN: Well, I think that it is a fact that cable modem has more of the high-speed data marketplace. That's owing large to the fact that it started sooner. The cable companies began providing cable-modem service I think in advance of DSL deployment any big way than the local telephone companies. It doesn't change the fact, however, that in the case of AT&T, we serve 16 million homes with our cable plant. And we need the opportunity to provide high-speed services to other customers outside of our cable footprint. So we are pursuing the provision of DSL service. And what concerns us is not having the ability to access DSL services, either on the deployment ourselves -- in other words, being able to get to the local loop to provide the DSL equipment ourselves -- or having some disadvantage, inherent disadvantage, by changing the Act's requirements for unbundling for essential facilities.

SEN. DEWINE: Let me ask a question to the whole panel. A recent New York Times article dealt with the future of the telecommunications industry. The article speculated that many of the current long distance and competitive local phone companies could potentially either fail or be acquired by the Bell companies. That version of the future had the Bell companies in control of the telecommunication industry in just a few years. Obviously, the 1996 Act did not contemplate a competitive landscape such as that described in this New York Times article.

Any comments? I'll start with you, Mr. Dorman. We'll get the crystal ball out here for us.

MR. DORMAN: Sure. If you go back to the separation in 1983 that basically spun the Bell companies off from AT&T in the settlement of the antitrust suit, I think we have to recognize that the long- distance industry, as it's been referred, is really a product. Long distance is a product of a more complete telecommunications bundle. And I think the fact that it takes, as we've talked here today, much longer to make progress in the local entry than it does long distance does create a symmetry. I'd agree with Mr. Ellis; there is a symmetry.

The cost and the time necessary -- I think Verizon was granted authority to be in the Massachusetts long-distance market within the last week or so. They were in the market the next day offering it across the state to any of their customers. When AT&T announced it was going to upgrade the TCI and Media One cable plants, we'd been hard at for three years. We've spent $20 billion, and we still don't have it all done yet. And that's 16 million homes.

I think that the final point is that, as former Chairman Hundt said, vertical integration is an economic reality in situations where you have these kinds of asymmetries. There's been lots of speculation about that already in the industry where people want to accelerate their entry into different markets or do it in the more capital- efficient way. So I don't think that the article was suggesting something that hasn't already been considered by some or is completely out of the realm of the possible.

MR. ROBBINS: Mr. Chairman, let me make a couple of points about the article that I think sort of outlined the incumbent local-exchange carriers' behavior. Yes, according to Mr. Ellis, 75 percent of broadband access users are using the cable modem.

And the reason for that is -- as Mr. Dorman just pointed out -- cable did get out there in front and provide this service, while the phone companies warehoused the DSL technology. It wasn't until cable rolled out the modems that the phone companies said, hey, we better get with it, or we're going to lose this market opportunity. They were selling second lines, they were selling ISDN, they were selling T-1s.

I would give you another example of the power of incumbency here. And that is that while there's been all sorts of talk about local rates being subsidized, some of the ILECs have asked for pricing flexibility so that they could increase their local rates and drive competitors like ourselves out of business. So take what Mr. Ellis says with a little bit of salt, please.

SEN. DEWINE: Ms. Herda?

MS. HERDA: Mr. Chairman, I didn't see the article, but I think I understand the point. If you had asked me two or three years ago who would end up the stronger of the long-distance companies, the local companies, I don't think I would have predicted what's occurred today. But I think what's occurred today is that you have very significant competition in long-distance services and a lot of market shares that a lot of parties are going after.

Regardless of what Mr. Ellis says about all the competition that's going on in his marketplace, there truly isn't opened competition going on. They still have the vast majority of the marketplace, and without enforcement, it's going to stay that way. And, yes, that article could be true if that, indeed, is what occurs. I do believe, though, that if there is enforcement -- if the Congress and the FCC is vigilant -- that that article does not have to be reality.

SEN. DEWINE: Mr. Ellis?

MR. ELLIS: Senator, a lot I want to respond to. I'd just start out by saying, with respect to the advanced services market, I don't think there's a single analyst who has a different view that that cable modem will be the dominant provider of advanced, Internet services or as far out in the future as they predict it. The question is, whether there's going to be an alternative to it. They're the dominant provider. And the allegation that we were slow getting into it is kind of ironic. You know what we've been through in the last five years. We've been spending billions and devoting thousands of employees to comply with the Act. And for somebody to come in and fault us because we're not embarking on DSL technology as fast as perhaps we would have liked to, that's just wrong.

With respect to the issue that Ms. Herda has raised -- that's enforcement -- to my knowledge, we don't have any problems with Time Warner. She referred to an incident that took place in 1999, and it was worked out. Our trunk performance, for example, over the last year, there's been no problems. So if we have difficulties with Time Warner or with any carrier, their processes in place to work them out.

Your question about the merger -- I think that's where we started, about potential mergers -- all I can say is, this industry is increasingly competitive. There's an increasing globalization in the market. And it would not surprise me across telecom that you will see people and businesses doing exactly what they do in others. They look for scale and efficiencies.

SEN. DEWINE: Mr. Ellis, in part of SBC's takeover of Ameritech, it promised to enter the markets of other established phone companies. The Cleveland Plain Dealer reported in March of this year that SBC had decided to delay these plans. First of all, is that true? And if it is, is the company -- what's your plans for the future?

MR. ELLIS: Under the merger conditions, we were required to be in 15 cities March 9th, and we're in 20 cities. We're 5 cities out of the 30 ahead. What we did, we put together what's called the National-Local Plan before the Ameritech merger, more than three years ago. And it depended directly on our ability to go to the customers -- major business, small business, medium-size business -- and offer a complete package, particularly data. No one, I submit, would have predicted that almost three-and-a-half years from when those plans were put together we would be in only three states. It became clear to us that we could not -- it did not make sense to fulfill our very ambitious plans until we had that capability.

We're meeting our requirements. We're in a holding pattern in terms of those cities who are not going to spend the money that we had originally intended until we got data primarily and long-distance relief. It's as simple as that. Nobody would have anticipated -- just like no one would have anticipated that here we are five years plus, after the Act, and there are five states that have passed the 271 test. Nobody would have predicted it. And we didn't predict that it would be three-and-a-half years in only three of our states.

SEN. DEWINE: Senator Kohl?

SEN. KOHL: Thank you, Mr. Chairman. Mr. Chairman, Senator Leahy's not able to attend, but he ask that his statement be placed into the record.

SEN. DEWINE: We will place that in the record.

SEN. KOHL: I thank you.

Mr. Dorman, your company, AT&T, has plenty of experience with antitrust law. I mention that because the regional local phone companies created after the break up of AT&T are now engaged in several mergers of their own, so that there are now only four left, as you know. And these companies maintain their monopoly status for local telephone service. They control over 90 percent of the service to local phone lines.

So Mr. Dorman, what role should the antitrust laws again play in ending the near monopoly of the incumbent local phone companies just as these laws were used in the AT&T monopoly? And alternatively, many say that what we really need is to give the FCC real enforcement power so that they can take action and implement the Telecom Act. Is that a better route than the one I mentioned at first?

MR. DORMAN: I think you have a situation where we have laws, and having more policemen on the street is probably a good idea. And what I mean by that is that both the FCC and the state commissions have important roles in enforcement. And the swiftness of that enforcement is critical. As Ms. Herda said, time and money is on the side of the incumbents. So if we are in a situation where the only course of action is antitrust, having recalled how long it took for the Bell system and AT&T to be separated to settle that antitrust action, that would I think create a situation where competition would suffer and competitors would suffer.

And I do believe that we cannot ignore the fact that there are antitrust laws and we have to be vigilant in following. If there are abuses, then they should be pursued. I think as a business person, your first reaction in facing situations where someone is, in your view, violating an antitrust, is to try to work it out, to point it out. And I think that in the case of the Telecom Act we have a vehicle that was established to identify the behavior, disincent it, and in fact actually reward behavior opposite of that with the carrot of long-distance entry. And I think a lot of that was thought of in the building of the Act, but I don't think we can walk away from the fact that there has to be a test in the antitrust contacts that can be ignored.

SEN. KOHL: Mr. Ellis, do you have an opinion?

MR. ELLIS: Senator, I've, obviously, not done a very good of trying to make the point that our markets are open. In some markets -- Houston, Dallas -- we've lost 30 to 35, 40 percent of business lines. The very same systems that the competitors use to take the business lines from us and provide that market are available for residents. I can't change the fact that people focus on the business markets, but it's not because of failure on my company's part. They're there. We have lost those there, and the new-creative customers, they follow the money. And that market is open for competitors to come in. We have hundreds. I'll send you the list of them. Look in the phone book. They'll have choices.

Now I grant you, they're not focused on residents, and we talked about why. But the business market is flourishing. In every major city there are markable switches by Time Warner and others. Facility- based, resale, UNI-P, the customer has choices. And it is wrong to characterize our market as a monopoly, just as it's wrong in SBC's territory to say we have 93 or 96 percent of the market.

We do not. And we certainly don't have the most attractive customers in terms of recurrence. The competitors are going right after them for the reasons we talked.

SEN. KOHL: Ms. Herda, Time Warner Telecom has not had the problems that many other competitors have had. Why have you achieved your successes while many of the other companies in your industry has failed, and is there a lesson from your successes that can be applied to other CLECs?

MS. HERDA: That sounds like a question I guess from the investment community. Well, first of all, we've been very focused on being a true, facilities-based provider. We build fiber-optic networks, and we believe our strategy is to leverage those networks with additional products and services and continue to get a good return on our investment. I think that a lot of our competitors, quite frankly, their biggest competitor is also their biggest vendor. And when you have a situation where your biggest competitor is your biggest vendor in an environment where there is no enforcement, you run into problems. As I had said in my testimony, that's what happened to the DSL providers. It happens to us today, because even though we are very independent from the local-exchange carriers with their own networks, we must interconnect with them.

And I'm happy to agree with what Mr. Ellis said earlier, that the trunking problems in Southwestern Bell territory were taken care of. But that's just the point. The 271 process works there, and we need that type of enforcement all across the country. I just recently lost a $100,000 a month customer in Verizon territory because of trunking problems. They were slow to respond, and by the time we got all the trunks in, the customer had already chosen another provider. Now I have to take the trunks down because if I don't use them in 90 days, they're no longer valid trunks. But I lost the customer, so that's what I'll have to do. We spent a lot of money for nothing.

So I think the fundamental reason why we've also succeeded is because we've also focused on getting a return on our investment. And our business plan works. It's very facilities-based, and we are not as dependent upon the local-exchange carriers as others are.

SEN. KOHL: Well, as you know, your company does not currently directly serve residential customers. You instead serve business companies. Why is this, Ms. Herda?

MS. HERDA: Well, actually, prior to me joining the company in 1996, we were very deeply involved in a residential pilot in Rochester, New York, which was very successful in terms of customer acquisition. The only problem was, we couldn't figure out a way to make money. So the company decided to move the residential -- that was over the hydrofiber, co-ax cable -- with Time Warner Cable. At the time we were integrated within that same company. When I came on board, I separated the company from Time Warner Cable and refocused it on business services where I knew we could make money. There's limited capital out there for businesses, and that's where we thought that we could get a better return on our investment. I think a lot of people have testified today that there was no money in residential service then. I really can't say if there's money in it today. We haven't been pursuing it.

SEN. KOHL: Okay, Ms. Herda.

Mr. Dorman, many competitive local phone companies face difficulties gaining access to multi-tenant buildings, and many argue that this is one important reason why their companies have had such a difficult time competing with the incumbent phone companies. Would you feel that building access legislation that would enable phone companies to gain the access to multi-tenant buildings on the same terms as incumbent companies -- wouldn't this promote competition by removing a major competitive bottleneck?

MR. DORMAN: I think that, as Chairman Wood said earlier, the last foot, or first foot -- whatever the case may be -- is very important. And if a customer wants to be served by our company, and they cannot be because of the control of that last foot or the connection in the building, then, obviously, that's a difficult thing for us to overcome. The benefit of having national legislation is obviously not having to work through a crazy quilt of 50 individual states considering that issue, and coming to some conclusion which may, perhaps, be very different state by state. So I think that whether it goes all the way to legislation or SEC action, having an ability to do that on an national basis would be attractive for national competitors.

SEN. KOHL: Okay. Any other opinions on that one?

MR. ELLIS: I'd just say, Senator Kohl, this issue is not unique to the CLECs. This is between the landlords. We have the same problem -- the landlord and a competitor entering your contract, and we have to live with it. So this is not an issue that we have a position that's any different from any of the other competitors.

SEN. KOHL: Okay.

MS. HERDA: Although, I think that the advantage that the RBOCs have is that they are in the quite vast majority of the buildings that are out there. Without a doubt, there are a few landlords. I mean, quite frankly, the landlords have been trying to get a piece of telecom revenue for as long as I've been selling competitive telecom, which is about 13 years. We've always had to spar with them. And we eventually do get into buildings where we have the tenants in the buildings. But when you sell to a lot of small customers in the building, those type of customers don't have the pull with the landlords, and those are the customers that don't get the competitive telecom services. It's usually the larger ones that do.

The landlord community absolutely needs to be compelled to provide nondiscriminatory access. And there should be penalties for any delays that they create. We have lost millions of dollars of business because they've delayed or refused to let us into buildings.

SEN. KOHL: I thank you.

Mr. Chairman?

SEN. DEWINE: Ms. Herda, you want to tell me a little bit about what you all are doing in Ohio and what your plans are?

MS. HERDA: Sure. We actually have quite a presence in Ohio. We're in Dayton, we're in Columbus, we're in Cincinnati. We have large networks in those cities. We are serving customers like Wright- Patterson Air Force Base in Dayton. We serve a lot of school districts, actually, in Cincinnati-- Kenneth (sp) local school district, Roger Bacon High School; Covington Catholic High School. We serve large customers too, hospitals like Mercy Hospital.

We are connecting up our cities also. We have a strategy of building regional connections between our cities, and those particular cities have a lot of community of interest between them, so that we can truly provide a completely diverse network to the customers in the Ohio area.

SEN. DEWINE: Thank you very much.

MS. HERDA: You're welcome.

SEN. DEWINE: Let me thank our panel very much. It's been very informative, both panels. This has been informative and I think an important discussion about competitive progress in the local telephone market five years after the 1996 Telecom Act took effect. The testimony we heard today has demonstrated that to some extent the Act is working and competition is moving forward. It's the pace at which it is moving that concerns us. Competitive providers have less than 7 percent of the national market, and clearly much remains to be done.

We will continue to watch the competitive developments closely to ensure that we have vigorous competition in the telecommunications industry. We look forward to working with those in the industry to promote competition and to protect consumers. We thank you all for your patience. And again, we thank our witnesses very much.

END

LOAD-DATE: May 5, 2001