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Printed Hearing The Committee on Energy and Commerce W.J. "Billy" Tauzin, Chairman The
Internet Freedom and Broadband
Deployment Act of 2001 <DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:72829.wais]
THE INTERNET FREEDOM AND BROADBAND DEPLOYMENT ACT OF 2001
=======================================================================
HEARING
before the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
on
H.R. 1542
__________
APRIL 12, 2001
__________
Serial No. 107-24
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
72-829 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250
Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
(ii)
C O N T E N T S
__________
Page
Testimony of:
Ashton, Douglas C., Managing Director, Communications
Technologies Equity Research, Bear Stearns and Company..... 33
Cicconi, James W., General Counsel and Executive Vice
President, AT&T Corporation................................ 38
Gregori, Joseph, CEO, Infohighway Communications Corporation. 45
Henry, James H., Managing General Partner, Greenfield Hill
Capital, LLP............................................... 49
Hills, Gordon, Executive Director, Economic Opportunity
Program of Elmira New York, on behalf of the National
Association of Community Action Agencies................... 52
Mancini, Paul K., Vice President and Assistant General
Counsel, SBC Management Services, Incorporated............. 55
McLeod, Clark, Chairman and Co-CEO, McLeodUSA................ 63
McMinn, Charles J., Chairman of the Board, Covad
Communications............................................. 69
Pitsch, Peter, Communications Policy Director, Intel
Government Affairs......................................... 74
Regan, Timothy J., Senior Vice President, Corning
Incorporated............................................... 78
Tauke, Thomas J., Senior Vice President for Public Policy and
External Affairs, Verizon Communications................... 85
(iii)
THE INTERNET FREEDOM AND BROADBAND DEPLOYMENT ACT OF 2001
----------
WEDNESDAY, APRIL 25, 2001
House of Representatives,
Committee on Energy and Commerce,
Washington, DC.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2123, Rayburn House Office Building, Hon. W.J. ``Billy''
Tauzin, (chairman) presiding.
Members present: Representatives Tauzin, Bilirakis, Upton,
Stearns, Gilmor, Cox, Deal, Largent, Ganske, Norwood, Cubin,
Shimkus, Wilson, Shadegg, Pickering, Fossella, Blunt, Davis,
Bryant, Ehrlich, Buyer, Radanovich, Pitts, Walden, Terry, Bass,
Dingell, Waxman, Markey, Hall, Boucher, Brown, Gordon, Deutsch,
Rush, Eshoo, Stupak, Engel, Sawyer, Wynn, Green, McCarthy,
Strickland, DeGette, Barrett, Luther, Doyle, John, and Harman.
Staff present: Howard Waltzman, majority counsel; Brendan
Kelsay, professional staff member; Hollyn Kidd, legislative
clerk; and Andrew W. Levin, minority counsel.
Chairman Tauzin. The committee will please come to order.
This will be a very crowded session today, and so I would ask
our guests to take their seats and get comfortable. We have a
very large and illustrious panel of witnesses, and this
obviously is going to be a long day of hearing, and the sooner
we can get settle down and get started the better.
Good morning. I would first like to welcome our guests this
morning and thank the members for attending this important
hearing. Today the committee will hear testimony regarding the
Internet Freedom and Broadband Deployment Act, legislation that
I introduced yesterday, along with my colleague, the ranking
member of this committee, Mr. Dingell, and many of our
colleagues.
I am delighted that we are conducting this hearing today so
that all of the members of the committee may participate in the
discussion again of the bill's merit. I am also delighted that
Chairman Upton will mark this bill up in his subcommittee
tomorrow, and I want to thank the chairman for his expeditious
consideration of the measure.
Mr. Dingell and I worked with many of our colleagues for
the past 2 years attempting to finish the deregulation begun by
the Telecommunications Act of 1996. In 1999, we introduced H.R.
2420, which was the identical bill that we refiled again
yesterday, a bill to deregulate the provisions of high speed
data and Internet access services.
That bill in the last Congress gathered nearly 240 co-
sponsors, indicating very broad and very deep support among the
members, our colleagues, of the House. Yesterday, we
reintroduced the bill and the hearing will mark the beginning
of the process to which the 107th Congress will consider the
legislation.
Broadband services offer consumers new ways to communicate,
to learn, to do business, and to entertain themselves. I am
often asked at home to explain broadband, and I like to use the
refrigerator and beer analogy.
Today if we want to use the Internet, and we have got to
dial it up, and wait for it to warm up, and depending upon the
speed of our PC, and the speed of our connections, it may take
a while for us to chill the beer down.
It is like going to the refrigerator and finding the darn
gone thing shut down and having to turn it on and wait for it
to chill the beer. Broadband is where you turn up in the
kitchen and find a refrigerator that is always on, and when you
open the door not only is the beer chilled, but there are
20,000 varieties of beer in that refrigerator with rich
content.
For television consumers who may not be as keenly aware of
Internet services yet, as we move television into the age of
digital communications, television will be the broadband portal
by which many Americans will experience Internet services. Rich
content, that refrigerator full of 20,000 varieties of
communications.
The broadband services are not nearly as available as their
slower dial up counterparts. While broadband deployment has
begun to speed up in urban and densely populated suburban
areas, broadband deployment is almost nonexistent in most of
the rural areas of our country.
Many of the reasons for the disparity in the deployment of
broadband services are economic. Broadband is a capital
intensive investment, the cost of which can be recovered more
rapidly if it is being spread over more and more lucrative
customers.
But that does not mean that Congress should not be
concerned about the disparity in deployment. Areas in which
broadband services are not available are in jeopardy. They are
in jeopardy of being left out of the new information age.
And Internet dependent businesses simply will not locate in
rural areas if broadband is unavailable, and those that are
there may find themselves required to move to go to those parts
of the country where in fact these services are abundantly
available.
To give carriers a greater economic incentive to deploy
broadband services more rapidly everywhere and anywhere in the
United States, Congress needs to complete the deregulation
begin by the Telecom Act by deregulating broadband services.
Currently, there are regulations imposed upon broadband
services and facilities provided by the incumbent local
exchange carrier that are not imposed upon any of the broadband
carriers. ILECs must provide their facilities, even brand new
facilities, on an unbundled basis to competitors at regulated
prices.
ILECs must resell their broadband services to competitors
at wholesale rates, which no other carrier is required to do.
In addition, the ILECs, and the Bells, are prohibited from
offering long distance data services, which then deprives them
of the efficiencies that can be gained from offering end-to-end
services.
These restrictions give the ILECs little incentive to
deploy new services or facilities. Why spend the money to roll
out broadband when your competitors can then use your network
to take away your broadband customers. Even worse, to take away
your old customers, your telephone customers, while they are
doing it.
These types of rules might have made sense for basic
telephone service, but cable companies now control 75 percent
of the broadband market, and so the ILECs cannot be considered
dominant by any stretch of the imagination.
In fact, the fact that cable is deregulated says a lot
about deployment. The fact that cable is so actively deploying
broadband in a deregulated governmental relationship says a lot
about the need for this bill.
And I am not suggesting that we rather subject the cable
companies to the same rules that are currently applied to the
ILECs. To the contrary, I applaud the cable companies for
aggressively rolling out broadband services and frankly I hope
the government continues to stay out of the way so that cable
companies can continue to do so.
But what it means is that ILECs should have the
deregulatory parity with cable companies in the broadband
market. Those that are worried about cable rates for television
services ought to think about cable rates for broadband
services if there are no real competitors out there contesting
for those same customers.
Broadband is a national market that does not need
regulation. What it needs is the ability to thrive, similarly
to what happened when the wireless industry was given its
chance and government stayed out of the way. Wireless thrived
in the absence of regulation, and broadband will just as well.
But broadband needs to be deregulated, and we have
introduced a bill to accomplish that goal. The bill provides a
right amount of deregulation for broadband services, and
rejects the application of antiquated telephone rules to the
new market like broadband, and it seeks to maximize investment
and innovation of new facilities.
After many strong years of growth the tech sector is
experiencing some very difficult times. How can we stimulate
the high tech sector of our economy? If we deregulate the
broadband market, we will witness indeed the acceleration of
broadband deployment.
As we will hear today from witnesses like Peter Pitsch of
Intel, and Tim Regan of Corning, an acceleration of broadband
deployment is exactly what the tech sector needs to get back on
its feet, and get the dot.com companies coming again,
functioning again, surviving and growing.
And broadband services will bring new opportunities for
many of our constituents. It will bring them choice, and it
will bring them new services, and it will bring them all those
products of all those high tech companies. And the deployment
of broadband facilities will hopefully restore what has become
one of the most important sectors of our economy.
I look forward to the witnesses today, and I certainly look
forward to my colleagues' participation in this extremely
important debate, and the Chair now yields to the ranking minor
member of the committee, my friend and co-sponsor of this
legislation from Michigan, Mr. Dingell.
Mr. Dingell. Thank you, Mr. Chairman, and I commend you for
holding this hearing today, which I note is our fifth hearing
on this matter. And I am pleased to joined you in co-
sponsorship of the reintroduced Internet Freedom and Broadband
Deployment Act.
I am happy to have worked with you on the drafting of this
legislation, because I believe that the legislation is right,
and I believe it is fair, and I believe it will provide great
benefits to the public and to the American economy as a whole.
The bill will make sure that competition for broadband and
Internet services is strong, and that high speed Internet
connections are delivered quickly, something not happening now.
And above all else that no single sector of the industry is
given de facto monopoly when it comes to providing consumers
with broadband Internet access as is now the case. Today's
hearing marks the fifth time that we have held hearings on this
broadband development in less than 2 years.
The first four hearings were heard in the
Telecommunications Subcommittee on legislation substantially
identical to that upon which we proceed today. It has been
before this committee in at least two Congresses, and I want to
comment you for calling today's session before the full
committee.
This is an important legislative issue which for many
reasons demands the addressing of the committee, and it is
crucial that all members have the opportunity to learn
firsthand about the strong need for regulatory reform in this
area.
Five years ago you will recall, Mr. Chairman, the Congress
passed the most substantial rewrite of the nation's
telecommunications laws since 1934. The Act was an
extraordinary achievement. Unfortunately, not all of our hopes
have been materialized.
Like all legislation the Telecom Act simply reflected the
Congress' best policy judgment based on the facts as we knew
them at that time or anticipated they might change. But now in
this information age facts change more rapidly than ever before
and those who operate on Internet time the last 5 years seems
to be an eternity.
For the benefit of 20-20 hindsight, perhaps the most
glaring oversight of the Telecom Act was the failure to create
with certainty a proper regulatory environment for Internet. As
a result, with its explosive growth, the Internet is still in
many ways grinding along in low gear.
While we hear a great deal about the benefits of the
information super highway, the truth is that most Americans are
relegated to the slow lane and the expensive lane. It is
astounding to me that only 5 percent of Americans today have
broadband.
Only 5 percent for high speed Internet service today, and
95 percent of our people's Internet users are stuck with low
speed dial up service. The Internet users are not being
permitted to participate in the progress made in this area.
If there is any realistic hope that the new economy will be
resuscitated, these numbers must change dramatically and fast
and I believe that the legislation before us will make that
possible. What is even more astounding is how the 5 percent
number breaks down.
Let's look at what you have to do to get in under the
benefits of getting these kinds of new services. First, you
have to live in an area where broadband service is offered, and
that is a matter of pure luck.
Second, you must be fortunate enough to be able to afford
it. Third, if you surmount these hurdles, you are three times
more likely to subscribe to cable modem service than to DSL.
The troubling fact is that cable companies now have a fine
monopoly of their own.
They control more than 70 percent of the broadband Internet
market, and we will be asking some questions about this this
morning, Mr. Chairman. One must also ask why there is a major
discrepancy in market shares. Is it because the cable companies
provide vastly superior service?
That is the most unlikely question since most technical
reports say that service qualities of modern cable modems
versus DSL are largely comparable. It is much more likely that
the discrepancy in market share is due to the tremendous
competitive advantage that cable companies enjoy in the
broadband marketplace.
Since the Telecom Act removed virtually all Federal
regulation of cable companies, these companies are not free to
invest in advanced broadband services without any requirement
whatsoever that new broadband facilities be shared with
competitors. They also have no constraints going from
regulation.
When it comes to cable the law contains no interconnection
requirements, no resale requirements, no requirements to lease
proprietary network facilities to competitors at cost based
rates. I am quite certain that if in fact cable companies are
required to share their property with competitors that AT&T
would not have spent more than $100 billion to require
broadband facilities.
No bank would have lent them the money, and their
shareholders would have staged a revolt, and the investment
simply would not have and could not have been recovered.
However, that is precisely the situation that the nation's
local telephone service companies find themselves confronting.
I would note that they are best positioned and most likely
competitors to cable, willing and able to provide effective
competition for broadband Internet services, and in so doing
they will stimulate the cable people to provide better service
at lower costs.
But they remain saddled with common carrier regulations
designed for another time and quite different purposes. While
these regulations continue to be necessary to open telephone
networks to competition, there are an absolute impediment to
realizing healthy competition in the broadband Internet market.
The simple truth is that the Tauzin-Dingell bill will do
nothing--and I repeat--will do nothing to roll back market
opening provisions contained now in the law. What the bill will
do is simply to remove regulatory obstacles that substantially
hinder investment in broadband technologies.
It my view that is the single best way to get the new
economy back on track and to give the American public a real
choice when it comes to faster and better, and cheaper Internet
access. Mr. Chairman, I would urge my colleagues to support
this legislation and I thank you for this hearing.
Chairman Tauzin. Thank you, my friend, and the Chair is now
pleased to recognize the chairman of the Telecommunications and
Internet Subcommittee of this fine committee, Mr. Fred Upton of
Michigan.
Mr. Upton. Well, thank you, Mr. Chairman, and as the
subcommittee chairman, I am pleased that we are able to open up
this hearing to all full committee members to ensure that
everyone has the opportunity to participate, and I commend both
you and Ranking Member Dingell for helping to hold it this
morning.
This hearing will compliment the four hearings held in the
subcommittee last Congress, including the legislative hearing
on an identical bill last July. Last month, I had the
opportunity to chat with the head of the Southwestern Michigan
Association of Realtors.
The No. 1 question on the minds of prospective buyers in
Baring County these days is not about property taxes or local
schools, or hospitals, but whether or not there is high speed
Internet access in the neighborhoods.
I am told that the potential buyers are willing to commute
more than 30 minutes, and sometimes even across State lines,
just to live in communities which have this services.
Our businesses report similar competitive disadvantages.
Regrettably, high speed Internet access is not available to
most consumers in Southwest Michigan like it is in more
populated areas of the country, and it is having a negative
impact on economic growth and the quality of life.
I compared high speed Internet access to the interstate
highway system and the railroads from days ago, and as I
crisscross my district I can see the population's economic
growth which has occurred in those communities along the
interstate highways, and some would say that the towns which
don't have access have remained in a time capsule; nice towns,
nice people, but they virtually stood still in terms of
economic growth.
That is what I fear will happen in Southwest Michigan if we
fail to move to get these communities connected to the high
speed Internet highway. That's why we need to provide
deregulatory parity for high speed Internet access, regardless
of the platform by which it is delivered, be it by telephone
wires, cable, wireless, or satellite.
By doing this we can undo the enormous regulatory shackles
which prevent telephone companies from providing DSL the last
mile. That said, as Chairman of the Telecommunications and
Internet Subcommittee, I have done a lot of thinking about this
bill lately.
Since becoming Chairman several months ago, my door has
been open to virtually all comers, whether they be ILEC, CLEC,
DLEC, IXCs, PUCs, and yes, MCs, Members of Congress, to discuss
their support or opposition, whatever the case may be.
It is a matter of public record that I was not a co-sponsor
of H.R. 2420 last Congress, and I am not a co-sponsor of H.R.
1542, the bill before us today. I have always stated that I
would seek to make some constructive and positive changes to
the bill, and this will happen.
I listened intently to Chairman Powell when he testified
before our subcommittee on March 29, and in his testimony he
said this. ``You have to have a response to consumer harm and
dangers of marketplace failure. I believe that response is
enforcement. I might give you the benefit of the doubt, but you
cheat, and I am going to hurt you, and hurt you bad, hard, and
that is what enforcement means. And I think to do this
seriously, we will need the help of Congress. I believe the
enforcement tools made available to us are inadequate, with
billion dollar industries. Our fines are trivial, and they are
the cost of doing business to many of the companies.''
I would note that the FCC's fines for phone companies'
violations of the law are up to $100,000 per violation, and
capped at a million. I think that this is what Chairman Powell
was referring to, was inadequate, trivial, and the cost of
doing business to many companies.
As H.R. 1542 moves through the legislative process I will
seek to significantly increase those fines and enhance other
FCC enforcement tools to make sure that Chairman Powell and his
colleagues at the FCC will be able to hurt, and hurt hard those
who violate the law.
It is my hope that the threat of such fines would compel
companies to make sure that they are doing right by the Telecom
Act of 1996, and by the consumers who the law seeks to benefit
through robust competition in the marketplace for local
telephone service.
Moreover, I believe that there are ways that we can improve
the State PUCs process of resolving disputes over terms
contained in interconnection agreements. Mr. Chairman, I look
forward to working with you to move this bill along the way.
Thank you.
Chairman Tauzin. I thank my friend, and the Chair is now
pleased to welcome and recognize the gentleman from California,
Mr. Waxman, for an opening statement.
Mr. Waxman. Well, thank you very much, Mr. Chairman. I am
committed to a policy that leads to more competition, lower
prices, better service, and marketplace conditions that
encourage the greatest possible technological advancements.
As the debate on this issue has developed, I have been
careful not to rush to judgment on how we can best achieve that
goal. I have tried the best I can to keep an open mind on
legislative proposals, including the Internet Freedom and
Broadband Deployment Act.
Depending on who you talk to, the Tauzin-Dingell bill is
either going to speed broadband deployment throughout the
country, and allow competition to flourish, or it is going to
destroy the very life blood of competition, ruin competitive
carriers, and hurt residential and business consumers.
At this point, my view is that H.R. 1542 will do more harm
than good, and I want to raise some specific competitive
concerns that I have about this legislation. First, I believe
that there is some confusion about the role of DSL in this
debate.
DSL is a high speed broadband service that is being
deployed today. It is a local service that the incumbent ILECs
can offer anywhere they choose under current law and in
competition with other DSL providers. And they do offer it. In
short, the ILECs do not need long distance relief to offer DSL.
The CLECs currently serve only about 3 percent of the local
lines that go to residences and small businesses, and about 17
percent of the local lines that go to big businesses.
Facilities-based competition is currently limited to about 2
percent of the market. I believe that the dominant position the
ILECs hold in their service areas is a critical part of this
debate.
Under the requirements of the 1996 Telecommunications Act,
ILECs must meet a 14 point competitive checklist before they
can gain entry into the long distance markets in their service
areas. They have gained entry in five States, and a number of
other 271 petitions are pending, including one before the
California PUC, which is expected to be considered in June.
I am concerned, however, that the Tauzin-Dingell bill would
allow the ILECs into long distance data service, without having
to meet the checklist requirements, or make any demonstration
that their own markets are open to competition. I urge today's
witnesses to specifically address this point so that the
committee can evaluate this concern.
According to the bill's proponents, data and traditional
voice services are different forms of communication, and so it
only makes sense that they be regulated differently. That
sidesteps what I believe to be the core issue. Both forms of
communication are transmitted on the same wire and the final
mile of that wire for almost every residential and business
customer is still under the control of the ILECs.
At the same time the legislation would eliminate the
competitive checklist requirements on ILECs, it would make it
more difficult for CLECs to compete against them in their
service areas. The 1996 Act required the ILECs to offer
unbundled access network elements and resale to their
competitors.
But the Tauzin-Dingell bill would eliminate these
competitive requirements for high speed data service. We
learned firsthand with the divestiture of AT&T how effectively
strong market opening requirements work to bring competition
and huge savings to customers.
Finally, this legislation gives the ILECs unregulated entry
into long distance data service without including a performance
standard or any other provision to make sure that they actually
deploy broadband service in undeserved areas. So the ILECs get
their reward up front, but there is no guarantee they will ever
provide the public policy service that Congress is expecting.
The communications industry is now about one-seventh of our
economy. Any legislative changes that we make that could lead
to less competition would reverberate throughout our economy
for years to come.
It is imperative that we move deliberately and wisely, and
I look forward to hearing from our witnesses on these and other
important issues today. Thank you, Mr. Chairman.
Chairman Tauzin. The Chair thanks the gentleman. The Chair
is now pleased to recognize the chairman of the Commerce
Consumer Trade Protection Subcommittee, Mr. Cliff Stearns.
Mr. Stearns. Good morning, and thank you, Mr. Chairman. I
look out in the audience and see these 11 distinguished senior
vice presidents or CEOs, and so I welcome this hearing. This
is, as many of us know, is not the first introduction of your
bill.
Last year it had a number of co-sponsors that made it
appear that it would pass the House easily. However, I think as
you move forward there is going to be quite a bit of concern,
and I think having this hearing this morning is the right step
forward.
The bill is centered upon the belief that present
regulatory conditions of both interLATA prohibitions and
network unbundling, and resale requirements imposed on the
RBOCs adversely affects an RBOC's ability to offer high speed
data service.
In other words, Mr. Chairman, is the present environment
for RBOCs an incentive for them to participate, and they don't
think so, and your bill is giving or lining up the incentives.
They are pressing for this legislation because the
unbundling and resale requirements they argue, when applied to
advance services, provide a disincentive for them to upgrade
their networks.
Furthermore, by lifting the interLATA restrictions, the
Bells claim they still have an incentive for seeking relief for
interLATA voice services due to the demand for bundle services,
including long distance voice.
Now, conversely, those opposing the legislation do so
because they believe that such relief would undermine the
unbundling and resale safeguards for competitors and their
ability to compete with the incumbent phone company for
customers.
Additionally, they claim the means for such regulatory
relief is spelled out simply in Section 271 of the Telecom Act,
and granting regulatory relief to the RBOCs prior to such
clearance would result in financial ruin for competitors.
I would add, Mr. Chairman, in Congress Daily this morning
that we had four distinguished key Senators have written to the
FCC, and speaking against the bill, and they have one sentence
in their letter which says, ``If present trends continue, local
markets will not be open to competition and incumbent companies
will leverage their monopolies as they enter new service
areas.''
So we see both sides of the argument. And while I generally
support increased competition and less regulation, there is a
lot of complexities in this. I am not a co-sponsor, Mr.
Chairman, as you know of your bill, but I am sympathetic to the
fact that we need something to jump start this whole area of
bringing broadband to this country.
And so I am very interested in a thorough examination of
the facts, having an exchange of ideas with these 11
distinguished witnesses, and hearing public debate. So I
commend you for having this hearing. I would follow up on the
chairman of the Subcommittee on Telecommunications, Mr. Upton,
when he had talked about enforcement.
Chairman Powell has called for increased enforcement
through the FCC, and he wants those powers to do so, and I
intend to work with Mr. Upton and the chairman, and my
colleagues in crafting language that will deter companies from
simply saying, okay, we will just pay these fines when we have
violations, and just consider that as a cost of doing business.
Only when we have the fines that are strong enough so that
the industry does not think, well, it is just a cost of doing
business, will we have real enforcement by the FCC, and I would
like to give them that power. So I look forward to the mark-up
tomorrow, and Mr. Chairman, I again commend you for this
hearing today.
Chairman Tauzin. I thank my friend, and assure him that I
intend to work with him on exactly that type of strategy. The
Chair now recognizes the gentleman from Massachusetts, the
ranking minority member of the Telecommunications and Internet
Subcommittee, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman. Mr. Chairman, the
legislation that we are now considering is highly flawed for
three reasons. It is undigital, and it is unnecessary, and it
is unfair.
It is undigital because it fails to recognize the
fundamental truth about going digital. By converging all
information into a series of zeros and ones, digital helps to
create a technological esperanto.
All media can speak all forms of information; videos,
photos, e-mail, faxes, music, everything can be expressed
technologically as zeros and ones. Conversely, this legislation
creates a technological land of make believe, where bips
traveling through networks can be magically separated into
voice and data, and rather than learning what technology
teaches us and getting in sync with convergence, this bill
represents a digital divergence.
Ripping certain bips out of the network to be treated by
regulators differently turns back the clock, and presents once
again the problem of trying to force certain services into
particular regulatory boxes even as technology renders such
classification antiquated and meaningless.
This bill is also unnecessary. The Bells don't need
legislation in order to provide digital services. They can and
do offer DSL services today. The Bells don't need legislation
to offer Internet access. Again, they offer such services
today.
Moreover, the Telecom Act allows the Bells into long
distance after they have met the requirements of a competitive
checklist in a State. They have done this in five States,
including Massachusetts. We are the beneficiaries of all of
that additional competition.
In other words, the key to entering the long distance
market is in their own hands. In addition to being undigital
and unnecessary, this bill is also unfair. In the aftermath of
the enactment of the Telecommunications Act of 1996, several
new commercial enterprises were launched, and they began to win
customers, and provide new services, and invest in
infrastructure.
In fact, they poured about $60 billion into new
infrastructure. They delivered on the promise of the Act by
deploying new digital services, prompting the Bells to finally
get around to offering such services themselves, and finally
spending 10's of billions of dollars to go digital, that they
should have been spending all along.
And this is the thanks that new companies get. They get a
bill that drops a boulder of uncertainty into the marketplace
and in a proposal that eliminates market opening provisions of
the Telecom Act and frees the Bells into the long distance
marketplace before they have met the competitive checklist in a
State. It is a Bell protection program, plain and simple.
It shields the Bell companies, while emptying a six-shooter
into the heart of the new economy companies, the NASDAQ, and
that is what the NASDAQ is. It is what happened to the
information economy after 1996, and this bill shoots right at
the heart of that revolution.
That's because in order to benefit these four corporate
behemoths thousands of companies will suffer the consequences.
Beyond raising the specter of monopoly providers in certain
regions and markets throughout the country, the bill
accelerates the trend toward monopsony, where there will be
only one buyer the way it was until 1984.
And rather than dozens of companies building networks, and
buying equipment, we will have one major purchaser of
manufactured goods and software for the network over vast
regions of the country and that will stultify economic growth
and innovation.
Our national economic interests is furthered by a policy
that reinvigorates telecommunications competition, and
encourages America's hi-tech equipment manufacturers to become
the worldwide arms merchants of the information revolution.
Consumers benefit when warring parties fight for their
loyalty in the telecom marketplace. They lose when the
government blesses detente for the Bells. Now, a word about the
process by which we are considering this legislation.
Going right from a full committee hearing today into a
subcommittee mark-up is a disservice, not only to the members
of the subcommittee who will have little time to reflect and
benefit from today's proceedings, but also to our witnesses who
are talking time out of their lives to inform and educate us.
Given the importance of the bill to our economy, it is
unfortunate that more time was not allocated at this
particularly precarious time in the capital markets, and in our
national economy to better examine the proposal in that light.
Moreover, while many of us on the committee have spent
years working on these issues, many members are new to the
committee, our new members of the Telecommunications
Subcommittee this session. I think it is disrespectful to the
issues at stake not to afford members a full set of hearings
this year, and to engage in discussions with the conditions of
this year with information that comes to light.
It is only April 25. What is the rush. The announced
scheduled is for a mark-up tomorrow. I would have preferred
additional hearings or at least moving the mark-up back until
last week.
If we proceed tomorrow, then I will offer amendments
tomorrow and we will have votes on amendments. I thank you, and
I yield back the balance of my time.
Chairman Tauzin. The gentleman looks forward to the
gentleman's amendments tomorrow. And the Chair recognizes the
gentleman from California, Mr. Cox, for an opening statement.
Mr. Cox. Thank you, Mr. Chairman, I actually want to
commend Mr. Markey for his statement, inasmuch as much of what
he said is what I was going to say, although I am not sure that
the hearing today or the mark-up tomorrow should necessarily
require us to pick sides the way seemingly we are about to do.
A thoughtful process ought to permit us to reconcile the
views that are being expressed, the competitive claims that are
being made in a policy that doesn't necessarily shortchange the
local exchange carriers, or chill their willingness to invest--
but at the same time does not put the thumb on the scale in
favor of the local exchange carriers over cable providers, or
satellite providers, or fixed-wireless providers, or any other
potential competitors.
It is for that reason that I do agree with Mr. Markey that
we are being deprived by the process of the opportunity to
think about what we are going to hear from 11 distinguished
panelists today in a process that requires us to submit
amendments today on a bill that we have just received for a
mark-up tomorrow.
In order to not just listen and pick sides, but to try and
listen, and rationalize, and harmonize, and synthesize what we
are hearing, I think at least 24 hours might be necessary. I
support the goal of this legislation to jump start the
deployment of broadband access.
And I also think that Mr. Markey hit the nail on the head
when he focused on the fact that in a technological world there
simply is no distinction worth making between voice and data. I
don't think any of the local exchange carriers in their
competitive plans sees a real distinction between voice and
data.
Hopefully they want to get into all of these markets, and I
am concerned that the legislation before this committee might
unintentionally provide an incentive for competitors to create
and maintain that distinction, simply because the regulatory
model requires it.
There is nothing in the technological world that requires
it, and there really is a convergence that if it is not already
fully under way, it is surely possible if regulation doesn't
get in the way of it, convergence between the Internet
services, telephony, broadcast video, and just about everything
else that you can think of that is transportable in digital
form.
So the challenge to this committee is to look beyond the
urgent competitive pressures of the moment to the marketplace
that can be in the not too distant future, if distorting
government regulations don't prevent it from materializing.
And I hope, Mr. Chairman, that we do give every
consideration to the thoughtful presentations that we are about
to hear from these 11 distinguished panelists, who undoubtedly
spent a good deal of time, energy, and intellectual effort in
formalizing their comments for us today, and I yield back.
Chairman Tauzin. The Chair thanks the gentleman, and would
assure him that that is the reason that we are having a hearing
today, is that we want to inform the whole committee, as well
as the subcommittee, on various view points on the legislation.
The Chair recognizes the gentleman from Virginia, Mr. Boucher,
for an opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman, and I want
to commend you for the leadership that you have taken in the
effort to stimulate broadband deployment, which is currently
the greatest challenge that confronts the continued growth and
development of the Internet.
I am pleased, Mr. Chairman, to be listed among the co-
sponsors of the legislation that is the subject of the hearing
this morning, and I will use my time to make three brief points
in support of the need for its approval by this committee.
First, the legislation accomplishes a long needed
deregulation of DSL services, which will dramatically
strengthen the financial case for the deployment of this
broadband offering to homes and to businesses.
The major reason that the cable industry has captured more
than 70 percent of the last mile of broadband market is that
cable is essentially unregulated, while DSL services are
burdened with extensive regulations that dampen the willingness
of telephone companies to invest in their deployment.
The legislation that is before this committee largely
resolves that regulatory disparity. Second, the measure will
ensure greater competition and greater investment in the
offering of Internet backbone services by permitting Bell
operating companies to offer data across LATA boundaries, while
reserving to the Section 271 process the permission for the
Bell companies to offer voice-based long distance on a
nationwide basis.
This provision is essential to ensure adequate Internet
backbone services in many rural areas of the Nation, to promote
competition and backbone service offerings with consequence
benefits for end-user pricing, and to ensure an adequate level
of investment in the Internet backbone in order to handle the
ever growing volume of Internet traffic.
Third, the freedom to become Internet backbone providers
will further incent the Bell companies to deploy DSL services
over the last mile, since they will be able to maximize the
return on their DSL investment, when they can carry the traffic
from the originating user through the Internet backbone, and
perhaps even to the user on the terminating side.
For all of these reasons, Mr. Chairman, the legislation
makes much needed reforms. I am pleased to be serving as one of
the co-sponsors and to encourage the approval of the
legislation by the subcommittee tomorrow as an essential step
in the promotion of the greater growth and development of the
Internet. Thank you, Mr. Chairman. I yield back.
Chairman Tauzin. The Chair thanks the gentleman
particularly for his co-sponsorship and support, and I wish to
inform the members that Mr. Goodlatte, who has introduced
several legislation which Mr. Boucher has also joined as an
original co-sponsor of the bill. The Chair is now pleased to
welcome for an opening statement the gentleman from Oklahoma,
Mr. Largent.
Mr. Largent. Thank you, Mr. Chairman. In the interest of
time, I want to submit my entire statement for the record. I
have served on this subcommittee now for over 4 years, and
during this time I have learned that regarding this particular
piece of legislation that we are having a hearing on today that
members are characterized as either pro-Bell, pro-long
distance, or pro-CLEC.
And I have tried to have my position in the record reflect
that I am none of those. I am pro-competition. I voted for the
1996 Act because I thought that it would enhance competition in
all sectors of the telecommunications industry, and I am proud
of the vote that I cast in support of the 1996 Act.
Mr. Chairman, I would also like to submit for the record an
article that was published on April 23, just 2 days ago, in
Business Week, and read the opening paragraph. The title says,
``Don't Let Telecom Competition Vanish.'' ``And the winner in
this great telecom consolidation sweepstakes is monopoly. That
appears to be the most likely outcome as the giant
telecommunications industry works its way through the current
meltdown. The promise of competition and lower prices provided
by the entry of new players is quickly fading. With hundreds of
new telecom startups hugely in debt, and facing bankruptcy,
only those companies with deep pockets will survive to pick up
the remaining assets on the cheek. These appear to be none
other than the old baby Bells, which may well wind up
controlling not only the telephone and data services, but also
the all important broadband market. Newly appointed Federal
Communications Commissioner Chairman Michael Powell should take
note. Competition is being threatened more than ever in
telecom.'' Mr. Chairman, I know that when the debate was raging
in 1996 before the Telecommunications Act was passed that the
mantra that was sounded by all players at the table was create
a level playing field.
We heard it over, and over, and over again. Mr. Chairman, I
would just tell you that the bill that we are considering and
about to hear testimony, I believe, tips that level playing
field in a way that may be irreversible, and is why I am deeply
concerned and very interested to hear the testimony of the
witnesses that we have at the table today, because as I said, I
am pro-competition, and my fear is that the bill that we are
considering and will mark up tomorrow tips that level playing
field in a way that will damage the competitive nature of the
telecommunications industry in a way that will be irreversible.
I yield back the balance of my time.
Chairman Tauzin. I thank the gentleman, and by unanimous
consent the gentleman's full statement is a part of the record,
along with the attached article, and by unanimous consent, all
members written statements with attachments are made part of
the written record of this proceeding without objection, and it
is so ordered.
The Chair now recognizes the gentleman from Tennessee, Mr.
Gordon. Let me announce for the record that the Chair has asked
the staff to prepare a list of the members present at the
dropping of the gavel and under our rules, members are called
in order of their appearance at the drop of the gavel, and then
other members as they have appeared at the hearing.
So that is the reason that we are going to depart from the
normal seniority line in some cases. The gentleman from
Tennessee, Mr. Gordon, is recognized.
Mr. Gordon. Thank you, Mr. Chairman, and I, too, would like
for my full statement to be placed in the record, and I want to
add my welcome to this distinguished panel today. You bring a
lot of expertise and we appreciate your time for us.
I, too, was one that voted for the 1996 Telecommunications
Act, and hoping that it would bring us more investment, more
competition, and in turn more services and lower prices for
consumers.
And I think in some areas that we were successful with
competition, and in some other areas I think we have seen more
consolidation. And I hope that we can use some of the lessons
from that 1996 Act as we proceed today.
Also let me say that although the essence of this bill has
been before us since the last Congress, and we should be up to
speed on it, the fact of the matter is that because of the
competition for our time, and energy, and interest here, I
think that many of us do have more questions and more to learn.
But it is upon us, and so let's try to learn all that we
can today, and I hope that we will have a little time to
discuss this balance as we go forward. As I can see, a part of
the purpose of the bill is to allow the Bells, and to
interLATA, or long distance data transmission, to bring
additional investment and competition into that area.
And one of the things that I want to learn more about is
how this bill is going to impact additional competition and
investment into the DSL area, and I hope that we can learn more
about that today, and I want to hear from that from you. Thank
you very much.
Chairman Tauzin. The Chair thanks the gentleman, and the
Chair now recognizes Mr. Ganske for an opening statement.
Mr. Ganske. Thank you, Mr. Chairman. The decision that we
are confronted with is how to best create an environment where
Internet service will rapidly expand. There are diverse
opinions as to how we can accomplish that goal.
Do we need to open electronic data transfer markets, or
will opening these markets without first requiring the Bells to
meet the Section 271 requirements reverse the accomplishments
of the Telecom Act of 1996. I am looking forward to receiving
the advice and suggestions of the distinguished panel.
I am pleased that two of those testifying are Iowans;
former Congressman and member of this committee, Tom Tauke, who
now represents Verizon; and Clark McLeod, the founder and CEO
of McLeodUSA, one of America's most successful competitive
global exchange companies.
Mr. Tauke and Mr. McLeod possess a tremendous wealth of
knowledge and experience in the telecommunications field, and I
believe that they will offer some very different visions of the
future for this essential industry, and I look forward to their
testimony, and thank you, Mr. Chairman.
Chairman Tauzin. I thank the gentleman, and by the way, I
want to thank the cooperation of the minority in assembling
such a distinguished panel. We are going to get to you as far
as I can, I promise you. The Chair now recognizes the
gentleman, Mr. Sawyer, for an opening statement.
Mr. Sawyer. Thank you, Mr. Chairman. With your permission,
I will include my full text in the record, but let me just
simply make four fundamental points. I am less interested in
the great turf wars among competitors than I am in how their
fair competition benefits consumers.
I am interested in whether it will ensure broadband to
those who do not have it now, and will it encourage carriers to
build out their infrastructure to the undeserved. Finally, I
hope that we will be able to heed the wishes of Chairman
Powell, who asked us so eloquently to give him the means to
enforce laws, and to bring meaningful sanctions to those who
violate Section 251 and Section 271.
There are a lot of consumer angles to this bill that I am
not sure that we have sufficiently explored, and I am hopeful
that we will be able to do so today. Thank you, and I yield
back.
Chairman Tauzin. I thank the gentleman, and the Chair
recognizes Mr. Shimkus for an opening statement.
Mr. Shimkus. Thank you, Mr. Chairman. I initially thought
that we would get to multiple pipes and multiple choices in the
competitive scheme. I do not think that consumers are going to
have multiple choices, but I do believe that they are going to
be by set deliverable methods; by cable, direct satellite,
basic telephone lines.
I think we need to move to competition and DSL. I applaud
the chairman, and this is a similar bill that a lot of us co-
sponsored last year. I am not a co-sponsor this year, but it is
a method to get to a means, which is Internet DSL service to
our citizens who really don't have it right now.
So I applaud the chairman, and I look forward to the
hearing, and I yield back my time.
Chairman Tauzin. Thank you, my friend, and the Chair
recognizes the gentleman from Louisiana, Mr. John, for an
opening statement.
Mr. John. I will be very brief, Mr. Chairman. I really
believe that the economic future and educational future of
America rests upon our ability and corporate America's ability
to deliver high speed broadband access not only to corporate
America, but to all residents, rural, urban, and suburban.
And I think the question before us today is what has
happened since 1996 with the deregulation of the telecom
industry. I think that started the ball rolling toward
broadband development, but how fast do we get there?
I have heard arguments the whole way, and being a new
member of the Energy and Commerce Committee, I have had to
educate myself very quickly on this issue. But I have heard
many comments that we need to, at all costs, get this broadband
deployed into all sectors so that everyone will have access.
But I also believe that there is a balance and a risk that
we take if we go into it at all costs. So I am anxious to hear
from the witnesses about the move toward deployment, because I
think it is very, very important, and there must be a balance
that we reach, and it must be deployed as soon as possible.
But at the risk of what? And that is what I am interested
in hearing today from some of the panelists. So, I thank the
chairman.
Chairman Tauzin. I think the gentleman, and the Chair
recognizes the gentlelady, Ms. Wilson, for an opening
statement.
Mrs. Wilson. Thank you, Mr. Chairman, and thank you for
holding this hearing, particular as so much has changed since
last year when we were looking at this before. I believe that
the sponsors of this bill have been straightforward, and very
persuasive, and passionate, and believe very much that this is
the right thing to do.
And I am convinced that your support for this bill is very
straightforward and honest, but I am still unsure about whether
you are right, and whether this is the right way to go,
particularly in the state of very rapid change in the
telecommunications industry.
And in just looking back over the last year since we
considered this bill before, so much has changed, and I do
believe that competition, whether it is long distance, or data,
or local service, improves service and improves options for
consumers.
And it pushes innovation and without the 1996 Act, many of
the innovations and the services, and the companies that we are
talking about today would not even exist. In New Mexico just in
the last year, U.S. West was acquired by a competitive
telecommunications company, Qwest, that came into the business
as a high speed, broadband, network, and they now own our local
telephone company.
They are rapidly moving toward 271 application, which we
hope will happen this summer or fall, and they agreed to make
huge investments in the State of New Mexico, and service
quality is beginning to improve. All of those were very good
signs, and they wouldn't have happened if it weren't for the
competition in the 1996 Act.
But we have also seen other things happen over the last
year. We have seen since the 1996 Act the consolidation of the
Bells from 8 to 4, and we have seen fierce regional and
national backbone competition with 40 providers, and about 17
long distance players, and the Bells now wanting to get in to
compete in that market as well.
But what we haven't seen is the independent or the
incumbent local telephone companies competing against each
other, and we haven't see competitive local service. The CLECs
are in trouble across the country. Northpoint went dark on
April 2, and Advanced Radio Telecom, Winstar, Espire, go down
the list.
All of the CLECs in general are in trouble. So the real
fundamental question for me is how do we promote local
competition, and how do we prevent the remonopolization of the
industry, not horizontally, but vertically, so that in the end
what we don't end up with is a very small number of companies
serving me from my home in Albuquerque through all of the long
distance and international calling, and I only have one choice.
That to me is the fundamental question of how do we promote
local competition. Thank you, Mr. Chairman.
Chairman Tauzin. I thank the gentlelady, and the Chair now
recognizes Ms. Harman for an opening statement.
Ms. Harman. Thank you, Mr. Chairman. This subject is of
intense interest to my constituents who occupy what is called
the digital cost of Southern California. I voted for the 1996
Telecom Act, and I believe that it was Congress' intent then
that the Act apply to voice and data services.
On the House floor the chairman of this committee said,
quote, today in a bipartisan way, we unleashed the spirit of
competition in all forms of communication services, from
telephones to computers, to services dealing with video
programming and data services.
That was February 1, 1996, and it took us many, many months
to carefully balance the interests at stake in that Act, and I
think we realigned the forces of that act 5 years later at our
peril. So it would be my preference to let that Act stand, and
even if it does not directly cover everything in this bill, I
think to use a Supreme Court term, the penumbra of that Act
does cover everything in this bill.
I would leave my remarks at this point and ask for
unanimous consent to insert a more complete version of them in
the record, and yield back the balance of my time.
Chairman Tauzin. Unanimous consent has been granted.
The gentleman from Virginia, Mr. Davis, is recognized for
an opening statement.
Mr. Davis. Thank you, Mr. Chairman. We are now at a
critical juncture in our economy. New technologies and
innovation in services and service delivery are promising to
improve telecommunications for individuals and small businesses
alike.
Consumer expectations are evolving with the anticipation of
widespread broadband deployment, and thousands of high skilled,
high paying jobs have been created nationwide. Yet the telecom
industry, which has fueled our Nation's economic expansion, is
struggling to maintain its momentum.
Competitive carriers following the promises of the 1996
Telecommunications Act invested over $50 billion in new telecom
networks. For the past 2 years, they have committed over a
billion dollars per month for DSL-type broadband connectivity
alone.
But we have all witnessed over the past 6 to 9 months the
rapid downturn in the economic viability of the competitive
industry and the impact it has had on our economy, particularly
in terms of consumer confidence and employment.
Mr. Chairman, this hearing today serves an important
objective for our committee. Our discussion gives us an
opportunity to measure the extent to which the
Telecommunications Act of 1996 has achieved its ultimate
purpose, to unleash competition in all forms of
telecommunications services in order to increase the quality
and lower the prices of those services for American consumers.
While judicial action brought competition in the long
distance market, the passage of the 1996 Act hailed Congress'
recognition that to achieve network wide competition, we had to
prescribe a recipe that would similarly bring competition to
the local telecom market.
Like in any market only then would consumers benefit from
lower prices, advanced services, technological innovation, and
increased investment in information infrastructure.
The strategy is simple. Offer the RBOCs an incentive to
open their local monopolies so that conditions for market
competition in the local loop will flourish. I commend you, Mr.
Chairman, and the ranking member for your commitment to
consumers. But I strongly disagree with the path taken in H.R.
1542.
I think it would irrevocably defeat the purpose of the Act
by destroying the efforts made over the last 5 years to bring
competition to the local loop. By eliminating the applicability
of Section 271 to in region interLATA data and eliminating the
requirement that the ILECs provide their network elements to
competitors on an unbundled basis, this legislation will
destroy any incentive for the ILECs to open up their local loop
to competition. At this time the ILECs possess monopolistic
control over 90 percent of their markets nationwide.
In my home State of Virginia, Verizon controls 96 percent
of the phone lines. Clearly competition in the local markets
targeted by the 1996 Act has not yet arrived. Furthermore, this
bill would ultimately retard speedy deployment of broadband
technologies to consumers.
With little competition in a State that brings wired
digital services into homes and businesses, there will be no
competitors or market forces to push their wide spread
provision of broadband markets.
Indeed, I disagree with the notion that broadband
deployment is not moving at a market induced pace, and as a
result the RBOCs are the only entities capable of delivering
the service in the wire market. Statistics show that broadband
deployment is indeed moving forward.
At the end of 2000 the DSL market had 2,429,000 lines in
service, a 389 percent increase from year end 1999. ILECs
accounted for 78 percent of the total, followed by the CLECs
with 21 percent.
SBC had almost 10 times as many subscribers as of March
2001 as in the fourth quarter of 1999, increasing from 115,000
subscribers to 954,000 subscribers, and at the same time
raising the price of that service by 25 percent.
Over the same period, SBC's DSL availability has doubled
from 10.2 million customer locations to 21.7 million customer
locations. Furthermore, the Act in no way prohibits the ILECs
from offering interLATA voice over data service in out of
region areas. But to date no RBOC has invested in the
infrastructure to move in those areas.
Finally, the proposition that the RBOCs are the only
entities capable of bringing broadband to the rural corners of
America is seriously undermined by the fact that rural
interregion access lines are being sold by the millions. The
RBOCs have already divested 10 million rural lines.
As well, Qwest CEO Joe Nacchio has publicly discussed the
idea of selling off rural in-region access lines, including
possibly the operation of some entire States, leaving Qwest
free to focus on the 8 to 12 metropolitan areas that it
considers strategically important.
GTE, now part of Horizon, has sold 393,000 rural lines
since last summer. I want to note that several large employers
in my district have had enormous problems with special access
provisions by the ILECs that have significant impact on the
businesses, and I would like to include the statements of one
of them in record.
I agree that deregulation is always preferable for
encouraging market forces, but the 1996 Act also provides for
deregulation so long as there is competition. A monopoly will
never voluntarily welcome competition, and of course it makes
rational business sense that they would not.
Deregulation for deregulation's sake is bad for consumers,
and it is bad for our economy, and to remove the carrot that is
embodied in Section 271 would allow ILECs to close off access
to the local loop and simply obliterate the Act's ultimate goal
to foster competition in the local telecom markets. I look
forward to hearing our witnesses perspective on this complex
issue.
Chairman Tauzin. Thank you, gentleman. The Chair now
recognizes the gentlelady from California, Ms. Eshoo, for an
opening statement.
Mr. Eshoo. Thank you, Mr. Chairman. The issue of waiving
the important competition and enhancing requirements of the
Telecom Act has been brought before this committee on numerous
occasions since the Act's passage in 1996, and in my view it
has never been less necessary than it is today.
CLECs have lost 90 percent of their stock values in the
past year. Some have filed for bankruptcy. Conversely, the
Bells are having more Section 271 applications granted by the
FCC and still own more than 90 percent of the market.
And the Bells continue to have fines levied against them
repeatedly for violating their contractual and statutory
obligations to allow for interconnection to their networks. And
yet instead of finding ways to protect competition by assuring
that some of the CLECs survive, this bill in my view drives the
last nail into their coffins.
Many CLECs rely heavily on line sharing to improve DSL
service delivery, and bring broadband service to more American
consumers. This bill again in my view eliminates that practice
and effectively eliminates those competitors.
Those companies who are born out of the Act and who have
solid business plans are likely to struggle through this
downturn, but are also more likely to survive the end. Failure
appears inevitable for those who base their strategies on less
sturdy ground, and those companies who have the benefit of the
historical monopoly position have steadily moved forward and
are far more likely to not only survive, but also to acquire
some of the weakened players.
This, I suppose, is competition at work. Finally, this bill
has the one hook that I think will get its undeserved support,
and that hook is the promise that rural areas will magically
receive access to advanced data services if we pass the bill.
No one that I know of is against upgrading service to rural
areas.
But where is the evidence that the Bells have any desire
and demonstrated ability to do that. The evidence suggests
otherwise. U.S. West has sold off many of its rural exchanges,
and I would be curious to know of Verizon's efforts to bring
service to upstate New York since the FCC's approval of its New
York application.
Moreover, the smaller independent companies seem to be
doing far more in getting broadband to undeserved areas. I
fully appreciate that less revenue can be derived from rural
areas, and that it is more economical to serve business
customers, but that's exactly the point.
An important part of the public policy that we have tried
to create in the Act was to provide residential competition for
our constituents. This bill removes valuable incentives that we
crafted to bring that service to them. Without the protections
of the Act, and the enhanced enforcement provisions, I fear
that we are going to fail in that objective.
So thank you, Mr. Chairman, for holding the hearing, and I
look forward to what our witnesses will provide, in terms of
information to us on that, and I look forward to hearing from
them.
Chairman Tauzin. I thank the gentlelady, and the Chair now
recognizes Mr. Bryant for an opening statement.
Mr. Bryant. Thank you, Mr. Chairman. I also would like to
thank you for holding this important hearing today, and for
your leadership on this issue of broadband deployment. The dial
up Internet service is operating at a maximum speed of 56
kilobytes per second, and with the high speed data services
having the capacity to transmit the information at the rate of
no less than 384 kilobytes per second, the benefits of
broadband technology are numerous and undeniable.
However, with the creation of this technology, we have seen
the deployment of broadband, and it has been slow to say the
least. Our Telecommunications Act of 1996 was a good bill, and
I voted for it, but when this bill passed the house on August
4, 1995, I don't believe we foresaw the role that the Internet
was going to have in our Nation and in our world's economy.
When considering this bill in 1995, our concern was voice
service and not data. The 1996 Act dealt with opening the local
telephone market to competition under the Act, and the FCC must
agree that the incumbent local exchange carrier has opened the
local telephone market to competition.
I believe that the intent of the 1996 Act was misunderstood
when the FCC concluded from the Act that the ILECs could not
provide broadband Internet access because the services are long
distance.
As a result of this ruling the deployment of broadband
services has been stifled. The 1996 Act dealt with opening the
local telephone market to competition, and this legislation
leaves the rule relating to local telephone service intact.
Despite the benefits of high speed Internet access, 88
percent of all Internet connections in the United States are
dial up. I realize that broadband deployment is expensive and
it makes sense that companies would deploy broadband where the
majority of customers live, which is in the urban and densely
populated suburban areas.
This business practice really excludes the more rural
areas, and I am afraid that as a result the Internet revolution
could pass by rural America, and rural America includes a large
part of my district and other parts of Tennessee.
The ILECs have the capacity and capability to provide the
broadband technology to rural and urban areas alike, and I
don't think it is right for the government to hamstring these
companies with regulations or red tape.
Other high speed Internet providers like cable, wireless,
and satellite companies, have been able to operate in this
market uninhibited by FCC regulations, and I believe that
broadband companies should also be allowed to operate without
government interference.
I would like to thank the witnesses today for coming, and
for your patience with all of us in making these statements. I
look forward to hearing from you on the details of broadband
deployment, and the importance of speeding timely deployment,
and ubiquitous performance of broadband services, and the
details as to how this bill would help achieve this goal.
I am particularly interested to hear from what the
witnesses have to say about rural areas, and how they will be
better served under this legislation. Last, I would also like
to--I think it is important that we hear about what is going to
be done or what is being done currently to deploy broad band
services by businesses, and the extent to which in providing
these services are hindered by government regulation. Thank
you, Mr. Chairman.
Chairman Tauzin. I thank the gentleman. The Chair will now
recognize the gentleman from Minnesota, Mr. Luther, for an
opening statement.
Mr. Luther. Thank you, Mr. Chairman. I will be brief, and I
will submit my entire opening statement for the record. But
just one concern that I did want to touch on, and that is a
concern that I have with the bill, and that the bill would
eliminate the line sharing requirement that has been in place
for a little over a year now.
My home State of Minnesota was the first State in the
Nation to require its incumbent dominant carrier to lease its
existing loop line to competitors providing broadband DSL
service.
This is simply common sense. Why would one require
customers to pay for an extra loop line. I am interested to
hear the rationale for the elimination of the line sharing
requirement, and in particular how it would affect consumers if
this bill were to pass.
So that is the one point that I wanted to particularly
raise and certainly would welcome input from members of the
panel. And thank you, Mr. Chairman, and I will yield back the
balance of my time.
Chairman Tauzin. I thank the gentleman, and the Chair
recognizes Mr. Walden for an opening statement.
Mr. Walden. Thank you, Mr. Chairman. I have an opening
statement that I will submit for the record, and the biggest
issue I have is how you are going to get down in rural areas
with broadband.
And I wish there were actually some requirement in this
legislation or some other that would in effect mandate that,
and I am not talking about rural areas and communities of 30-
or 40,000. I am talking down to the small communities like in
the district of my own.
So, Mr. Chairman, I will submit my testimony for the record
and look forward to the witnesses' comments.
[The prepared statement of Hon. Greg Walden follows:]
Prepared Statement of Hon. Greg Walden, a Representative in Congress
from the State of Oregon
Mr. Chairman, thank you for your and the Committee's attention to
the need to improve broadband access in America.
The issue of high-speed Internet access is an important one to my
constituents in central, eastern and southern Oregon. Our congressional
district, the most rural district on this Committee, is geographically
larger than 33 states. In the extremely rural parts of the district,
unemployment is as high as 19 percent, property values are low and many
young folks leave as soon as they can for jobs in Portland, Seattle or
Boise.
In these areas that have been hit hard by reduced timber harvests,
a depressed agriculture economy and limited transportation
infrastructure, the Internet holds great promise. The Internet
eliminates that great enemy of rural economies everywhere--distance
from urban commercial centers--and provides a pipeline of prosperity
and learning to far-flung areas. It also allows companies to locate in
rural areas to take advantage of the outstanding quality of life there.
This is the potential of the Internet.
But while the Internet itself makes distance irrelevant, the cost
and practicality of providing high-speed Internet has everything to do
with distance. It costs a great deal of money to string wires between
households miles apart. And, not surprisingly, high-speed Internet has
not found its way into many parts of rural Oregon. The resulting
situation is troubling: those Americans who could most benefit from the
distance-eliminating effects of the Internet, i.e. those who live in
rural areas, are perhaps least likely to have reliable, high-speed
access.
While the federal government cannot completely eliminate this
problem--the laws of economics will always apply, after all--Congress
must make certain that everything is being done to give rural Americans
the best chance possible to receive high-speed Internet access. If
there are regulations that stand in the way, we should change them. If
there are tax incentives that would spur real investment in rural
telecommunications, we should consider enacting them. And if rural loan
programs through the U.S. Department of Agriculture and other agencies
need additional funding, we should look at that too.
We simply cannot stand by while the Internet passes by rural
Americans.
Mr. Chairman, I appreciate the opportunity today to examine the
regulatory factors affecting Internet communications. I look forward to
hearing our witnesses explain what changes could be made to the
regulatory framework to give my constituents and other Americans the
best possible opportunity to gain access to the ``information
superhighway.''
Thank you again, Mr. Chairman.
Chairman Tauzin. I thank the gentleman, and the Chair
recognizes the gentleman from Wisconsin, Mr. Barrett, for an
opening statement.
Mr. Barrett. Thank you, Mr. Chairman. I will be brief as
well. My perception in this area is that people love
competition when they are going into someone else's back yard
to compete. They are not so keen about competition when someone
is coming into their back yard to compete.
And what concerns me about this legislation is not that we
would be opening new areas for the Bells to have broadband. I
think that competition is good. What concerns me is that I am
still waiting. After 5 years, I am still waiting for local
competition.
And during the course of this hearing I will be asking
witnesses and listening to testimony, because I think that the
promise that everybody here heard in 1996 that there would be
competition, that promise is still in my mind not met, and for
me that is a very, very important concern.
So I appreciate you having the hearing, Mr. Chairman. I
think this is a very, very important issue, and I do have some
serious questions, and hope that they can be answered through
the course of this hearing. I would yield back the balance of
my time.
Chairman Tauzin. Thank you, Mr. Barrett. The Chair now
recognizes Mr. Terry for an opening statement.
Mr. Terry. When we start rearranging ourselves in our
chairs, I yield back my time.
Chairman Tauzin. I thank you, my friend. We will be doing a
lot of rearranging I think over the next few hours. The Chair
recognizes Mr. Stupak for an opening statement. He is now
there. So the Chair recognizes Mr. Green.
Mr. Green. Thank you, Mr. Chairman, and I won't be as brief
as Mr. Terry, but I will not give my full opening statement. I
have had the opportunity during our recess periods to see the
competition that we have in Houston, Texas, in our local phone
service, and it is very aggressive campaign.
So that's why I am glad to be a co-sponsor of this bill. I
think that we can provide additional avenues for high speed
Internet connections, with the example of the competition at
least in Houston, and I am sure in other parts of the country
we will see competition between both our Internet providers,
but also between our RBOCs. And that's why, Mr. Chairman, that
I'm glad that we are moving this bill. I will yield back my
time.
Chairman Tauzin. Thank you, my friend.
I recognize my friend from New Hampshire, Mr. Bass, who is
recognized.
Mr. Bass. Thank you very much, Mr. Chairman. I also want to
commend you for your willingness to have a really thorough
examination and exchange of ideas before the full committee on
this very important issue. You know, my district is a microcosm
of probably the whole country.
There is fairly good broadband service in some of the more
populated areas, but virtually nothing in the more rural areas,
and I hope that this discussion and further action that the
subcommittee and the full committee, and the Congress take on
this issue will move to bridge that huge disparity that exists,
and continues to exist, across this country. And with that, I
will yield back to the chairman.
Chairman Tauzin. I thank the gentleman. The Chair
recognizes Mr. Brown for an opening statement. He is not here.
So, Ms. DeGette for an opening statement.
Ms. DeGette. Thank you, Mr. Chairman. Colorado, and in
particular the area around Denver, is one of the fastest
growing areas in telecommunications in the country. In fact, I
think we are now the fourth largest area.
This is 100 percent due to the 1996 Act. Not only is Qwest,
which Congresswoman Wilson mentioned, based in my district in
Denver, but also the vast number of CLECs that have grown up in
the area are completely due to the 1996 Act.
And I am a strong supporter of competition, and I always
have been, and so I am concerned about how this bill will
affect competition and I am eager to hear from the witnesses.
One thing that I would interject that I haven't heard folks
talking about, during the recess, in a great act of luck, I
actually had a telecommunications roundtable, not knowing that
this hearing would be scheduled.
One of the people who came to the roundtable was a
representative from a group called Wild Blue, and Wild Blue is
developing satellite transmissions for high speed data to rural
areas.
And I will submit to many of my colleagues from rural
areas, particularly very small towns, that the only practical
way we will be able to do high speed data transmission in the
future is not through laying cable, not through laying high
speed lines, but through other technologies that have been
developed completely as a result of the Act.
And that's why I want to make sure that anything that we do
in this committee does not undermine the fundamental purpose of
the 1996 Act, which is to foster competition in all areas of
technology as we move forward in telecommunications, and I will
yield back. Thank you, Mr. Chairman.
Chairman Tauzin. I thank the gentlelady. The Chair
recognizes Mr. Radanovich for an opening statement.
Mr. Radanovich. Thank you, Mr. Chairman. I welcome the
members of the panel and look forward to your testimony. I have
a statement in the record and yield back. Thanks.
Chairman Tauzin. The Chair thanks the gentleman, and
recognizes Ms. McCarthy for an opening statement.
Mr. McCarthy. Thank you, Mr. Chairman, and I will put my
remarks in the record and just make a few comments, because I
want to get to the panel of experts who are here today.
Since the enactment of the Telecommunication Act, the
deployment of broadband services has increased rapidly.
Incumbent local exchange carriers, cable companies, competitive
local exchange carriers, and wireless companies, are all
offering broadband services. The second report of the FCC on
Advanced Service Capability concluded that, ``advanced
telecommunications capability is being deployed in a reasonable
and timely fashion overall.'' The report states that in late
1998 there were roughly 375,000 subscribers to advanced
services. By the end of 1999, there were 2.8 million
subscribers. That is an increase of 300 percent.
The proponents of H.R. 1542 tout the bill as a means to
spur broadband deployment more rapidly. Broadband service is
becoming more available throughout much of the country thanks
to the aggressive roll of services by the CLECs and the cable
industry.
This competition forced local phone companies to deploy
digital subscriber lines, a technology they had for some time,
but were slow to offer. Now all of the regional Bells are
deploying broadband services, particularly DSL, in their home
regions.
Opening the Telecommunications Act to provide interLATA
relief for data is not needed. If the ILECs meet the
requirements of Section 271 of the Telecommunications Act, they
can offer long distance service for voice and data. Verizon and
SBC have met the requirements and now offer such services in
New York and Massachusetts, and Texas, Oklahoma, and Kansas,
respectively. SBC just recently filed a Section 271 application
with the FCC to enter the long distance market in my home State
of Missouri. Clearly the Act is working. In addition, in a
statement to the Subcommittee on Telecommunications and the
Internet this past March, FCC Chairman Powell stated that the
FCC would speed the review of Section 271 applications. If the
ILECs want interLATA relief, they just need to meet the fair
and reasonable requirements set under Section 271.
I understand my colleagues desire to spur deployment, but I
do not agree that this legislation will do so. If enacted, it
will likely have the consequence of reducing competition,
increasing costs, and stifling innovation. Without access to
incumbent facilities, competitors, such as Birch Telecom, based
in my congressional district in Kansas City, would not be able
to offer DSL service to its residential and small businesses.
Last July, then FCC Chairman William Kennard in his
testimony before the House Judiciary Committee, stated that,
``eliminating data from Section 271 would eliminate a crucial
incentive for incumbent BOCs to open their local monopoly
markets. The opening of local markets is absolutely critical
for accelerating broadband deployment.'' I agree with that
assessment and I do hope that Congress allows the Act to work.
Thank you, Mr. Chairman. I yield back the balance of my time.
Chairman Tauzin. Thank you, gentlelady.
The Chair recognizes the gentleman from Mississippi, Mr.
Pickering, for an opening statement.
Mr. Pickering. Thank you, Mr. Chairman. Let me begin with
the words of Chairman Powell in the hearing that we had right
before the recess in response to a question that I asked.
Is now the time in a period of economic uncertainty,
especially in the tech sector, where we are seeing the
bankruptcies, the loss of capital, the devaluations, the
emerging competitors, and critical condition, is now the time
to reopen the Act and have dramatic change?
Chairman Powell responded that ``I think that my advice,
such that it is worth anything, is that any sort of wholesale
rewriting of the Act to my mind is ill-advised.'' I went on to
ask one further question.
Given the context of the market and the capital flows right
now in the tech and telecom sectors, and especially with the
emerging competitors, would a dramatic policy change further
destablize and possibly harm emerging competition.
Chairman Powell responded that if you focus particularly on
capital markets, you would have to say it could. Now is not the
time given the economic conditions of the tech and telecom
sectors to be dramatically reopening the Act.
Moreover, the Act in the name of deployment violates the
principles of the 1996 Act of competition, convergence, and for
capital right now the need for certainly. In the name of
deployment, it would kill competition, kill convergence, and
create uncertainty.
For those reasons, this bill should not be passed or signed
into the law, and the reality is that in its current form it
cannot be passed to both bodies of Congress or signed into law.
It is fundamentally flawed, and it cannot be fixed.
The foundation is not repairable.
Now, if we desire to find competitive common ground, if we
want to look at the 1996 Act, for both sides have legitimate
concerns, and we have lessons learned over the last 5 years of
not only how to increase deployment, increase competition in
local and data, and cable, and in local competition, I do think
there is another way and a better way to find that competitive
common ground.
Unfortunately, as I look at the bill, I have to conclude
that it is a sham. You cannot separate digital, and you cannot
separate voice from data. If you cannot separate voice from
data, how can you have data relief.
If we talk about enforcement, how can we enforce the
opening requirements when the Act eliminates the opening
requirements of interconnection and the unbundling once a
network offers advanced services.
The combination of the technological reality of not being
able to separate voice from data, and the bill's elimination of
interconnection and unbundling requirements to offer advanced
services makes this a fundamentally flawed, and a bill that
cannot be fixed or repaired, or amended with enforcements or
any other types of amendments.
It cannot pass the other body, and it violates the
principles of competition, convergence, and certainty. Chairman
Powell said it was ill-advised during a period of economic
uncertainty, and all of these are articles in the tech sector
of bankruptcies and devaluations, and critical conditions of
the emerging competitors.
I urge the committee to step back. I urge the industries
that want to see advanced deployment into all areas of my home
State and rural areas, and undeserved markets, to come back to
a table that is fair and balanced, inclusive, and open just as
we tried to do in the 1996 Act.
There are things that we can improve in the Act. There are
ways that we can come together and find the principled approach
of advancing deployment, but at the same time not harming
competition not harming convergence, and not creating
uncertainty during a critical economic period of time. With
that, I yield back.
Chairman Tauzin. The Chair thanks the gentleman.
The Chair recognizes Mr. Rush for an opening statement.
Mr. Rush. Thank you, Mr. Chairman. I, too, join in with my
colleagues in commending you for this indeed very, very
important hearing. The RBOCs contend that if we give them
interLATA relief that consumers will have more prices and more
choices for advanced broadband services.
On the other hand, the CLECs contend that in lifting the
interLATA restrictions will undermine the Telecom Act, and mean
higher prices and less choices for the consumers. They contend
that this is true especially if RBOCs do not have to open their
markets to competition.
As we move forward with this legislation, I believe that we
must tread carefully so that we do not run afoul of the
fundamental principle of the Telecom Act, which is indeed as
has been stated before many, many times, which is competition.
I believe that the Telecom Act is working because of the
competition, and we have seen real commitments by the
competitors and incumbents alike to deploy broadband services.
With that said, I am cognizant of the limitations that the
RBOCs face in deploying broadband services under the current
regulatory scheme. For the past few years, they have repeatedly
argued that cable, satellite, and wireless providers do not
have such regulatory burdens.
And this, Mr. Chairman, this inequitable treatment has
hindered them from effectively competing in this market. One
area of concern to me, and an important area of concern to me,
is the lack of deployment of advanced services in undeserved
areas, such as urban and rural poor areas.
According to the proponents of this build, if they are
given interLATA relief, they will deploy broadband services in
undeserved areas. I remain skeptical, for many inadequate and
unsound reasons, these areas have been neglected by CLECs and
incumbents alike.
And, Mr. Chairman, I look forward to today's hearing, and
the testimonies regarding these particular issues. Thank you
and I yield back the balance of my time.
Chairman Tauzin. The Chair thanks the gentleman, and the
Chair recognizes the gentleman from Pennsylvania, Mr. Pitts,
for an opening statement.
Mr. Pitts. Thank you, Mr. Chairman, and thank you for
holding this important hearing. It is 11:30, and I have enjoyed
the members' comments, and I am looking forward to hearing the
testimony of the distinguished panel, and so I will submit my
opening statement for the record and yield back.
Chairman Tauzin. The Chair thanks the gentleman.
The Chair recognizes Mr. Hall for an opening statement.
Mr. Hall. Mr. Chairman, I thank you, and I, too, will be
very, very brief. I certainly want to welcome my colleague, Tom
Tauke, who is a long time member of this committee and this
Congress, and the very distinguished panelists here.
I think that people want to hear them and not us, and I
just want to very briefly say that I represent a district that
has some rural areas in it; part of Dallas, and then it goes on
up to the Red River and back down through the oil patch.
We recently held a forum on the campus of Austin College in
Sherman, Texas, and the topic of the forum was workforce
development, and with the Internet having provided new mediums
in communication, education, commerce, and entertainment, there
was considerable interest in how educators, businesses, and
government can work together in training tomorrow's workforce.
I guess my question would be--and the gentleman from
Mississippi succinctly set it out when he says in its current
form he is not happy with the bill, and that is what
subcommittees and hearings are all about--that I want to see
what is in this bill.
I held off as the chairman knows last year until you had
218 or 219 signatures, because there are good people on both
sides of this issue, and people that really made great
contributions to the economy of this country, and people with
whom I had voted for years and years. We came to the
crossroads, and can't agree with both sides but hoping both
sides will continue to negotiate, and to probe, and to try and
work something out.
Ms. Eshoo set it out very well when she said that we want
to upgrade the service to rural areas, and I want to see how
this works out in my district. I yield back my time. I thank
you for introducing the bill, and I thank you for having this
hearing, and we will be listening very closely as we progress.
Chairman Tauzin. Thank you, my friend.
The Chair now yields to Mr. Shadegg for an opening
statement.
Mr. Shadegg. Thank you, Mr. Chairman, and I will be brief.
Let me commend you for holding a committee hearing, a full
committee hearing on this extremely important topic, and for
bringing this legislation before us.
I think it is timely and important. In the interest of our
witnesses and being able to hear them, I will take advantage of
the unanimous consent and insert my full opening statement in
the record. I do want to associate myself with the remarks of
Mr. Cox, Mr. Davis, and Mrs. Wilson.
I share a great deal of concern about this legislation, and
particularly about competition at the local level, the local
service level. And I think that before we move on legislation
of this great significance that we ought to do so cautiously,
and we ought to understand what we are doing, and we ought to
understand its implications.
I am going to be looking carefully at that issue, and
specifically at the question of whether we have done enough to
open up competition at the local service level, and whether or
not this legislation advances that cause or does not do so, and
I thank you, Mr. Chairman, and yield back the balance of my
time.
Chairman Tauzin. The Chair thanks the gentleman, and the
Chair recognizes Mr. Wynn for an opening statement.
Mr. Wynn. Thank you, Mr. Chairman. I appreciate you
bringing this matter before the committee and convening this
hearing. I will submit for the record, and I will note that
this is not just a battle between LECs. There are actually
consumers out there that are interested in this, and we clearly
have a conflict between the advantages of deployment, versus
the advantages of competition.
Ultimately hopefully we will be able to decide which of
these two approaches best benefits the consumer and make
rational decisions with respect to legislation that will help,
quote, the folks back home in the most efficient way. I yield
the balance of my time.
Chairman Tauzin. The Chair thanks the gentleman, and the
Chair recognizes Mr. Norwood for an opening statement.
Ms. Cubin.
Mr. Buyer.
Mr. Buyer. Thank you, Mr. Chairman. I want to thank you for
introducing this legislation. The deployment of broadband goes
beyond just my congressional district, and it is more than just
about greater, faster, more efficient access to the Internet.
It is about increasing the quality of life. Right now in
America, we have what has been coined the digital divide. Those
who have access to quality Internet service, and those who do
not.
For example, right now my congressional staff who work here
in Washington, DC have greater access and more choices in
Internet service providers than do my staff in Kokomo and in
Monticello, Indiana. In fact, my Washington staff has perhaps a
half-a-dozen quality providers of broadband services, and in
Indiana, they only have one.
My goal in supporting this bill is to provide the access
and choice to all Americans, regardless of where they live, to
have the same access in rural areas as they do or as those who
live in large metropolitan areas.
If we do not do something now to increase the competition,
then those living in rural America will be left behind,
economically, socially, educationally, and in so many other
ways, not to mention the negative effect it is having on small
businesses trying to compete in the marketplace.
Expanding broadband to libraries, schools, and to students
at home would be among the most important effects of our
efforts. As I meet with students and teachers, I am constantly
reminded of the importance of broadband improving student's
educational experiences.
This is true for students of all ages, including adults.
Distance learning is a common way of life in rural communities,
and broadband only increases the level of learning and the
educational environment.
Broadband, both fixed and wireless, has the ability to
transform the way teachers teach, and the way our students
learn. I believe that Congress has a role in making sure that
Americans can equally participate in the digital world.
The legislation being addressed today appears to be one of
the better vehicles to encourage deployment of broadband,
because it also appears that the FCC, while it has the ability,
will not act.
As a strong supporter of this legislation in the last
Congress, I am still not convinced that we should limit our
efforts to deploy broadband to this bill alone, especially with
the reluctance of the Senate to act.
While many in the industry have be coming in to see me
about this legislation, I have yet to have anyone tell me that
they will deploy broadband services in my rural communities if
the business model does not allow it.
Therefore, I believe that the House should also pursue
other ways to encourage the installation of the infrastructure
in rural and less developed communities, and therefore, I am
open and ready to listen.
The deployment of broadband and increasing competition has
real effects on the quality of life of Hoosiers that I
represent. The lack of broadband hurts our students'
educational opportunities, hurts our businesses' ability to
compete, and discriminates against willing participants in the
digital age.
Some may see the lack of services as only hurting rural
Americans, but I submit that it hurts all of America. America
has been great and a leader in technology because we are a
melting pot of ideas, of goals, and of dreams. Yet, when we do
not allow a particular sector to participate equally, then we
lose the ingenuity of so many.
So my goal is to erase the digital divide so that so many
Americans can be active participants, and if I can be frank,
the last time I was really involved in these issues was back in
the Judiciary Committee back in 1996 and 1996. Then I sort of
left those issues.
So now I come back to the Commerce Committee, having left
Armed Services, and Judiciary, and so if you have left
something and you come back 5 years later, it is like going and
seeing your cousins, or your are seeing your niece and nephew
that you hadn't see for a while.
You see, I have it all locked in my mind the way it was
when I was a conferee back in 1995 and 1996. Over the last 3
months, the more I am beginning to see, I don't recognize it. I
am supposed to say how much you have grown, and how excited I
am to see what you have become, but I can't say that.
I am beginning to say how disappointed I am, and it is not
looking as the way that Congress intended it, nor envisioned
it. So I want to compliment you, Mr. Chairman, for the
legislation, and I yield back my time. Thank you.
Chairman Tauzin. Thanks, Steve. The Chair is now pleased to
recognize Mr. Engel for an opening statement.
Mr. Engel. Well, thank you, Mr. Chairman, and I, too, will
want to compliment you for having this hearing, and I want to
compliment the distinguished panel for having to endure all
these opening statements.
I am going to be brief, because a lot of good points have
already been addressed, but I am a strong supporter of H.R.
1542. I represent an urban district, and I am, too, very
concerned about the digital divide in my district. And I
believe that this legislation will help close that digital
divide.
And I am also concerned with the fact that small businesses
having difficulties affording high speed Internet access and I
believe that this legislation will help in allowing small
business to afford this access.
I also think that it is equitable that the wiring of high
speed Internet access by cable companies is not regulated. And
if that is not regulated, then we could have an approach to try
to regulate cable companies in the wiring of high speed
Internet access. I don't think that is the approach that we
should take.
I think that this approach is far preferable to regulation
and to allow the baby Bells to have the regulations that the
cable companies have as well. So I think that this legislation
moves in the right direction.
In negotiations, yes, I am always for it, and I think that
the process works that there will be negotiations. But I think
that it is important to move this bill forward and important to
pass this bill, and I think that this bill will be good not
only in urban districts, such as mine, or in rural districts
such as Mr. Buyer said.
But I think it will be good for all Americans, because
again I think it will bridge or help bridge the digital divide,
and will help make this technology more accessible to our
constituents. I thank you, Mr. Chairman, and I yield back the
balance of my time.
Chairman Tauzin. I thank my friend, and the Chair yields to
Mr. Strickland for an opening statement.
Mr. Strickland. Mr. Chairman, I am looking forward to
hearing from our witnesses, and so I will forego an opening
statement. Thank you.
Chairman Tauzin. I thank the gentleman, and I think that
concludes the opening statements. Is there anyone who has not
yet made an opening statement who would like to? I think we
have got it covered.
[Additional statement submitted for the record follows:]
PREPARED STATEMENT OF HON. MICHAEL BILIRAKIS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Thank you, Mr. Chairman.
I want to commend you for scheduling today's hearing on the
Internet Freedom Broadband Deployment Act. The Internet has grown
dramatically during the 1990s. According to the Department of Commerce,
over 40 percent of American households now have access to the Internet,
while about 45 percent of all Americans have Internet access at home
and/or outside the home.
Today, the majority of residential Internet users access the
Internet through the same telephone line that can be used for
traditional voice communication. The highest speed modem used with a
traditional line is 56 kilobits per second, which makes sending or
receiving large data, video or graphics files difficult and time
consuming.
As the content on the Internet and Wold Wide Web has become more
sophisticated, consumers have been clamoring for faster Internet
connections. Broadband services provide consumers with the ability to
send and receive information at much faster speeds. However, not all
Americans have access to the faster services provided by broadband
technologies.
Consequently, there have been many proposals to speed up the
deployment of broadband services. Today's hearing focuses on the
Internet Freedom and Deployment Act, which would amend the
Communications Act of 1934 to prohibit states or the Federal
Communications Commission from regulating the provision of high speed
data services. I have heard from parties on both sides of the debate on
this legislation.
Yesterday, I received a letter from the Florida Public Service
Commission which raises a number of concerns about the Internet Freedom
Broadband Development Act. First, the Commission is concerned that the
legislation could grant a monopoly carrier the ability to enter the
long distance data markets without any of the safeguards provided for
in the 1996 Telecommunications Act.
The Commission is also concerned that the bill may diminish local
oversight of telecommunications companies and eliminate the federal
provision which currently permits state commissions to enhance
competition for local telephone services by requiring additional points
of interconnection with the incumbent's local telephone company
network. The Commission questioned whether or not the bill would reduce
incentives for incumbent local exchange companies (ILECs) to open local
markets to competition.
I am hopeful that the issues raised by the Florida Commission will
be discussed during today's hearing, and I look forward to hearing from
our witnesses.
Thank you, Mr. Chairman.
Chairman Tauzin. Then the Chair is very pleased to
recognize a very distinguished panel of witnesses today. Let me
introduce all of you first, and then I will begin with Mr.
Ashton as our first contributor. You know that under our rules
we have a 5-minute rule.
If you have not testified before the committee before, the
little units that are sitting on the desk give you a warning,
and when the yellow light goes on, you have got about a minute
to wrap up. We have your written statements in our packets, and
we can refer to them as we listen to you.
So kindly try not to read your written statement. Just sort
of summarize and have a conversational dialog with us about
what you think about the status of competition in this bill.
We will begin by introducing all of you first. Mr. Douglas
Ashton, Managing Director, Communications Technologies Equity
Research, Bear Stearns and Company, in Boston, Massachusetts.
We are pleased to welcome you, Mr. Ashton.
Mr. Jim Cicconi, the General Counsel and Executive Vice
President of AT&T, here in Washington, DC, and, Jim, it is
always a pleasure to see you again.
Mr. Joseph Gregori, the CEO of InfoHighway Communications,
on Broadway Street, in New York. Welcome, sir.
Mr. James Henry, the Managing General Partner of Greenfield
Hill Capital LLP, Fairfield, Connecticut. Welcome, sir.
And also Mr. Gordon Hills, Executive Director of the
Economic Opportunity Program of Elmira, New York, who is
testifying on behalf of the National Association of Community
Action Agencies, of which I was a former officer in my home
community.
Mr. Paul Mancini, the Vice President and Assistant General
Counsel of SBC Management Services, Incorporated, of San
Antonio, Texas. Mr. Mancini, welcome.
Mr. Clark McLeod, Chairman and Co-CEO of McLeodUSA, Cedar
Rapids, Iowa.
Mr. Charles J. McMinn, Chairman of the Board, of Covad
Communications, Santa Clara, California. Again, welcome, sir.
Mr. Peter Pitsch, Communications Policy Director, Intel
Government Affairs, here in Washington, DC. Peter, welcome.
Mr. Timothy J. Regan, a Senior Vice President, Government
Affairs, of Corning, Incorporated. Welcome, Tim, again.
And the Honorable Tom Tauke, a former member of this
committee, whom we are always delighted to welcome back, the
Senior Vice President for Public Policy and External Affairs,
of Verizon Communications, here in Washington, DC.
Gentleman, thank you all for coming, and we will begin with
the testimony of Mr. Ashton.
STATEMENT OF DOUGLAS C. ASHTON, MANAGING DIRECTOR,
COMMUNICATIONS TECHNOLOGIES EQUITY RESEARCH, BEAR STEARNS AND
COMPANY
Mr. Ashton. Good morning, Mr. Chairman, and other
distinguished members of the House Committee on Energy and
Commerce. Thank you very much for inviting me here to discuss
the Internet Freedom and Broadband Deployment Act of 2001.
I am going to speak today from the perspective of the
technology analyst, more so than a telecom analyst. I cover
telecommunications technology vendors. But I can say in a
recent report that we submitted to our constituencies, which
was primarily money managers and the companies in the industry,
we recognize that the only catalyst for a better technology in
a telecom environment is regulatory reform.
We called our report, ``Saving Telecommunications,''
because we think that that kind of dramatic title is relevant
to the conditions that the industry is in today. I am going to
try and limit my comments to just giving a framework, and I
want you to think about the industry, because there are certain
things that we would all like to see.
But there are certain realities in the way the business has
evolved since 1996, and really looking back even further than
that. But in essence the word that I would like to use when I
am speaking with investors is the word transition.
This industry just happens to be transitioning in many
different ways at the same time, and it has been very
destructive to the status quo, and it has been very
destablizing for both service providers and vendors. When you
think about these transitions, think about them in three ways.
We are trying to transition from a narrow band networking
environment to a broad band networking environment, and that is
a momentous change for this industry. Up until this point, we
have largely been about narrow band services and primarily
voice.
The second, which is a microcosm of the first, because we
have already started down the modernization path, is the idea
of moving from core network modernization or long haul, which
is where you here a lot about optical technology and the like,
to access modernization, which seems to be the focus of this
bill.
The third transition is probably the most self-evident, but
what I find is that people missed the importance of it, and
that is that this industry is trying to transition from a voice
dominated business to a data dominated business, and that is a
very difficult transition to make.
The risks in this business are now higher because the path
to those services is not clear for any of the carriers or the
vendors. Think about it this way. I always tell my investment
clients that if I give you a company and said that 80 percent
of your revenues come from a business that is slowing, and it
now has more substitutes than it ever has--and the pricing of
it is going to change because we used to do it based on
distance, and now that is seemingly going away.
It is priced interlastic, and so the more that we lower
prices, we don't generate the growth that we used to when we
lowered prices. It is not the kind of stock that you would want
to buy. Well, that is basically our industry and getting past
that point is going to be very difficult.
So if we take these in turn, and I will go through them
very quickly, think about the core access shift, because that
is what is going on right now, and we are stopped at the door
of access to modernization.
And this is very problematic for all the core long haul
players, and all the core optics vendors. Think of level three
Williams and AT&T in Sprint, and MCI World.com and a host of
others. They have modernized and they made one fatal mistake,
which was that they bet on an orderly development of access
modernization.
Without it, and it is not here, and it doesn't look like it
is going anywhere, those investments are kind of twisting in
the wind. So this sector as a whole has now reached from that
core to access modernization stage, kick starting or jump
starting that stage of the process is really the only way to
get us out of what I am starting to call technology malaise and
telecom malaise, but in a different order, which is I believe
that telecom--and particularly access--is this sphere of
influence on which all the other technology markets will rest.
If we don't get modernization there, we are telling
investors that you cannot expect to see a return of the
technology markets in general.
We think that it is nice to think about competition, and
see CLECs, and others, but when you think about access, think
about it in three ways. There is three types of access
networks, because there are three types of end-user groups.
There is large businesses, small businesses, and
residential or consumer customers. Our modernization and access
is largely evolved around the large business market, but is not
moving down. It is not moving down into the small business and
residential markets, which you can consider the same, because
largely the network on which they are serviced is the same if
you think about any suburban town and all the businesses that
lie at the end of the street.
In getting to the access modernization path that we would
like to see in the technology markets, we see one primary
problem that has two subproblems, which his the companies that
need to do this investment are having a hard time identifying
the services that can pay for it.
And so they are hesitant to take the risk, and they are
looking for ways to bring that rate of return up. And clearly
one of those ways is regulatory reform in the bill that has
been talked about today.
If this bill can move forward, I think it will
substantially enhance the rate of return picture that the
access providers can attempt and set up a competitive
environment that is largely based on cable and the RBOCs, which
I think will be enough to get the benefits of that.
Thank you.
[The prepared statement of Douglas C. Ashton follows.]
PREPARED STATEMENT OF DOUGLAS C. ASHTON, MANAGING DIRECTOR, BEAR
STEARNS & CO. INC.
INTRODUCTION
Good morning, Mr. Chairman and other distinguished members of the
House Committee on Energy and Commerce. Thank you for inviting me here
to discuss ``The Internet Freedom and Broadband Deployment Act of
2001.'' I am appearing today as an industry analyst whose focus is on
telecommunications, in general and telecommunications technology, in
particular. My views should not be attributed to Bear Stearns & Co., my
employer, as they have not taken an institutional position on the
legislation being introduced today.
My views on today's topic are shaped by my experience as a equity
analyst, since 1994 to the present time, my work experience at the
American Enterprise Institute and specifically research conducted while
writing a recent Bear Stearns publication, Saving Telecommunications:
The Next Generation Access and Services Evolution. I believe that
copies of this publication have been sent to the Chairman and other
distinguished members of the Committee.
I would like to offer a financial analyst's perspective on the
topic of today's hearing. I will make my comments as general as
possible and in doing so will seek to address just a small number of
the many important issues the telecommunications industry is facing
today. However, before we get into those issues, I would like to make a
few comments on how integral I view the health of the
telecommunications sector is to the health of the US economy, US
competitiveness, and to technology in general.
Over the past decade, a diverse set of advanced and widely
available telecommunications services have become ubiquitous enough to
become an integral part of our national fabric. They have infiltrated
our daily lives in ways that were not so long ago unimaginable. The
benefits are largely self-evident (through all income and age classes)
and have been a major contributor to what economists commonly refer to
now as a period of historic productivity gains. We do not believe it a
stretch to say that the process, for a time, made our
telecommunications infrastructure one of our most important and
differentiating national assets. In fact, it has been the focal point
of what is arguably our most important asset: our technology-based
human capital.
As the telecommunications sector advanced it also broadened its
sphere of influence. Today, I believe these advances have reached the
point where it can be accurately said that telecommunications is the
center around which the greater technology sector revolves around, the
straw that stirs the drink, if you will. This relationship is not only
found here in the US. It is a global phenomenon. As such, all citizens
now have a stake in the ongoing development of our communications
infrastructure: those who use it, develop it and invest in it, which
means more of us than it used to. In essence, telecommunications has a
global constituency.
To date, the sector's development has largely been a race to the
top, and the end result has been a more efficient system for gathering,
processing and disseminating information. Better yet, it has not all
been work related: the communications revolution has changed the way we
entertain ourselves, yet another example of its reach.
Unfortunately, we are only part of the way there and it is clear
that all is not well. Conditions in the sector have rapidly
deteriorated and an industry once thought to hold so much promise now
appears to have relatively little. The same can be said for many of its
participants, which just a short time ago were thought to have bright
futures, but now are considered to have little to none. These
statements ring true for both carriers and vendors and its effect is
destabilizing for everyone. As an analyst, it is clear that we have now
entered into a period where bankruptcies and layoffs are as much or
more frequently part of the news than new product and service
initiatives. This will likely be followed by a period of restructuring
which will then give way to a new investment cycle. The latter stages
will be a healthy development but can only be done when the rules of
the game are set. Because that is a prerequisite, it is imperative that
these rules be set soon.
I. THE INDUSTRY'S THREE CHALLENGES
Why are we here? We believe it is the result of the sector having
reached a number of important cross-roads at roughly the same time, all
of which participants are having trouble navigating through. In
essence, today's difficulties are the result of the industry
collectively confronting three important challenges. The first is the
move from narrowband to broadband networking, the largest, riskiest and
most expensive undertaking the industry could ever attempt to
accomplish and a necessary precursor towards next generation services.
The second is a microcosm of the first, a move from core (or long-haul)
network modernization to access modernization, something that is well
underway, but which has stalled due to over-investment in the core and
lack of follow-through from the access network on which the core so
desperately depends. The third and most important issue represents a
shift from an industry business model historically driven by voice
revenues and profits to one that will be more data and voice and data
driven.
While all are obviously secular issues, current economic conditions
are making a bad situation worse. As such, almost all stocks associated
with communications and technology have either been in a freefall or
are sputtering around with little direction. This is what happens when
visibility into future revenue and profit growth is near zero.
Moreover, telecommunications is a capital intensive business and
because few service providers appear to be attracting capital, moving
forward is problematic. Yet the capital issue is not the problem, but a
symptom of it. In essence, the market no longer wants to own the arms
suppliers nor those who make use of their technology.
In such conditions, the sectors' participants as well as those with
a stake in things (basically, all of us) are largely in search of a
catalyst. Rate cuts do not seem to have helped and neither has the
prospect of a tax cut. In our belief, investors have made the correct
conclusion, for the industry's problems are as much about regulation
and new service identification and how these issues affect the all-
important rate of return equation as they are about anything else. In
other words, the problems are secular and need, for starters, secular
attention. Without it, the communications malaise that has quickly
turned into technology malaise will not be a short-term problem.
Thankfully, it does not have to be this way.
To put it simply, the communications industry is rapidly coming to
grips with the fact that its workhorse (voice) is getting old. Voice
revenue growth, wireless subscriber growth, and many other voice
metrics are indicative of slower growth. This is not a good thing:
voice services constitute well over 80% of industry revenues and thus
an even higher percentage of its profits. Moreover, voice services are
no longer thought to be price elastic (i.e. lower prices do not
stimulate more usage), voice has more, not less profitable substitutes
than ever before (i.e. short messaging and e-mail) and in the end, it
primary method of pricing (distance) is thought to be going away.
Early forays into the proposed answer (advanced data services) have
not been encouraging. Simple data transport (Internet access) and flat
rate pricing have instead proven to be a lethal combination to the
industry's bottom line. The most popular data service, dial-up Internet
access, is something we prefer to categorize as communications' third
rail, not its savior, yet it was the last great growth driver for
technology markets in general. While a form of data access, it is
preclusive to broadband services development because it is not fast
enough to deliver the kind of services that could provide an answer to
the maturity of voice revenues and the recent demise of most Internet
mass market applications. In fact, it is these services that will be
required to pay for it in the first place.
Think of it this way. The networks that connect customers to the
public switched telephone network (PSTN) and the Internet itself were
designed to support a product catalog consisting of voice services. The
same can be said for wireless. To extend this catalog, we thus have to
rebuild the network. We have done so in part, but the parts in which
this have been done are largely where it was easiest and least
expensive. The big build is ahead of us. As our friend Tom Nolle of
CIMI Corporation recently noted, ``while there is no consensus on what
the future revenue engine of the market will be, there is general
agreement that whatever it is, it will require broadband customer
connections. Thus, the highest priority in networking is to modernize
the access network to support broadband.''
II. THE WRONG ORDER
It does not help that, in running in the direction of network
modernization, we have gone about the task in the wrong order. We
started the modernization process in the core of the network and are
now only beginning to think about how it might happen at the edge
(access). Simply put, we have modernized our highways but not our local
roads, making it difficult to get on, go fast and go to the places we
might want to go. Access is the platform on which broadband services
have to ride and today it is the bottleneck. Without change here, we
will not get much change anywhere.
There are a number of reasons for this reverse order, although by
now it is something more than just coincidence that capital was largely
directed to the part of the network deregulated first (long-haul
transport). Deregulation spurred investment, as it usually does, yet
the investment was made based on one fatal assumption: that access
modernization and ultimately the new services revolution would follow.
When we had the Bell System, that would have been a natural conclusion
to make for we would have regulated modernization in. Under the current
framework, this has not occurred and now the core has a problem. Why?
Because access markets are governed by a regulatory scheme that has
served to dis-incentivize those who own and control it.
The reason for this is simple. Our networks are a network of
networks and the services equation means that whatever service is
offered is done so at the lowest common denominator of the network.
Today, that is access usually at dial-up modem speeds. Even the
Internet itself is a best efforts network and thus cannot generally
deliver any kind of quality of service, yet another necessity for the
introduction of a variety of advanced services and in particular,
video. Without access modernization, the core is helpless to get out of
its current predicament (less spending will help), and core optics and
transport cannot recover. The idea here being that traffic is more
easily created from broadband customers than from dial-up customers.
With it, things are only a little less bleak in the core, for access
modernization will be a time consuming process under the best
circumstances. Breaking up the RBOCs or what is sometimes called
``structural separation,'' in our belief, would be worse, not better,
at least from a timing perspective. This would take a long time and
would delay spending and thus modernization and would also facilitate a
delay in the restructuring of the industry. At least from a technical
and global competitiveness basis, we need to take action that is more
time sensitive.
End to end broadband networking is a place that only the local
exchange carriers (LECs), particularly the Regional Bell Operating
Companies (RBOCs), the cable television multiple systems operators
(MSOs) and wireless service providers can take us to. It is a place
that will require an extraordinary amount of investment made on riskier
presumptions than any of these service providers are used to. The first
go round was about voice, which was more or less a known commodity.
Networks could be ratcheted up to deal with the volume. It was more
incremental anyway you look at the services equation. Modernizing
access is much more complex and costly: we would estimate that
modernizing our wireline access infrastructure will likely cost over
$200 billion from start to finish. Moreover, it will be done without a
firm grasp of what services will be demanded and at what price they
will be purchased.
III. PROBLEMS AND SOLUTIONS
The question for the industry is how to make that happen. If the
past is any lesson, the answer is to incentivize those that can
initiate change. In particular, we need regulation that will reward
risk taking, e.g. one that gives those who do the risk-taking the
incentive to garner its rewards. The three groups mentioned above are
the only ones that can realistically be said to have such an
opportunity and it is important that a reasonable profit picture can
develop.
Yet, today, two of the three major access segments are required to
share access to their networks (in different ways), which means they
currently have little incentive to spend because some of the potential
benefits will go to others. In essence, they know that their own
capital investment cannot be optimized when the benefits of investment
potentially will flow to competitors while the risks are solely theirs.
And as we noted earlier, we just have happened to reach a point in the
industry's cycle where the investment to be made is a little bit more
risky than usual. This is mainly because we are talking about designing
a new network for services of a different type than today's network was
designed for.
This is true for, as we noted, the telecommunications industry is
at a services cross-roads. Voice revenues will continue to decline
under technological and competitive pressure, destabilizing the major
service providers that rely on it as a source of cash flow. To offset
this loss, we need non-voice public services. Yet, as we have noted,
such services will require broadband access. All things narrowband have
largely been attempted. There is no way around this reality. Think of
it as a pre-build.
The Telecom Act of 1996, by accident or design, had the result of
focusing new investment on the access modernization task.
Unfortunately, its rules set up a structure that never lent itself to
the kind of investment that consumer broadband empowerment embodies.
Think of it this way. The end user market can be segmented in three
ways: multi-site businesses, single-site businesses, and residential.
The single site market is usually thought to house either small
businesses or mid-size businesses. The multi-site market can be divided
into principal sites and satellite sites of large businesses. The
multi-site market is where the focus of competitive carriers has been
and the former two are not, for a reason. Big businesses are easier to
target: they are a smaller in number, are located in areas that tend to
have a high concentration, and they tend to have the highest
willingness to pay. Conversely, the single site, small business and
residential markets do not have these metrics, yet are virtually linked
together based on where they are located and how they are serviced. In
large part, it became a game of one or the other and we know what
happened.
In hindsight two things are apparent. First, that the changing
nature of voice and simple data transport services in a competitive
market ended up yielding a much lower return on capital than initially
expected. Second, because of this, massive economies of scale became
paramount. As this was borne out and some would argue was present since
inception, participants were forced to focus on low-risk builds, which
equated to a replication of the services and networks already in place
geared towards those who would pay the most: large businesses. The
mantra was: it's better to offer services that are known quantities
than to offer something new and untried. The result: we now have an
overabundance of capacity in many areas of the network, with the
exception of access, particularly for small to medium size businesses
and residences.
More technically, what is needed are new rules and we are
supportive of those proposed. With them the winners will be two-fold.
End users would be the recipients of the benefits that come from
advanced services offered through a modernized network. Industry
shareholders would benefit through a revitalized technology market that
depends on a revitalized communications network platform and broadband
networks. The idea here: jumpstarting broadband access will jumpstart
technology, from PCs to software to servers to storage. Finally, the US
economy would benefit for we would have a network that is the
competitive equal to one that will be built abroad that in many cases,
can be done more efficiently based on better consumer densities and
more facilitative topologies.
We can get our telecommunications and our technology markets back
if we take the right action on a timely basis. The alternative is a
long-running period of technology malaise. This is a result that
neither the global telecommunications consumer, those employed by the
technology sector and of course, those who have a stake in
technological advancement want to see.
Chairman Tauzin. Mr. Upton. Thank you.
Mr. Cicconi, welcome.
STATEMENT OF JAMES W. CICCONI, GENERAL COUNSEL AND EXECUTIVE
VICE PRESIDENT, AT&T CORPORATION
Mr. Cicconi. Thank you, Mr. Chairman. I want to thank you
and Chairman Tauzin for inviting me here today to share AT&T's
views. We oppose this bill because it places at risk the goal
of the 1996 Telecom Act, bringing competition to local phone
service in America.
Let me make four points. First, this bill represents a
serious threat to local competition at a time when it is
already under severe stress. The 271 process in the 1996 Act
allows the Bells to enter the long distance market for voice
and data, provided they open their local monopolies.
The Bells have been cleared to do so in five States, and
two are pending now. They themselves predict accelerated 271
approvals this year and next. This process provides the data
relief they seek in this bill, but only after they meet the
law's requirements to open their markets.
What the Bells want though is to avoid the actual
requirements for data, which is the bulk of the traffic on
their networks. This bill would grant their wish, but it would
leave little incentive for them to open their monopolies.
Moreover, this bill would go beyond data. It will deprive
competitors of the ability to purchase access to crucial parts
of the monopolies network, access that is essential for
competitors to have any chance to succeed.
Make no mistake. This bill would undercut the most
important provisions of the 1996 Telecom Act, and would
preserve monopoly power over local phone service.
Second. There is no real regulatory barrier to the bill's
deployment of DSL. It is occurring today, and it is occurring
faster than the deployment of any new technology in memory. The
Bells are spending billions to deploy DSL for one reason.
Competition.
DSL is not a new technology. It sat on the Bell shelf for
years. They had no incentive to roll it out until competitors
showed up as a result of the 1996 Act. In fact, they didn't
even face any market opening restrictions before the 1996 Act,
and so there was actually no impediment to their deployment of
this technology.
The first places they deployed it is where competitors were
most active. They are not deploying DSL because they are public
spirited folks, though I am sure that they are. They are
deploying it because competition forced them to do so.
And if a big part of that competition is removed, as this
bill would clearly do, the likelihood is that the Bells will
slow broadband deployment and raise prices. In fact, that has
already happened.
You also heard that this bill will bring broadband to rural
areas. With respect, this is a transparent effort to exploit
digital divide concerns. There is nothing in this bill that
would ensure that. All we get are vague promises that if
monopolies are allowed to keep the CLECs out of their
facilities, they would be more inclined to bring DSL to rural
areas.
By the time, at the same time, as it has been pointed out
here, they are selling off rural exchanges. Which is the better
way to get DSL to rural areas and inner cities? I would bet on
the presence of competitors before I would bet on mere
promises.
Third, the monopolies argue for major changes to the
Telecom Act in the name of regulatory parity. They say cable
operates free of regulation. This is simply untrue. Cable faces
significant regulatory requirements the Bells don't face.
Cables is licensed by over 30,000 local franchising
authorities across the Nation, and we pay them over $2 billion
in franchise fees annually, and often most provide free service
to local governments and schools as a condition. Bells face
nothing similar.
There is also a statutory limit on the number of
subscribers that any cable operator can serve. If the Bells had
faced a similar limit, it is possible that none of their
mergers with each other would have been allowed.
There are other compelling reasons why Congress regulates
these two industries differently. The local telephone companies
have not faced any competition to their core or local exchange
business. Only a tiny percentage of Americans actually have a
choice for local phone service today.
Cable on the other hand faces ubiquitous and fast growing
competition. Nearly everyone in America, including everyone in
this room, has a choice if they want cable's core product,
which is multi-channel video.
The Bells are regulated differently precisely because
Congress concluded correctly that their local markets are still
closed. Finally, this hearing poses a fundamental question.
What is the best way to accelerate the deployment of broadband
or indeed any new technology.
The Bells say relieve them of competitive pressures and
they will roll out new services faster. We say competition is
the better guarantor that new technology will reach all
Americans.
Theirs is a trust me approach, with all the dangers that
entails. The other approach says to trust market forces, and
trust competition, because time and again that has proven the
correct course. The government trusted competition when it
broke up the Bell system in 1984. The result is vibrant
competition and long distance and dramatic drops in prices.
The opposite has happened in local service. In 1996,
Congress again decided to trust competition and it was right.
This bill would undo that decision and would trust monopolies,
and that is why it is wrong.
The hope of competition in local phone services is at a
critical juncture today. CLECs have invested heavily to compete
in reliance on the law that Congress wrote. All of us are
having a tough enough time getting the monopolies to do what
the law requires.
Billions have already been wagered and billions have been
lost. Many CLECs have gone under and many are on the ropes.
Simple fairness argues against Congress changing the rules it
wrote in the middle of the game, and especially now.
If you do, who will ever again invest to bring choices to
consumers in the face of monopoly power. Thank you again for
the chance to present AT&T's views.
[The prepared statement of James W. Cicconi follows.]
PREPARED STATEMENT OF JAMES W. CICCONI, GENERAL COUNSEL AND EXECUTIVE
VICE PRESIDENT, AT&T CORP.
Thank you, Mr. Chairman and Members of the Committee, for inviting
me here today to share AT&T's views on the Internet Freedom and
Broadband Deployment Act of 2001. We believe that the bill places at
risk all of the hard work of this body to bring consumers the benefits
of a competitive marketplace, and the private investment made by new
entrants to bring broadband services to the American people. With the
Bell companies gaining permission to offer long distance services
pursuant to Section 271 of the Telecommunications Act of 1996, the main
effect of this bill would be to protect the Bell companies from
advanced services competition. There is no justification for doing so.
Five years ago, this Committee crafted landmark legislation that
was intended to end almost a century of monopoly control over the local
telecommunications market and bring the benefits of competition to
consumers. Foremost among the market-opening tools of the 1996 Act was
the obligation imposed on incumbent local exchange carriers (``ILECs'')
under Section 251(c) to share their networks with competitors. In
return for opening their markets to competition, the Bell companies
would be allowed into the long distance market.
In response to the passage of the Act, AT&T and dozens of companies
invested tens of billions of dollars in new telecommunications
facilities and services. These companies took substantial risks in
reliance on the regulatory framework created by the 1996 Act, under
which they should have had a fair chance to compete with the
established incumbents. Unfortunately, the ILECs have resisted and
challenged nearly every attempt to implement the pro-competitive
provisions of the Act. This strategy of resistance, delay, and
litigation has enabled the ILECs 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.
We are deeply concerned that the legislation before you today would
subvert the incentive-based framework of the 1996 Act, further
undermine competition in the provision of telecommunications services,
and slow the deployment of advanced services. Far from promoting
broadband deployment or bridging the ``digital divide,'' this bill
would deprive competitors of the ability to purchase access to the
incumbents' network in order to provide competitive advanced services
and gain a foothold in the marketplace. Faced with even less
competition, the incumbents will slow--and indeed have slowed--the pace
of broadband deployment.
The unbundling requirements in the 1996 Act were imposed because
Congress recognized that the incumbent LECs had bottleneck control of
local telecommunications networks and the economic incentive to use
those networks to deter competition. The ILECs' dominant market
position and their economic incentives to use that position to
undermine competition have not changed in the last five years. By
cementing the dominant position of the incumbent carriers, the bill
will frustrate the prospects for competition in an industry already
destabilized by the recent market downturn. Indeed, the mere
consideration of the measure by this body would lessen the incentive of
the Bell monopolies to comply with the market-opening requirements of
the Act, and could deter Wall Street from providing the needed funding
for carriers struggling to provide consumers with a meaningful
alternative to the incumbent monopolists.
There is simply no need to abort the promise of competition in
exchange for broadband deployment by the incumbents. We have heard the
incumbents complain before that overregulation was deterring them from
rolling out advanced services and facilities. Specifically, in 1998,
they demanded that the FCC give them the right to offer advanced
services largely free of the requirements of Sections 251 and 271 of
the 1996 Act, much as this legislation would shield them from those
requirements. But before they gained the relief they sought,
competitors began to deploy broadband services, and the incumbents
responded with vigorous deployment of their own. Now, with the
competitors seriously weakened and their deployment plans curtailed,
the incumbents are back with the same untenable claims of
overregulation. They are as unjustified now as they were two or three
years ago. Now, as then, the incumbents' threat that they will cancel
deployment unless the rules are changed is nothing more than a ploy to
retain and strengthen their monopoly position.
Indeed, despite the market-opening principles embodied in the 1996
Act, the ILECs' market position is even more entrenched than it was
only a year ago. The Bell companies have added almost five times the
total number of access lines of all the competitive providers combined,
and today they provide more than 90 percent of residential DSL
services. Experience shows that the ILECs have deployed advanced
services under the existing rules when faced with competition, and
absent competition did not deploy them, even when the technology
existed and the market-opening requirements of the 1996 Act had not yet
been enacted. Remove the possibility of DSL competition--as this bill
would--and the prospects for ILEC deployment of advanced services will
be substantially reduced. And where competition to the ILECs has
declined, the price they charge for DSL rises significantly.
There is likewise no case for modifying the existing 271 process.
Five years after enactment of the 1996 Act, the incumbents have been
able to persuade the regulators to grant their requests to enter the
long distance business without any change in the law. In five states--
including two of the largest--the Bell companies now offer
interexchange services. There will certainly be more this year. In the
meantime, several large companies, including several owned by the Bells
or in which they have significant investments, are providing
significant Internet backbone capacity to all regions of the Nation.
The public need not be forced to pay the high cost of enacting the bill
before you.
I will address each of these concerns in turn.
BROAD EXEMPTIONS FROM THE UNBUNDLING AND WHOLESALE RESALE REQUIREMENTS
WILL DETER BROADBAND DEPLOYMENT AND COMPETITION
In what has been described as an attempt to speed the deployment of
high-speed Internet access services to consumers, this bill creates
broad exemptions from the ILECs' unbundling and resale obligations for
high speed data facilities and services. But relieving the ILECs of
these obligations will only delay the deployment of high-speed Internet
access by undermining the ability of competitors to offer DSL and other
advanced services. AT&T has made a substantial commitment to providing
competitive DSL service to residential and business customers. 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. Without access to the ILECs' facilities, as
contemplated by the 1996 Act, AT&T's ability to put these assets to use
for consumers will be substantially diminished. Other competitive DSL
providers would likewise see a substantial dimunition in the value and
use of their facilities and investments if this bill were to become
law. Worst of all, the bill would deny customers the lower prices,
greater innovation, and broader deployment of advanced services that
only competition can deliver.
Specifically, this bill would deny CLECs the access to facilities
they need to compete. Under the FCC's existing rules, ILECs already are
generally not obligated to offer unbundled access to packet switching
and advanced services equipment. But this bill would end access to
those facilities under all circumstances, even when necessary to permit
competition, and would extend this exemption even to facilities that
are used to provide basic telecommunications services, as long as they
are also used for the provision of advanced services. As the ILECs
update their networks and replace more and more of their copper
facilities with fiber optics to deliver high speed services as well as
basic voice, an increasing portion of those networks will become
inaccessible to competitors. Ultimately, there could be little, if
anything, left of the statutory mandate for ILECs to give competitors
access to unbundled network elements--even loops, which are the
critical ``last mile'' that competitors simply cannot do without. This
would effectively close the most significant door to competition under
the Act, by enabling incumbent carriers to avoid the fundamental
obligation to open up their networks to new entrants.
The manner in which ILECs upgrade their networks exacerbates this
problem. The copper portion of the ILECs' networks--the only portion
that seemingly would remain accessible to competitors--more and more
frequently does not run all the way from a subscriber's premises to the
central office. Instead, as the incumbents push fiber further out into
the network, copper loops terminate at so-called ``remote terminals''
that house the equipment for DSL service. Under the bill, however, an
incumbent would not be required to give a competitor access to the
equipment at the remote terminal (even for the provision of basic voice
service) or to the customers' data communications signals at the
central office. It leaves competitors no practical alternative for
providing advanced services using the incumbent's loop facilities. In
effect, in a direct reversal of the requirements of the 1996 Act, the
bill would preserve, exclusively for the incumbent carriers, the
economies of scale, scope and density that they have built on the backs
of the ratepayers as the sanctioned monopoly providers of local
services for nearly a century.
It is clear that this price need not--and should not--be paid in
order to encourage ILEC investment in broadband facilities. After
sitting on DSL technology for ten years, ILECs finally deployed it only
in response to competitive offerings of CLECs and cable companies (and
specifically to AT&T). Verizon, for instance, will spend $18 billion
this year on capital investment.<SUP>1</SUP> SBC is spending more than
$6 billion on its heavily-promoted ``Project Pronto,'' <SUP>2</SUP> and
Qwest will spend $9.5 billion this year to build out its facilities.
<SUP>3</SUP> BellSouth's Duane Ackerman has stated that BellSouth
``invested over $33 billion . . . during the 1990's,'' and that
BellSouth expects ``total DSL revenue of approximately $225 million
this year and $500 million in 2002.'' <SUP>4</SUP> Further, Mr.
Ackerman acknowledged that the regulatory challenges BellSouth is
facing ``are unlikely to slow down the momentum of the marketplace.''
<SUP>5</SUP> Contrary to the incumbents' complaints, the facts
demonstrate that application of the 1996 Act's unbundling requirements
has not been a deterrent to this extraordinary level of investment.
Further, these investments are producing significant revenue for
the ILECs. While SBC threatens to cease deployment of advanced
facilities in Illinois after a state regulatory decision allowing
competitors access to SBC's fiber optic facilities, it simultaneously
boasts 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.'' <SUP>6</SUP> Beyond those
savings, of course, SBC and the other ILECs 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.
The losers in SBC's game of chicken with the Illinois regulators
are consumers. As the Illinois Commerce Commissioner, Terry Harvill,
aptly observed in his letter last month 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.''
Nor is there any assurance that the incumbents would use the
regulatory relief in the bill to deploy broadband facilities any faster
or to historically underserved areas like rural communities or inner
cities. Their arguments that this bill will give them the incentive to
bring high-speed access to rural areas ring hollow when you consider
the fact that they are selling off many of their rural exchanges, and
there is little evidence that the ILECs have used the last five years
to extend broadband to unserved communities. And without the
competitive spur of new entrants, the incumbents will slow the pace of
deployment and raise prices for advanced services. 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 approximately 25
percent and Earthlink followed suit.
The impact of this bill on competition would be particularly severe
in light of current market conditions. Competitive LECs are suffering
heavily because of the difficulties they have encountered entering
local markets and the economic downturn. Over the past year, the CLEC
industry has virtually collapsed. Numerous competitors, including
Winstar, e.spire, Vectris, Jato, Prism, NETtel 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 last month, leading numerous companies
to withdraw their IPO plans. <SUP>7</SUP>
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 have resolved to focus on
a few core markets. Each of these decisions has been accompanied by
hundreds of eliminated jobs. CLECs dismissed over 6000 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.
Mr. Chairman, as the ``father of program access,'' you are well
aware that new entrants need access to the assets of incumbents in
order to break into new markets. You took the lead in ensuring that new
entrants to the video market would have access to the cable programming
they needed to compete with incumbent cable operators. New entrants to
the local exchange market need access to the facilities of the
incumbent LECs for the same reasons. Depriving them of this access will
deprive the public of the competitive telecommunications alternatives
envisioned by you and the other authors of the 1996 Act.
INTERLATA DATA RELIEF IS NOT NECESSARY FOR THE DEPLOYMENT OF BROADBAND
FACILITIES AND SERVICES
The second component of the bill, interLATA data relief, also is
not necessary to ensure adequate investment in broadband backbone
facilities. There are ample backbone facilities throughout the United
States from a wide variety of companies, including three--Qwest,
Genuity, and Williams--that are affiliated with Bell companies. Other
providers, such as Level 3, 360Networks, Global Crossing, and XO
Communications, are currently adding fiber and deploying new
transmission technologies to expand the capacity of existing networks.
Qwest has deployed an 18,500 mile fiber network connecting 150 cities
in the United States.<SUP>8</SUP> Level 3's high-speed network has over
16,000 miles of fiber optic lines and connects 50 U.S.
cities.<SUP>9</SUP> 360Networks recently deployed 21,000 miles of fiber
optic networks.<SUP>10</SUP> In 1999 alone, twelve new companies began
providing national Internet backbone services, for a total of 46
providers in the United States.<SUP>11</SUP> There is no support for
the claim that section 271 is somehow depriving the country of needed
backbone capacity. If anything, there is now a glut of backbone
capacity far exceeding current demand.
In fact, dozens of competitive providers have, in the last four
years, blanketed the Nation with over 1,000 high-speed Internet points
of presence (``POPs''), and today 95 percent of all Americans live
within 50 miles of one of these competitively provided POPs. Each
represents a DS-3 POP capable of providing customers with speeds of 45
Mbps or more. And even this understates the level of access to the
Internet backbone, because local ISPs aggregate onto high-speed private
lines the demand of local communities for transport to the Internet
backbone, regardless of the distance to the Internet POP.
More fundamentally, this legislation is unnecessary because the
BOCs themselves hold the key to obtaining the authority to provide any
long distance service by opening their local markets to competitors.
Earlier this month Verizon was granted permission under Section 271 of
the Act to provide interLATA service in Massachusetts, in addition to
its existing authority to provide interLATA service in New York. The
FCC has also granted SBC approval to provide interLATA service in
Texas, Kansas, and Oklahoma. Although AT&T believes that each of these
Bell company applications fell short of what the Act requires in
particular respects, it is clear that the requirements of Section 271
of the Act are attainable and can be met, if a Bell company takes steps
to open its local markets to competition.
This is a particularly significant point because granting the Bell
companies interLATA data relief would harm the very competition that
Congress is seeking to promote. As this Committee is well aware, in
order to foster local competition, the 1996 Act permits in-region
interLATA authority only after a Bell company 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.
Nor is there any basis to conclude that, in adopting the
Telecommunications Act of 1996, Congress intended to exclude broadband
or advanced data services from the interLATA restriction. Even the most
cursory review of the 1996 Act and its legislative history belies such
an argument. For example, Section 271(g)(2) of the Act, which carves
out incidental interLATA services that may be provided by the BOCs
without FCC approval, specifically includes ``Internet services over
dedicated facilities to or for elementary and secondary schools.''
Other Internet services provided by the Bell companies were therefore
deliberately made subject to the interLATA restrictions.
Too much remains to be done for Congress now to reopen the Act and
remove or lessen the incentives provided by Section 271. The four Bell
companies continue to dominate the local exchange market--CLECs account
for only about 6 to 8 percent of the total local telecommunications
market <SUP>12</SUP> and far less of the market for residential local
telephone service. By permitting Bell companies to enter the high speed
interLATA data market without first opening their local markets, this
bill would substantially reduce the likelihood that this dominance will
end.
In particular, passage of this legislation would harm consumers in
the more than 40 jurisdictions where the Bell companies have not yet
sufficiently opened their local markets to obtain interLATA authority.
SBC recently filed a Section 271 application to provide interLATA
service in Missouri,<SUP>13</SUP> and press reports indicate that other
Section--271 applications may soon be filed.<SUP>14</SUP> But if this
legislation were enacted, the Bell companies would have less of an
incentive to take any steps to open their local markets in these states
to competition. Companies that lack the Section 271 incentives of the
RBOCs have been far slower to comply with the market-opening provisions
of the 1996 Act. For example, as the former CEO of Ameritech noted
shortly after the Act's passage, GTE (then an independent LEC) has ``no
incentive'' to cooperate to open its markets because it is not subject
to Section 271.<SUP>15</SUP>
Congress understood that if the Bell companies could provide long
distance service before there were sufficient local alternatives, they
would have the incentive and the ability to use their local networks to
favor their long distance affiliate and discriminate against competing
long distance providers that needed access to the Bells' local networks
to reach consumers. Nothing has changed in the past five years that
would alter that conclusion.
The bill's attempt to ``limit'' interLATA relief to data
transmissions would, moreover, be unavailing. With the growth of
services like IP telephony, there is no longer a clear or readily
identifiable distinction between ``voice'' and ``data'' transmissions.
SBC, for example, has indicated an intent to move to packetized voice
transmissions, which would essentially eliminate any distinction
between the two services and allow SBC to characterize all
transmissions as ``data'' transmissions. From a practical standpoint,
even if the distinction remained clear, there is no effective way to
determine whether the BOCs are only transmitting data services over
their interLATA facilities. The ``data exception'' in the bill would
essentially hand ILECs the tool they need to shut CLECs out from their
networks completely, and would quickly and surely swallow the policies
and rule embodied by Section 271.
Perhaps most telling is the fact that, if there is a problem here,
it can be addressed far more narrowly than by legislation that rejects
the incentive-based framework of the 1996 Act. Indeed, the FCC has
itself established an expedited process under which it will approve
targeted LATA boundary modifications if a Bell company can demonstrate
that such a modification is necessary for the deployment of ``advanced
services.'' It is notable that the FCC has not received any requests
for LATA modifications under this process.
CONCLUSION
With all due deference to you, Mr. Chairman and the other co-
sponsors of this bill, there is no need for this legislation. Under the
spur of competition--indeed, only under the spur of competition--the
Bell companies have invested in broadband facilities and services.
Moreover, because the Bell companies continue to dominate the local
exchange market, this legislation would harm consumers and set back the
cause of competition by undermining the very incentives and policies
that Congress intended to foster local exchange competition.
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. Rather than eliminate the most
important incentive for the Bell companies to open their local markets,
Congress should consider ways to make the process that it established
in the 1996 Act more--and not less--effective.
Thank you again for the chance to present our views.
Footnotes
<SUP>1</SUP> Id.
<SUP>2</SUP> SBC Investor Briefing, SBC Announces Sweeping
Broadband Initiative, at 2 (Oct. 18, 1999).
<SUP>3</SUP> ``Running on Empty; Industry Trend or Event,''
Communications Week International (Mar. 5, 2001).
<SUP>4</SUP> Duane Ackerman, Talk Notes, Salomon Smith Barney
Conference (Jan. 9, 2001) at 7, 15.
<SUP>5</SUP> Id. at 11.
<SUP>6</SUP> Id. at 2.
<SUP>7</SUP> Telecom Meltdown, Business Week (April 23, 2001).
<SUP>8</SUP> Qwest News Release, Qwest Communications Completes
18,500 Mile Nationwide Network and Shifts Construction to 25 Local
Fiber Networks, Sept. 13, 1999.
<SUP>9</SUP> ``Teligent to Buy Network Services from Level 3
Communications,'' CNETNews.com (May 9, 2000).
<SUP>10</SUP> ``360networks Announces Record Fourth Quarter and
2000 Revenues,'' PR Newswire (Mar. 1, 2001).
<SUP>11</SUP> Boardwatch Magazine's Directory of Internet Service
Providers (11th ed., 1999).
<SUP>12</SUP> C.E. Unterberg, Towbin, Broadband Communications
Providers, June 14, 2000, p. 5.
<SUP>13</SUP> ``SW Bell Seeks To Offer InterLATA Services In
Missouri, Says It Followed Texas Model,'' TR Daily (April 9, 2001).
<SUP>14</SUP> See ``Qwest Takes a Shortcut to Re-Enter Long
Distance,'' Hive4.com (April 15, 2001) (reporting that Qwest plans to
file 271 applications for all 14 states in its region in late 2001).
<SUP>15</SUP> Mike Mills, ``Holding the Line on Phone Rivalry; GTE
Keeps Potential Competitors, Regulators Price Guidelines at Bay,''
Washington Post, Oct. 23, 1996, at C12.
Mr. Upton. Thank you.
Mr. Gregori.
STATEMENT OF JOSEPH GREGORI, CEO, INFOHIGHWAY COMMUNICATIONS
CORPORATION
Mr. Gregori. Good morning, if it is still appropriate. My
name is Joseph Gregori, and I am the CEO of InfoHighway
Communications Corporation. I would like to thank the chairman
and other members of the committee for allowing me the
opportunity to speak with you this morning.
First, I would like to just spend a moment or two to tell
you about InfoHighway, and what we are doing, and then share
with you our view of this bill. InfoHighway is an integrated
communications provider serving the needs of small to medium-
sized businesses, primarily in the northeast where we have just
opened up several new offices in cities, and in Texas.
We provide a full range of communication services,
including bundled voice, high speed data through DSL, and other
Internet offerings. We provide these services through a
combination of our own network facilities, resale and UNIP.
That's how we are reaching our customers.
We are utilizing DSL technology because we think it is the
right choice, and deploying such through a co-location strategy
that includes both deployment in the RBOC central offices, as
well as directly in buildings that are not currently being
served and may be out of reach of DSL services.
We have chosen DSL and are building our own network to
further position ourselves in the future to deploy new
technologies, voice-over DSL and voice-over IP. We see the
convergence coming, and we are not ready yet to endeavor down
that path, but we are positioning ourselves that way.
We have deployed our equipment, primarily Cisco and Access
Link communication devices, and DSLAMs in approximately 100
buildings in 10 central offices, the majority of which in the
last 6 months, since our recent funding in September 2000.
As a service provider, we differentiate our service by
focusing on the needs of the customer, which are primarily
small to medium sized businesses. These customers typically
don't have data or communications staffs, or the in-house
expertise necessary, but rather look to service providers like
ourselves, who offer communication solutions to their needs
with friendly, responsive, customer service.
Whether it is our high speed Internet access products, our
customized voice calling plans, or total bundled communication
services, we are delivering new creative valuated solutions to
this market segment.
With respect to this bill, I have several views. First, if
passed, I believe that it will result in less incentive for the
RBOCs to continue to open their local networks and comply with
the 14 point checklist requirements of the 1996 Act.
The data services segment is a huge slice of the interLATA
traffic, and granting relief as proposed by this bill would be
a major concession and relieve the RBOCs of a significant
statutory requirement.
The effect of such to me is very clear; less competition
and less choice, especially for the small to medium-sized
business segment. Today they are undeserved, and if this bill
is passed, they will likely have fewer choices.
The checklist works. In several States, 271 approval has
been granted. Why would we consider changing that now. Second,
I believe the RBOCs are frustrated and will continue to
undermine competition at every juncture.
Providing them with access to advanced data services now
across LATA boundaries will reinforce such. Our experience is
recently demonstrated to us that these practices will continue.
One RBOC has recently proposed to raise wholesale rates to
competitors that access their network, while also withdrawing
access to advanced data services to companies like ours.
We had access to advanced data services very briefly, and
we made a significant investment in the product rollout, and
then it was just as quickly withdrawn from us. And last the
bill as drafted I believe will be interpreted very negatively
by the capital markets.
Wall Street and venture capitalists will perceive this as
further support for the RBOCs and rightly so, and to the
detriment of competition. An already tight capital market will
further constrict. Every competitor will be impacted as
additional capital will become scarce.
In closure, although I believe in the intent and the spirit
of the bill, the outcome, if passed, will not be the expected
one. Competition will suffer. If this bill is passed, the RBOCs
will have less incentive to comply with the 14 point checklist,
and competition will not be served in the small to medium-sized
business segments, and it will be perceived negatively by the
capital markets. Thank you.
[The prepared statement of Joseph Gregori follows.]
PREPARED STATEMENT OF JOSEPH GREGORI, CHIEF EXECUTIVE OFFICER,
INFOHIGHWAY COMMUNICATIONS CORPORATION
Mr. Chairman and Committee Members, my name is Joseph Gregori and I
am chief executive officer of InfoHighway Communications Corporation.
InfoHighway is also a member of the Association of Communications
Enterprises, better known as ASCENT, which represents entrepreneurial
communications firms. I appreciate the opportunity to offer my
comments, on behalf of my company as well as ASCENT, on the Internet
Freedom and Broadband Deployment Act of 2001.
InfoHighway Communications Corporation is a leading Integrated
Communications Provider serving the small to medium-sized business
market in New York, New Jersey, Pennsylvania, Massachusetts, Maryland,
Washington, D.C., and Texas. The company offers a fully bundled package
of services, including voice, data, and Internet offerings. We provide
these services--appropriately enough considering the subject for
today's hearing--through a combination of the three entry strategies
established by the 1996 Telecommunications Act: our own facilities,
resale and unbundled network elements. Additionally, InfoHighway is
building an advanced data network, deploying DSL technology through
both a building-based and central office collocation strategy. To date,
we have deployed DSL technology in approximately 100 buildings and have
collocated in 10 ILEC central offices.
InfoHighway, which through its subsidiaries has been operating for
over five years, has over 150 employees serving customers in 11
markets. In September of 2000 we received a $150 million equity
commitment, of which $45 million was initially invested in our first
stage of growth and network deployment. Our Network plan calls for us
to provide DSL in conjunction with the UNE-Platform <SUP>1</SUP> in its
initial stages, and then converging services utilizing Voice-over-DSL
and Voice-over-IP as these technologies mature and are commercially
accepted.
---------------------------------------------------------------------------
\1\ The term ``UNE-Platform'' refers to all unbundled network
elements being combined and provisioned as a single entity.
---------------------------------------------------------------------------
InfoHighway serves over 6,000 customers with more than 20,000
access lines. We are adding over 2,000 new access lines per month. Our
target market is small to medium-size businesses, a vastly under served
audience that, in the past, has not had access to a broad range of
services and service providers. Indeed, an important reason that
customers do business with us is that we address their specific needs
through innovative products and responsive service. Whether it's our
high-speed DSL services, local and long distance voice offerings,
custom features such as enhanced voice mail that can be accessed from a
PC, or conference calling services, our products and services are
designed to help small and mid-size firms.
I applaud the efforts made by this panel to ensure that all
Americans are given access to the current benefits and future potential
of the Internet. Certainly, InfoHighway and other members of the
competitive community want broadband services deployed as quickly as is
possible. You could almost say that the success of my company depends
on it. It is critical to note, in fact, that InfoHighway and other such
entrepreneurial firms have been on the forefront of advancing
technological change at a rate never before seen. Collectively we have
raised billions of dollars in capital to invest in the necessary
infrastructure for these new and exciting services. And, on a daily
basis, are offering these services to thousands of new customers. This
investment in and deployment of advanced services by InfoHighway and
other competitive carriers simply would not have happened without
passage of the 1996 Telecommunications Act. Unfortunately, these
significant advances are often overshadowed by the constant criticism
leveled at the Act by the Regional Bell Operating Companies and their
allies.
While I understand the intent behind the Internet Freedom and
Broadband Deployment Act of 2001, I do not believe it would promote
either Internet freedom or broadband deployment. Indeed, the only
beneficiaries of the legislation's ``freedom'' would be the remaining
Regional Bell Operating Companies, because they would be freed of their
statutory obligation, set forth in the 1996 Act, of opening their local
markets to competition. Conversely, the legislation provides anything
but ``freedom'' for InfoHighway and other competitive service
providers, as well as consumers. In fact, the bill would deny us the
freedom to compete for consumers, as promised by the 1996 Act, and
consumers the freedom of choice in service providers.
The legislation, if enacted, would do tremendous harm to
InfoHighway and our customers. It would seriously impair the ability of
our company to effectively execute its business plan, secure additional
funding and deliver new services to end users. By giving the RBOCs the
ability to transmit data on an interLata basis, the bill would
substantially reduce the incentive for the RBOC's to open their
networks to competitors, such as InfoHighway, by complying with the
process set forth in Section 271 of the 1996 Act. The result would be
less competition, which is the exact opposite intent of the 1996 Act.
Consumers, especially small to medium-sized businesses would yet again
be denied the very benefits anticipated by the opening of local markets
to new entrants, including technological innovation and creative
service offerings.
If InfoHighway's experience is an accurate reflection of what is
occurring throughout the industry, and I believe it is, the RBOCs have
frustrated and will continue to undermine competition at every
opportunity. Recently, for example, one particular RBOC proposed to
reduce by nearly half the wholesale margins for local service in
Massachusetts and withdrew advanced data services to companies such as
ours after we successfully launched the product in New York. Passage of
the legislation before us today would serve only to reinforce this
anti-competitive behavior.
Allowing the RBOC's to transmit advanced data services across Lata
boundaries also would further tighten the capital markets for
entrepreneurial companies like InfoHighway. The capital markets are
demanding performance measurements from the new service providers,
which is a good, sensible requirement. Until the local markets are
completely opened, however, giving the RBOC's interLata data authority
would be viewed as support for the incumbents, not for competitors. The
legislation, in short, would greatly hinder the ability of competitive
service providers to secure much need funding, both today and in the
future.
Eliminating the RBOCs unbundling and resale obligations with
respect to advanced services, such as DSL services, would be equally as
harmful to InfoHighway and other competitive carriers. We believe, as
does the U.S. Court of Appeals <SUP>2</SUP>, that there is no
distinction between these services and standard voice services. The
RBOC's must provide access to these services, through unbundling and
resale, as they do their other service offerings. Data, not voice,
represents the future of communications. Denying competitors access to
such services would set in motion their future obsolescence while, at
the same time, handing over even greater monopoly power to the RBOCs.
---------------------------------------------------------------------------
\2\ Association of Communications Enterprises v. FCC, 235 F.3d 662
(D.C. Circuit January 9, 2001).
---------------------------------------------------------------------------
The fact is Mr. Chairman the legislation before us today would do
tremendous harm to competitive carriers while giving the RBOCs relief
which they simply do not need. First, in the 271 process, the statutory
scheme already exists that would effectively provide the RBOCs with the
relief proposed by the new legislation. Verizon, for example, can today
offer interLata data services in New York, my home state, because their
271 application, in accordance with the 1996 Act, was approved by the
FCC. Second, new emerging competitive service providers already are
deploying broadband services and, I submit, would be deploying them
substantially faster if the RBOCs were convinced that no exemptions
from the 271 process would be forthcoming. Finally, the RBOCs
themselves are deploying broadband high speed Internet access to their
customers. And they are doing so not because they have been freed from
their ``regulatory shackles,'' but because competition is forcing them
to.
Even the most cursory analysis of the facts will leads to the
conclusion that any new legislation concerning broadband deployment is
unnecessary. What is needed is time and patience. The plain fact is the
1996 Act states in unambiguous terms that compliance with the 14-point
checklist contained in section 271 will result in the relief from
interLATA restrictions the RBOCs seek. This essential quid pro quo
process can and will work, and it would be completely counterproductive
to override the process in place by enacting the legislation before us
today.
I urge the members of this Committee to uphold the 1996
Telecommunications Act and to ``stay the course'' on behalf of
competition and American consumers. By allowing the 1996 Act to
continue to deliver the promise of competition, enterprising
communications providers like InfoHighway will continue bringing high
speed Internet access and choice in service providers to consumers
across the country.
This concludes my prepared statement. Thank you again for the
opportunity to testify today. I will be happy to answer any questions.
Mr. Upton. Mr. Henry.
STATEMENT OF JAMES H. HENRY, MANAGING GENERAL PARTNER,
GREENFIELD HILL CAPITAL, LLP
Mr. Henry. Good afternoon. I would like to thank the
chairman and the members of the committee for inviting me to
testify at today's hearing. Just by way of introduction, I
manage a company called Greenfield Hill Capital, which is a
telecommunications Investment Fund.
Prior to founding Greenfield Hill Capital recently, I acted
as a telecommunications research analyst on Wall Street for
about 7 years, most recently at Bear Stearns, where I was
responsible for following the competitive local exchange
carriers among other competitive and resurgent business models
across the telecom, and data services space.
My comments today or my testimony today will provide a Wall
Street perspective on local competition and what I perceive as
potentially adverse implications on this legislation on local
competition and broadband deployment.
First, let me just state that I believe that local
competition is in the public interest insofar as it accelerates
the deployment of advanced broadband networks, technology, and
services to both businesses and consumers across the country.
Second, that it drives reduction in the prices of local
telecom services, and, three, it creates new jobs and demand
for technologically sophisticated networks. So I believe that
local competition is in the public interest on that basis.
Competition from a Wall Street perspective has historically
been viewed as a very positive opportunity based on large
extent on the track record of the long distance industry, the
value, wealth, and creation that occurred there.
The size of the local market opportunity, its
profitability, and relatively stable growth initially attracted
a lot of investors and a lot of capital to the space. I think
the evidence is quite clear that in the past year investor
sentiment has turned quite to the contrary as a result of a
number of factors that include the legislative and regulatory
uncertainty that overhangs the industry today.
My second point is that the CLECs are the principal agents
of local competition, and broadband deployment in the local
telecom market. I would point out that the CLECs, including the
CLECs subsidiaries in companies like AT&T and World.com have
installed a total of 12.2 million local telephone lines
competitively since the passage of the Telecom Act of 1996.
Those lines represent about $7.5 billion of annual
recurring revenue which has been generated by these competitive
companies. By contrast, I would note that the incumbent local
exchange carries, principally SBC and Verizon, have done very
little outside of their respective home territories on the
competitive front, and in fact both companies have announced
recently pullbacks to their out of region initiatives, despite
the commitments made under the merger agreements for Ameritech
and GTE.
I would also point out that the ILECs have pulled back to
some extent their in-region broadband initiatives, particularly
as it relates to DSL, and in fact you have seen them raise
prices just as competition has dropped off and the other
competitive players have died.
The third point is that access to capital is the lifeblood
of telecom in particular, and early stage companies like the
CLECs in particular, and therefore access to capital is the
lifeblood of competition in the telecommunications industry,
particularly local.
As a result of relatively free flowing access to capital
from 1996 through 1999, CLECs deployed approximately $55
billion of capital to build alternative local networks,
broadband networks, and unfortunately as the capital markets
have collapsed beneath the weight of great uncertainty, and
concerns surrounding the technology in the telecom sector, CLEC
capital spending has slowed dramatically.
I would note in fact that CLEC capital spending in 1999 was
$6 billion. It grew dramatically to $10 billion in the year
2000, and is expected to contract to reduce to only $7 billion,
and probably less, in 2001, and likely lower than that beyond.
As far as Wall Street concerns and investor sentiment, it
is my observation as an industry analyst that the investment
community's willingness to fund telecom companies in general,
and CLECs in other early stages of businesses in general, or in
particular, is adversely impacted by legislative and regulatory
uncertainty.
The proposed Act that is in front of the committee is
illustrative of that kind of legislative uncertainty that I
think will cause investors to move to the sidelines and
withhold capital from these companies.
I have had numerous conversations over the past number of
quarters with investors--public equity investors, and private
equity investors, and high yield investors--across all the
capital markets, who have said that they view regulatory
uncertainty in telecommunications as a principal reason or one
of the principal reasons that they have moved to the sidelines.
As far as the particulars, I am troubled by this Act
insofar as it could, one, jeopardize competition for broadband
by exempting high speed data and Internet services, as well as
the facilities that provide those services from regulation.
Two, it could significantly reduce the incentives for the
Bells to comply with 271, and to open their local markets to
competition.
And, three, could seriously jeopardize line sharing. So, in
summation, I view that this bill would be negative to
competition in the local market, and it would be negative to
broadband deployment overall, and I would urge the committee to
not approve the bill.
[The prepared statement of James H. Henry follows.]
PREPARED STATEMENT OF JAMES H. HENRY, MANAGING GENERAL PARTNER,
GREENFIELD HILL CAPITAL LLP
INTRODUCTION
Mr. Chairman and Members of the Committee, thank you very much for
inviting me to testify at today's hearing on the proposed Internet
Freedom & Broadband Deployment Act of 2001. My name is James Henry and
I am the Managing General Partner of Greenfield Hill Capital LLP, a
hedge fund focused on the communications sector. Prior to founding
Greenfield Hill Capital I served as a research analyst following the
telecommunications industry for approximately 7 years. Most recently, I
was a Senior Managing Director at Bear, Stearns & Co. Inc. where I was
ranked 2nd in Institutional Investor Magazine's All American Research
Team survey for the CLEC category in 1999 and 2000. My testimony today
will provide a ``Wall Street'' perspective on local competition and the
implications of the proposed legislation.
LOCAL TELECOM COMPETITION
I believe that competition in the local telecommunications industry
is in the public interest insofar as it (1) accelerates the deployment
of advanced networks, technology, and services to businesses and
consumers, (2) drives reduction in the prices of local
telecommunications services, and (3) creates new jobs and employment
opportunities for technologically sophisticated workers. Competition in
the telecommunications market has historically been viewed as a
compelling opportunity by the investment community as a result of the
substantial size, growth and profitability of the market coupled with
regulatory and legislative initiatives to foster the growth and
development of competition in the marketplace. That perception has
clearly changed to the negative as a result of a number of factors that
include legislative and regulatory uncertainty.
CLECS=LOCAL COMPETITION
The CLECs and other non-incumbent telecommunications companies are
the principal drivers of competition in the local market. The CLECs,
including the CLEC subsidiaries of AT&T and WorldCom, have installed a
total of approximately 12.2 million local access lines and achieved an
annualized local revenue run rate of approximately $7.5 billion since
the passage of the Telecommunications Act of 1996. By contrast, the
ILECs, principally SBC Communications and Verizon, have done very
little outside their respective regions on the competitive front. In
fact, both companies announced significant pullbacks of their out-of-
region competitive initiatives in the past quarter.
ACCESS TO CAPITAL
Access to capital is the lifeblood of the telecommunications
industry in general and the CLECs in particular, given the high startup
costs and the capital intensity of the businesses. Therefore, I submit
that access to capital is vital to competition in the local telecom
market to the extent that the CLECs offer the only meaningful source of
local competition. As a result of the relatively free-flowing access to
capital enjoyed between 1996 and 1999, the CLECs deployed approximately
$55 billion in capital to build alternative local networks. Regrettably
as the capital markets have collapsed beneath the weight of the broader
market and the significant uncertainty surrounding the sector, CLEC
capital spending has started to slow significantly. For example, CLEC
capital spending grew from $6.0 billion in 1999 to $10.2 billion in
2000, but is expected to contract to $7.0 billion or less in 2001.
WALL STREET CONCERNS
It is my observation as an industry analyst that the investment
community's willingness to fund telecom companies in general and CLECs
in particular is adversely impacted by legislative and regulatory
uncertainty. The proposed Internet Freedom & Broadband Deployment Act
of 2001 is illustrative of the kind of legislative uncertainty that
will cause investors to move to the sidelines and withhold capital from
the emerging local competitors. I have had a number of conversations
with institutional investors, including private equity investors,
public equity investors, and high yield investors, that have cited
regulatory uncertainty as one of the principal reasons for avoiding the
telecommunications sector in general and the CLECs in particular.
THE INTERNET FREEDOM & BROADBAND DEPLOYMENT ACT OF 2001
The proposed legislation has the potential to create the following
issues that would adversely impact the CLECs and therefore the pace of
local competition in the United States. The principal issues that
concern me about the proposed legislation include, but are not limited
to, the potential that it could (1) jeopardize competition for
broadband and voice services by exempting high-speed data and internet
access services and facilities from regulation, (2) significantly
reduce the incentive of the ILECs to open their local markets to
competition in order to qualify for entry into long distance, and (3)
jeopardize line sharing and eliminate access to unbundled loops, sub
loops, and dark fiber on facilities that are used for both voice and
data. Furthermore, I would submit that any legislation that views voice
and data network facilities as separate is not prepared to follow the
telecommunications industry into the inevitable future of unified
packet-switched networks that will carry all traffic. In conclusion, I
urge the committee to not pass the proposed legislation because I
believe it will have an adverse impact on local competition, which
would not be in the public interest.
Mr. Upton. Mr. Hills.
STATEMENT OF GORDON HILLS, EXECUTIVE DIRECTOR, ECONOMIC
OPPORTUNITY PROGRAM OF ELMIRA NEW YORK, ON BEHALF OF THE
NATIONAL ASSOCIATION OF COMMUNITY ACTION AGENCIES
Mr. Hills. Good afternoon. Thank you, Mr. Chairman, for
inviting me here, and giving me the opportunity to testify. My
name is Gordon Hills, and I am a member of Keep America
Connected, and also the executive director of a community
action agency in a rural urban environment in upstate New York.
Also, I am different from some of the members here in that
I am going to be hopefully an end-user of the product that this
bill will provide. So I am speaking on behalf of consumers.
Keep America Connected, formed in February 1997, is a
partnership between consumer organizations, labor, and local
phone companies. This partnership represents older Americans,
people with disabilities, rural and intercity residents, people
of color and low income residents.
Keep America Connected works to achieve affordable access
to modern telecommunication services by all consumers. A major
intent of the organization is to ensure that regulatory changes
guiding the transition to a competitive market also preserve
affordability and accessibility.
We appreciate you conducting this vital hearing because our
service populations will be the beneficiaries of your
legislation. I joined Keep America Connected because I wanted
to find a way to make a difference and empower many of our
communities that are disenfranchised.
I serve on the Keep America Connected Board of Directors,
and on the Technology Committee for the National Association of
Community Action Agencies or NACAA. The goal of Keep America
Connected is to make sure that we all have access to the
wonders of telecommunications and that policymakers remember
that consumers are concerned with both rates and accessibility.
The Community Action network that I work in operates in 96
percent of the Nation's counties supporting a wide range of
programs. Many of those agencies performs services for more
than 34.5 million people living in poverty in the United
States.
And those programs represent a broad range of services. One
of my major responsibilities are to support more than 900
community action agencies and assist them in upgrading their
technological capabilities. This includes equipping low income
clients with technical skills and facilitating high speed
Internet access.
In short, our national network is to Keep America
Connected's commitment toward bringing affordable broadband
services to all Americans. While building up technology in
individual agencies, we are focused on providing cutting edge
training to preschoolers, troubled teens, and the elderly.
With the held of broadband technology, we intend to use
video and audio strictly to augment our education programs.
Broadband access will allow the use of streaming video and
audio in teaching and training modules.
However, with more than 60 percent of community action
agencies located in rural areas, the only hope of high speed
access will be for Congress to allow income in local exchange
carriers to build out networks.
For all the stakeholder groups that were involved in
affordable access to high speed telecommunications brings the
promise of the information age closer to reality for us. Access
to broadband means very different things to different groups,
but the needs and interests of various stakeholders are not
mutually exclusive.
They share common concerns of economic development and
quality of life issues and the wide range of benefits as a
whole is much greater. For small businesses, greater broadband
promotes business development and economic equality. I talk
about this because I am also a member of the Workforce
Development Board.
A greater deployment of broadband will allow smaller
businesses to compete with larger ones. For those living in
rural areas, social applications, which includes telemedicine
and distance learning, help to bridge the difference and
distance of geography.
We strongly support the Internet Freedom and Broadband
Deployment Act of 2001. It is an important step to achieve a
more rapid deployment of broadband technology to all consumers,
and particularly those that right now have very limited access.
With that, my time is up, and I will yield.
[The prepared statement of Gordon Hills follows.]
PREPARED STATEMENT OF GORDON HILLS, EXECUTIVE DIRECTOR OF ECONOMIC
OPPORTUNITY PROGRAM, MEMBER, KEEP AMERICA CONNECTED
Thank you, Mr. Chairman, for allowing me the opportunity to
testify. My name is Gordon Hills and I am a member of Keep America
Connected. Keep America Connected, formed in February, 1997, is a
partnership between consumer organizations, labor, and local phone
companies. This partnership represents older Americans, people with
disabilities, rural and inner city residents, people of color, and low-
income citizens. Keep America Connected works to achieve affordable
access to modern telecommunications services by all consumers. A major
tenet of the organization is to ensure that regulatory changes guiding
the transition to a competitive market also preserve affordability and
accessibility.
We appreciate your conducting this vital hearing because our
serviced populations will be the beneficiaries of your legislation.
I joined Keep America Connected because I wanted to make a
difference and empower many in our community that are disenfranchised.
I serve on the Keep America Connected Board of Directors and on the
Technology Committee for the National Association of Community Action
Agencies or NACCAA.
Keep America Connected was begun in 1997 to provide a new voice for
consumers in the telecommunications arena. Traditionally, organizations
that claim to speak for consumers on these issues seemed to have on one
main concern: low rates.
Naturally, we do not disagree that consumers should pay only just
and reasonable rates. However, we believe that this is not the only
interest that consumers have with respect to telecommunications. It is
equally important that consumers have the option to choose these
services. As the current focus on the digital divide demonstrates,
without this legislation it is likely that some parts of this country
will not see these benefits for some time to come.
The goal of Keep America Connected is to make sure that we all have
access to the wonders of modern telecommunications and that policy
makers remember that consumers have more than one issue, rates, that
they are concerned with. I think that my own experience illustrates the
need for this focus.
The Community Action Agencies with which I work were established
under the Johnson administration to help fight the war on poverty.
These agencies operate in 96% of the nation's counties supporting a
wide range of programs. These agencies perform services for more than
34.5 million people who are living in poverty in the United States.
Programs include referrals, emergency services, education, and family
development, to name a few.
One of my major responsibilities is developing a program that will
support more than 900 community action agencies upgrade their
technology capabilities. This includes equipping low-income clients
with technical skills and facilitating high-speed Internet access. In
short, NACCAA shares Keep America Connected's commitment to bring
affordable broadband services to all Americans.
NACAA's Board of Directors has approved a strategic plan that will
better enable the organization to bring technology to all of its member
organizations. This will be a daunting task. We are confronted with
traditional and non-traditional problems associated with the Digital
Divide.
While building up the technology in the individual agencies, we are
focused on providing cutting edge training to pre-schoolers, troubled
teens, and the elderly. With the help of broadband technology, we
intend to use video and audio streaming to augment our education
programs. Broadband access will allow the use of streaming video and
audio in teaching and training modules. However, with more than 60
percent of CAA's located in rural areas, the only hope of high speed
access will be for Congress to allow Incumbent Local Exchange Carriers
to build out networks.
Finally, the work performed by CAA's generates a vast amount of
data that is shared between organizations. Because we do not have
significant resources, we will need to depend more on high-speed
Internet access as the conduit for data sharing and transfer. Data
relief will allow the incumbent local exchange carriers to provide high
speed access to members of Keep America Connected, thereby allowing our
individual organizations to provide our services in an efficient and
affordable manner.
For all of the stakeholder groups that I've mentioned, affordable
access to high-speed telecommunications--broadband access--brings the
promise of the Information Age closer to reality.
Access to broadband means very different things to different
groups, but the needs and interests of various stakeholders are not
mutually exclusive. They share common concerns of economic development
and quality-of-life issues. The wide range of benefit for the whole is
very great.
For example, for consumers, data relief leads to reduced costs,
greater availability and choice of high-speed Internet service through
increased competition. For small businesses, greater broadband promotes
business development and economic equality. Greater deployment of
broadband will allow smaller businesses to compete with larger ones.
For those living in rural areas, social applications, which includes
telemedicine and distance learning, help to bridge the distance of
geography. For minorities, increased broadband access helps to level
the playing field in the New Economy--this means greater educational
and economic opportunities. For individuals with disabilities broadband
provides an increase in independent living.
It is our belief that the real benefits of competition will not be
delivered until it reaches all classes of consumers. Consumers need
more choices in local and long distance providers, not the ``cherry-
picking'' marketing strategies currently driving competition. America
cannot and should not be divided into a society of the information
haves and have-nots. Predictable, sufficient supports are needed to
make sure the availability of affordable, universal telephone service.
From my work at the community level I can clearly see the promise
that the Internet can bring to consumers. While it can help our centers
to manage information, it can also provide the members of these
communities with the latest online applications in education, medicine,
e-commerce and many other areas. But none of this will be possible
without an acceleration of broadband deployment.
We strongly support the Internet Freedom and Broadband Deployment
Act of 2001. It is an important step to achieve a more rapid deployment
of broadband technology to all consumers. The bill meets the test of a
common sense, pro-consumer approach to do two things:
First, it eliminates unnecessary government restrictions on who can
offer data services, providing additional consumer choice and
benefiting all.
Second, it proposes to eliminate regulations that have discouraged
deployment of advanced services to consumers.
We feel that the Tauzin Dingell bill is an essential element in
eliminating the digital divide and we urge the Congress to enact it
quickly. Those Americans stuck in the digital divide have already lost
too much time.
Chairman Tauzin. Thank you very much, Mr. Hills, and by the
way, I want to commend you for your work with Community Action.
As a former officer in a local action agency, I know the work
that you do, and I thank you for it.
Mr. Hills. Thank you.
Chairman Tauzin. Mr. Mancini is recognized.
STATEMENT OF PAUL K. MANCINI, VICE PRESIDENT AND ASSISTANT
GENERAL COUNSEL, SBC MANAGEMENT SERVICES, INCORPORATED
Mr. Mancini. Thank you for the opportunity to appear and
testify before you this morning. I am Paul Mancini, Vice
President and Assistant General Counsel of SBC Communications.
H.R. 1452 will encourage broadband deployment to consumers
in all areas of the country. It will balance the regulatory
disparity that currently exists between different types of high
speed Internet access providers, and it will help close the
digital divide, and it will encourage competition by providing
more customers with more choices in higher quality services at
competitive prices.
I would like to focus my remarks this morning primarily on
the market for high speed Internet access services and the
situation that we confront in Illinois, because this provides a
compelling real life evidence of why this bill should be
passed.
There are two fundamental competitive principles that we
believe should guide Congress when considering this
legislation. First, competitive markets should be free from
government regulation.
Second, if there is some sound, public policy reason for
regulating a competitive market, all service providers in that
market should be subject to symmetrical regulatory
requirements.
In other words, the same services in the same competitive
markets should be regulated in the same way, regardless of who
is providing the services or what technology is used.
By way of background, SBC's high speed Internet access
services is called digital subscriber service or DSL. We
compete directly against the local cable operator which offers
cable modem service, as well as against wireless and satellite
based high speed Internet access providers.
The cable operators, including AT&T, have in excess of 75
percent market share in this market. Moreover, you have to keep
in mind that all versions of this Internet access are based on
new investment, new facilities, new networks, to provide this
capabilities. They are not based upon the old Legacy voice
network.
I found it very interesting when I was reading AT&T's
written statement yesterday and listening to their opening
remarks. You would think from hearing those that AT&T is a
simple bi-standard or poor little DSL provider that is being
forced out of the high speed Internet market.
Let's be clear about this. AT&T is the Nation's largest
cable monopoly, and they are also the Nation's largest provider
of high speed Internet access service through a closed network
that includes content and is completely unregulated.
And they, along with other cable companies, are now trying
to ask Congress to block competition in that market in which
they are the dominant provider. I would like to talk about just
some facts, and not allegations, and not speculation.
So there are a few undisputed facts that should drive your
consideration of this legislation. Notwithstanding what you
hear from some components, this bill is not about Bell's
company monopolizing the DSL market, because there is no such
thing as a separate DSL market.
Rather, the FCC and every independent analyst and economist
who have looked at this issue have concluded that the market
for high speed Internet access services is a separate,
distinct, and competitive market in which there are four
different providers using different technologies, competing
head to head.
The main providers are cable companies, DSL companies,
wireless and satellite companies, all providing their own
version of open Internet access. Moreover, it is undisputed
there is no bottleneck in this market.
Indeed, each of the four types of providers use their own
facilities and do not rely on the facilities of the other three
providers. As everyone has mentioned, cable modems clearly
dominate the market today, and they serve 3 out of 4 customers.
Finally, it is undisputed that telephone companies are
heavily regulated when they provide DSL, but no similar
regulatory requirements apply to cable modems or wireless, or
satellite providers. Despite the fact that we are the non-
dominant player in this competitive market, we are subject to
persuasive regulation by the FCC, by the States, and now
recently by the Illinois Commission.
For example, when we provide DSL service, we are faced with
the following types of obligations. We have to interconnect
with data competitors. We have to share the broadband spectrum.
We have to connect with ISPs. We have to offer open access.
We have to offer wholesale pricing obligations, and we have
to offer resale, and we have to provide the location, and we
have to operate through a separate structurally separate
subsidiary.
And I would say to Mr. Cicconi that cable companies,
including AT&T, do not have any one of those obligations. Not a
one. If you compare that to a franchise obligation, you can see
the regulatory disparity that exists in this market.
So, in contrast, there is simply no public policy
justification for heavily regulated, the non-dominant player,
DSL, in a competitive market. Moreover, the disparate
regulatory treatment has consequences, and it results in
reduced and distorted decisions, delay deployment, higher
costs, and fewer choices. Now, let me just give you an example
in Illinois.
Chairman Tauzin. The gentleman's time has expired. So you
are going to have to wrap real quick.
Mr. Mancini. In Illinois, as a result of the decisions by
the Illinois Commission which required us to, quote, unbundle
our integrated line cards, we have submitted sworn affidavits
from AlCatel's chief technology officer, that says that one is
technically infeasible.
In addition, it increased our costs over $500 million, and
as a result, we had to suspend deployment of DSL in Illinois.
This is the type of regulatory decision by State agencies which
is going to destroy the potential for DSL to compete against
cable modems in the future.
[The prepared statement of Paul K. Mancini follows.]
PREPARED STATEMENT OF PAUL K. MANCINI, VICE PRESIDENT AND ASSISTANT
GENERAL COUNSEL, SBC COMMUNICATIONS INC.
Thank you for the opportunity to appear and testify before you this
morning. I am Paul K. Mancini, Vice President and Assistant General
Counsel of SBC Communications Inc.
HR ____, commonly known as the Internet Freedom and Broadband
Deployment Act of 2001 will encourage greater broadband investment and
deployment of high-speed Internet access to consumers in all areas of
the country. It will balance the unjustified and anticompetitive
regulatory disparity that currently exists between different broadband
providers, help close the Digital Divide, and encourage competition by
providing customers with more choices and higher quality services at
competitive prices.
I commend Chairman Tauzin and Ranking Member Dingell for their
leadership and for recognizing that the application of rules designed
to regulate the legacy voice network has delayed the availability of
high-speed Internet access for consumers, has delayed the widespread
deployment of broadband services for consumers, and has slowed
competition between competing providers in this market.
There are two fundamental competitive principles that should guide
Congress. First, competitive markets should be free from governmental
regulation of the rates, terms and conditions under which goods and
services are provided to the public. Second, if there is some public
policy reason for regulating a competitive market, all service
providers in that market should be subject to symmetrical regulatory
requirements. In other words, the same services in the same market
should be regulated in the same way, regardless of who is providing the
services or what technology is utilized to deliver those services. Let
consumers decide who to select based on competitive markets, and not on
the result of regulations that pick winners and losers.
Congress need look no further than to the wireless market for
confirmation that these principles will benefit consumers and
competition. In the early 1990s, Congress decided that a competition
model (rather than a regulatory model) should be used for the wireless
market. Hence, neither the FCC nor the states regulated the prices,
terms or conditions in that market and there are no requirements for
wirelesss providers to unbundle their networks or to assist their
competitors entry into the market. As a result, investment in the
wireless market has exploded, prices have fallen dramatically, and
consumers have benefited from the robust competition in that market by
seeing more choices, more innovation and lower prices.
HR ____ is a step in the right direction toward fulfilling these
fundamental principles in the market for high-speed Internet access
services. Any legislation to promote the delivery of these services to
the public should reduce the asymmetric regulation that currently
exists between the cable industry, the telephone industry and other
providers of these services, and bring about more competition and
choices for consumers and to the marketplace. It is only through full
and fair competition that consumers in the market for high-speed
Internet access services can obtain the benefits of quality, choice and
price.
SBC strongly supports HR ____ and encourages this Committee and the
Congress to pass this legislation. This bill is procompetitive and it
will remove costly and unnecessary barriers to entry by lifting
disparate regulation in the competitive high-speed Internet access
market and the competitive high-speed data services market.
In considering HR ____, it should be emphasized that in the market
for high-speed broadband Internet access--all competitors, including
SBC as well as cable, fixed wireless and satellite providers, started
from the same starting block. In the market for high-speed data and
Internet access services, there are certain undisputed facts that
compel adoption of this legislation:
<bullet> First, the market for high-speed Internet access services is a
competitive market in which there are four different types of
providers (using different technologies) competing head-to-
head--cable modems, Digital Subscriber Line or DSL, fixed
wireless and satellite providers.
<bullet> Second, there is no ``bottleneck'' in obtaining access to the
customer--none of the Internet access providers depend on the
facilities or networks of their competitors to reach their end
user customers.
<bullet> Third, all local exchange carriers (LECs) that provide DSL are
behind in the provision of high-speed Internet access
services--cable modems currently dominate this market and serve
three out of four customers who use such services.
<bullet> Fourth, the LECs are heavily regulated when they attempt to
provide competitive Internet access services (while cable and
the other competitors are unregulated) and the LECs (but not
their competitors) are required to assist their competitors in
entering this market.
<bullet> Fifth, SBC and the other Bell companies are at a competitive
disadvantage in that they cannot provide competitive high-speed
Internet access and data services on an interLATA basis, while
their cable, fixed wireless, satellite and other competitors
are free to do so and do not face the same restrictions.
<bullet> Finally, state regulatory commissions have unwisely asserted
jurisdiction over only the DSL providers in the high-speed
Internet access market and, to date, at least one commission
has required the so-called ``unbundling'' of the high-speed
Internet access and data networks of the incumbent local
exchange company (ILEC) (including requiring the mixing and
matching of line cards made by different manufacturers located
in remote terminals). This so-called ``unbundling'' is clearly
contrary to the intent of this legislation, and, it in fact,
would be prohibited if HR ____ is enacted. These types of
requirements apply only to the incumbent local exchange company
and not to any other high-speed Internet access provider--
furthering increasing the regulatory disparity of a competitive
service.
The effects of the disparate regulatory treatment that currently
exist in the high-speed Internet access market include reduced
investment by LECs in this market, the inefficient deployment of new
technologies, higher costs, fewer choices for consumers, and
continuation of the ``digital divide.'' Hence, elimination of the
regulatory disparity between the Bell operating companies (BOCs) and
their competitors in the high-speed Internet access and data services
markets is essential to fulfilling the fundamental principles outlined
above.
In summary, access to high-speed Internet connections is crucial in
today's economy. High-speed connections to the Internet mean faster
downloads and can provide a lifeline to small businesses, schools and
hospitals. Communities that have access to high-speed Internet
connections will prosper and grow in the Information Age. Communities
that don't will find themselves on the wrong side of a growing digital
divide. Consumers with high-speed Internet connections will be able to
get on-line with the speed they need to link with far away friends and
family members, tap the latest medical or educational resources, or
enjoy multimedia entertainment.
However, different rules for competing high-speed Internet
companies are not only bad public policy, they are stifling and
distorting investment and competition and creating anticompetitive
barriers to entry. That slows down choices and new technology for
consumers. Without full and unfettered competition in this market, many
consumers will never have access to high-speed Internet services or
they will only have access to the services provided by the dominant
cable modem provider.
There is no downside in passing HR ____. Consumers benefit from the
growth of competition and the elimination of costly and anticompetitive
barriers to entry in the market for high-speed Internet access
services. Equalizing the regulatory treatment of competitors will
permit my company (as well as other providers in this market) to
compete for customers fairly, resulting in greater choices, lower
prices and more rapid technological innovation. By contrast, the
failure to enact H.R. ____ will freeze or reduce DSL deployment and
investment, and leave the rest of the country with no alternative to
the dominant local cable operation and the other providers in this
market. Some competitors may want to delay the inevitable competition
that will result when all markets are open to competition and to
handicap the Bell companies when competing in the Internet access
market, but such a policy will harm competition and consumers. The same
competitive services should be regulated the same way. One competitor
should not have to incur increased costs and operate at a competitive
disadvantage simply because of the type of technology that it uses.
Such regulatory disparity is bad public policy, it creates barriers to
entry, it distorts investment decisions and the marketplace, and it
restricts choices for consumers.
BACKGROUND
Historically, the only telecommunications pathway or wire to nearly
every home and business in this country was the local copper loop used
to provide voice service. Until recently, the local loop was part of a
circuit-switched network which was capable of transmitting only narrow-
band analog or digital voice, and slow speed switched data services.
The local exchange telephone companies provided these services pursuant
to a legally franchised monopoly, and thus were subject to pervasive
regulation at both the state and federal level. As competition began to
develop in the telecommunications marketplace, the local loop continued
to be viewed as the only way for competitors to deliver voice services
to the customers. In other words, it was considered a ``bottleneck.''
However, approximately 25 years ago, there developed another
telecommunications pathway or second wire to the home. Cable service
began to emerge as an alternative to broadcast television service,
through the use of antennas located at the cable provider's head-end
that received programming from satellites, which was then transmitted
over coaxial cable to homes and businesses. Coaxial cable was different
from the LECs' local copper loops, in that it was capable of
transmitting broadband video and high-speed data services.
Additional telecommunications pathways to homes and businesses
rapidly developed through various wireless technologies, including
digital satellite service, cellular and PCS services, as well as fixed
wireless.
Meanwhile, as competition was developing in the telephone industry,
the Internet began to evolve. When the '96 Act was being debated in
Congress, the scope of the Internet and the provision of high-speed
Internet access to the public was uncertain. Congress sought to address
this new telecommunications phenomena and the promising new advanced
services through passage of Section 706 of the '96 Act. Section 706
established a new national telecommunications policy to ``encourage the
deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans.'' Specifically,
Congress directed the FCC and state commissions to pursue this
objective by ``utilizing price cap regulation, regulatory forbearance,
measures that promote competition in the local telecommunications
market, or other regulatory methods that remove barriers to
infrastructure investment.''
Unfortunately, neither the FCC nor the States have eliminated, or
even reduced, the regulation of ILECs, particularly when they are
trying to compete in the competitive advanced services market.
CABLE MODEM VERSUS DSL SERVICE
With the evolution of the Internet, both the cable and telephone
industries had to develop the technologies necessary to provide their
customers with high-speed Internet access and data services. The cable
industry developed cable modems to be used in conjunction with their
broadband coaxial cable networks. The ILECs were at somewhat of a
competitive disadvantage because their narrow-band local copper loops
were not designed nor were they equipped to provide high-speed service
to consumers or businesses. Hence, we had to develop a new technology--
DSL service, in order to provide digital information at high bandwidths
over copper loops.
While the ILECs were developing DSL service, the cable industry has
been rapidly deploying its cable modem technology. The ILECs are now
playing catch-up and are scrambling to deploy DSL service as a
competitive alternative to cable modem service for residential and
small business customers. But, the cable industry is far ahead of the
ILECs in terms of actually serving customers. At the end of the first
quarter of 2000, there were approximately 2.5 million residential
subscribers to high-speed Internet access services in the United
States. Of these 1.9 million, 77% were cable modem subscribers. Only
21% were DSL subscribers. It obviously makes no economic or public
policy sense, for the FCC and the states to continue to regulate the
nondominant player in this competitive market (DSL), when the dominant
player (cable companies that provide cable modems) serve three out of
four customers in that market and they are completely unregulated.
Thus, the consumer market for the delivery of high-speed broadband
Internet access and data services is a highly competitive market served
by the cable industry, the ILECs, fixed wireless providers and
satellite companies. The FCC has recognized, and it is beyond dispute,
that the high-speed Internet access market is a separate and distinct
market in which cable modem service, DSL service, fixed wireless
service and satellite access service provide the same high-speed
Internet access and offer to the same residential and business
customers the same advanced and high-speed data services.
Most importantly, the ILECs had no ``head-start'' in the deployment
of advanced services technologies. The ILECs possess neither de facto
nor de jure monopoly in the provision of broadband Internet access,
advanced services, or high-speed data services. And, finally, it is
absolutely clear that the LECs' local copper loop is no ``bottleneck''
in the provision of high-speed Internet access and data services to
consumers. None of the four types of providers in this competitive
market rely on or use the facilities or networks of their competitors.
ASYMMETRIC REGULATION
Unfortunately, the rules and regulations that apply to the
provision of advanced services by the cable industry, ILECs, fixed
wireless and satellite companies are entirely different.
The cable industry is essentially unregulated in the provision of
cable modem service. Under Title VI of the Communications Act, the
cable industry (as well as fixed wireless and satellite access
providers) are not required to interconnect with its competitors, nor
unbundle its facilities and make them available to competitors, nor
provide collocation space to its competitors, nor resell its services
to competitors, nor provide advanced services through a separate
subsidiary. Moreover, the cable industry is not currently required to
give its customers a choice of an Internet service provider. This
unparalleled ability of the major cable providers to control both the
means of access to the Internet, combined with its control of the
content that is delivered to consumers provides it with an enormous
competitive advantage in the marketplace. For example, AT&T/TCI/Media
One and AOL/Time Warner control vast holdings in the access and content
market. AT&T/TCI/Media One is the largest cable provider and provides
cable modem service to almost 30% of all cable modem customers. AOL/
Time Warner, directly and through its ownership of RoadRunner provides
cable modem service to approximately 38% of cable modem customers.
Together, AOL/Time Warner and AT&T also own 8 of the top 15 video
programming services, including 4 of the top 5. As a result, it is more
likely that the cable industry and other broadband providers, rather
than ILECs, will continue to hold a dominant position in the provision
of high-speed Internet access and advanced services.
This is in stark contrast to the telephone industry, where the
ILECs remain pervasively regulated today, even when they try to provide
competitive advanced services that do not use or rely on the legacy
voice networks. Under Title II of the Communications Act, the ILECs are
subject to common carrier regulation in their provision of broadband
Internet access, advanced services, and high-speed data services. In
addition, the ILECs are obliged to assist the CLECs in offering
competing DSL services through the interconnection, unbundling, and
collocation requirements of Section 251(a) and (c) of the
Telecommunication Act of 1996. Moreover, SBC's advanced services
affiliates, through which SBC provides Internet access and high-speed
data services, are required to provide interconnection under Section
251(a) and permit resale under Section 251(b).
Unfortunately, under an asymmetric regulatory scheme, the
regulators, not the marketplace, determine the winners or losers. That
significantly affects the growth of the services and the availability
of choice. Accordingly, any legislation addressing high-speed broadband
advanced services should eliminate the regulatory disparity between the
cable companies, telephone companies, fixed wireless providers and
satellite companies when they provide high Internet access services.
This bill goes a long way toward accomplishing this objective by
exempting high-speed data and Internet access services and the
facilities used to provide such services from regulation, and by
eliminating any further unbundling requirements with respect to high-
speed Internet access and data services.
ECONOMIC BENEFITS
The rapid deployment of high-speed services is essential to
expanding and reviving the economy. During the last economic boom, the
information technology sector generated roughly 30% of the total annual
U.S. economic growth and 70% of the total U.S. productivity growth.
However, just as it helped revive the economy during the last boom, the
present downturn in the Internet and high-speed industry has
contributed to a broad downturn in overall growth and investment. The
tightening of capital markets before Internet firms could begin booking
profits caused this chain reaction. In part, these E-commerce and
content providers have failed to create profitable businesses because
slow narrowband connections limit the Internet's potential. Slow
connections inhibit this industry by limiting product information to
static pictures and text. High-speed Internet access, with speeds up to
100 times greater than narrowband, eliminates these impediments.
The broadband market is heavily oriented towards content, and will
include packages of video and data. The key broadband offering is an
integrated package of transport and content, not just transport alone.
The cable industry occupies the strongest position in this market
because it has the facilities and faces NO regulation. Likewise, the
telephone companies today are in the best position to compete with the
cable industry and other broadband providers to bring new services,
lower priced services, and more choices to consumers, but not without
making a substantial investment to build a competing broadband network.
This is exactly what SBC has started.
PROJECT PRONTO
On October 18, 1999, a few days after SBC closed its merger with
Ameritech, we announced one of the most ambitious network enhancement
upgrades in telecommunications history. We called this Project Pronto
to emphasize the speed that customers want to access the Internet and
the need for quick time-to-market to compete with cable modem providers
and others that are providing alternative technologies for high-speed
Internet access. Unlike many programs and services offered by the large
long distance companies and other local competitors, this Project was
intended to serve the mass residential and small business market, not
large business customers. In other words, customers wanted high-speed
access, cable companies already had a head start in this market and we
needed to commit capital and deploy new facilities fast in the market.
The size of the Project is huge, as is its $6 billion price tag. It
calls for constructing 16 thousand miles of new fiber optic cable, 17
thousand ``remote terminals'' and much more equipment. This was an SBC
shareholder driven investment, with no tax incentives or government
loans. Project Pronto involved SBC acquiring and deploying new types of
advanced services equipment that all other potential DSL competitors
could have invested in and deployed on their own.
Pronto started out covering all 13 SBC states. Besides the quality
of life enhancing benefit of bringing high-speed Internet access to the
broader mass market of residential and small business consumers that
make up your constituents, Pronto means more jobs in each state and
contributions to the economy via purchases of equipment from several
vendors for items such as the new fiber facilities and new equipment
used to provide this access.
STATE REGULATORY MINEFIELDS
Managing a project of this scope and complexity is hard enough from
a pure business perspective, but the road to deploy Pronto has also
involved trying to manage our way through a regulatory minefield. The
recent DSL related regulatory requirements imposed in Illinois
illustrate how onerous and technically infeasible requirements can
distort and potentially destroy competition in the high-speed Internet
access market. The regulatory requirements in Illinois are such that
SBC has determined it must suspend Pronto deployment in that state.
This decision was made with great reluctance in that it, in effect,
concedes market share to the dominant provider of high-speed Internet
access, the cable modem providers and the other providers in that
state. However, we made this decision because of our obligations to our
shareholders to make investments where there is an opportunity to earn
a reasonable return on such investments. The end result of this
situation is that, if the Illinois Commerce Commission (``ICC'') does
not reconsider its order, consumers in that state will lose a choice in
the high-speed Internet access market, and all DSL providers within
SBC's ILEC territory in Illinois (including SBC's own affiliate) will
fall even further behind cable modem providers who already serve about
3 out of every 4 residential customers. The bottom line is that
consumers and DSL providers lose and cable increases its lead in this
market.
What is so bad about the Illinois regulatory situation? While the
subject is quite technical in nature, essentially the ICC is applying
rules primarily designed to open the legacy local exchange voice market
to these new DSL-capable facilities and equipment in the high-speed
Internet access market. In our view, the types of state actions ordered
by the Illinois Commission not only are unlawful under the 1996 Act,
but also they apply solely to one provider in the market (DSL), destroy
the incentives of SBC and other LECs to invest in the high-speed
Internet access market, and compliance with those requirements are
technically impossible. Even the manufacturer of the advanced services
equipment in question has testified under oath that they are
technically infeasible and simply will not work. As a result of these
actions, SBC has had to suspend deployment of DSL facilities in
Illinois, to the detriment of consumers and competition in that state.
Specifically, these rules require the Pronto architecture to be
made available in minute piece parts in a ``mix and match'' manner to
allow competitors to install equipment components made by different
manufacturers inside SBC's advanced services equipment. There are
substantial problems with these rules. First there are portions of the
Illinois orders that just don't work. Trying to fit one vendor's
components in another vendor's equipment is like trying to insert a
Sega game cartridge into a Nintendo game system or a Toyota carburetor
into a Ford engine. It won't fit and it won't work.
It is not just SBC that is saying this. So do the manufacturers of
the telecommunications equipment in question. The chief technology
officer of Alcatel has submitted a sworn affidavit to the ICC that the
requirements imposed by the ICC are simply not technically feasible.
The ICC requires the Pronto architecture to do things it is just
technically not capable of doing. All of these new obligations are
unworkable from an economic, technical and operational perspective.
Even if these requirements were technically feasible (which they are
not), they add unnecessary and unjustified complexity and costs. They
undermine the business case for proceeding with Project Pronto in
Illinois. These additional costs--which may exceed more than $500
million for Illinois alone--would price DSL completely out of the
Internet access marketplace. While SBC is not opposed to providing
access to its Pronto high-speed Internet access service to competitors
at forward looking prices and, in fact, offers to do so, it cannot
deploy new DSL facilities under the Illinois regulatory model.
A major concern is that the FCC and other states may decide to
follow the counterproductive policies enacted in Illinois. Onerous
regulations that single out only the non-dominant provider in this
competitive market discourage investment and eliminate the benefits
that facilities based competition brings to consumers. This important
issue calls out for a national direction and policy. We believe that
this bill is essential and to promote investment and competitive choice
to the benefit of American consumers.
INTERLATA RESTRICTIONS
One of the key regulatory disparities in the market for high-speed
data and Internet access services is the restriction from offering
interLATA long distance services. Section 271(c) of the Act prevents
the Bell operating companies (BOCs) and their affiliates from providing
services across LATA boundaries and from offering the Internet backbone
service itself. This restriction is no longer necessary or required
because the market for high-speed data services for business customers
is a fully competitive market and the BOCs are not in a monopoly
position in this market. None of our competitors in this fully
competitive market--cable companies, satellite or wireless providers,
the interexchange carriers, nor the CLECs--are subject to this
restriction.
The interLATA restriction thus places BOCs at a significant
competitive disadvantage, in the provision of a full complement of
competitive high-speed data services. Most medium and large business
customers have offices in multiple locations, states, or even countries
that need to be interconnected for the exchange of high-speed data
communications. Frequently, these business customers also want someone
to manage these high-speed data networks, including for example the ATM
and Frame Relay engines, SONET rings, and interLATA transport. This
requirement places the BOCs at a distinct competitive disadvantage,
because they are unable to be full service providers to these business
customers.
There is no continuing need for the interLATA restrictions for
these services. As the FCC has found, the business market for high-
speed broadband services is separate and distinct from the consumer
market for the same services. <SUP>1</SUP> Virtually all business
customers have access to high-speed broadband service that is typically
provided over T-1 lines, and business customers have many competitive
alternatives for obtaining that high-speed broadband
access.<SUP>2</SUP> Accordingly, there is no ``bottleneck'' in the
``last mile'' to the business customer for such competitive services.
---------------------------------------------------------------------------
\1\ In the Matter of Inquiry Concerning the Deployment of Advanced
Telecommunications Capability to All Americans in a Reasonable and
Timely Fashion, and Possible Steps to Accelerate Such Deployment
Pursuant to Section 706 of the Telecommunications Act of 1996, Report,
CC Docket No. 98-146 at para. 28 (released February 2, 1999).
\2\ Id. at para. 26.
---------------------------------------------------------------------------
Finally, the interLATA restriction (as well as the other disparate
regulatory requirements) artificially inflates the BOCs' costs of
deploying high-speed Internet access and data service technologies, and
renders that deployment less efficient. These costs are reflected in
our costs to our customers, and they preclude our ability to exert
downward pressure on the retail rates in these markets to the detriment
of customers. Further, it means that significant portions of our
nation, particularly in rural areas, cannot receive high-speed access
to the Internet because they are not close enough to a hub that can
connect them to the Internet backbone. With the limited interLATA
relief contained in this bill, the BOCs will be in a position to
connect these communities to the Internet, thus making available to
rural consumers and businesses the same high-speed Internet access and
high-speed data services that are available in urban areas.
CONCLUSION
HR ____ has gained the support of many members of this Committee
and over 70 members of the House. It is a major step in the right
direction to correct the imbalance in regulation and close the
``digital divide.'' We look forward to working with the Committee and
the Congress to achieve these objectives.
Thank you for the opportunity to comment on this very important
legislation which will, if passed, promote competition and benefit all
consumers by providing them with more choices and higher quality
services at lower prices.
Chairman Tauzin. I thank the gentleman.
The Chair recognizes Mr. Clark McLeod.
STATEMENT OF CLARK McLEOD, CHAIRMAN AND CO-CEO, McLEODUSA
Mr. McLeod. Thank you, Chairman Tauzin. I appreciate being
invited to speak to the committee today. I will depart
completely from my written comments, and try to respond to some
of the comments from the group. I would like to start with the
fact that this bill is totally unnecessary.
There is nothing that occurs in this bill that will spur
broadband deployment to rural markets. That's obvious from what
this group has already said. There is really nothing that
prevents the telephone companies from deploying DSL service
today. Nothing.
And for us to go and retool something that took 6 years to
create the Telecom Act and undermine it in this fashion is
very, very disruptive to our industry. No and's, if's, or but's
about it.
This bill actually does damage. It restricts access to the
Bell networks by competitors. It restricts access to a monopoly
supply that is totally destructive to a competitive
environment.
And it takes away any reason for the Bell companies to
comply with the 14 point checklist. The 14 point checklist once
complied with will allow the Bell companies to do everything
everywhere, and we all agreed on it back in 1996.
So let me step back for a moment. I only have a couple of
minutes here, but I have a perspective that maybe is different
than some of the other people here, and that I have been in the
competitive industry now for 21 years, and you can tell by my
gray hair that I have been around for a long time.
I started a company in 1981 that turned out to be the
fourth largest long distance company in the United States. It
was started in 1981 for one reason; the FCC opened up the AT&T
network to competitors to use in March 1981.
MCI had tried to compete with AT&T for 13 years up to that
point, and had gotten 1 percent share. AT&T's market was open
to competitors like ourselves so that we could buy services and
bring in new network to combine with that to provide a
ubiquitous coverage of our market area.
The exact same thing is true today. If we want a
competitive marketplace, if we want broadband services
deployed, the key to that is in the access to the local
network. You know, that local network is made up of both copper
and fiber that the Bell companies have today?
And you know that DSL is just putting a copper link on
steroids? Right? So what we need access to is that copper
network. Now, the Bell companies would say the network is open.
Well, if you call it being open that open, then you are
right. But try to walk through a door that is that wide open.
So I want to be as constructive as I can with the group today,
and talk about what we could do. A couple of things that have
worked recently.
Chairman Powell talked about wanting to be able to impose
fines. A little twist to the fines. They do need to be imposed,
$60 million have been imposed on SBC in Illinois recently, but
it all went to the Illinois Government, not to the competitors
who were hurt by their non-compliance.
In three States--Colorado, Iowa, and Minnesota--Qwest
Communications pays us when they don't meet standards. That
makes sense doesn't it? The people who are damaged.
So, one, I would propose that if anything is done that we
should look to the FCC to enforce the current Act, and award
damages, and award them to the right place. Make the 14 point
checklist mandatory; date certain, complied with throughout the
country; and then everybody is free to do everything.
And finally we can't do anything to restrict access to the
current Bell network. That is what makes a monopoly a monopoly.
They control supply. Competitors have to get access to that
supply. Thank you.
[The prepared statement of Clark McLeod follows.]
PREPARED STATEMENT OF CLARK MCLEOD, CHAIRMAN AND CO-CEO, MCLEODUSA
INCORPORATED
On behalf of McLeodUSA, I would like to thank the Committee for the
opportunity to talk with you today. I would like to accomplish two
goals today: first, summarize our concerns with providing the Mega-
Bells unwarranted additional access to intercity long distance markets;
and second, propose alternatives that will improve nondiscriminatory
and quality access to all intracity networks, thereby accelerating the
benefits of competition to consumers.
I. MCLEODUSA IS EXACTLY WHAT CONGRESS ENVISIONED.
A. Entrepreneurial
In the early 1980s, I was CEO of Teleconnect, a company founded to
compete in the long distance industry. I started basically out of my
garage and began to bring the benefits of competition to my customers.
In 1981, the Federal Communications Commission (FCC) mandated AT&T to
allow competitors complete use of its existing network. As public
policy continued to develop and support competition in that industry,
several competitors, including Teleconnect, began to have success. Over
the course of about 8 years we built Teleconnect into the fourth
largest long distance company in the country employing nearly 7,000
employees. In 1990, MCI purchased the company, then named TelecomUSA.
So you can see that entrepreneurial spirit can produce effective
competition.
In 1992, I organized McLeodUSA, headquartered in Cedar Rapids,
Iowa, and began competing in the local and long distance telephone
markets. We started slowly. When the Telecommunications Act of 1996
(``the '96 Act'') was passed, we were able to take our company public
and really accelerate our competition with the local monopoly Bell
companies.
McLeodUSA's corporate team is recognized as one of the strongest
management groups in the telecom industry: strong because of our
breadth, and strong because of our depth. With the support of policy-
makers, we can continue our competitive activities at a similar pace if
policy makers do not give unwarranted favors to the Mega-Bells that
will delay or foreclose competition.
McLeodUSA Incorporated is a Nasdaq-100 company traded as MCLD. The
Company's Web site is available at www.mcleodusa.com.
B. Serving a Wide Range of Customers
We serve both business and residential customers. In fact we have
more residential customers than business customers. Our goal is to be
the number 1 and most admired company in the markets we serve. We
cannot accomplish that by only serving large business customers in
large cities, so we rejected that model. The Mega-Bells like to portray
competition as competitors who merely ``cherry-pick'' high-margin large
business customers. This portrayal is clearly false as to McLeodUSA.
We also serve a wide range of communities ranging from cities as
small as a few hundred people up to cities as large as Chicago. The
``96 Act only required the Bell companies to open their intracity
networks. Consequently, McLeodUSA is currently serving or plans to
serve customers in all markets served by the Bells (now including GTE).
In the communities we serve, our focus is primarily on small and
medium sized enterprises. While we do serve residential and large
businesses, we have found that small and medium sized businesses are
largely underserved. We have good success with those customers using
our beat-cop sales approach that meets customers face-to-face.
Currently our average customer only has about 6 lines. So again you can
see we are not in this business to only serve the ``high margin'' large
business customers of the Bell companies.
II. MCLEODUSA IS BRINGING COMPETITION AND ITS BENEFITS.
In March 1996 we served approximately 40,000 local access lines. By
December 2000 we served 1.1 million lines. Although we have
demonstrated rapid increase in our annual compounded growth rate, we
currently serve less than 1% of the nearly 200 Million access lines
served by the Bell companies. We can attest to the fact that
competition in the local markets is a long-term endeavor.
A. Jobs
In late 1994 we had approximately 200 employees, primarily in Iowa.
Today we have nearly 11,000 employees working in 130 offices located
across 25 states. We have invested in and created jobs in many of the
districts of the members of this committee. We expect our job creation
will continue to grow as long as public policy continues to support
competition.
B. Technology
At the end of 2000 we had 50 central office and long distance
switches and 396 data switches in operation. In addition we deployed
and operated nearly 22,000 route miles of fiber optic cable connecting
most of those facilities, growing to more than 30,000 miles by year-
end. Our one functional network connects 810 cities in all 50 states
allowing McLeodUSA to reach approximately 90% of the U.S. population.
Even better, we are now actively developing next-generation
enhancements to our network. This activity will allow us to offer high
speed, broadband, next-generation services throughout our network
coverage area. The one critical missing requirement, however, is
nondiscriminatory and quality access to the intracity network.
McLeodUSA is not alone in the installation of fiber optic cable. I
encourage you to look at other competitive companies who are installing
fiber optic networks. I believe you will see an astonishing amount of
intracity fiber and technology installed.
During my years in the competitive long distance industry, I saw
deployment start in the early ``80s and really take off after
divestiture in 1984. During the next 15 years, numerous competitors
have entered the intercity long distance markets and constructed
multiple intercity fiber networks. Long distance competition is robust
and so much intercity fiber exists throughout this country that
arguable supply exceeds demand. This should not surprise anyone and, I
contend, is the normal consequence in a truly competitive industry.
Consumers are reaping the benefits through reduced long-distance rates.
This country has an oversupply of intercity network capacity to
carry all services, both narrowband and broadband. We do not need more
intercity capacity as proposed in this so-called ``Internet Freedom and
Broadband Deployment Act.'' What we really need are intracity networks
with broadband capacity. Existing intracity networks are narrowband
only. This is the real ``Digital Divide.'' It exists between intercity
broadband fiber networks and intracity narrowband copper networks.
This divide can only be effectively bridged by competition.
Meaningful competition, not legislative ``relief,'' will drive
appropriate investment and technological advancement just as it has for
the past five years. Meaningful competition absolutely depends on
quality access to all intracity networks.
Quality access means much more than simply ordering a loop or
circuit. It entails equal, nondiscriminatory treatment in every step of
the process, including Pre-ordering (exchanging information), Ordering
(accurate and timely data exchange between competitors), Provisioning
(confirm and implement orders accurately), Maintenance and Repair
(service problems) and Billing.
III. CHANGING THE FUNDAMENTAL RULES OF THE ``96 ACT IS UNNECESSARY AND
HARMFUL TO COMPETITION AND CONSUMERS.
A. Unnecessary
Changing the existing system of laws and regulations as supported
by the Mega-Bells will definitely not address the critical problem of
nondiscriminatory and quality access to all intracity networks.
Congress debated the telecommunications issues for seven years before
finally passing the ``96 Act with the support of all segments of the
industry. Since then the FCC has further defined and enforced the law.
The system is working, and could be strengthened with certainty of
compliance by the Bells and additional enforcement of the current law.
During the past 5 years, McLeodUSA and other competitors have
formulated and executed business plans. We are aggressively competing
under the existing rules and never asked Congress for any legislative
``favors.''
In sharp contrast is the action of the original seven Bell
companies and GTE. Although the stated purpose of the proposed
legislation is to allow the Mega-Bells to provide intercity long
distance data services, it is interesting to note that these Bell
companies have always been free to provide these services outside of
their own regions. In fact, at the time the ``96 Act became law, it was
anticipated that we would see widespread competition between the Bell
companies. In this sense, the original seven Bell companies and GTE
controlled their own destinies. They could have chosen to, and were
expected to, compete directly against each other. If they had, they
could be in the intercity market today. Instead they merged to form
four larger, stronger ``Mega-Bell'' monopolies.
During their merger review proceedings, both SBC and Verizon made
commitments to compete outside their region to gain regulatory
approval. Their actions since show that their promises were hollow. For
example, given the size and scope of SBC it would not have been
difficult (in fact, I believe it would have been relatively easy) for
SBC to invest in fiber to connect its California operations with its
Texas operations and actively compete in Arizona and New Mexico along
the way. But they refused. Furthermore, Verizon had competitive
operations and customers in Illinois, California, Indiana and Texas and
was poised to compete with SBC in those states. Instead, they recently
sold that business to SBC. The result is increased monopoly and
decreased competition in these states. Verizon avoids competition and
SBC invests in its monopoly rather than in competition. Their choices
have slowed the development of competition and delayed competitive
choices for consumers.
Furthermore, the Mega-Bell-controlled intracity network serves over
90% of the nation's business and residential lines. They also have a
combined market capitalization of $404 billion as of April 4, 2001,
which is about 33 times larger that the aggregate market cap of CLECs.
Their size and last mile stranglehold puts them in control of the
course of competition. Even large companies like AT&T, WorldCom and
Sprint are not in a comparable position because they lack ownership or
quality access to the intracity network. Instead of working with us to
provide quality access to the intracity network, the Mega-Bells have
constructed countless roadblocks, like imposing special charges only on
competitors, and pursued numerous legal challenges to the requirements
we felt they agreed to.
Now, in spite of their actions and their inherent competitive
advantage, they are before Congress asking for favors. Last year, they
asked Congress to eliminate reciprocal compensation payments. Now they
seek unwarranted access to the intercity long-distance business that
will only delay competition and preserve their monopoly over local
markets. Their actions warrant consternation not ``relief.''
Congress should not being granting ``favors'' to the Mega-Bells.
Since our existing system is working, and we have robust intercity
networks, there is no need to give ``relief.'' When Mega-Bells
effectively open their intracity network quality access, the FCC grants
authority to provide long distance service. To date the FCC has granted
long-distance (intercity, narrowband and broadband) approval in 5
states: New York, Texas, Kansas, Oklahoma and Massachusetts. Numerous
other Section 271 activities are ongoing. Most of the remaining 45
states have invested heavily in the 271 process, and we should support
that investment of tax dollars.
We should also consider what has already been given to the Mega-
Bells. Currently the telecommunications industry is divided into
intracity (local) and intercity (long distance) markets. The Mega-Bells
currently have access to and control virtually the entire intracity
portion of the industry. On the long distance side, the industry is
further divided into intra-LATA (which the Mega-Bells also have access
to) and the interLATA markets. The inter-LATA segment is further
divided into in-region and out-of-region. The Mega-Bells have always
had access, but refused to serve, the out-of-region segment. We must
not simply ``give'' them access to an additional part of the intercity
long distance market.
B. Harmful to Consumers and Competition
We are making progress on opening the critical local loop
bottleneck. We cannot afford to stop or slow that effort by allowing
Mega-Bells to prematurely enter the intercity long distance data
market.
Today the sole method of solving the last mile bottleneck is by
offering the ``carrot'' of in-region intercity long distance entry. Of
the total ``pie'' of telecom revenues, the Mega-Bells already have
access to more than one-half by offering local and intra-LATA long
distance service. In fact they dominate that portion of the total
telecom market. SBC alone now serves approximately one-third of all
access lines in the country.
If you do not find the pace of local competition acceptable, the
solution is to increase the ``carrot'' or add a ``stick,'' rather than
to reduce the carrot. Data services constitute the high-growth, high-
revenue segment of the intercity long-distance market. It makes up the
largest portion of the ``carrot.'' If it is lost, there will be almost
no remaining economic incentive to comply with the 14-point checklist
in Section 271 and provide quality access to the last mile local loop.
In addition it is almost impossible to divide the ``carrot'' as a
practical matter. There is no meaningful distinction between voice and
data. Whether you are watching voice or data, when they are digitized
and transmitted over a fiber optic cable they are both just flashes of
light. When you see those flashes there is no way to determine whether
the message is voice or data and, therefore, no way to know if the
message should be allowed. Furthermore, as voice over the internet
technology continues to develop, the problem grows. If we allow the
Mega-Bells to provide long distance service for the Internet, then when
voice communication over the Internet becomes widespread, the
``carrot'' will be gone and there will be no incentive to ease the
stranglehold on the last mile local loop.
Just as important is access to capital. Since passage of the ``96
Act, McLeodUSA and other competitors have raised billions of dollars in
capital to fund aggressive plans to deploy broadband networks to serve
business and residential consumers in both urban and rural America.
Continued access to capital is a critical need for competitors like
McLeodUSA to continue providing consumers with a competitive choice.
McLeodUSA is acutely aware of the need to maintain investor
confidence in the national goal of bringing competition to the
telecommunications marketplace as set out in the ``96 Act. Legislation
which would carve out intercity long distance data services from the
pro-competitive goals of the ``96 Act would surely be seen by Wall
Street investors and others in financial markets as a retreat from that
national commitment and bad for competitors. As a result, the ability
of new entrants to raise the capital needed to bring true, facilities-
based competition to all telecommunications markets could be placed in
jeopardy. Such a further constriction on al already tight capital
market could slow the drive toward competition even though that is not
what supporters of such ``data deregulation'' legislation intend.
During last year when Congress considered changing the rules and
granting legislative ``favors'' to the Mega-Bells, access to capital
declined dramatically. The stock prices for the Mega-Bells decreased in
equal comparison to the overall market drop. In contrast, the CLEC
stock prices were really punished and driven to historical lows. During
a 52-week period prior to April 4, 2001, stocks have fallen the
following amounts: Mega-Bells--39% and CLECs-- 94%.
Although stock prices for the strongest CLECs like McLeodUSA,
Allegiance Telecom and Time Warner Telecom only fell 80%, 89% and 65%,
respectively, Wall Street clearly favored the Mega-Bells who were the
clear beneficiaries of the proposed changes in the rules. CLEC stock
prices disproportionately decreased for two key reasons: uncertainty in
the public policy arena and continued difficulties in accessing the
Bells' intracity networks.
Certainty in public policy will steady the capital markets.
Additional capital flowing to competitors will allow continued
deployment of intracity fiber to connect with the existing copper
network owned by the Bell companies. This will help connect the
intracity network with the robust intercity network and bring high-
speed services to every home in the local market.
IV. ALTERNATIVES TO ENSURE NON-DISCRIMINATORY AND QUALITY ACCESS TO ALL
INTRACITY NETWORKS, THEREBY BENEFITING CONSUMERS
A. Separate Mega-Bells' Network and Retail operations
In order to facilitate the growth of competition we must return our
focus to non-discriminatory and quality access to the ``last mile''
local loop.
As I described earlier, by the end of 2002, McLeodUSA will be
capable of delivering broadband service to within a local telephone
connection of approximately 90% of the U.S. population. Our fiber
network will be up to the Mega-Bell bottleneck at the local loop. But,
we need continued commitment from policy-makers to help open the
bottleneck in order to complete delivery of broadband services to
customers.
There is an inherent conflict of interest between the Mega-Bell's
dual role as both the network supplier and retail competitor. As the
Mega-Bells lease their local network infrastructure to CLECs, the Mega-
Bell's retail operations are threatened with lost customers and
revenue. As long as they can, the Mega-Bells will preserve the use of
their last mile network for preferential use by its retail operations.
The only viable, long-term solution, and the very best way to
facilitate competition, is to separate the Mega-Bells' network and
retail operations. Competitors and Mega-Bell retail operations must
each have quality access to the local infrastructure (loops, unbundled
switch ports, unbundled trunks) on a nondiscriminatory basis. As we
have seen before in other circumstances, separate but equal does not
work. Mega-Bell retail operations must be required to purchase the same
network inputs at the same rates, under the same terms and conditions
and through the same operation support systems (OSS) as competitors.
And, Mega-Bell network operations must be made blind. When an order or
request is received they must not know whose order is being handled in
order to insure equality.
Separation can be done either structurally, by breaking the Mega-
Bells into two companies, or functionally by establishing processes and
procedures to separate the operations. Qwest has recently undertaken
functional separation and while we are at the very early stages we hope
their actions will be fruitful. We are working closely with Qwest in
this process and are willing to work with others. We believe, however,
that if competitors can show that functional separation has not
occurred, then either the FCC or state regulatory bodies should have
jurisdiction and authority to require structural separation. In the end
we must have separation to insure quality access for all competitors to
the ubiquitous network paid for by consumers, along with improvements
being paid for with forward-looking UNE rates and true parity regarding
provisioning of local service, which is the cornerstone of the Section
271 competitive checklist.
B. Require Mandatory Date Certain Nondiscriminatory and Quality Access
to all intracity Network
Requiring specific actions can also facilitate competition by the
Mega-Bells. What I propose here is adding a ``stick'' to our policy
scheme, in addition to the ``carrot.''
Congress should make compliance with the 14-point checklist in
Section 271 of the 96 Act mandatory. Compliance with the 14-point
checklist will provide competitors with nondiscriminatory and quality
access to the intracity network. So the key is for Congress to amend
Section 271 to require the Mega-Bells to meet those requirements to the
satisfaction of the FCC by a date certain. If they fail to do so, the
statute should provide a penalty for noncompliance and the penalty must
be sufficient to make compliance the more economic alternative. The
statute should also authorize a private cause of action so that those
who are harmed by any Mega-Bell's failure to comply with the law could
bring suit to recover damages. These actions should also allow recovery
of treble damages and attorneys fees as well as awards of punitive
damages in egregious cases. These tools have been adopted previously by
Congress to produce results and can be used now to establish effective
competition.
Congress might also consider another alternative. Require the Mega-
Bells to meaningfully compete out of region before they are allowed to
offer long distance service in region. Such a requirement could be
easily measured. For example we could require each Mega-Bell to
actively serve a substantial number of customers in at least 150
central offices in at least 25 different markets within the territory
of the other three Mega-Bells before they can offer in-region long
distance.
C. Award Damages to Competitors
Congress should authorize the FCC to award meaningful damages
directly to competitors when the Mega-Bell company is found to have
engaged in anti-competitive conduct, violated the law or breached an
agreement. Awarding damages to competitors is the fastest way to speed
competition and benefit consumers by incenting the Mega-Bells to change
their behavior and fix the problems, rather than simply pay the fines
as a cost of doing business.
McLeodUSA has experienced the absolute truth in the concept that
awarding damages directly to aggrieved competitors benefit consumers.
State Commissions in Iowa, Minnesota and Colorado, through various
proceedings and processes, have established a series of objective,
measurable and verifiable standards in provisioning local service. If
QWEST fails to meet these standards, the Commissions are authorized to
require QWEST to pay damages directly to competitors. Since January
1999, QWEST has paid $4.76 million directly to McLeodUSA for failure to
comply with its obligations as determined by these 3 state Commissions.
Requiring the Mega-Bells to pay damages directly to the aggrieved
competitors was one reason QWEST negotiated a long-term agreement that,
among other things, accelerates McLeodUSA's entry into additional
markets throughout the 14-state footprint of QWEST. Competition
benefits. Consumers benefit.
In contrast, the Illinois Commerce Commission (ICC) does not have
the statutory authority to award damages directly to competitors, and
consequently, the Mega-Bell has chosen to merely pay the fines as a
cost of doing business rather than fix their problems. During the past
18 months, the Illinois Commerce Commission (ICC) has imposed fines
over $60 Million for anti-competitive acts and historically
unacceptable quality of service performance. Under Illinois law,
however, all damages imposed by the ICC are simply deposited into an
Illinois state general fund. SBC, with a market capitalization of $147B
as of April 4, 2001, chose to pay these $60M fines merely as a cost of
doing business rather than fix the problem. Therefore, because the ICC
cannot award damages directly to competitors, competitive providers are
hurt and consumers are denied a competitive choice.
I want to stress this critical fact: awarding damages directly to
aggrieved competitors will accelerate competitive entry into more
markets and provide consumers a competitive choice.
CONCLUSION
Today we clearly have a ``Digital Divide.'' It exists between
intercity broadband fiber networks and intracity narrowband copper
networks. It can only be effectively bridged by competition.
Mega-Bells have refused to compete and resisted opening their
intracity networks, which has delayed competition. Congress must not
reward those actions.
Meaningful competition will drive investment and technological
development and absolutely depends on quality access to all intracity
(local) networks that are controlled exclusively by the Mega-Bells. The
biggest impediment to competition in the intracity market is the lack
of nondiscriminatory and quality access to the local intracity network.
If Congress wants to facilitate competition, and the related
advancement of broadband services, it must ensure nondiscriminatory and
quality access to all intracity networks. This proposed Mega-Bell
legislation does nothing to accomplish this goal, and therefore,
Congress should oppose it.
To ensure such quality access, Congress should not further restrict
our access to capital by changing the agreed rules, but instead should
mandate compliance with the 14-point checklist by a specific date and
award damages to aggrieved parties for noncompliance.
Again, I thank the Committee for the opportunity to appear before
you today, and would welcome the opportunity to answer any questions
that any of the Members might have.
Chairman Tauzin. Thank you very much. The Chair is now
pleased to welcome and recognize Charles McMinn for his
testimony.
STATEMENT OF CHARLES J. McMINN, CHAIRMAN OF THE BOARD, COVAD
COMMUNICATIONS
Mr. McMinn. Good afternoon, Mr. Chairman, and Ranking
Member Dingell, and distinguished members of the committee.
Thank you for inviting me here to testify today. I am the
Chairman of the Board and a co-founder of Covad communications.
Covad is the Nation's largest competitive provider of broadband
DSL services, including Internet access.
We offer our Internet services in an area that covers
nearly 50 percent of the country. That is more than any CLEC,
and that is more than any cable company, and that is more than
any ILEC in the United States.
We have over 320,000 DSL subscribers on our network, half
of which are residential customers, and we are a company that
did not exist before the Telecommunications Act was passed.
I am here to tell you that if you pass this bill as it is
currently written that you will eliminate the driving force
behind the hi-tech sector, the investment unleashed by the
Telecom Act of 1996.
While this bill will certainly benefit the four Bell
monopolies, I promise that it will halt investment in the hi-
tech sector. It is a poison pill for the technology economy. I
was in New York only yesterday at a financial conference.
I am already being told by investors that because of their
fear of this bill that they are slowing their technology
investments, and not just in CLECs like Covad, but in equipment
suppliers like Lucent and Cisco.
As you can see from this panel the three competitive
companies you invited here today all chose to send their top
executive officers. This issue is absolutely critical to us.
The sad fact is that competition in the local telecom markets,
especially in residential broadband services, would be
virtually eliminated by this bill.
The Tauzin-Dingell bill dismantles the core unbundling
requirements of the 1996 Act. It eliminates line sharing, and
it ensures that the four Bell companies will be the only ones
offering residential consumer broadband activity in the United
States.
They won't tell you this, but the Bells are deploying DSL
as fast as they can. In 1996, there were virtually no DSL lines
installed. At the end of 2000, there were 2.3 million. SBC
alone has nearly a million subscribers.
What's more, the DSL share of the market is projected to
pass the cable share of high speed access in the United States
within the next 2 years, and that's despite the fact that the
cable industry got a 3 year head start.
The speed of DSL deployment by the RBOCs would not have
happened without competition from companies like Covad. We were
the first out of the gate, taking technology that they had in
house for over 6 years and driving it into the market. We were
the prod that got the Bell Companies moving.
We offer services in all of their markets, while still
today they only offer their broadband services in their own
monopoly territories. This unhealthy situation will be cemented
in place if this bill is passed. The Bells, of course, will say
that they face fierce competition from cable companies.
This is true only where cable companies offer high speed
data services, which is a small fraction of the whole country.
To put that competition in perspective, Covad's national DSL
network is already larger than all of the cable modem networks
in this country combined.
I have with me today our newest product, a Covad Jump Start
Kit. Using this equipment, just the equipment in this box, and
following some easy instructions, new DSL customers can install
their own broadband connection without the need for us to send
them a technician.
There is no need for a step data line, and a customer gets
connected in a matter of days. Our kits work by employing line
sharing. Every carrier uses line sharing to reach residential
customers.
It allows the customer to receive DSL and surf the net over
the same copper line as regular old telephone servers. This
bill, as it is currently written, eliminates line sharing for
everyone by the ILECs. Let me be clear. If line sharing is
eliminated, Covad will have no choice but to withdraw from the
residential market.
We cannot match a competitor whose lines are subsidized. We
have tried in the past and it just does not work. The bill goes
even further. If line sharing is eliminated, not only would we
disconnect over 50,000 of our subscribers, but we would be
locked out of the residential market forever.
This bill destroys the very core of the Telecom Act and the
right of competitors to lease basic portions of the monopoly
network. The Telecom Act does provide a tremendous framework to
induce competition or introduce competition into the market. It
does come up short on enforcement.
Several members of the committee have mentioned that fact.
We believe that additional enforcement is necessary, and not a
reduction of the competitive capabilities that the Act put in
place.
I will commit to you in closing to discuss any and all of
these matters at your convenience. It is without question the
most important issue facing this industry and one that we take
very seriously. Thank you very much for your time.
[The prepared statement of Charles J. McMinn follows.]
PREPARED STATEMENT OF CHARLES J. MCMINN, CO-FOUNDER AND CHAIRMAN OF THE
BOARD, COVAD COMMUNICATIONS COMPANY
Good morning Mr. Chairman, Ranking Member Dingell, and
distinguished members of the Committee. Thank you for inviting me here
today to testify on this very important issue.
My name is Charles McMinn. I am the Chairman of the Board and a co-
founder of Covad Communications Company. Covad is the nation's largest
competitive provider of broadband DSL Internet connections, offering
service to nearly 50% of the country--more than any other CLEC and any
other ILEC. We have over 320,000 DSL subscribers, half of which are
residential customers. I am here today to tell you that if you pass the
bill before you as it is currently written, you will eliminate the
driving force in the deployment of broadband technology in the United
States, competition that the Telecom Act of 1996 created.
Your decision in 1996 to open local telecommunications markets to
competition allowed consumers a choice in broadband services from a
variety of competitive providers. The bill you are considering today
will take that choice away.
The public telephone network is the only ubiquitous, government-
subsidized communications delivery system in the nation. Using copper
phone lines, companies can and do offer a variety of different
services, including voice, data, and video. While other delivery
systems offer a promise for the future, the monopoly copper phone
network is the here and now. It is the only choice that many consumers
will have for the next decade.
The sad fact is that competition in local telecom markets,
especially in residential broadband services, would be virtually
eliminated by this bill. The Tauzin-Dingell bill dismantles the core
market-opening provisions of the 1996 Act, eliminates line sharing, and
ensures that the four Bell monopolies will be the only companies
offering residential consumers broadband DSL internet connections to
the vast majority of consumers in the U.S.
Two colleagues and I founded Covad in October of 1996, just months
after you passed the Telecommunications Act. We took DSL technology--
which had been collecting dust on the shelves and in the warehouses of
the Bell companies for over six years' and quickly used it to build a
broadband network that can reach nearly half of the homes in America.
This competition drove the Bells to deploy their own DSL services
for the first time. The total number of DSL lines installed nationwide
in 1996 was zero. In 1998 it was about 38,000. At the end of 2000, that
number topped 2.3 million. Verizon alone jumped over 500% between 1999
and 2000, from 87,000 to 540,000. SBC ramped up to 767,000 from
169,000.
The speed of DSL deployment by the RBOCs would not have been
accomplished without competition from companies like Covad. Still
today, CLECs like us are the only competition that the ILECs face in
many of their markets. We offer services in all of their markets, while
they offer services only in their own markets. The fact is, we are the
ones who compete against each and every ILEC in each and every region
in the United States. They do not compete against each other.
Let me repeat that. Even though the ILECs were allowed to compete
against each other, none of them have chosen to do so. Only CLECs like
Covad are competing to offer consumers a choice. If this bill is
passed, competition will be history and consumers will suffer, as they
have in the past.
The ILECs, of course, will say that they face competition from
cable companies. This is true only where cable companies offer high-
speed data services, which is a small fraction of the whole country. To
put that competition in perspective, Covad's national DSL network alone
has more coverage than all of the cable modem systems in the U.S.
combined.
I believe that Covad is a tremendous example of the type of
innovation and entrepreneurship that you envisioned and expected when
you passed that great law. Starting from scratch, we at Covad have led
the charge to bring broadband services to every home in America, and we
couldn't have done it without the Telecommunications Act.
I have with me today our newest product--the Covad JumpStart kit.
It represents the progress and innovation possible through a policy of
local competition. Using the equipment in this box, and by following
some easy instructions, new DSL customers can install broadband in
their homes without a visit from a technician. As a matter of fact,
almost 80% of our residential lines are installed using the JumpStart
kit. There is no need for a separate data line, and a customer can get
connected in a matter of days. With JumpStart, broadband DSL can be
wrapped up and given as a gift. That's quite a long way from a few
years ago when the ILECs controlled broadband services, when prices
were high, availability scarce, and installation times stretched into
months on end. This was a time when no consumers and few businesses
could even afford broadband connections. This bill would return us to
those times because it would eliminate the only competition that the
Bells face--CLECs like Covad.
Our JumpStart kit works by employing line sharing. Line sharing is
a simple policy. It allows a customer to receive DSL and surf the net
over the same copper phone line used for regular old telephone service,
that same copper line that has been paid for by consumers over and over
again. Because of the unique technical characteristics of DSL,
broadband services and voice services can travel over the same copper
wire. They literally share the line. The issue before the committee
is--who has the right to choose how that wire is used--the customer or
the monopoly?
Using line sharing and ADSL technology is the only economically
feasible way to serve residential users and to mass market DSL service.
When a Bell company provides DSL to a customer, it exclusively employs
line sharing. They do not force the customer to install a separate
phone line, and they do not send a technician to the customer's house
to complete the installation. When Covad serves a residential customer,
we also employ line sharing. This fairness principle is at risk in the
legislation you are considering.
The Tauzin-Dingell bill as it is currently written eliminates line
sharing for everyone but the ILECs. This conveys a preferred status on
the ILECs that we can not possibly overcome. Let me be clear. If line
sharing is eliminated, Covad and other CLECs will have no choice but to
stop offering broadband services to consumers. This could result in the
disconnection of 50,000 residential DSL lines for Covad alone. It also
means that our Jumpstart kit would become a thing of the past. The oft-
ignored section of the current bill reads:
``. . . the Commission shall not require an Incumbent Local
Exchange Carrier to provide . . . unbundled access to any
network element used in the provision of any high speed data
service, other than those network elements described in Section
51.319 of the Commission's regulations (47 C.F.R. 51.319), as
in effect on January 1, 1999 . . .''
Line sharing was ordered in November 1999, and therefore would, under
the proposed Tauzin-Dingell bill, cease to exist. How can this possibly
benefit the consumer?
I would also note that numerous other pro-competitive rules that
are vital to a competitive marketplace would be completely eliminated
as well, but the elimination of line sharing is at the top of the list
Aside from unplugging over 50,000 Americans from their Covad
broadband connections, the elimination of line sharing also represents
a serious retreat from the goal of a competitive local
telecommunications market. By eliminating line sharing, Congress will
ensure that the Bell monopolies, and only the Bell monopolies, are
allowed to offer residential customers DSL services in the vast
majority of the U.S. In the absence of line sharing, competitors will
have to lease a separate phone line and send a technician to the field,
adding significant costs and time delays, a cost disadvantage that we
can not hope to overcome. And so we will have to withdraw from the
consumer market.
Moreover, the Tauzin-Dingell bill would relegate consumers to only
those broadband services the Bell monopolies decide to offer. While the
Bells offer only one type of DSL called ADSL, Covad and other
competitive companies offer a menu of DSL services and products that
give consumers a wide range of broadband choices, higher speed and
farther-reaching services. The Tauzin-Dingell bill takes away new and
innovative services from consumers. I submit, and Covad firmly
believes, that such a re-monopolization of the local market is clearly
not in the best interests of the nation. That certainly was not the
goal of the Telecommunications Act.
We are not alone in our opposition to returning to a local phone
monopoly. I point to an April 18, 2001 Business Week editorial that
reads:
``The Bells are not known for their competitive vigor or their
willingness to roll out broadband quickly. Indeed, it was only
competition from new companies that spurred them to start. Even
now, the monthly cost--about $40--for broadband service is
high, and the quality of digital subscriber line (DSL) service
often low. Baby Bell SBC Communications Inc. just hiked its
rate to $50 a month. Broadband is clearly the next big thing in
the info-tech economy. Cell-phone and handheld-device
manufacturers, Internet infrastructure builders, server makers,
content providers, software writers, advertisers, and others in
the IT sector are betting on broadband . . . But regulators
will have to do their part as well. If consolidation produces
more monopolization of the telecom market, America's high-tech
economy will suffer.''
At a time when competition for local broadband services is beginning to
take off, I don't believe the nation can afford to return to a
monopolized local telecommunications network.
The Tauzin-Dingell bill addresses a variety of other issues that
relate to local telecommunications competition. In each case, we
believe such provisions will stifle competition and slow broadband
deployment. The Section 271 process is crucial to ensuring that local
markets are indeed opened to competition. Eliminating it with respect
to data services is not only technically infeasible; it is the same as
eliminating it all together. There is no feasible way to accurately
distinguish between voice and data. How would you classify a
videoconference between Chicago and San Francisco? How about a
forwarded voice transcript of that same conference? Or an online replay
of the conference available to anyone on the Internet?
The process that Congress put in place in 1996 is working--the FCC
has not rejected a single RBOC long distance application since 1998,
and the Bell Companies have announced plans to submit dozens of
applications for approval this year. By year-end, it is expected that
half the nation's population will be able to buy long distance services
from their monopoly phone company. Removing this pro-competitive
provision from the Act would return the nation and its broadband
consumers to a monopolized local market--but no provision of the bill
will harm consumers more than the elimination of line sharing.
Covad has more experience competing in the last mile of the local
market than perhaps any other carrier. We've competed in local
broadband since December of 1997, when we began providing service in
San Francisco. We deal with each of the four Baby Bells, and can offer
service to nearly half of the homes in America. It is this long history
and experience that leads me to believe there are indeed steps that
Congress can and should take to further the goal of local competition.
I don't believe they will come as a surprise to any Member of this
Committee.
The Telecommunications Act provides a tremendous framework to
induce competition into a monopoly market. It comes up short, however,
on enforcement. Only the rigorous enforcement of the law and of the
Telecom Act will promote the deployment of broadband. Not only do
competitors continue to receive poor wholesale performance from all the
Baby Bells, we are without an effective means to have our concerns
addressed by policy makers. The current fine structures that regulators
possess are wholly inadequate. I believe that FCC Chairman Powell said
essentially the same thing in his testimony here in March.
For example, in the month following Verizon's entry into the long
distance market in New York, both the FCC and the New York Public
Service Commission found that Verizon had violated the law and ``lost''
thousands of CLEC orders. Both agencies together fined Verizon over $13
million. An impressive sounding figure, but when one considers the size
of this company, the penalty is quite literally pocket change. Verizon
recovered the $13 million in just three hours of operating revenue. In
regulatory proceedings, the Baby Bells will tell you that it is cheaper
to pay the fine than to actually address and fix the problem. It is
also ironic that the Bells are permitted to recover the costs of the
fines from customers through their local phone rates. Clearly the
current enforcement regime is not a deterrent to anti-competitive
behavior.
Whatever the intent of this legislation, the elimination of line
sharing will end residential DSL competition overnight, leaving
consumers with no choice. Granting ``interLATA data'' relief will delay
indefinitely the opening of the local market. If Congress is to take
action, it must be to ensure increased and vigorous enforcement of the
law and increased competition, not the elimination of the only real
competition the ILECs face. Without it, American consumers will be left
out in the cold, and once again will be at the mercy of a monopoly
local phone company.
I would leave you with one final thought. Monday's edition of The
Wall Street Journal features a story on the impact of the economic
slowdown on fiber-optic companies. The article reads:
``After two years of staggering sales increases, the world's
major fiber-optic companies are experiencing growing pains, as
a slowdown in telecommunications spending hurts components and
systems makers alike . . . The big domino in all of this is the
lack of funding for start-up phone companies. Funding began to
dry up in the middle of last year. The start-ups, which were
building optical-telecommunications networks, no longer have
the cash to spend on optical equipment, and some have declared
bankruptcy. As a result, the large incumbent phone companies,
which had to spend aggressively to protect their customer
bases, have curtailed their own spending plans . . .''
The message from this article is clear. Competitive deployment drives
the Baby Bells to spend and deploy. Further, outlawing local
competition, as Tauzin-Dingell does, will have serious repercussions on
the economy as a whole.
I look forward to working with you to see us through this process.
The story of Covad is one I believe you all envisioned back in February
1996. Unfortunately, I fear our story, and the story of all competitive
providers of broadband services, is lost amid the hype about ``leveling
the playing field'' of pseudo-competition between the Bell monopolies
and the cable companies. Competition and innovation brought broadband
to the masses. The real beneficiaries of this competitive policy have
not been companies or shareholders. Instead, the beneficiaries have
been consumers and constituents who have reaped the benefits, in the
form of new services and--for the first time--a choice in a local
provider. Please do not eliminate that choice through your actions.
Thank you very much, and I would be happy to answer any questions
you might have.
Chairman Tauzin. Thank you very much, sir. The Chair is now
pleased to recognize for an opening statement Mr. Peter Pitsch,
of the Intel Corporation.
STATEMENT OF PETER PITSCH, COMMUNICATIONS POLICY DIRECTOR,
INTEL GOVERNMENT AFFAIRS
Mr. Pitsch. Thank you, Mr. Chairman, and members of the
committee. I am the Communications Policy Director for Intel,
and I would like to thank you for this opportunity to be here
this morning to testify before the committee on this important
topic.
In my oral testimony, I want to limit myself to three main
points. First, I would like to discuss the importance of
broadband deployment. Second, I would like to lay out Intel's
policy prescriptions in this area, and last, I want to make a
brief comment about Intel's position and posture in this larger
broadband debate.
First, regarding broadband deployment, Intel believes that
rapid deployment of affordable broadband technology will
dramatically drive the growth of the Internet, E-commerce, and
our larger economy.
In my testimony, I cited our chairman, Andy Grove, surveys
of EEOs, business press, and so on, but today I want to make
just one fundamental point about the importance of broadband,
and that is that we are just beginning to phantom the
importance of broadband deployment.
I would ask you to consider back to the first days of the
PC and those initial computer applications, and then consider
where we are today. I submit that dramatic increases in the
growth of broadband penetration will lead to a similar growth
of developments, and flourishing of opportunities that we saw
with the interaction between software and hardware developers
in the P.C. sector.
One particular study I reference is a study that looks at
the broadband revenues worldwide and indicates that in 1999
those revenues were about $60 billion, and projects that by
2004 those revenues could be over $460 billion.
It should come as no surprise then that Intel and many of
the high tech sector want policymakers to get broadband policy
right, and in our view, like consumers, Intel believes that
public policy should best promote rapid deployment of
affordable broadband to all consumers.
We believe that the Congress and the FCC should and can
make this happen through the deregulation of the incumbent
local exchange DSL services in the last mile. I wish to point
out that I am not taking any position. Intel does not take any
position on the interLATA provisions of this bill.
However, we do believe that eliminating the unbundling
restrictions that currently exist and threaten the investment
opportunity for the incumbent telephone companies in the last
mile between their central office and the residential customer
do represent a barrier to deployment. I would like to explain
that just briefly.
This investment is risky. It is discretionary. It is not
part of the legacy of existing copper in central office
buildings, and if we impose that kind of unbundling obligation,
we undertake the business case for these companies to make that
investment.
Intel's position is that if a company takes a broadband
deployment risk, it should get the reward. We are satisfied
that there can be safeguards designed that protect competition
and achieve this goal.
In my testimony, I mentioned conditioning relief upon
compliance with the FCC and States, co-location, and loop
provisioning requirements. I also mention the possibility of
conditioning relief for an ILEC on the achievement of
milestones, benchmarks that would require the companies to meet
certain buildout requirements.
Last, I would like to talk about Intel's position in the
larger broadband debate. The position here today is really just
one of a consistent set of policy positions we have taken in
this larger area.
I would like to point out that Intel, through our trade
association, ITI, a hi-tech trade group that I know that many
of you are familiar with, supported the FCC's decision in
finding cable unbundling to be premature at this point.
We supported the FCC's decision to require the companies
existing--the incumbent companies to unbundle their existing
copper and make their central offices available. We also
supported the FCC decision not to impose unbundling
requirements on DSL electronics, and there are other examples
as well.
It should be clear here that Intel is not uninterested. We
believe that we are disinterested. We want all these providers
to have ample opportunity to provide this, and our positions at
various points are that we have opposed or supported all of our
friends in this larger community.
But consistently hopefully always with the goal of
encouraging affordable broadband for all consumers. Thank you.
[The prepared statement of Peter Pitsch follows.]
PREPARED STATEMENT OF PETER PITSCH, COMMUNICATIONS POLICY DIRECTOR,
INTEL CORPORATION
Mr. Chairman and Members of the Committee, my name is Peter Pitsch
and I am the Communications Policy Director for Intel Corporation. I
would like to thank you for this opportunity to testify before your
Committee. For three decades, Intel Corporation has developed
technology enabling the computer and Internet revolution that has
changed the world. In 2000, Intel had sales of $33.7 billion, over
86,000 employees, and spent $3.9 billion on research and development
and another $6.7 billion on capital expenditures. Intel's mission is to
become the preeminent building block supplier to the worldwide Internet
economy. Of particular relevance to the issue of broadband deployment,
last November Intel successfully launched the Intel<SUP>'</SUP>
Pentium<SUP>'</SUP> 4 processor designed to deliver advanced
performance for Internet computing, including imaging, streaming video,
speech processing, 3D, multimedia and multitasking.
Intel believes that the rapid deployment of affordable broadband
technology would drive dramatic growth of the Internet, e-commerce and
the IT sector. As Chairman Andy Grove, said in Intel's most recent
annual report, ``Connectivity is certainly what's driving the growth in
computing right now.'' <SUP>1</SUP>
---------------------------------------------------------------------------
\1\ Intel 2000 Annual Report, p.6.
---------------------------------------------------------------------------
Broadband has the potential to transform the Internet. Sixty-four
percent of CEOs ``cited broadband connectivity as the most significant
immediate factor influencing the way customers will experience
entertainment and communications in the future.'' <SUP>2</SUP>
According to a recent Business Week article, ``In the long run,
realizing the promise of the Net will depend on the widespread
introduction of advanced technologies such as broadband to the home . .
.'' <SUP>3</SUP> Some reasons why are:
---------------------------------------------------------------------------
\2\ ``Broadband Will Profoundly Alter Consumer Experience'' by Ben
Macklin. http://www.emarketer.com/analysis/broadband/
20010327__bband__consumer__exp.htm.
\3\ ``Rethinking the Internet'' by Michael J. Mandel and Robert D.
Hof. Business Week, March 26, 2001.gQ02
---------------------------------------------------------------------------
<bullet> Increased bandwidth could enhance distance-learning,
telemedicine, home-management, and public services, in addition
to features such as video on-demand and audio streaming.
<bullet> Video conferencing and Voice over the Internet could connect
family and friends.
<bullet> Web surfing and e-commerce will occur at much faster speeds
and with more video content.
<bullet> The ``always on'' capability of broadband means that services
such as electronic yellow pages, stock quotes, and weather
forecasts, will be utilized more often than when users have to
dial-in every time they want access to this type of
information.
<bullet> Websites will become more interactive and graphics-intensive.
Online shopping will become more attractive when more websites
are able to offer better customer service. For example, Land's
End converts more than 10% of its Web visitors to buyers--
compared to the average 4.9%--in part because it offers live
chat and other customer service extras.<SUP>4</SUP>
---------------------------------------------------------------------------
\4\ ``Rethinking the Internet'' by Michael J. Mandel and Robert D.
Hof. Business Week, March 26, 2001.
---------------------------------------------------------------------------
However, we are just beginning to fathom the possible effects of
broadband access. Consider the difference between the first computer
applications and those offered today. Dramatic increases in broadband
access could spur another ``virtuous cycle'' of innovative products and
services similar to those that have been introduced by hardware and
software developers in the PC sector. And while only about 5% of U.S.
households have broadband, one thing is certain: once users experience
broadband, they value it. In fact, 63% of respondents in a recent
survey stated that they would give up coffee before they gave up their
DSL service.<SUP>5</SUP>
---------------------------------------------------------------------------
\5\ DSL users just love their high-speed Net, http://www.nua.ie/
surveys/?f=VS&art__id=
905356682&rel-true.
---------------------------------------------------------------------------
Broadband access has implications for more than just service
providers and their customers. Specifically, the IT sector as a whole
will benefit. For example, one study considered broadband revenues for
various groups including manufacturers of communications equipment,
gateway devices, and semiconductors, as well as service and content
providers. They estimate that worldwide broadband revenues will
increase from $59.7 billion in 1999 to $464.5 billion in
2004.<SUP>6</SUP>
---------------------------------------------------------------------------
\6\ ``Entering the Broadband Era'' Cahner's In-Stat Group, May
2000.
---------------------------------------------------------------------------
It should come as no surprise then that Intel wants policymakers to
get broadband policy right. Like consumers, Intel wants public policy
that promotes the rapid deployment of affordable broadband technology
to all consumers. In pursuit of this goal, Intel joined other members
of the Information Technology Industry Council (ITI) <SUP>7</SUP>, in
the adoption of the following broadband principles:
\7\ ITI is the association of the leading information technology
companies, including computer hardware and software manufacturers,
networking companies, and Internet services companies. ITI member
companies employ more than 1.2 million people in the United States and
exceeded $633 billion in worldwide revenues in 1999.
---------------------------------------------------------------------------
1) Markets, not regulators, should drive the deployment of broadband
technology. To that end, ITI supports the deregulation of the
telecommunications industry and the continued non-regulation of
information services.
2) Market-based competition among all channels of the communications
marketplace is the best way to promote rapid deployment of
broadband technology.
3) Government intervention in the market is appropriate only where a
competitive bottleneck exists.
4) ITI does not endorse any single broadband technology and believes
deployment of multiple technologies will benefit consumers.
Consistent with these principles, Intel believes that the Congress
and Federal Communications Commission (FCC) should encourage the rapid
deployment of broadband services to consumers through deregulation of
the incumbent telephone companies' new, so-called ``last mile''
broadband investment. I wish to point out that Intel is neutral on
whether the interLATA restrictions of the 1996 Act should be modified.
We believe that deregulation of last mile broadband investment,
however, could be done in a way that would preserve the 1996
Telecommunications Act goal of removing barriers to competition in the
telecommunications markets and stimulate investment, spur technological
innovation, reduce prices, and increase consumer choices. Section 232
of H.R. 2420, last year's vintage of The Internet Freedom and Broadband
Deployment Act, would have moved in this direction.
In particular, Intel believes unbundling requirements for new
broadband equipment and fiber loops deployed between an incumbent
telephone company's central offices and residences should be
eliminated. This action would remove a deployment disincentive that
Incumbent Local Exchange Carriers (ILEC) face--being required to allow
competitors unbundled access to this new high-speed equipment. In the
past, Intel has supported the imposition of unbundling obligations on
the ILECs' essential facilities but we do not believe these obligations
should be extended to new broadband services for residential customers
because that investment is both risky and discretionary. Unlike the
existing local loop, ILECs do not have a legacy advantage in newly
installed broadband investment and broadband equipment is readily
available to competitors and ILECs alike. Removing the unbundling
disincentive will lead ILECs to deploy more quickly high-speed services
such as DSL, bringing the benefits of broadband technology to more
consumers. Intel believes those who take the broadband deployment risk
should get the reward.
Intel is satisfied that safeguards can be designed to ensure that
the removal of those barriers has the desired effect and does not
adversely impact competition. Importantly, deregulation should be
conditioned on ILEC compliance with FCC and state collocation and loop
provisioning rules. Intel has long maintained that it is important that
the competitive local exchange carriers (CLECs) have access to ILEC
loops and central offices. Indeed, in December 1998, we reached an
accord with several ILECs that conditioned deregulation of their
broadband services on their making these essential facilities available
to the CLECs. Finally, in the case of new fiber loops, ILECs should be
required, upon request, to maintain the existing copper local loop, so
competitors do not lose access to the home and remain capable of
providing advanced and other telecommunications services.
Intel also believes that to get relief an ILEC should be required
to meet important build-out benchmarks. For example, it could be
required to make advanced services available to 80% of its customers
within 3 years and 100% of its customers within 5 years. In sum, Intel
believes there is a sensible step-by-step approach to eliminating
regulatory barriers that will encourage rapid deployment of advance
services to consumers through deregulation and competition.
I would like to close by noting that Intel's support of DSL
deregulation is just one part of a consistent set of policies that we
believe will increase the deployment of a variety of competing
broadband technologies. For example, in the area of high-speed cable
access, through ITI we supported the FCC's decision to forego
regulatory action to mandate cable access.<SUP>8</SUP> ITI has also
advocated regulatory relief for ILECs before the FCC. ITI argued, and
the FCC agreed, that certain high-speed DSL equipment installed by
incumbent local phone companies should not be required to be unbundled.
ITI submitted comments to the FCC on this particular matter because we
believe that it will enhance the competitive growth of the broadband
market by providing an incentive for ILECs to deploy DSL quickly. At
the same time, however, the FCC also agreed with the position taken by
ITI that the local loop must remain open to all competitors.
---------------------------------------------------------------------------
\8\ ITI wrote to FCC in support of the Commission's amicus brief in
AT&T v. City of Portland. ITI argued that because cable Internet access
is an emerging service and the providers currently lack market power in
the Internet access market, they should not be subject at this time to
open network requirements. Furthermore, ITI agreed with the position
taken by the FCC that the question of whether cable companies should be
required to open their cable modem services should be addressed at the
federal level. Apart from legal arguments over federal and local
jurisdiction, ITI argued that there are compelling economic and
business reasons for developing a national policy on this important
issue.
---------------------------------------------------------------------------
As you can see, Intel has been actively involved in broadband
policy issues. We have not sided with one camp or another, but instead
we have supported and opposed the positions of all of the major players
at one time or another. Throughout this policy process, Intel has
supported the same basic goal; namely, rapid deployment of widespread,
affordable broadband for consumers.
We would encourage the Committee to be as forward-looking as
possible when it examines broadband issues. As we all know, the
telecommunications debates of the latter part of the 20th century often
involved pitting entrenched business interests against each other, or
they focused on the competitive deficiencies of one communications
medium or another. Today, we have a far different landscape, one that
has emerged only in the last several years. With the Internet achieving
status as a mass medium, consumer demand for broadband data service has
grown dramatically. All major communications infrastructure providers
should be encouraged to meet that demand even if, in practice, that
means the government will be loosening some of the regulatory
restrictions that may have made sense in a prior era. As this debate
continues, I would urge you to turn to Intel and the high-tech
community as an disinterested voice on these important issues.
On behalf of Intel, I would like to thank the Committee for its
time, and I would be glad to respond to any questions.
Chairman Tauzin. Thank you very much, sir. The Chair is now
pleased to welcome and for his testimony Mr. Tim Regan, of
Corning, Incorporated.
STATEMENT OF TIMOTHY J. REGAN, SENIOR VICE PRESIDENT, CORNING
INCORPORATED
Mr. Regan. Thank you, Mr. Chairman. As you said, I am from
Corning, Incorporated, and we are the original inventors of
optical fiber, and obviously have a lot of interest in seeing
the technology deployed.
I applaud the committee for undertaking this discussion
today, because it deals fundamentally with the issue of
investment, and we really have two problems from where we stand
on investment.
One is to get investment going again in the
telecommunications sector. One of the things that brought this
economy down is that investment dried up in the
telecommunications sector, and so we need a revival of it.
The second thing is that we really can testify to the fact
that broadband as we define it is not being deployed to
American homes today. And let me explain what I mean by
broadband.
Broadband, as I refer to it, is the capability to both send
and receive information in all its forms--voice, data, video,
graphics, high speed video--by the subscriber. It is not DSL,
and it is not cable modems, and it is not fixed wireless. These
are properly defined as high speed capabilities.
And I will address only the broadband issue, because
fiberoptics is inherently capable of transmitting broadband,
and not these other capabilities. Now, we have witnessed very
unusual investment behavior in this sector as it applies to
investment in fiberoptic broadband systems to residential
customers.
Specifically what we observed is that incumbent local
exchange carriers are investing in copper rather than
fiberoptic systems in new bills and in rehab situations when
fiber systems are equal in cost to copper. It is hard to
believe, but it is true today. We have reached the cross-over
point.
And I can read a statement that came out of the Wall Street
Journal specifically that refers to that. The quote is, ``Sales
of communications wire from fiberoptic and coax cable to old
fashion copper rose 6 percent to $14 billion last year. Here is
the most surprising part. The bulk of the industry sales
continue to come from the same type of wire that Alexander
Graham Bell developed in 1879 to transmit voice signals.
Copper.'' Obviously this situation puzzled us and so we hired a
couple of economists, and we said look at this thing. Why is
there this apparent irrational act. They came back and said,
no, the ILECs are acting in a very rational way.
It turns out that there is new economic research that
indicates in certain situations you are better off to wait than
to invest in new technologies. Those situations include
situations where you have high--some costs, and in situations
where you have technology uncertainty.
They also noted that the unbundling rules at Telric that
came out of the FCC have also caused a bit of a problem, and
that they have not allowed a sufficient rate of return on the
capital investment to get the investment moving.
So you have essentially a powerful--two powerful forces
going on at the same time, which are inhibiting the investment
in this revolutionary technology. So you might say, well, what
is the solution, and we don't have any magic wands.
One solution we might think about is to consider the
possibility of actually amending the unbundling rules so that
you can allow a sufficient rate of return on capital to justify
the investment. In a sense, this is not a regulation issue. It
is a financial issue.
It is how do we get the rate of return up, and you can get
the rate of return up by changing the rules. So it is worth
taking a look at this, and I think in the final analysis what
we really face is we face here a tug between two things.
We all want competition, and we have a natural tug between
the unbundling rules that will enhance competition, and the
rules which can inhibit investment, and somehow we have to find
the right balance. So, with that, I would like to thank you for
your time. I guess I am less than 5 minutes, but I'm sure that
is probably appreciated.
[The prepared statement of Timothy J. Regan follows.]
PREPARED STATEMENT OF TIMOTHY J. REGAN, SENIOR VICE PRESIDENT, CORNING
INCORPORATED
Introduction
Mr. Chairman, my name is Tim Regan. I am a Senior Vice President of
Corning Incorporated. We are the original inventors of optical fiber
and, of course, are anxious to see the technology deployed to all
Americans.
My argument is very simple. From the perspective of the fiber
optics industry, broadband is not being deployed to residential
customers in America. This is true for residences located in urban,
suburban, or rural America. Business customers are getting it, but
residences are not.
I know that you might find this statement somewhat astounding
because you hear a lot about the so-called broadband deployment. Cable
modem service, ADSL service (i.e., asynchronous subscriber line), and
various wireless data have been described to be broadband, even by the
FCC. I will argue in my testimony that these capabilities are more
properly described as high-speed data service, not broadband service.
I will also describe in my testimony recent economic research that
Corning has commissioned to determine why broadband capability is not
being deployed to residential customers. The study identifies both
financial and regulatory barriers to deployment.
And, finally, I will propose a possible solution to remove barriers
to broadband deployment. The Internet Freedom and Broadband Deployment
Act of 2001, in large part, encompasses this proposal. Thus, we are
positively inclined toward the bill.
What is Broadband?
The first issue, of course, is the question of what is broadband.
The answer is not obvious.
Oddly enough, the term ``broadband'' really comes from an older
age--the analog age. In the analog age, the information-carrying
capacity of a network was defined by the width of the band of spectrum
used to carry a signal. The wider the band, the greater the
information-carrying capacity. Thus, the term ``broadband'' was used to
characterize a system capable of carrying a considerable volume of
information.
In the analog world, a standard television video signal that
requires 6 megahertz per channel was considered to be broadband. Voice
at 4 kilohertz was thought to be narrowband.
In the digital world, the notion of broadband really doesn't apply.
The information carrying capacity of a digital network is described as
a bit transfer rate. As you know, digital signals are represented by a
series of on and off signals that are characterized by pulses of
electrons or photons. Transmissions in the digital world appear more
like Morse code.
If we use standard television video as a service to characterize
broadband, as we have done in the analog world, a bit transfer rate of
4 million to 90 million bits per second would define broadband. An
uncompressed standard television video signal requires 90 million bits
of information per second to transmit. It can, however, be compressed
to 4 million to 6 million bits per second using compression standard
known as MPEG-2.
Data has become a very important form of information in the digital
world. Remember that computers were originally called data processing
machines. In the computer data world, the connections between computers
are quite robust. A standard has evolved known as Ethernet, developed
by IBM over two decades ago. It provides for the transmission of 10
million bits per second between computers on a local area network.
Today, the Ethernet standard has been upgraded to a 100 million bits
per second.
Frankly, I think the term broadband is so imprecise, it is probably
useless at this point.
I think the better way of engaging the public debate is to identify
bit transfer rates Americans will need to gain access to audio, video,
and data applications. Table 1 describes the transmission speeds
necessary to gain access to a variety of applications.
Table 1
Network Transmission Speed Requirements for Real Time Audio, Video, and Data Applications
----------------------------------------------------------------------------------------------------------------
Applications Downstream Speed Upstream Speed
----------------------------------------------------------------------------------------------------------------
Audio
CD Quality Sound................................................ 256 kbps \1\ --
Broadcast Quality............................................... 48 kbps to 64 kbps --
Plain Old Telephone Service..................................... 64 kbps 64 kbps
Video
Broadcast HDTV (compressed)..................................... 20 mbps \2\/channel --
Broadcast Standard TV (MPEG-2 compressed)....................... ~4-6 mbps/channel
Videoconferencing............................................... 64 kbps-2 mbps 64 kbps-2 mbps
Data
File Transfer (Ethernet)........................................ 10 mbps 10 mbps
Web Browsing.................................................... 240 kbps 240 kbps
Network Games................................................... 80 kbps 80 kbps
----------------------------------------------------------------------------------------------------------------
Source: Timothy C. Kwok, Microsoft Corporation, ``Residential Broadband Internet Services and Applications
Requirements,'' IEEE Communication Magazine June 1997, Tables 3 and 4, p. 80-81.
\1\ 1 kbps is one thousand bits per second.
\2\ 1 mbps is one million bits per second.
If you think that Americans will need access to information in all
its forms--audio, video, and data--it is easy from Table 1 to see that
a capability in excess of 22 million bits per second downstream and 10
million bits per second upstream is ideal. Let me explain with some
examples of the bit transfer speeds necessary to do audio, video, and
data:
<bullet> Plain old telephone service requires 64 thousand bits per
second both upstream and downstream.
<bullet> Standard television using MPEG-2 compression technology uses 4
million to 6 million bits per second per channel downstream.
Since there are on average 2\1/2\ television sets in every
household in America, three channels at 4-6 million bits per
second each is needed.
<bullet> HDTV using the most advanced compression technology requires
20 million bits per second downstream.
<bullet> And, 10 million bits per second both upstream and downstream--
the so-called 10 Base-T Ethernet standard--is required to give
people the same data speeds at home that they get at work in
order to facilitate telecommuting.
I realize that the 22 and 10 million bits per second sound like a
lot. But, I believe it is what will be needed. Here's the calculation.
You need 10 million bits per second both downstream and upstream to
give subscribers the same capability at home that they have in the
office (i.e., Ethernet 10 Base-T). The remaining 12 million bits
downstream could accommodate two to three channels of standard
television quality video.
The FCC has stated in its various Section 706 reports that
broadband is 200 thousand bits per second--or less than 1% of my
prescription. I do not see how the FCC can defend such a low standard
in light of the speeds described in Table 1 above as necessary to
transmit the applications we know of today, never mind the limitless
array of new ones that will be created once the infrastructure is
deployed.
The FCC and others have defined broadband at such a low level
because they fundamentally misunderstand the nature of the future
network. It has been described by the FCC as a superhighway. And,
consistent with this analogy, the connections to the home are simply
narrow on and off ramps.
This is the wrong analogy. The network of tomorrow, which will all
be digital, is not a highway. It is a series of bridges. The bridges
connect islands of intelligence--computers. After all, this is what the
Internet is. It is a network of computers, and each computer has the
capacity to store and process hundreds of millions of bits of
information.
Today, these islands of intelligence are for the most part
connected by
very narrow bridges, a copper pair that can transmit only 56 thousand
bits. Even with these very narrow bridges, we have been able to realize
tremendous economic benefit from connecting these islands of
intelligence.
Fed Chairman Alan Greenspan best characterized the impact of this
connectedness before the Business Council when he said:
``Your focus on technology--particularly the Internet and its
implications--is most timely . . . The veritable avalanche of
real-time data has facilitated a marked reduction in the hours
of work required per unit of output and a broad expansion of
newer products whose output has absorbed the work force no
longer needed to sustain the previous level and composition of
production. The result during the last five years has been a
major acceleration in productivity and, as a consequence, a
marked increase in the standards of living for the average
American household (emphasis added).'' <SUP>1</SUP>
Tremendous economic prosperity has been realized over bridges that
connect the computers at 56 thousand bits per second. Can you imagine
what will happen when we can connect these islands of intelligence by
bridges that can carry over 10 million or 20 million bits per second?
The question before us is how to build these bridges as soon as
possible.
Why Aren't the Bridges Being Built?
Obviously, to deploy this new technology will require considerable
investment on the part of all telecommunications carriers. The problem
is, the dynamics to finance this investment have not been unleashed.
In fact, we have witnessed some unusual behavior. Incumbent local
exchange carriers (ILECs) continue to deploy copper wire rather than
new technology like fiber optics to provide service to new residential
customers (i.e., ``new builds'') and to totally rehabilitate
deteriorated plant that is serving existing customers (i.e.,
``rehabs''). They are spending approximately $9 billion deploying
copper to serve new builds and rehabs in the residential market.
This reality was evidenced in a recent article in The Wall Street
Journal which stated:
``Global sales of communications wire, from fiber-optic and
coaxial cable to old-fashioned copper, rose 6% to $14 billion
last year . . . Here's the most surprising part: The bulk of
the industry's sales continues to come from the same type of
wire Alexander Graham Bell developed in 1879 to transmit voice
signals--copper (emphasis added).'' <SUP>2</SUP>
The fiber optics industry is somewhat puzzled by this investment
behavior because it does not appear to be cost driven. The cost parity
between fiber optic and copper solutions for residential customers is
well established by industry sources. For example, Matthew Flanagan,
President, Telecommunications Industry Association, submitted comments
to the FCC attesting to this fact. As evidence, he submitted sworn
affidavits from four different telecommunications engineering experts
who all supported the cost parity claim. <SUP>3</SUP>
----------
<SUP>1</SUP> Remarks by Alan Greenspan, Information, Productivity,
and Capital Investment, Before the Business Council, Boca Raton,
Florida, October 28, 1999.
<SUP>2</SUP> Mark Tatge, ``Wire Makers Thrive Despite Advent of
Wireless Phone'', The Wall Street Journal, February 16, 2000, p. B-4.
<SUP>3</SUP> Matthew J. Flanagan, re: Implementation of the Local
Competition Provisions in the Telecommunications Act of 1996, CC Docket
No. 96-98, Telecommunications Industry Association, letter to Federal
Communications Commission, August 2, 1999, which states at p. 6-7 that
``In his Declaration, Mr. Cannata from Marconi Communications,
demonstrates that POTS can be provided over a fiber-to-the-curb
(``FTTC'') system at 98 percent to 103 percent of the cost of providing
POTS over a copper system using a digital loop carrier (``DLC/
copper''). He notes further that the FTTC system can be upgraded to
provide high-speed data (i.e., 10/100 Base T) by incurring a 16 percent
incremental cost compared to a 40 percent to 50 percent incremental
cost to upgrade DLC/copper to provide Digital Subscriber Line (xDSL)
service. Finally, he demonstrates how a further upgrade to provide VHS-
quality broadcast video can be deployed for an incremental cost of 44
percent over FTTC for POTS, which again compares favorably to the 40
percent to 50 percent incremental cost associated with the xDSL
solution.
Mr. Jacobs from Corning Incorporated shows in his Declaration
similar results with respect to broadband solutions. His analysis shows
that an Ethernet fiber-to-the-home system (``EFTTH'') using multimode
fiber can be deployed at 7 percent less than ADSL over copper, and
EFTTH is substantially more capable. The EFTTH system can deliver POTS,
10/100 Base T data, and VHS-quality broadcast video, which cannot be
done on an ADSL system.
Mr. Tuhy from Next Level Communications states in his Declaration
that ``fiber-based narrowband solutions for local access serving
residential end-users can be deployed at cost parity with copper-based
solutions as measured on an installed first cost basis for newly
constructed or totally rehabilitated outside plant.'' He makes a
similar statement with respect to broadband. He notes that Next Level
Communication's FTTC system ``can be deployed to provide integrated
voice, data, and video for the same cost as a copper-based solution
with an ADSL
Because we are somewhat puzzled by this investment behavior, we
commissioned a study by three Ph.D. economists, Drs. Kevin Hassett and
J. Gregory Sidak, who are associated with the American Enterprise
Institute for Public Policy Research, and Dr. Hal Singer who is
associated with Criterion Economics. The study concluded that the ILECs
and the CLECs are acting very rationally in delaying their decision to
invest in new technology to serve residential customers. They
identified both financial and regulatory explanations for the delayed
investment behaviors. From a financial perspective, this delayed
investment behavior is explained by a rather new model for explaining
investment behavior known as the Dixit-Pindyck model. This model shows
that when faced with certain conditions, a prudent investor will
maximize his return by delaying investment in next generation
technology. These conditions include a sunk cost investment, a high
degree of market or technology uncertainty, and the absence of robust
competition. Under these three conditions, which are all prevalent in
the residential telephone market, a carrier is better off delaying a
decision to invest in new technology. <SUP>4</SUP> Since ILECs are
required to provide telephone service, they invest in copper solutions
which are suited for just plain old telephone service.
----------
overlay for high-speed data.'' This assumes new builds or total
rehabs as well as first installed cost comparison.
Finally, Mr. Sheffer from Corning Incorporated addresses the rural
deployment issue in his Declaration. He cites a proprietary Bellcore
(now Telcordia Technologies) study prepared for Corning showing that
the cost of narrowband fiber-to-the-home (``FTTH'') at $2,370 per home
passed beats narrowband DLC/copper at $2,827 per home passed. In other
words, narrowband FTTH is 16.2 percent less costly than DLC/copper in a
rural setting. More surprisingly, broadband FTTH also beats narrowband
DLC/copper by 7.5 percent (i.e., $2,616 per home passed for broadband
versus $2,827 per home passed for narrowband). Again, this analysis was
based on new builds and total rehabs and the cost comparisons were done
on an installed first cost basis.
<SUP>4</SUP> Kevin A. Hassett, J. Gregory Sidak, and Hal J. Singer,
An Investment Tax Credit to Accelerate Deployment of NewGeneration
Capability, February 28, 2000, p. 7, which states: ``A simple example
can make the point more intuitive. The traditional view is that one
should invest in any project that has a positive net present value of
cash flows. Recent advances in economic theory have shown, however,
that this rule is not always correct. On the contrary, it is often
better to wait if at all possible until some uncertainty is resolved
and cost reduction can be achieved. Consider, for example, a firm that
traditionally offers telecommunications services through copper wire.
The firm must decide whether to install a new advanced broadband line
that costs, say, $100 today but has an uncertain return tomorrow.
Suppose that, if the demand for high-bandwidth services is high, the
firm stands to make $400 profit. If, on the other hand, there is a bad
outcome and the demand for the new services is low, then the new
``pipe'' will be underutilized, and the firm will gain nothing from
owning it. If the probability of either outcome is 0.5, then the
expected net present value of laying the new broadband line is,
ignoring discounting, calculated as follows: (0.5 x $400) + (0.5 x $0)
- $100 = $100. We can summarize this simple decision problem in the
following table.
Scenario 1: The expected profit if firm installs a NGi fiber-optic cable that costs $100 and has an uncertain
return tomorrow.
----------------------------------------------------------------------------------------------------------------
Tomorrow
Today Invest ----------------------------------------------- Net Expected
Good Outcome Bad Outcome Return
----------------------------------------------------------------------------------------------------------------
-$100.............................. (0.5 x $400) + (0.5 x $0) = $100
----------------------------------------------------------------------------------------------------------------
Because the project has a positive expected cash flow, one might
think it optimal to install the cable today. But it is not. If the firm
delays making the investment, it can reduce the risk by observing the
experience of others and capturing the gains associated with deploying
reducing-cost technology later. The value of waiting is that the firm
can decide not to make the investment if the bad state occurs. We can
summarize this subtler decision problem in the following table:
Scenario 2: Expected profit if firm waits and decides tomorrow.
----------------------------------------------------------------------------------------------------------------
Tomorrow
Today Invest -------------------------------------------------- Net Expected
Good Outcome Bad Outcome Return
----------------------------------------------------------------------------------------------------------------
$0.............................. 0.5 x ($400-$100) + (0.5 x $0) = $150
----------------------------------------------------------------------------------------------------------------
By waiting, the firm would increase its expected return by $50. If
the firm invests today, it gives up an option to invest tomorrow that
is worth $50. The firm is better off waiting because it can avoid the
loss of $100 by not purchasing the new cable in the bad state. Note
that the two examples would have the same expected return if the firm
were allowed to resell the ad-
The study goes on to conclude that the incentive to delay for ILECs
is intensified by the so-called unbundling rules which require
incumbents to allow their competitors to use parts of the incumbents'
network at a regulated rate. This rate does not provide a sufficient
return on investment to justify investment is new technology.
The parts of an ILEC's network that must be unbundled and resold to
competitors are known as unbundled network elements, or ``UNEs.'' The
FCC has defined the price for the sale of these UNEs as TELRIC, or
total element long run incremental cost. TELRIC attempts to value the
various network elements based upon their forward-looking costs. The
FCC believes that TELRIC replicates how competitive markets actually
operate by approximating what it would actually cost an efficient,
competitive firm to produce UNEs.
The study concludes that TELRIC pricing creates a disincentive to
invest in new technology. It states:
``Most observers believe that mandatory unbundling [at TELRIC]
limits the upside potential of any new investment project and
that the expected return to investment in some projects may
fall below the firm's cost of capital. ``This disincentive to
invest has been emphasized in the public debate over
telecommunications policy by both incumbent local exchange
carriers (ILECs) with respect to the local telephony networks,
and by AT&T with respect to proposals that unaffiliated
Internet service providers be given the legal right of
mandatory access to AT&T's cable-television networks.''
<SUP>5</SUP>
In other words, the rate of return provided for TELRIC pricing is
inadequate to give carriers an incentive to invest in new technology.
Other experts, including Kathleen Wallman, former Chief of the
FCC's Common Carrier Bureau and Deputy White House Counsel in the
Clinton Administration, as well as Supreme Court Justice Breyer, have
observed this disincentive. Ms. Wallman stated in a speech to state
regulators:
``Do we really mean to say that any carrier that is thinking of
building a new broadband network should count on being able to
recover, from day one of the operation, only the forward
looking cost of their brand new network? I don't think so. No
rational, efficient firm would take that deal. And that would
be our collective loss, not just theirs.''
Similarly, Justice Breyer reinforced this observation when he noted
that ``. . . a sharing requirement may diminish the original owner's
incentive to keep up or to improve the property by depriving the owner
of the fruits of value-creation investment, research, or labor.''
<SUP>6</SUP>
The point is, the new economics as characterized by the Dixit-
Pindyck model combined with the unbundling rules at TELRIC create a
powerful disincentive for ILECs to invest in new technology. This
disincentive is reflected in the stock price of incumbents, including
AT&T, when they make decisions to invest in infrastructure. Their stock
price falls.
With this explanation, it is clear that regulatory changes are
necessary to give carriers an incentive to invest in new technology,
especially broadband technology. As indicated in the analysis,
financial changes are also necessary.
The Proposed Solution
One thing is clear from the analysis, the existing regulatory
structure is not working. It is discouraging investment in broadband to
residential customers, not remaining neutral or encouraging it.
One possibility to address this problem is to start out with an
obvious regulatory failure. This failure is reflected by the fact that
ILECs are investing in copper systems for residential new builds and
total rehabs rather than fiber-based solutions that are equal in cost.
The analysis we commissioned indicates that this seemingly irrational
behavior is, in part, due to the unbundling requirements and the price
set for the various unbundled elements.
----------
vanced broadband line at the original purchase price if there is
bad news. But that salvage scenario is patently unrealistic for two
reasons. First, many pieces of equipment are customized so that, once
installed, they would have little or no value to anyone else. Second,
if the demand for high-bandwidth services is indeed low, then the
advanced broadband line would have little value to anyone else. For
these reasons, the investment in the equipment is ``irreversible'' or
sunk in the sense that it has virtually no value in an alternative use.
<SUP>5</SUP> Id., p. 3-4
<SUP>6</SUP> AT&T Corp. v. Iowa Util. Bd., 119 S. Ct. 721, 753
(1999) (Breyer, J. concurring in part and dissenting in part) (citing
1.H. Demstez, Ownership, Control, and the Firm: The Organization of
Economic Activity, 207 (1988)).
A possible solution, therefore, would be to eliminate the
unbundling rules entirely, or only with respect to residential new
build and total rehab situations where the regulatory failure is
occurring. In either case, the regulatory relief would be conditioned
upon an ILEC investment in broadband capability. Broadband in this case
would be a data transfer speed sufficient to allow the subscriber to
both send and receive audio, video, and data. This capability can be
delivered with a variety of technologies and architectures including
copper-based xDSL, satellite, hybrid fiber coax, and fiber-to-the-home.
In any event, the conversion of the network to broadband capability
is a long-term undertaking. By some estimates, it could take 30 years
to complete. We must move ahead now. The Internet Freedom and Broadband
Deployment Act of 2001 is a good place to start.
Conclusion
Mr. Chairman, in conclusion, I think my testimony can be summarized
by three points: First, broadband is not happening. Second, the lack of
deployment is caused by the unbundling rules and financial factors. And
third, eliminating the unbundling requirement, either entirely or for
residential new builds and total rehabs, where broadband is being
deployed, is a reasonable and measured step to take.
Thank you for your time and attention. I stand ready to address any
questions you may have.
Chairman Tauzin. Thank you, Mr. Regan. And finally the
testimony of Tom Tauke, of Verizon Communications, is welcomed.
Tom.
STATEMENT OF THOMAS J. TAUKE, SENIOR VICE PRESIDENT FOR PUBLIC
POLICY AND EXTERNAL AFFAIRS, VERIZON COMMUNICATIONS
Mr. Tauke. Thank you, Mr. Chairman. It is always good to be
here. I will say it is nicer to be up there where you get to
walk around a little bit during the course of the meeting.
I want to make a couple of assertions that I believe most
of us agree upon. The first is that the broadband market is a
distinct market. The high speed services market is an
identifiable and distinct market.
The second is that the deployment of broadband services is
key to economic. Alan Greenspan has suggested that the
productivity growth that we have experienced over the last
several years has come from networking, and the improvement of
those networks will explode the economic growth.
Third, that the members of this committee, and the Members
of Congress want the right public policy for broadband, and the
right public policy is a policy which, one, encourages
deployment, and two, encourages competition. Now, I think that
we can agree on all of those things.
For some of you, I think you are not aware that Congress
has never established a broadband policy, and if you believe
that Congress has established a broadband policy, I encourage
you to look at what the three Circuit Courts have done that
have addressed broadband issues.
They haven't been able to figure out what the 1996 Act said
about broadband services, and whether or not they are telecom
services--they couldn't agree on that--or what rules ought to
apply.
Congress needs to set a broadband policy. When you don't,
you have a lot of confusion and we have mass confusion to day
as to what rules apply. You have unfairness, and certainly it
is unfair for the dominant provider to be able to offer
services and not have any rules or regulations, while the
provider that has less than a quarter of the market has all
kinds of rules and regulations. You have that unfairness today.
And you have barriers to the deployment of broadband
services. We believe that the Tauzin-Dingell bill moves in the
right direction in setting the right policy. I will say to you
that we might start by agreeing on what the Tauzin-Dingell bill
does, because I don't recognize the bill from a lot of the
assertions that have been made today about it.
Let me tell you what I think it does. First, it does not
change any of the rules relating to the telephone network, to
telephone services, to narrowband services, none of those
change.
The assertion has been made, for example, that if we deploy
fiber in the network that we don't have to unbundle. We don't
see that. We believe that we still have to unbundle and sell
the loop to carriers, even if it is on fiber, and sell it to
them for their voice services. The telephone rules don't
change.
Second, it imposes no new rules on anybody else. Satellite,
wireless, cable, nobody else gets any new rules. Third, it
lifts the telephony rules which we believe the FCC and some
have mistakenly begun to apply to broadband which Congress
never directed be applied to broadband.
I might say that the FCC even tried to undo some of that
and got overturned by the Courts. Let me just say that we
believe there are two areas where the rules need to be lifted.
One is in the local broadband networks. We have learned a
lot about DSL deployment and DSL is important, but the first
one that talked about fiber was Tim Regan, and the biggest
challenge we face is that as we attempt to upgrade the local
networks by putting fiber out to the neighborhoods, we have all
kinds of technical inhibitions to doing so because of the
rules, and economic inhibitions from doing so.
And yet it makes no sense for you to try to discourage us
from deploying fiber in the network. The second area where we
think the rules should be lifted is the interLATA restrictions,
and we believe that also happens under the Act.
I testified 2 years ago before this committee, and at that
point I used the airport analogy, and the long hauls. We were
getting lots of long hauls, you know, and lots of routes from
New York to Los Angeles, and we weren't getting those regional
networks that would serve places like in Iowa in my hometown.
Well, I can report to you 2 years later that everybody is
continuing to invest in those long haul networks, but we don't
have many more regional airports that hook people in to the
broadband nationwide network, and the need is still there.
There are two separate needs and both are important.
You are not plowing new ground here by the way. What you
are doing is very parallel in this bill to what was done with
wireless services back in 1993. Wireless at that time was
recognized as a separate market. Congress decided that the
telephony rules, even though wireless service looked a lot like
telephony, the telephony rules should not apply.
And Congress established a pro-market policy and then in
1996 lifted the interLATA restrictions on wireless. What
happened to wireless? An explosion of growth from 11 million
users in 1993 to a hundred-million today.
Development of robust competition, and ubiquity of
deployment, new services provided for consumers, and lower
prices. You can get the same good results from the right policy
for broadband.
[The prepared statement of Thomas J. Tauke follows:]
PREPARED STATEMENT OF THOMAS TAUKE, SENIOR VICE PRESIDENT, VERIZON
COMMUNICATIONS
Mr. Chairman, thank you for this opportunity to testify before the
Committee. I am Tom Tauke, Senior Vice President for Public Policy and
External Affairs at Verizon Communications. I am before you today in
support of the Internet Freedom and Broadband Deployment Act of 2001
and to tell you that, without changes in the current regulatory regime,
the deployment of high speed Internet access will be significantly
impeded, to the detriment of the American economy as a whole and all
Americans.
Mr. Chairman, the Internet is a wonderful tool that developed far
faster than anyone could have imagined. Use of personal computers and
dial-up access to the Internet fueled the growth the U.S. and world
economy enjoyed in the late 1990's. This growth has now reached a
plateau. More is needed now to move the economy to the next level. And
that stimulus--stimulus to the economy as a whole--could be provided by
greater deployment of high-speed broadband Internet access.
The current infrastructure on which the Internet rides has proven
insufficient to handle the explosive growth. To stimulate the
infrastructure investment that is required, policy-makers must stop
applying old regulatory models to this entirely new, competitive
technology. As the recent economic indicators have shown, the
consequences of this policy are very serious. The entire Internet
economy rests on the ability of businesses to reach consumers and to
reach each other. Without broadband deployment, many local communities
will never realize the promise of high-speed Internet, and Internet
companies will not be able to reach their markets. This has had and
will continue to have a serious impact on the value of the Internet
economy itself and the economy at large.
Using policies for the Internet and broadband services that were
intended for a local voice telephone market has slowed deployment of
broadband, inhibited competition and slowed investment at the very time
when we need every possible player involved to help advance the
capabilities and capacity of the Internet.
The opponents of this legislation will talk about everything but
broadband services. They will tell you their stories about narrowband
local service competition and about voice long distance. But this bill
is not about narrowband or voice long distance. This bill will not
change the market-opening provisions of the 1996 Act or the section 271
tests that Verizon and the other Bell companies will have to pass if
they are to provide voice long distance services. What the bill will
change is rules that were never intended to apply to the Internet world
in the first place and, in doing so, will allow more resources to be
devoted to meeting consumers' needs for broadband services. That is why
I urge you all to support this legislation.
THE STATE OF THE INDUSTRY
As recently as a few years ago, the American people knew nothing of
the Internet. Electronic commerce was all but unknown. In 1995, when
Congress was re-writing the Communications Act, revenues generated by
the Internet were a mere $5 billion. Since then, the growth of the
Internet has been astounding, far outstripping everyone's predictions.
Last year, Internet revenues rose to an astronomical $130 billion.
With this growth, there has been increasing demand for bandwidth
and speed. The 56k modems that were fast a couple of years ago now seem
to crawl. Consumers who have gotten used to high-speed connections at
work want the same speeds when they go online at home.
This problem is exacerbated in rural areas and other locations that
are distant from backbone connections or hubs. Even where backbone
exists, such as in major urban centers, it is often congested. Many
Internet providers have no way to get their data traffic to the
backbone efficiently and without numerous back-ups and delays. Many are
simply located too far away from convenient backbone connections. And
when they do get to the backbone, they find that the lack of adequate
capacity slows their customers' service.
If any leg of the transmission is slow, the consumer cannot enjoy
the benefits of high-speed Internet service. Without this speed, some
of the more exciting applications for education and telemedicine
involving video, for example, are impossible. We need competition and
investment in the Internet from end-to-end--from the local connection
to the nationwide and global backbone. Without it, whole new industries
based on a more advanced Internet will be stymied and the continued
development of our high tech and computer industries will be slowed.
The Internet drove the growth of the high tech sector, and it can drive
it again, if we change the regulatory regime that now inhibits
investments by some of the most logical players.
Today, the two landline technologies that provide residential
consumers with high speed Internet access at a reasonable cost are
Digital Subscriber Line (DSL) services and cable modem services. Only
one of these services, DSL, is subject to significant federal
regulation. Even worse, only certain providers of DSL--the Bell
operating companies (BOCs)--are so constrained as to not be able to
provide data services across LATA boundaries that were drawn with
traditional voice telephone service in mind.
If consumers are to get widespread deployment of high speed
Internet services from competing providers, it is necessary for DSL
services to be deregulated just like cable modem services. Current
regulation hampers significant DSL deployment and denies consumers
benefits.
THE BROADBAND MARKETPLACE
Broadband services are different from narrowband services and
constitute a separate market. As the FCC found in analyzing the AOL-
Time Warner merger, ``Residential high-speed Internet service
constitutes a discrete market that must be considered separate from the
residential narrowband market.'' <SUP>1</SUP>
---------------------------------------------------------------------------
\1\ FACT SHEET: FCC's Conditioned Approval Of AOL-Time Warner
Merger at 3, dated January 2001.
---------------------------------------------------------------------------
This market is already competitive, as the FCC has repeatedly held.
For example: ``The record before us, which shows a continuing increase
in consumer broadband choices within and among the various delivery
technologies--xDSL, cable modems, satellite, fixed wireless, and mobile
wireless, suggests that no group of firms or technology will likely be
able to dominate the provision of broadband services.'' <SUP>2</SUP>
---------------------------------------------------------------------------
\2\ Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's
Rules to Establish Rules and Policies for Local Multipoint Distribution
Service and Fixed Satellite Services, 15 FCC Rcd 11,857, at para. 19
(2000).
---------------------------------------------------------------------------
Local telephone companies like Verizon are not the dominant
providers in this market--in fact, they are the new entrants. Cable
operators serve more than 70% of all residential broadband customers,
offering these customers high-speed local access bundled with the
service of an affiliated ISP.<SUP>3</SUP> Local telephone companies are
newer entrants in the residential broadband access market, challenging
the dominant market position held by cable operators.
---------------------------------------------------------------------------
\3\ On February 22, 2001, Precursor Group reported that 73 percent
of residential broadband service was provided by cable modems. How
Broadband Deployment Skews Economic/Business Growth at 1, dated
February 22, 2001. According to data released by the Commission in
October, cable operators control 70% of all ``residential and small
business high-speed lines''--a total that understates cable operators'
share of the residential market by including a class of business
customers largely served by DSL. Industry Analysis Division, Common
Carrier Bureau, High-Speed Services for Internet Access: Subscribership
as of June 30, 2000, at Table 3 (Oct. 2000).
---------------------------------------------------------------------------
In addition, local telephone companies must make substantial
improvements to their networks to provide residential broadband
access.<SUP>4</SUP> As the FCC has recognized, ``traditional
telephone'' networks ``are not ideally suited for broadband.''
<SUP>5</SUP> Specifically, the Commission has found that ``variations
in legacy outside plant conditions can limit access to certain end-
users even in upgraded areas.'' <SUP>6</SUP> For example, ADSL service
cannot generally reach customers whose loops exceed 18,000 feet or are
routed through a Digital Loop Carrier.<SUP>7</SUP> Further, ``in
contrast to an upgraded cable network, which can offer upgraded service
to all homes it passes, LECs must `condition' each end-user's line by
removing'' ``devices that were used to enhance the quality of voice
traffic over the copper.'' <SUP>8</SUP> The necessary improvements to
the telephone network will require substantial investments.
---------------------------------------------------------------------------
\4\ Inquiry Concerning the Deployment of Advanced
Telecommunications Capability to All Americans, Second Report, CC
Docket No. 98-146, at para.para. 31. 35 (Aug. 21, 2000) (Second
Advanced Services Report'').
\5\ Inquiry Concerning the Deployment of Advanced
Telecommunications Capability to All Americans, 14 FCC Rcd 2398, at
para. 46 (1999).
\6\ Second Advanced Services Report para. 31.
\7\ See id. para.para. 38, 40.
\8\ Id. para. 39.
---------------------------------------------------------------------------
THE REGULATORY LANDSCAPE
Cable operators started first, are ahead in deployment and have
more customers than local telephone companies. And yet cable is
unregulated, while telephone companies are burdened with a set of rules
that were designed for the voice business and that make no sense at all
in this marketplace.
This regulatory disparity has a direct effect on the market.
Observers note that ``DSL is a long shot to seize the lead now'' in
part because ``archaic regulations that forced DSL players to adopt a
wrong-headed structure from the get-go.'' <SUP>9</SUP> ``Even if the
FCC acts quickly [to free the Bells], it isn't clear that DSL, in such
turmoil, can keep pace with cable.'' <SUP>10</SUP>
---------------------------------------------------------------------------
\9\ Technology: Highway to Hell, Forbes, dated Feb. 19, 2001, at
98-99.
\10\ Technology: Highway to Hell, Forbes, dated Feb. 19, 2001, at
100.
---------------------------------------------------------------------------
Existing federal regulations handicap Verizon's provision of DSL.
The FCC has applied the section 251 unbundling and resale requirements
to Verizon and other incumbent local telephone companies. They require
Verizon to allow competitors to put their DSL equipment not only in our
central office equipment buildings but also in small ``remote
terminal'' boxes in local neighborhoods.
They require us to provide not only unbundled lines from our
locations to customers, but also ``subloop'' pieces of those lines. The
FCC first required us to provide DSL-capable loops, then it required
``line sharing''--allowing a competitor to use only a portion of the
capacity of the loop almost for free to provide DSL service while
Verizon provided the underlying basic telephone service. Now we are
also required to ``line split''--to arrange for two different
competitors to share our lines, while we provide no service at all to
the customer.
The FCC is now considering requests from other carriers that we be
required to provide our new DSL services to them at very low TELRIC
prices--that is prices that are below our costs. If we have to do this,
what incentive will we have to make the investments that make these
services possible? And yet that investment is exactly what you and the
public expect from us.
The other characteristic of the regulatory landscape is
uncertainty--participants and investors don't know for sure what the
rules are. One federal court of appeals has held that cable modem
service is a ``telecommunications service'' under the Communications
Act; another has held the opposite. A third circuit court has found
that comparable services provided by telephone companies are
``telecommunications services.'' Whether Verizon must provide wholesale
DSL services at discounts to their competitors and whether it must
unbundle its retail DSL service are now before the courts. Our
investment decisions, and the investment decisions of our competitors,
will be effected by the actions of these courts and by the Commission's
actions in response to them. If Congress wants to encourage broadband
investment, it needs to set a clear, national broadband policy.
THE CELLULAR EXPERIENCE
There is a better way. And it is not to heavily regulate
telecommunications services. Arguably, one of the greatest success in
this industry in the last twenty years is the growth of wireless
services, but that success came only after regulation was disposed of
and the marketplace was allowed to operate.
In March 1982, the FCC created commercial cellular service,
<SUP>11</SUP> and service began in 1983. No one at that time predicted
cellular's fantastic growth. In fact, at the time of the breakup of the
Bell system, it was unclear as to whether AT&T or the BOCs would
inherit AT&T's cellular spectrum licenses. AT&T had predicted that
cellular subscription levels would reach one million by 1999. In
reality, cellular subscribership reached that level in 1987, and at the
end of 1998, there were 69,209,321 wireless subscribers in the
U.S.<SUP>12</SUP>
---------------------------------------------------------------------------
\11\ Report and Order, 86 F.C.C.2d 469 (1981), modified 89 F.C.C.2d
58 (1982), further modified 90 F.C.C.2d 571 (1982).
\12\ CTIA Semi-Annual Wireless Industry Survey Results.
---------------------------------------------------------------------------
Wireless growth was slow at first. By the end of 1988, there were
approximately two million cellular subscribers in the U.S.,
<SUP>13</SUP> with an average monthly cellular bill of $98.02. At that
point, the FCC made an effort to significantly deregulate cellular
service.<SUP>14</SUP>. Within four years of the FCC's deregulatory
effort, cellular subscribership reached 11 million, while the
subscriber's average monthly bill dropped by nearly 30
percent.<SUP>15</SUP>
---------------------------------------------------------------------------
\13\ Id.
\14\ Amendment of Parts 2 and 22 of the Commission's Rules to
Permit Liberalization of Technology and Auxiliary Service Offerings in
the Domestic Public Cellular Radio Telecommunications Service, Report
and Order, 3 FCC Rcd. 7033 (1988), recon. in part 5 FCC Rcd 1138
(1990).
\15\ CTIA Semi-Annual Wireless Industry Survey Results.
---------------------------------------------------------------------------
A second major deregulatory effort was undertaken by Congress in
1993. In the Omnibus Budget Reconciliation Act of 1993, <SUP>16</SUP>
Congress, to a great extent, deregulated the cellular telephone
industry. In the next five years, wireless telephone subscribership
rose from 16 million to 69 million, while the average monthly bill
dropped by nearly 50 percent.<SUP>17</SUP> Today, there are more than
100 million mobile customers in this country, paying as little as $15
per month for basic service. Wireless long distance service has become
so inexpensive that about 40% of mobile phone users make long distance
calls on their cellular phone while they are home.
---------------------------------------------------------------------------
\16\ Omnibus Budget Reconciliation Act of 1993, Public Law 103-66.
\17\ CTIA Semi-Annual Wireless Industry Survey Results.
---------------------------------------------------------------------------
Regulation was not necessary to keep prices reasonable--the market
did that. In fact, regulation actually raised cellular prices. During
FCC proceedings, a Cellular Telephone Industry Association study showed
that cellular prices in regulated states averaged 17% higher than the
prices in unregulated states. It also found that cellular penetration
and cellular growth is lower in regulated states than in unregulated
states.<SUP>18</SUP>
---------------------------------------------------------------------------
\18\ The Cost of Cellular Regulation, Jerry Hausman, McDonald
School of Economics, MIT, January 3, 1995.
---------------------------------------------------------------------------
The inescapable conclusion is that the cellular industry--and
cellular consumers--benefited greatly from deregulation. In a
deregulated environment, subscribership rose and prices dropped.
The high-speed Internet market today is in a similar position today
as the cellular industry was more than ten years ago. Of the more than
60 million U.S. Internet households, 5.5 million access the Internet
via high-speed cable modem, and only 2.3 million use xDSL technology
for high-speed Internet access. Adoption of deregulatory measures, such
as those contained in the Internet Freedom and Broadband Deployment
Act, will permit telephone companies to provide xDSL technologies at a
more rapid pace, hopefully with the same results as deregulation of the
cellular industry: more consumers accessing the technology for lower
costs.
CONGRESS NEEDS TO ACT NOW
The FCC cannot solve the problem of regulation that inhibits
broadband deployment and skews the competitive marketplace--Congress
must do that. The longer the delay, the longer consumers will have to
wait for services they want and the longer the economy will have to
wait for the boost that these new services would surely produce. The
authors of this bill want to free the Internet from the LATA
constraints that were established for the voice telephone network
nearly twenty years ago. They want to remove burdensome regulation that
discourages innovation and deployment in data services. And they want
to put telephone company broadband providers on a more level
competitive playing field with cable. These are all worthy goals. I
urge you to start the process and to take up and report out the
Internet Freedom and Broadband Deployment Act without delay.
Thank you.
Chairman Tauzin. And you wrapped it up very nicely, and
almost within the time limit, Mr. Tauke.
We are going to have a vote on the floor in just a few
minutes, and I know that you would like to walk around, perhaps
for some very reasonable reasons.
And what we are going to do is that we are going to take a
break for lunch and other purposes, and come back at 1:30, when
we will begin our questions of the panel. The committee stands
in recess until 1:30.
[Whereupon, at 12:47 p.m., the committee recessed, to
reconvene at 1:35 p.m. the same day.]
Chairman Tauzin. All right. The Chair will recognize
himself and then members in order of their appearance for a
round of questions. The Chair recognizes himself.
Let me first make a statement, and then I want to ask a few
questions of you. History is a good gauge by which you can tell
where people have been and where they are going. I just want to
remind this audience and all of you that there was a time in
the history of this panel when we took on the deregulation of
the cable industry in 1986, and we accomplished that into law.
And we were back here in 1992 reregulating cable, because
we discovered in those interim years that cable and its
vertical integration had fairly well monopolized the video
marketplace.
There was a huge fight if you recall in 1992 when we took
on the issue of whether or not we ought to provide competitors
to cable then, and the programmatic access provisions that
created the satellite industry.
We allowed cable to go back into total deregulation, and to
let those new rules in 1992 expire on the basis of that renewed
interest in video competition and satellite services, and the
good effect of the program access bill.
It is for that very same reason that Mr. Dingell and I
bring this bill today, is to make sure that we don't have to
come back as we did in 1992 to revisit the question of cable
deregulation, as cable now moves into broadband deployment and
broadband services.
Several members mentioned that today, and Mr. Cicconi, I
want to focus on that first. If we didn't have a phone issue
here, and if this wasn't about the side of your business that
has to do with telephones, and if it was strictly about whether
or not cable is going to be permitted in this country to
operate broadband services in the deregulated market place we
provided for cable, which we want to preserve in this new
marketplace, these advanced services, and the minority
competitor with DSL continues to be regulated--and I have the
list of them, Mr. Mancini, and there are 22 different
requirements on the phone companies trying to provide broadband
services that don't apply to cable.
And absent--and just getting away from the phone company
issues themselves, telephone service, how could cable expect
that Congress wouldn't 1 day be forced to reregulate you if
there isn't enough competition out there in the marketplace,
and cable's share of broadband growth from 75 to 80, to 90, to
wherever it may end up being, absent a fair playing field? Mr.
Cicconi.
Mr. Cicconi. Mr. Chair, first of all, cable's share of
multichanneled video is declining dramatically. Competitors
have about 20 percent of the market, and they are growing at
twice the rate of everyone else, and the opposite is happening
in local phone service. So I dare say that----
Chairman Tauzin. Well, wait a minute. I only have a limited
amount of time. I want you to get away from the phone service.
I want you to simply answer the question. How can cable not
expect this panel 1 day to be revisiting regulation of cable
rates, terms, and conditions, when video for cable becomes part
of broadband services, and you have got 75, 80, 90 percent of
the market because we have not created a fair playing field for
competitors?
Mr. Cicconi. Well, Mr. Chairman, first of all, the chart
you held up is with respect or is somewhat misleading. I know
that the Bell companies produce it. They picked out 20 areas
where they are regulated and we are not.
Chairman Tauzin. Twenty-two.
Mr. Cicconi. I could produce about 30 areas where we are
regulated that they are not.
Chairman Tauzin. Bring me a chart like that. I want to see
it.
Mr. Cicconi. I would be happy to provide you that, but
several of the largest I mentioned in my opening statement. We
have regulation by 30,000 local franchising authorities across
America. The Bells have to deal with nothing of the sort. We
pay about $2 billion annually in local franchise fees.
Chairman Tauzin. Well, the Bells pay all kinds of telephone
taxes.
Mr. Cicconi. The Bells pay nothing of the sort. The Bells
benefit from the Universal Service Fund. We don't benefit from
that in providing these services.
Chairman Tauzin. So you think right now that the state of
the law is a fair playing field, and cable is as regulated as
the Bell Companies in the provision of broadband services?
Mr. Cicconi. Mr. Chairman, we are regulated differently. We
are both regulated, but we are regulated differently.
Chairman Tauzin. Are you as deeply regulated as the Bells?
Mr. Cicconi. Mr. Chairman, you yourself decided there in
the program access rules that satellite would be regulated
differently than cable.
Chairman Tauzin. Are you--I don't have a lot of time. Are
you as deeply regulated in the provision of broadband services
as the Bells? Do you make that assertion to this committee?
Mr. Cicconi. We are regulated, and we are regulated
differently. We have our obligations and they have theirs.
Chairman Tauzin. Let me move on. We heard a huge difference
of opinion in the middle of the panel. By the way, we have had
to excuse Mr. Hill, who had to catch a plane, and I apologize
for that.
We have heard a huge difference of opinion as to whether or
not the Bells are really incentivized to connect the last mile,
to lay the fiber, and to cook up the homes. As Mr. Tauke
indicated, to do something more than just build networks to fly
over us, but to actually connect our homes and our towns, and
our small businesses to broadband.
Mr. Regan, whose company buildings the fiber, and who would
love to see the Bells putting down more fiber to the home, and
Mr. Pitsch is obviously representing a company that has been
critical and instrumental in the computer industry, and in the
power of this new technology to service so well, and they are
both telling us that we had better worry about these unbundling
requirements because they serve as a disincentive to investment
in connecting the homes.
Mr. McMinn says, no, and I think Mr. McLeod says no, too.
These are good laws, and we are going to get deployment
regardless. The guys that make the cable and the guys that
literally empower the computers for us tell us it ain't
happening unless we change the laws.
Now, I want to ask you, Mr. McMinn, we wrote a law in 1996
to try and create and empower competition of the telephone
service. I am very interested. How many residential telephone
consumers does Covad serve for telephone service?
Mr. McMinn. We are not yet in telephone service.
Chairman Tauzin. So you serve zero residential telephone
consumers?
Mr. McMinn. We have a technology that----
Chairman Tauzin. But you are not doing it.
Mr. McMinn. We have a technology that is operational in the
San Francisco Bay Area that is in trial with our own employees
to provide not just one telephone line and one DSL line, but up
to 10 telephone lines on top of 10 DSL lines.
Chairman Tauzin. But for the time being, you are providing
data services to customers, but no telephone services?
Mr. McMinn. Mr. Chairman, we have only been around for 3
years. We have managed to put in place a footprint that covers
half the United States in that time, but we have not yet
managed to offer voice services and data services in
competition.
Chairman Tauzin. To a single customer. And this is my last
question as my time is up. I want to get a good understanding
of your argument that unless we change the policy on
unbundling, we do not incentivize the connection to the homes.
And only 7 percent of the homes in America are connected to
broadband right now, and unless we change the policy, that
number doesn't rise rapidly. That is kind of what I heard from
you two guys. I would like for each of you to elaborate on
that. Why is that true?
Mr. Pitsch. Mr. Chairman, I think I can put it quite
intuitively that if you are a company making a broadband
investment and if it fails, you assume the entire risk, and
your shareholders assume the entire risk. But if it succeeds,
your upside is capped by unbundling requirements, which in most
of these States the cost of cap was about 13 percent.
And you obviously are going to undercut the business
proposition to make investment, and this investment is risky,
and it is uncertain, and it is discretionary. This is not plain
old telephone service.
Chairman Tauzin. We are talking about new investments,
building new investments?
Mr. Pitsch. We are talking about building new investments,
exactly. So on that level, I submit that this is not cold
fusion. If they can make more money doing it, they will do it.
Chairman Tauzin. Mr. Regan, if you will answer, please.
Mr. Regan. I guess my answer is somewhat similar to
Peter's, except that I guess I want to modify it a little bit.
We have studied a very specific segment of the market, and that
is the deployment of what we call broadband. This is the
capability to deliver all the services, both in and out of the
home, in new build, and in rehab situations.
And what we have found is that the rate of return is
insufficient to justify the investment because of the
unbundling rules at Telric.
Chairman Tauzin. And finally do you agree with that, Mr.
Tauke?
Mr. Tauke. The financial issues are one thing, and I agree
with what they said about the financial issues. But frankly the
more troublesome thing right now are the technical issues. If
you put--let's say right now as you know, we have a limit on
the length of deployment of a DSL service.
If you live more than 1,800 feet from the central office,
you can't get it. The logical thing to do is to deploy fiber to
the neighborhood. If we are going to deploy fiber to the
neighborhood, then we have to--and this is just one example,
but we have to then offer co-location in remote terminals--
those little green boxes that you see in suburban
neighborhoods--for competitors.
To offer co-location and remote terminals requires that we
expand those remote terminals or have a garden pot of several
of these remote terminals in an area, and expansion would be
the thing you do.
When you try to expand, you have to get neighborhood
association approval, zoning ordinances, and you have to go to
zoning authorities, and city, county, to do this. The hassle of
trying to get co-location in remote terminals is so great that
it is a huge deterrent, in addition to the economic issues.
But it is a huge deterrent in the deployment of fiber. So
we aren't deploying the fiber to the neighborhoods right now
and this is a big deterrent as much as we could, and this is a
big reason why.
Chairman Tauzin. Thank you very much. Mr. Dingell.
Mr. Dingell. Thank you. Mr. Chairman, I have a series of
questions which I will direct at Mr. Tauke, Mr. Mancini, and
Mr. Cicconi. These will all be yes or no responses. I am doing
that because we have a limitation on time, and I want to be of
assistance to our witnesses, Mr. Chairman.
Now, gentlemen, at an earlier hearing my friends at AT&T,
Verizon, and SBC agreed on one thing; that the cable modem
service and DSL are functionally equivalent services. Do any of
you disagree with that statement, Mr. Cicconi, Mr. Mancini, and
Mr. Tauke. Do you disagree with that?
Mr. Cicconi. Yes, sir, I think they are very different
services.
Mr. Dingell. All right. Mr. Mancini, do you agree or
disagree?
Mr. Mancini. Absolutely not, and the FCC, and I think every
other independent analyst would agree that they are----
Mr. Dingell. So you are contesting then what was said
earlier. Mr. Cicconi is contesting what AT&T told the committee
earlier, and you are not, Mr. Mancini. Mr. Tauke, what is your
view on the matter?
Mr. Tauke. They offer the same service to consumers.
Mr. Dingell. And they are substantially identical?
Mr. Tauke. They are substantially identical.
Mr. Dingell. Very well. Now, Mr. Tauke, is Verizon's high
speed Internet service regulated by the Federal Government;
yes, or no?
Mr. Tauke. Yes.
Mr. Dingell. Mr. Mancini, is SBC's high speed Internet
service regulated by the Federal Government; yes or no?
Mr. Mancini. Absolutely yes.
Mr. Dingell. Now, Mr. Cicconi, AT&T offers high speed
Internet service. Is that regulated by the Federal Government?
Mr. Cicconi. Yes, sir, over cable it is.
Mr. Dingell. And you are saying cable is regulated?
Mr. Cicconi. Under the cable Act, cable services offered
are regulated by the government, and that is subject at all
levels.
Mr. Dingell. What are you required to do under this
regulation?
Mr. Cicconi. We are required to get local franchises, and
we are required to pay local franchise fees.
Mr. Dingell. I am not asking you about cable. I am asking
about your Internet services. Are they regulated by the Federal
Government?
Mr. Cicconi. Not in the same way, no, sir.
Mr. Dingell. Just answer my question.
Mr. Cicconi. Not in the same way.
Mr. Dingell. And so how are they regulated?
Mr. Cicconi. Well, I have indicated that under the Cable
Act that there are various requirements that we have on cable
services, and that's a cable service.
Mr. Dingell. All right. Let's go through that. Are you
subject to FCC prescribed depreciation rates on your
investments; yes or no?
Mr. Cicconi. I don't know off the top of my head, sir.
Mr. Dingell. You don't know. Do you have a legal duty to
interconnect with other companies, including your competitors;
yes or no?
Mr. Cicconi. When we offer telephone services to CLECs,
yes.
Mr. Dingell. When you offer telephone services. We are
talking now about your Internet services. Are you compelled to
do that at this time?
Mr. Cicconi. No, sir.
Mr. Dingell. You are?
Mr. Cicconi. I said no.
Mr. Dingell. You aren't compelled to interconnect with
other companies when you offer Internet services?
Mr. Cicconi. No, sir.
Mr. Dingell. You're not. Now, with regard to Internet
services, does the government require you to allow your
competitors to resell your services; yes or no?
Mr. Cicconi. Does the government require us to let our
competitors resell our services? No, sir.
Mr. Dingell. Okay. Are you under a duty to negotiate access
to your network on your Internet services?
Mr. Cicconi. No, sir.
Mr. Dingell. Must you allow competitors to physically co-
locate on your property?
Mr. Cicconi. No, sir.
Mr. Dingell. Must you obtain government approval before
carrying Internet service traffic over long distances?
Mr. Cicconi. No, sir.
Mr. Dingell. Okay. Now, Mr. Mancini and Mr. Tauke, you are
required to be regulated by government on all of those matters
are you not?
Mr. Tauke. That's correct.
Mr. Dingell. Very well. Now, Mr. Cicconi, if cable modems
and DSL are functionally equivalent services, why should a DSL
be subject to Federal regulatory burdens in these matters,
while cable modem service is not?
Mr. Cicconi. Do I have to answer yes or no, sir, or can I
explain my answer?
Mr. Dingell. Just give a short answer.
Mr. Cicconi. They are regulated differently because the
Congress has concluded that one is a bottleneck facility and
the other is not. You have a choice of receiving cable services
through the type of service cable offers through a variety of
means. You don't have a choice today in local phone service.
That is why they are regulated differently.
Mr. Dingell. Now, Mr. Cicconi, you make a very interesting
point. What percentage of the share of broadband residential
market service does cable modem service currently have? Is it
75 percent?
Mr. Cicconi. It is about 4 million out of a little over 6
million, sir.
Mr. Dingell. And what percentage that? Is it 75 percent?
Mr. Cicconi. Roughly.
Mr. Dingell. Now, assuming that DSL has all the remaining
broadband customers that would put telephone companies at a 25
to 30 percent market share. Now, Mr. Pitsch, you are an
economist and does that sound like a bottleneck or a monopoly
to you?
Mr. Pitsch. Sir, I would say that in that broadband market
that cable has more market power than DSL.
Mr. Dingell. Would it be fair to say that it was a monopoly
with that 75 percent?
Mr. Pitsch. I am always reluctant to call anything less
than 90 percent--sir, I think your questions are going very
much in the right direction. I think if I could just say two
sentences by way of explanation. I think that the broadband
market is a dynamic nascent----
Mr. Dingell. And 75 percent controlled by one kind of
company?
Mr. Pitsch. It is now controlled by one. However, if the
regulatory environment straightened out, and if wireless
specter becomes available, then these shares could change. I
think the point is that the----
Mr. Dingell. Well, this is a wonderful point. Is DSL a
bottleneck?
Mr. Pitsch. No, I do not think so.
Mr. Dingell. You don't think so. All right. Now, the----
Chairman Tauzin. The gentleman's time has expired. One last
question.
Mr. Dingell. Mr. Cicconi, this is what I know what you want
to answer. If Congress were to pass a law that required AT&T to
lease its broadband facilities to competitors at cost, and to
allow competitors to physically co-locate on AT&T premises, and
which would permit access to AT&T's network by all competitors
who want to interconnect, would you recommend that any further
investments by AT&T be made in broadband facilities?
Chairman Tauzin. Yes or no.
Mr. Cicconi. Mr. Dingell, that is really not the situation
facing us here. One is a monopoly facility and the other is
not.
Mr. Dingell. That would put you, my dear friend, on exactly
the same awkward ground that Mr. Mancini and Mr. Tauke stand.
And if you were in that position rush out to instruct your
company to make investments in this area, or would you say, you
know, I think we can put our money more profitably to work in
other places? What would be your response?
Mr. Cicconi. Mr. Dingell, there is no impediment today,
regulatory or otherwise, for DSL deployment.
Mr. Dingell. I am transgressing upon the chairman's time.
He wants you----
Chairman Tauzin. He would like you to answer his question.
Why don't you do that, Jim. Would you invest or not invest?
Mr. Dingell. How about Mr. Ashton. Mr. Ashton, you are an
expert in these matters. And you don't have any particular axe
to grind in this matter. Would you advise clients of your
company to rush out and invest under these circumstances?
Chairman Tauzin. Last question.
Mr. Ashton. No, I would not.
Mr. Dingell. Would not. gentlemen, thank you for your
kindness. Thank you, Mr. Chairman.
Chairman Tauzin. Thank you, Mr. Dingell. Chairman of the
subcommittee, Mr. Upton.
Mr. Upton. Thank you, Mr. Chairman, and I look a lot at my
district as a microcosm of the country. We have a lot of
different blends. We have ethnic strengths, and we have a very
good blend of rural and urban, large businesses and small, and
some terrific educational State universities there as well.
And when I look at a--and because Mr. Stupak is here--a
partial map of Michigan, and I'm sorry that I don't have the
upper peninsula here, but on the other side, and when I look at
a map of Michigan, a partial map of Michigan, and this district
is mine in this corner of the State, the southwestern side,
also looks like a microcosm of America.
By the way, yellow means DSL, and Michigan DSL service as
provided by Ameritech. In other words, the answer is that there
is not a lot that is there, and as I look at this legislation,
and I look at the intent of where I want to this technology to
go, I want to see all of Michigan in yellow, including the
upper peninsula, too.
But sadly this is where we are, and our district I don't
think is any different than very many districts around the
country, particularly when you have such variances as mine.
And I guess, Mr. Mancini, I would like to know from you--I
know that there is a project, project Pronto, which you have
prepared to testify with regards to, and I think the clock ran
out, but how is that investment proceeding, and what will this
legislation do in terms of speeding up shading our State
yellow?
Mr. Mancini. Well, Congressman, as you are aware, there are
distance limitations in DSL. In other words, if your home is
beyond 15 thousand feet from a central office, DSL really can't
provide service.
About 40 to 50 percent of our customers are within those
space limits or space requirements. So we have started Project
Pronto, and we could observe 45 to 50 percent of our customers.
What Project Pronto does is that it is a $6 billion investment
or bet on our part--no tax credits, no government assurances
behind it--to extend that work from 40 to 50 percent to 80
percent.
As a result of this $6 billion investment, which requires
us to lay fiber from the central office and build new remote
terminals closer to the neighborhoods, put new advanced
services and equipment into those remote terminals, and hook up
to the fiber, we will be able to reach 80 percent of the
customers.
That investment is proceeding in Michigan and the rest of
the country, but as I mentioned it is on indefinite hold in
Illinois because--and this causes us great concern, because
what the Illinois Commission did is being considered by
Commissions in Kansas, Texas, and California.
The end result of those kinds of overregulatory decisions,
which definitely do not apply to cable, could destroy the
economic base in our incentive to invest. What the Illinois
Commission did was go well beyond what the 1996 Act and the FCC
had required regarding unbundling.
They required that within those little remote terminals
that are close to the neighborhood, they are what we call line
cards, which are used to provide to split the data voice.
They require us to allow competitors to take their own line
cards made by their own manufacturers, and try to insert them
into this facility. First of all, it is technically infeasible.
The manufacturer of that equipment has said that it cannot be
done, and in addition, and as a result of those requirements,
it has imposed an additional $500 million cost on us.
And that destroys the economic base, and as a result we
will not deploy Project Pronto in Illinois, and over a million
Illinois customers will not have an alternative to cable.
Mr. Upton. Mr. Henry and Mr. Ashton, as I have had many,
many meetings over the last couple of months with a variety of
different interested parties, one of the common comments is
that--and particularly with the CLEC industry--is in big
trouble.
That they are not getting the return on their investment,
and some have suggested that this legislation would in fact
provide the final nail in the coffin, and that presupposes, of
course, the argument that the corpse is also inside the coffin.
You two have a little bit of a different view in terms of
the Wall Street analysis of the CLEC industry, and perhaps what
this legislation will do. Can you expound, and can you look at
each other's arguments that were made during the testimony and
offer some comment?
Mr. Ashton. I will go first. I am encouraged by the
questioning this afternoon when I see more questioning geared
toward the cable competitors in the cable industry than the
earlier commentary, which was very CLEC dominated.
And the reasons are because of where those companies focus
their networks, and where the networks have largely not been
modernized. And that goes back to my earlier comments this
morning, which were you have to think about the markets, in
terms of large business and small business, and residential
access.
And in the large business market, I think it looks more
like the core market. It has been largely--you can say in some
cities it has been overbuilt to some extent. There have been a
lot of fiber runs in the cities, which was a natural way for
the CLEC market to try and grow up, and get into the business.
But if you look at the small business and residential market,
it is not where the CLECs are largely dominant.
It is not an overly economical market for them, and so I
think more or less we have to move the commentary toward
broadband access in those markets to a competitive battle
between the regional Bell companies and the cable companies.
And I think, you know, the other thing is that a little bit
of this is in hindsight. The CLEC market itself is in dire
straits, and this may or may not kind of put that sector to
rest to some extent.
Mr. Upton. And getting a signal from my Chairman. And that
happened with or without this legislation?
Mr. Ashton. I think it would happen with or without it. I
don't think it is--it is my personal opinion, and not Bear
Stearns' opinion, but it is my personal opinion that this bill,
or without this bill, that those competitors are not worth
really worrying about.
Chairman Tauzin. The Chair recognizes the gentleman from
California, Mr. Waxman, for a round of questions.
Mr. Waxman. Thank you very much, Mr. Chairman. Mr. Mancini,
in a letter last fall to Pacific Bell, two small California
cities in Ventura County, California, complained that they were
being redlined based on population and income levels, and long
term business development potential.
They had been trying to get DSL service for 2 years before
they sent their letter complaining. At the same time, a
spokesman for Pacific Bell told the L.A. Times that the
company's only obligation is to provide basic telephone
service, that high speed Internet service is deregulated, and
that the cities didn't have enough potential customers to be
profitable.
Now, Pacific Bell had more than a 19 percent increase in
earnings last year, and in fact Pacific Bell's annual profits
have ranged from almost 12 percent to almost 21 percent. How
much income--let me ask you two questions.
How much in profits do you believe that Pacific Bell and
SBC, and other local carriers, are going to have to earn for
them to have enough of an incentive to offer high speed
Internet service to undeserved areas?
Mr. Mancini. I can't answer what the profits need to be,
but I can tell you what the criteria are on how we decided to
spend $6 billion to expand our network to cover 80 percent of
our customers, and those had to do with where central offices
were located, and where population centers were located, and
where the growth was going to be.
It was purely a decision on what is the most effective way
to expand the network, but in addition to that, we did make a
commitment to the FCC, which we have kept, that we would deploy
in what are called underserved and rural areas.
So as part of that $6 billion, we have in fact gone to
areas which we would not have economically normally done.
Mr. Waxman. Well, let me ask you this. I want to point out
that John Britain, who is the media director for Pacific Bell,
was quoted as saying of the high speed Internet services
deregulated in Ojai and Fillmore--these two cities don't have
enough potential customers to be profitable. What assurances do
we have in H.R. 1542 that you will ever deploy long distance
data service in some areas of this country that are not going
to fit that profile?
Mr. Mancini. My guess is that those areas are in fact
already served by PAC Bell with regard to long distance data,
and so I think they would immediately be able to provide that.
With regard to high speed Internet access, every company
has to make economic decisions. It is a competitive market, and
I think the right question is what incentives do the telephone
companies, as well as the cable companies and wireless
companies, and satellite companies, have to serve those areas.
It is not just us. This is not a monopoly market.
Mr. Waxman. Does the bill give you any requirement ever to
serve those areas?
Mr. Mancini. It doesn't give us or anyone else a
requirement to serve those specific areas.
Mr. Waxman. You have begun to offer long distance service
in Texas about a year ago.
Mr. Mancini. Yes.
Mr. Waxman. And can you tell us whether you were offering
services in rural areas?
Mr. Mancini. We are offering service in every single
community to every single customer that we serve.
Mr. Waxman. Mr. Tauke, Verizon has met the 14 point
checklist in New York State, and can offer long distance
service there. Can you tell me how many rural markets you are
currently offering long distance service and when you plan to
roll out service to those areas?
Mr. Tauke. We are offering long distance service, the
traditional long distance service, every place in New York
State to every customer. In terms of high speed data services,
that varies from area to area of the State.
Mr. Waxman. One thing that I can't understand, and maybe
someone on this panel can answer it for me, but there is a
savings clause in Section 232(b) of H.R. 1542, and it is at the
bottom of page 6, that reserves to the States the right to
continue to regulate voice services if this bill is enacted.
And my understanding is--and a number of my colleagues have
pointed this out today--that voice and data are identical when
transmitted with packet switching technology.
Can anyone explain to me as a technical matter how voice
and data traffic carried over high speed data service lines can
be separated so the States can fulfill their regulatory
function?
Mr. Tauke. Well, Mr. Chairman, I think there is a
substantial amount of confusion following the discussion this
morning on this issue. If Verizon, for example, under this
bill, builds a broadband network, we cannot market, we cannot
build, we cannot charge for any voice service that goes over
that network. Now, if someone else purchases from----
Mr. Waxman. My question was about technologically how a
State can regulate.
Mr. Tauke. Let me just speak to that. I am trying to get to
that. Just as it is the case today, if AOL leases a line from
us in order to provide ISP service to a customer, and they over
this broadband line offer voice services, and they charge for
the voice services, we can't do anything about that. We get no
money from it.
We aren't marketing it, and we can't do anything about it,
and whether or not the State Commission can regulate what AOL
does on voice services is a good question today, and it will be
a good question if this bill passes.
But it doesn't change what is currently the situation
relating to AOL offering IB telephony.
Mr. Waxman. Mr. McMinn, can you respond to my question?
Mr. McMinn. I think that your distinction of voice and data
is disappearing. As ones and zeros are indistinguishable from
each other, they are also indistinguishable in terms of how far
they have traveled, and how they have traveled to get to a
particular customer.
I mean, take a teleconference, and if it is handled over
the Internet between people that are in New York State and
California. Is that long distance, or is that data, or is that
voice? How about if someone makes a transcript of that
conference and makes is available on a website, and it is
accessible in Florida? Is that voice or is that data?
And supposing someone chooses to modify and redistribute
that? I mean, is that voice or is that data, or is that video?
I don't think that technologically the distinction is going
away by bits or bytes.
What I think is important for everyone to remember is that
we are trying to enable the most competitive broadband
distribution system for those bytes, and it is not about one
versus the other. It is about giving the consumers as much
different choices as they can get, and as many different
options to be able to get.
So we should not be picking winners and losers between
CLECs, ILECs, and cable companies. We should be figuring out
how to make all three of those networks continue to compete.
Chairman Tauzin. The gentleman's time has expired. The
Chair recognizes the gentleman from Oklahoma, Mr. Largent, for
a round of questions.
Mr. Largent. Thank you, Mr. Chairman. Mr. Ashton, in your
written testimony, you state that we need regulation that will,
quote, we need regulation that will reward risk taking, one
that gives those who do the risk taking the incentive to garner
its rewards.
And I wholeheartedly agree with that statement. My question
to you is how does rolling back access provisions, such as line
sharing rules, reward Mr. McMinn's company, Covad?
Mr. McMinn. Our point is that your voice network is
basically built out, and that competitive--and competing in
that market is largely something that can go on if it was worth
competing for, and there is no restrictions in the current
rules, nor do I read this Act to restrict voice competition.
But if you look at the broadband services buildout, and you
go beyond narrowband services, we need a new access network,
and the cost of that is going to be extremely high. And in my
belief that in order to get us going in that direction, it is
not just regulation.
It would not propose that this reform will just--just holds
all the answers. There are technical and equipment costs and
issues that need to drop, and more than anything, and it is
often forgotten, we have to identify services that will
actually travel over this network, and people will pay money
for, and demand in a large enough quantity to actually pay for
the network buildout.
And that is a question that is still out there, but that is
a major risk, because high speed--you know, $40 a month or
whatever it might be is not going to be enough to pay for this
buildout.
So I see it as a major risk, and I see it as a new type of
risk that the large carriers have not had to deal with before,
and I see it as something where we should reward that kind of
risk taking if it takes place.
Mr. Largent. But major risks, and yet this leads to my
third question, and I will ask the SBC folks in just a second,
but major risks. SBC's data revenues increased 39.9 percent to
$2.1 billion, compared to $1.5 billion in the year ago quarter.
The company's data revenue stream has nearly doubled in the
past 2 years. Man, that is the kind of risk that I would like
to get in on, a 39 percent rate of return. Wouldn't you?
I mean, that is what you would advise your customers
wouldn't it? Let's get in the kind of risk that has a return
that has 39 percent. That does not seem like a lot of risk to
me.
And yet the bill that we are talking about, and that his
hearing is about, is going to take players like Covad out of
the market. So they have zero ability to invest any capital in
making this kind of investment. Am I correct?
Mr. Mancini. No.
Mr. Largent. I am not asking you. I am asking Mr. Ashton.
Mr. Ashton. I wasn't sure. First off, the services that are
being offered today are being offered to customers that are the
easiest to offer them to; those that are within the distance
limitations of central office switches if it is DSL, or it is
all data services.
Data services are not that new. We have been offering T-1
and frame relay, and all kinds of data service for some time,
and that's where the companies are doing very well, because
there is more data demand than there ever used to be.
The question is that to bring this down to the mass market,
which is what I think is what we would all like to see, that is
going to require a different type of expenditure. We are not
talking about the large business market where they derive most
of their data revenues from.
We are talking about the consumer market and the small
business market, and those customers are largely not part of
these numbers, and they are not part of the growth, and they
won't be addressed because there are different economic
questions addressing them versus large businesses.
Mr. Largent. Mr. Ashton, you seem like a pretty sharp guy.
Are you aware that the CFO of Verizon Communications sits on
the Board of Directors for Bear Stearns?
Mr. Ashton. I am aware of that, but these positions----
Mr. Largent. I thought you would be.
Mr. Ashton. But I want to make this very clear. We are also
the largest--and James can answer this better than I can--but
we were one of the major financiers of CLECs, and we were the
primary investment bank behind Covad. But it is important that
the committee know that my comments are mine and not Bear
Stearns.
Mr. Largent. Mr. McMinn, in your testimony, you have
outlined your concerns with eliminating line sharing. I'm
curious. What has Covad's experience been with the Bell
companies' willingness to provision a line or loop when you
sign up a customer?
Mr. McMinn. Our position has really been a compromise.
Unfortunately, it is going to take me a few seconds to give you
the history here. As soon as the FCC determined that they were
going to encourage the adoption of line sharing, which was
April 1999, we began to offer DSL to consumer customers at a
loss.
We knew that it was uneconomical to do it on second lines,
but we anticipated the passing of that line sharing order, and
we began to offer consumer services. The FCC finally passed
that line sharing obligation in November 1999.
We thought that then we would be able to offer up line
shared lines. It took an additional year until some, but not
all, of the ILECs were able to offer line sharing for us, and
in particular let's take the case of Verizon.
They claimed publicly that they installed 3,500 line shared
lines per day increasing their customer base. In the first full
year of operation, they were unable to give us 3,500 lines of
line shared DSL. That is the disparity of all of this.
I think it is also important to remember that we are not
taking about wanting a free ride on these remote terminals or
the fiber that might be put into the field. What we are asking
for, and the only thing that we are asking for, is access to
the 1.6 billion miles of copper that are out there in the
plant.
And even in the most optimistic scenario of rolling out
remote terminals, that at least two-thirds of that existing
copper plant will remain in effect. It is that two-thirds of
the copper plant that lie beyond these exotic fibers, or lie
beyond the remote terminals we want.
We are willing to pay for the fibers ourself, and we are
willing to pay for the remote terminals ourself. We need access
to that copper.
Mr. Largent. Thank you, Mr. McMinn, and Mr. Chairman, I
will yield back. I do have another question for Mr. Mancini
that I hope to get to ask about the seeming incongruity of
their complaint about the burdensome regulation at a time when
they are getting a 39 percent rate of return on their
investment in broadband. I yield back my time.
Chairman Tauzin. The gentleman's time has expired. The
Chair recognizes the gentleman from Massachusetts, the ranking
member of the subcommittee, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman. Just a little bit of
history. In 1967, the Federal Government gave the Bell system
50 megahertz to deploy a cellular system, and they didn't do
anything with it. Nothing.
They were able to deploy DSL before the 1996 Act. They
didn't do anything with it. Nothing. They came here in 1995,
all seven chairmen from the Bells, and they said that if we
lift the restriction on their ability to get into cable that
they will compete against the cable industry.
What have they done? Nothing. They said that would give
them an incentive in fact to deploy. Have they? No. What has
led to the fact that we have now gone from virtually zero of
broadband access in 1995 to 52 percent of all homes in the
United States that now have access to broadband?
Paranoia. The cable industry and the telephone industry
afraid that someone else is going to get there before them.
Plus, Mr. McMinn, and Mr. McLeod, and Mr. Gregori, that's what
drives them. Paranoia.
You give something to the Bells and they don't have to do
anything with it, they won't. And, in fact, in 1993, this
committee, working with the Federal Government, had to say that
the Bells could not compete for the third, fourth, fifth, and
sixth licenses because they had not even gone to digital yet.
They were still on analog for their cells.
So we had to actually say that they can't even compete in
the regions in which they already own cell phone licenses.
That's 1993, because only the competitors were going digital,
and then they moved to digital, the Bells.
Let's get the little history here straight of the
incredible, backward way in which the Bells have looked into
the deployment of new technologies over the years. Mr. McLeod,
many companies in the telecom market have talked about one stop
shopping, and about a bundled package, and that includes a
group of services, including a DSL line, and voice data, local
and long distance, and Internet services.
How does a regulator know what service it is regulating?
How is the State or the Federal Regulator going to be able to
track down voice from video, from data, to make sure that it is
being monitored?
Mr. McLeod. There really is no way to track it down. On the
backbone networks, starting out in the 1980's when fiber was
deployed throughout the United States, and those networks
carried both voice and data services, and now as we move
forward in the local access arena, voice and data services are
integrated on the same copper wire.
So there is no way of separating the two. What is the key
element here through all of this is that that network element,
that last mile connection, is 100 percent controlled by the
Bell companies today, and we need access to it, equal access to
it.
Mr. Markey. So there will be a regulatory morass that is
created then?
Mr. McLeod. There will be, yes.
Mr. Markey. And this bill really doesn't help to clarify
that as far as I can see, because it really even doesn't
provide a definition that is useable.
Mr. McLeod. There is no definition whatsoever, and the
focus here on data, as compared to voice, is really absurd in
the new world of communication.
Mr. Markey. Well, when the Internet telephony explodes over
the next 5 years, will we be back here with a slew of lawsuits
on requests to change the legislation?
We have people down here saying you people didn't get it
when you acted in 2001. The bill really should have been about
Internet telephony. You didn't say anything about it. Are we
missing really where it is all heading right now, Mr. McLeod?
Mr. McLeod. Well, certainly voice over IP over the next 5
years over Internet protocol technology will be the primary way
that voice is carried.
Mr. Markey. Well, let me ask you this. Do you agree--you
and Mr. McMinn if you could--do you agree that we should not
import legacy subsidy models of per minute access charges, or
usage sensitive fees, on the Internet, including on IP
telephony, rather than having per minute charges on per
Internet traffic, while they are having flat rate, for example,
universal charges?
Mr. McLeod. Well, I think that eventually that--access
rates have been coming down, and recipe comp rates have been
coming down over time because they are viewed as artificial
charges, and some orderly mechanism for bringing those rates
close to zero should be in place, and I think that is the
direction that we are moving in.
Mr. Markey. Mr. McMinn.
Mr. McMinn. Well, I think in terms of what regulations or
what concerns might come up 2 or 3 years from now in the
regulatory environment, I think that is indicative I think of
the profound forward looking thinking that was in the Telecom
Act.
It did not try to predict what type of services were going
to be put in place. It opened up the network to a whole host of
new services, and in fact no one could have really predicted
the rate at which the Internet data use of the network has
evolved.
That was exactly the beauty of the Act. What we are seeing
now is an attempt to roll that back. The ILEX finally realized
that they weren't the most innovative forces in the United
States, and now that the door is open a little bit, all four
monopoly bodies are slamming against that door to try to shut
it down again.
Mr. Markey. I think to be honest with you, this bill is
technologically obsolete. I think it creates an image of the
FCC as State regulators trying to perform a most futile task,
which is chasing ones and zeros down the information super
highway trying to put them over to the side, and trying to
determine whether they are voice, or video, or data, or
Internet, or whatever, in an era when we are trying to
appreciate the fact that it is convergence and not divergence
which is going to be the hallmark of the future.
And I think what we are heading for in this bill is a
regulatory retrogression back to an earlier period of time when
there were separate and distinct services which were being
performed.
So I think that after we have spent a decade educating
ourselves as a committee as to the inevitability of
convergence, for us to be considering this kind of legislation
demonstrates that unfortunately we still need more remedial
work as to where the whole future of this technology is heading
over the next 5 and 10 years. Thank you, Mr. Chairman.
Chairman Tauzin. I would only add that everybody needs a
different level of remedial work. The Chair would recognize the
gentleman, Mr. Cox.
Mr. Cox. Thank you, Mr. Chairman. I'm sorry, Mr. Tauke, a
former colleague, that I was not here for your testimony, but I
read it. But I would have liked to have been here just to pay
you the courtesy of listening to it personally.
And I want to start as basically as I can along the lines
of the old Vince Lombardi talk to the Packers about getting
back to basics, where he said, ``Gentleman, this is a
football.'' And I want to ask you as a matter of philosophy is
digital voice information in your view data?
Mr. Tauke. Digital voice is the same ones and zeros as any
other digital service. I don't know that I would call that
data, because we do have an artificial regulatory structure in
place. It is artificial today.
I mean, the right thing to do is eliminate all of the
distance restrictions that are currently in the Act. There
should be no local calling areas. There should be no toll.
There should be no interLATA restrictions.
It makes no sense in today's world, but there is
unfortunately a regulatory structure which drives the way in
which the industry develops. It is still in place. Today, there
is no way that Congressman Markey or any other regulator can
know what is and is not voice that is going over the network
today.
The way in which the current law is enforced is by ensuring
that there is no offering, marketing, or sale, or money
collected, by a Bell company for an interLATA service. That is
the same mechanism that would remain in place for voice
services tomorrow, but as I indicated earlier, when you look at
what is going over the network, you can't tell what it is.
And so when AOL and when we sell a line to AOL today, we
don't know whether AOL is offering to their ISP customer voice,
video, data, whatever, that they put over that line.
Mr. Cox. And when you talk about the restriction that will
remain, you are talking about Section 6 of this bill that says
that there will be, even if we were to adopt this pending
legislation, a continuing prohibition on marketing voice
telephone services?
Mr. Tauke. Correct.
Mr. Cox. So let me explore a little bit about what we mean
by voice services, because this really is a dynamic marketplace
that is changing a lot. During the 2 week recess when I was
home in my district, I had talked to a lot of the tech
companies that I didn't even know that I represented.
It changes a lot, and one of them is building a car. They
are getting together with Honda, and Honda is going to actually
build the thing. They started out as a technology company
making the computers for the car, and they decided that their
computers were so far advanced beyond what is available on the
market today that they just built the car around it, and have
it be an intelligent automobile.
And when you are driving this car, you can answer your
pages hands free when you are on the road, and it does all
sorts of fun things, and it would be a fun car to own the way
they have described it.
But you could answer your pages just by talking, and via
the Internet, you voice responses to your pages are delivered.
Is that a voice service, and would it be subject to Section 6
of this bill?
Mr. Tauke. It is not subject to Section 6 of the bill,
because today voice services are not subject to any of the
distance restrictions as long as they are via wireless. So when
you pick up your wireless phone, Horizon can provide a
nationwide wireless service because the interLATA restrictions
on wireless services were lifted in the 1996 Act.
And so the wireless service voice, data, or whatever, that
you have in the Honda, those things can--a Bell affiliated
wireless company can offer those services because the
restriction on interLATA does not apply to wireless.
Mr. Cox. And that would be true also after the enactment of
this legislation?
Mr. Tauke. That would be true after the enactment of this
legislation. This legislation would lift the interLATA
restriction on wire line data services.
Mr. Cox. And so now let's move away from the automobile and
away from the wireless environment, to the workplace, and let
us say that you answer the same page from your place of work,
and you use your broadband connection in your office. Is that a
voice service?
Mr. Tauke. It probably would be a voice service given the
kind of service that you suggested it is, and as I interpret
the Act as it is written, or the proposed Act as it is written,
Verizon would not be able to offer that service. Another
company could.
Mr. Cox. So answering the same page in the same way,
depending on whether you do it from your car or your office----
Mr. Tauke. It depends on which technology; if it is
wireline versus wireless technology.
Mr. Cox. [continuing] results in two dramatically different
regulatory consequences?
Mr. Tauke. That's correct, and as today, there is a
different regulatory consequence between voice over, the
wireless phone, and voice over, the wireline phone.
Mr. Cox. And without question, and I think we all pretty
much all agreed on this, all 11 panelists, that the reason we
are here today is that we have some regulatory models that
don't fit the current regulatory environment.
And I think in your own remarks in answering my big picture
question about what is voice and what is data, you made it
clear that you are chaffing under the restrictions of an old
regulatory model.
My concern is this. If we move in the direction of the
proposed legislation, aren't we again institutionalizing this
very artificial distinction between voice, and data, even to
the extent of discriminating between voice and voice?
Mr. Tauke. No, I don't think you are really. I think what
you are simply doing is carving off one more piece. If
information services and wire services were carved up in the
1996 Act for InterLATA purposes, you would be carving off one
more piece, and you would be saying to the Bell companies that
if you have the network and the facilities, you can market that
service and provide that service, and charge for that service
if it goes over your network.
And I would observe because this question has been raised,
that the big money is still in the interLATA market is in the
voice market. In Massachusetts, where we just got authority, a
$2 billion market for interLATA voice services, and that is the
big huge incentive that is still out there for the companies.
Mr. Cox. Last, let me finish up on a point that I think
that Congress Markey raised, if not quite explicitly, almost
explicitly. Under this Section 6, you would be prevented from
marketing, billing, or collecting, for interLATA carried over
your broadband equipment?
Mr. Tauke. Until we got the 271 approval.
Chairman Tauzin. The gentleman's time has expired. He is
permitted to finish his answer.
Hon. Cox. To the extent that you are offering in the future
under this legislation broadband services to your customers,
and your customers are availing themselves of Internet long
distance telephony, local and long distance, do you think that
you wouldn't feel justified in coming back to the FCC and to
the Congress saying we are being ripped off, and that these
people aren't paying any of the fees that we have to pay in our
business.
And they are competing in ways that we can't, and they are
using all of our equipment, and they are in markets that we
should be able to be in, and we want a level playing field?
Mr. Tauke. Well, today, America On Line, if they purchased
one of our DSL lines, which they do, can offer IP telephony
over that line if they choose to do so. Verizon On Line, using
the exact same line on-line service, cannot offer IP telephony.
And it would be the same kind of restriction that would
remain in place tomorrow if this Act passed that is in place
today. And we might think that is not right, and I would say
that there are a lot of other restrictions that ought to go
away, but I think we would expect that we would adhere to the
1996 Act, and go through the 271 process to get rid of that
restriction.
Chairman Tauzin. The gentleman's time has expired. The
gentleman, Mr. McLeod, if you would like to respond, you are
welcome.
Mr. McLeod. Yes, just for a second, because I think there
is a tremendous amount of confusion here which we could solve
very quickly. It is 5 years after the Telecom Act, and it is
2001, and a 14 point checklist has not been completed in 45
States in this country to open up the local networks.
So we don't have these issues, and so we don't have to
define what is going on, whether it is voice or data. So that
the Bell companies can be freed to operate, and it is 5 years
later, and when are we going to talk about mandating that these
networks be open so that there can be competition.
Chairman Tauzin. The gentleman's time has expired. I would
only add as a point of reference that the 14 points have now
been expanded to 1,100 by last count. The gentleman, Mr.
Boucher, is recognized.
Mr. Boucher. Well, thank you very much, Mr. Chairman. And I
want to thank all of the witnesses for a very informative
presentation and discussion here this morning and this
afternoon.
There has been some discussion recently about what I think
is a very interesting proposal to create a new title to the
Communications Act, and a new Title 7, wherein would reside
converged broadband services.
The purpose of the new Title 7 would be to treat the
offerors, the providers, of substantially similar services the
same way from a regulatory standpoint. And that would be I
think a major and an important departure from current practice.
At the present time services are regulated not by the
character of the service offered, but by the company that
offers the service. So regulation tends to be industry specific
and not service specific, and that creates disparities, and it
creates a discriminatory and uneven treatment, and competitive
disadvantages.
A new Title 7 would have the benefit of placing within a
new regulatory environment all of the various services where a
common platform is used to provide multimedia offerings.
So if some combination of voice, video, and data, were
offered over the platform, this new regulatory treatment would
be provided. And telephone companies, cable companies, and
others, would be treated the same way under the regulatory
structure.
I think the time has come to do this. The legislation
doesn't speak to this, but perhaps at some future stage in the
legislative process we can address this concern, and if there
is a consensus to do it, insert this Title 7 concept.
Mr. Tauke, I would like to ask you for your comments on
this general theme, and whether or not you think an approach
such as this has merit.
Mr. Tauke. Well, Mr. Boucher, I do think the approach has
merit. As you will recall, Ira Magaziner, who was in the
Clinton White House, made quite an effort during the discussion
of the 1996 Act to float this notion, and to establish the idea
of a separate title for broadband services.
He recognized that broadband was a distinct market and
there should be a clear policy established that would apply to
all broadband service, regardless of the nature of the company
that offered the service.
And I think that there is substantial merit to that. As I
alluded to in my testimony, we need a broadband policy. It
makes no sense to have different policies for different kinds
of companies, and a deregulatory policy which gets rid of the
distance issues, which the gentleman from California was
talking about, and gets the States out of it and establishes a
national policy, is just what we need in my judgment.
Mr. Boucher. Well, thank you very much. I can't depart this
discussion without raising another issue that is not addressed
in the legislation, but is one which I think should be
addressed at the proper time.
And that is the need for an open access policy that assures
that whatever the platform for Internet transport that a
particular customer uses, that customer can have a choice of
Internet access providers.
Now, that is the rule today with regard to the telephone
company platform, and that would remain the rule for the
telephone company platform upon the passage of this bill.
But nowhere in the law, either present or proposed, do we
have a provision that applies that same open access principle
to the cable platform, the fixed wireless platform, or the 3-G
mobile wireless platform that we will soon be using, or to the
satellite platform.
And I wonder if our witnesses would care to comment on the
appropriateness of having open access so that every Internet
user has a choice of the Internet service provider that
provides services to him, and so that we eliminate this perhaps
last remaining regulatory disparity, assuming of course the
adoption of this bill and its many deregulatory provisions. Who
would like to begin? Yes, sir, Mr. McMinn.
Mr. McMinn. Well, certainly I think that the consumers need
absolutely as much choice as they can get in the provision of
broadband services. This is a whole new network that is being
built at Internet speed in the United States, and I will say
that they have open access today with our technology, with our
network, which covers 45 percent of the homes and businesses in
the United States.
We have over 250 Internet service providers that we sell
our services to so that they can provide Internet access to
their customers. But what I think is important to remember is
that just because the ILECs today are in this transition
period, that that choice is unavailable to the market, and in
fact choice will decrease in the market if the bill as it is
currently proposed goes into effect.
I mean, what more incentive do the ILECs need to roll out
broadband services than getting into the hundred-billion dollar
long distance business.
Mr. Boucher. Well, thank you, Mr. McMinn, that is an
interesting answer, but it doesn't have a lot to do with the
question. Would anyone on the panel care to comment on the
question of the need for open access?
Chairman Tauzin. The gentleman's time has expired, but
anyone is allowed to answer. Mr. Cicconi.
Mr. Cicconi. Mr. Boucher, first of all, I think it is
important to point out when one considers open access which as
I understand it has been defined as providing consumers with a
choice of ISPs, that everywhere in America today, every
consumer in America today, has that choice of ISPs.
And they can connect to the ISP of their choice through a
variety of means. Cable itself is in the process for providing
that form of an open access today, and frankly the only
impediment to providing that access has been a contract with
the people that built the network in the first place to allow
them a return on their investment.
AT&T is in the process of testing its system right now, and
we will be deploying it in scale in one of the major markets,
and in fact in Mr. Markey's district this year, and will be
doing full deployment next year.
Other cable companies are following suit on that, and I
might add that the jux of the position of these issues to me is
striking, because the bill in front of you would in fact
preempt any Federal or State regulation of the Bell facilities
in this area which are in fact bottleneck facilities on this if
they provide, or if they have anything to do with the delivery
of the high speed service.
So even an old Legacy facility within their network, if it
is involved in the delivery of this high speed service, the
Federal and State regulators would be preempted from anything.
So the oddity here, Mr. Boucher, in an open access proposition
is that where you don't have a bottleneck facility, some people
are opposing to regulate cable.
But where there is a bottleneck facility, we are proposing
to deregulate it, and let them shut out people who want to
access those facilities. I would submit that that an odd jux of
a position.
Mr. Mancini. If I could just reply. When we are talking
about the high speed advance services market, and that's what
we are talking about today, the BOCs nor anyone else have a
monopoly on those equipment, those facilities. Cable modems do
not use any of our systems, and we don't use any of theirs.
There is no monopoly.
So to talk about a monopoly system in a new competitive
market, where there are four different facilities, I think is
just strange cojolity.
Mr. Boucher. Well, thank you, Mr. Chairman.
Chairman Tauzin. I will allow Mr. Pitsch and Mr. Tauke, if
you will quickly respond as I need to move on.
Mr. Pitsch. Very briefly, as I indicated in my testimony,
we have supported what we would call good symmetry in this
market, Congressman Boucher. We have opposed forced access, or
access at regulated terms. We supported on negotiated terms,
and for that very same reason we would support not imposing on
bundling our regulations on the telephone company's last mile
fiber in a remote terminal investment.
Chairman Tauzin. Mr. Tauke, and then I will move on.
Mr. Tauke. Well, I just wanted to say, Mr. Boucher, that
any open access provision that Mr. Cicconi will agree to, I'm
sure that Verizon will happily agree to.
Chairman Tauzin. The gentleman's time has expired, and the
gentleman from Florida, Mr. Stearns, is recognized.
Mr. Stearns. Thank you, Mr. Chairman. Let's see. Listening
to your opening statements, I was here for all of them. Let me
see where I think we are at here. The Tauzin-Dingell bill will
probably pass if members believe that it will move broadband
forward in this country.
Will the arguments about what industry is regulated, yours
versus cable, and the facts that the CLECs will lose money, all
of that will probably not be as powerful as the argument what
will move broadband in this country.
Now, Corning obviously when Mr. Regan talks, he is talking
from self-interests because they want to sell more fiber. And
the gentleman who was talking about getting to the rural part
of this country, broadband--I mean, we would all agree if in a
magic wand this bill would get us more broadband, and I think
we would all go ahead with it.
But it seems to me that we also have to take the fact is
that we are not sure that it will. So let me ask Mr. Pitsch.
You are from Intel, and just take your hat off for a moment,
and you are supporting from your opening testimony the RBOCs.
So I want to say that without Congress doing anything, what
could the FCC do today to move broadband across this country?
Two things.
Mr. Pitsch. Congressman, they could reboot under Section
251(d)(2). They could determine that under the necessary and
impaired standard that a lot of the investment that I was
talking about is or should not be unbundled.
And they should do that under a standard set by the Supreme
Court, and under the Iowa Utilities case, just to use Just
Scilia's term, something akin to a central facility should be
unbundled.
Mr. Stearns. And why is that?
Mr. Pitsch. I'm sorry?
Mr. Stearns. Why should that be?
Mr. Pitsch. We support unbundling for the copper, and I
want to make this very clear, because that is a bottleneck in
the dial up market. That's No. 1.
Mr. Stearns. And No. 2? If that's it----
Mr. Pitsch. Well, another thing they could do is that they
could get a lot more wireless spectrum out, and they could
rebalance local rates to encourage local telephone competition.
Let's face it. One of the reasons we don't have a lot of local
telephone competition is because those rates are regulated
rates.
Mr. Stearns. Okay. Now, we have an article here from the
New York Times, dated April 22, and I want to give Mr. Mancini
an opportunity to answer this. This article in the jump
headlines said, ``How the Baby Bells May Rule the World.''
So the article shows that you folks have all the money, and
have all the ability here. So you are coming here with this
bill saying that you are the victim here and you need help.
This article, the way it is slanted, shows that in addition
that you are not only not the victim, but you are the 800 pound
guerilla.
And they show a graph here that shows that the long
distance calls, that the cost has gone down since 1985. Yet,
the costs for the local has gone up. So I want to give you an
opportunity to respond.
Mr. Mancini. Well, I obviously would like to know what they
meant by the cost of the local.
Mr. Stearns. Well, to the consumer. What it costs the
consumer to pay for local calls has gone up, while the costs
for the long distance has gone down. And my point being is that
you are making a lot of profit, and thee doesn't seem to be as
much competition in the local line as there is in the long
distance.
Mr. Mancini. Well, I can tell you, Congressman, that the
cost of local service to our customers has not increased since
1984. In Texas, for $9.85, you get 24 hour a day, flat rate
service, 30 days a month, and that cost has not increased since
1984.
Mr. Stearns. Did you see this article?
Mr. Mancini. I saw that article.
Mr. Stearns. Is the graph wrong from the Federal
Communications Commission, Bureau of Labor Statistics, showing
that the local calls have gone up almost 70 percent since 1985.
Is that graph wrong?
Mr. Mancini. I assume what they are including in there are
various costs of vertical services, like call waiting, call
forwarding, and some of those costs have increased. The costs
of local basic service has not increased. The cost of vertical
services has increased.
Mr. Stearns. Let me ask AT&T to respond to that.
Mr. Cicconi. Mr. Stearns, I do have the figures in front of
me. I think what may be confusing this, in terms of whether
they have gone up or not is whether they are adjusted for
inflation.
The consumer price index during this same period went up 73
percent and local phone service went up 70 percent, and I think
that is the graph that you are showing. During the same period,
even adjusted for inflation, long distance rates declined 34
percent.
This is the competitive market in action. When the Bell
system was broken up, it created a vibrant competition in long
distance and zero competition in local. And what you are seeing
there is the evidence that they have kept their rates
consistent with inflation, while competition, despite
inflation, has forced long distance rates down over the same
period.
Mr. Stearns. Is there anybody else who would like to
respond? Mr. Tauke. And I think, Mr. Chairman, that this
article has come out, and I think it is appropriate to give the
RBOCs an opportunity to respond to this article, because as it
points out, they are certainly the people who are making all
the money, or that is the implication here.
Mr. Tauke. Well, Mr. Chairman, and Congressman Stearns, I
first want to say that nobody is coming here, or at least I'm
not, saying that we don't have a good business.
And nobody is coming here and saying that our business is
not doing well. The market is growing rapidly and there are a
lot of new services that we are offering to consumers and it is
a good business. And the companies, thank the lord, are doing
reasonably well, which allows us to make huge investments in
this business.
We have to invest every year $18 billion in our business in
order to keep the networks moving forward and the services
being provided, and meet the demand that is out there.
In terms of the New York Times article, I would be happy to
give you a point by point response to the New York Times
article, but I think the basic issue on rates is this. Local
rates, the basic dial tone rate, has continued to decline. It
has not gone up.
And when you take into account inflation, it certainly has
not gone up. In a State like New Jersey, for example, the rates
have been $8.19 for as long as anybody can remember for dial
tone service.
But where there are increases is we have lowered the access
charges for long distance under the Federal cost proposal, and
so we got a $3.50 increase in the interstate charge that is
going to be coming. I should say that was in the first
lowering, and it was $3.00 the first time around, and now with
calls it is going up again.
So we lowered the access charges the long distance
customers were paying for use of the local network, and that
has permitted long distance charges to go down. These flat rate
charges that have been added to the local bill in order to
offset that cost.
We have seen more services added, such as vertical
services, and so those are the things that have added to the
cost of local telephone service, but your basic dial tone
service has gone down, and not up, over the last 15 years.
Chairman Tauzin. The gentleman's time has expired, and the
Chair recognizes the gentleman from Tennessee, Mr. Gordon.
Mr. Gordon. Thank you. I think Cliff Stearns summed up most
of our objective here, and that is that we want to see
broadband expanded to everyone, and we want to see competition
so that it can be done as economically as possible for relief
for our consumers.
I guess the first observation, Mr. Ashton, as I listened to
you today, and I remember just broadly trying to characterize
what you are saying, but it seems to me that what you are
saying is that having broadband is an expensive venture, and
that competition is good.
But as a practical matter, we might as well just realize
that CLECs, as good of folks that they might be, can't afford
it, and that if you want competition to the cable folks, you
might as well just go ahead and recognize that the Bells are
the only ones that have the money, and let's move on.
Is that generally what you are saying?
Mr. Ashton. Yes.
Mr. Gordon. That's fine. I just thought I wanted to get it
out there.
Mr. Ashton. Yes. It can only be done by those who have the
money. It is pretty basic.
Mr. Gordon. And I guess Chris Cox is gone again, but if he
was here, he would have heard once again, Tom, that you are the
best. You really are always articulate and your plane over Iowa
is a very good analogy.
And I understand your interest in wanting them to land with
the broadband coming in there, but what about DSL? Do we need
to have--the other aspect of this bill will--is that going to
reduce the DSL landings in Iowa? I would like for someone to
take the other side of Tom's----
Mr. Tauke. Well, first, on the local market in DSL and line
sharing, I now that this is an issue that troubles the
committee, and frankly it is a case where the committee has a
choice to make, a tough choice.
I don't think that all the choices here are difficult, but
I would have to acknowledge that this one is a challenge,
whether or not to require line sharing under the Act. The Act,
as it is currently written, does not require line sharing.
Others may add to this, but I will try in an objective way to
give you the two sides of the issue.
The side against line sharing, what is the reason for
getting rid of it? The reason for getting rid of it is, one,
that there are very few people, Covad notwithstanding, who are
using line sharing.
There are most of the DLECs that are out there that use a
different technology. They use SDSL technology, and they do not
line share. They purchase the full loop. And so as result, you
have a relatively small number of people who are losing or
using line sharing.
Line sharing in our view is a real inhibitor
technologically speaking to the deployment of additional fiber
in the network. We frankly don't know how to do it. We don't
know how to deploy the fiber and still be able to continue line
sharing.
We have people saying, well, we will just maintain the
copper. Well, if you maintain the copper when you are trying to
replace it with fiber, it takes all the reason for putting
fiber in out. It takes all the reason away, because one of the
reasons that you put in fiber is to avoid the maintenance, the
high maintenance costs of the copper.
So if you have to maintain the fiber or have to figure out
a way to do line sharing over the fiber, you can't make it
work, or we haven't figured out how to do so yet. And so
therefore you have a choice between continuing line sharing on
the one hand, or on the other hand, encouraging the deployment
of fiber.
The second observation that I make is that those who are
doing line sharing today, and I emphasize that we believe that
it is a very small percent, but those who are doing line
sharing today still have the option to buy the whole loop.
Now, when they buy the whole loop, what do they do? They
offer not just data services, but they also can offer the voice
services, and so therefore you get more voice competition. It
would be good for voice competition frankly if Covad would
offer voice services, along with their data services.
And I would suggest that they would have a whole lot better
business plan if they were offering an array of services over
that wire, instead of trying to just offer discreet service to
customers.
So I think the choice that you face is that you have to
decide is line sharing and the value that it brings to the
competitive market in broadband sufficient to offset the
downside that comes from the delay in the deployment of the
fiber facilities and the broadband facilities in the local
loop.
We don't believe it is, and we assume that the authors of
the Act don't think it is, but that is the choice that you
have.
Mr. Gordon. Mr. Chairman, as usual, Tom is very good. Could
we give someone an option if they want to take a contrary view.
Chairman Tauzin. You still have time, and Mr. McMinn can
respond.
Mr. Gordon. Okay. Good.
Mr. McMinn. I will repeat one fact. The reason why more
companies are not offering line sharing, especially in Verizon
territory, is the 100 to 1 or 300 to 1 advantage they have put
in front of--the obstacle that they have put in front of us, in
terms of ordering up line sharing from them in order to be able
to implement it. And 3,500 lines in 1 year, and 3,500 lines a
day.
Mr. Gordon. What about his technology?
Mr. McMinn. I would like to address the technology, because
there is a couple of things that have been merged together
here. One is the deployment of fiber in relatively dense
metropolitan areas to offer even higher levels of broadband,
which is what Project Pronto and some of the others are
designed to do, versus offering broadband in truly rural
communities.
Wired technology will never offer that result, and I
understand that many of the members here represent truly rural
communities. Do not hang your hats on a false promise that the
ILECs will roll out fiber to these remote areas.
Think of the analogy to t.v. There is no cable t.v. in
rural America. They get their t.v. over satellite, or some
other alternative technology, and it becomes much more
economical than the buildout of a cable plant to the most
remote areas.
It makes much more sense to develop or promote a technology
that focuses on alternative ways to deliver broadband, either
by satellite or by wireless, to the most remote areas.
Certainly cable over time has been pushed more and more
outward, but that's only the wire that has to be run, and not
the fiber and not the active electronics.
Chairman Tauzin. The gentleman's time has expired. The
gentleman from Michigan has a request.
Mr. Dingell. Mr. Chairman, I would ask for unanimous
consent that the gentleman be given 1 additional minute so that
I might and so he could yield for me to ask a question.
Chairman Tauzin. Any objection? Hearing no objection, the
gentleman yields.
Mr. Dingell. Thank you. Thank you, Mr. Chairman. Mr. Tauke,
I am curious. We have been talking about line sharing. Can you
think of anybody, or Mr. Mancini, can you think of any company
that uses this line sharing for purposes of broadband that also
provides voice service, or do they just limit themselves to
offering data?
Mr. Mancini. If they are line sharing that is all that they
can offer. They have a choice. If they line share, they can
have the high frequency parts of the loop that provide data.
They also have their choice of getting the full loop if they
want to offer both voice and data.
Mr. Dingell. But all of them only use the high end, and
none of them offer voice service along with the data; is that
right?
Mr. Mancini. Today that is correct.
Mr. Dingell. Is that right, mr. Tauke?
Mr. Tauke. Yes.
Mr. Dingell. Mr. McLeod, do you agree with that?
Mr. McLeod. Sure.
Mr. Dingell. Sir, do you agree with that?
Mr. McMinn. Actually, that's not true. You can offer voice
services----
Mr. Dingell. How many do it?
Mr. McMinn. Well, I think the issue here is this.
Mr. Dingell. No, no, I hope that you are not offended, but
I have a question to which I would like an answer.
Mr. McMinn. I will try to answer.
Mr. Dingell. How many of them offer voice and data?
Mr. McMinn. There is quite a few CLECs. Probably a handful
of CLECs that do that.
Mr. Dingell. A handful?
Mr. McMinn. Yes.
Mr. Dingell. And most of them do not?
Mr. McMinn. It is very difficult to compete against a
subsidized voice offering with one that is not subsidized.
Mr. Dingell. So very few of them do?
Chairman Tauzin. The gentleman's time has expired. If Mr.
Tauke would like to respond.
Mr. Dingell. Mr. Tauke.
Mr. Tauke. There are a number of CLECs who offer both voice
and data services, and they purchase the line in order to do
that. They purchase the full loop in order to be able to do
that. When you do line sharing, by definition, what you are
doing is purchasing a small piece of the loop for a couple of
dollars a month.
And the expectation is that the local company, the
incumbent, is providing voice service over the line, and then
somebody else is providing the data service, which is what
Covad generally does.
Now, Mr. McMinn had earlier indicated that you could have
IP telephony that you would put over the line sharing piece of
the loop. Of course, from all our perspectives, what that means
is that we have to maintain the loop, but we get only a couple
of dollars a month for the line sharing of that line, and we
can't do anything with the rest of it.
And so that highlights I think the problem with the whole
line sharing structure that we have. So they can offer the full
service without purchasing the full loop.
Mr. Dingell. You are coming to the point where this imposes
certain technological limitations on your use of that line, and
it also imposes certain limitations on the services that you
can offer in instances where that line sharing takes place; is
that not so?
Mr. Tauke. The biggest problem with line sharing, frankly
speaking, is that if you have the copper loop, it is not a big
deal. But if you don't have a copper loop and you are trying to
put fiber into the network, further into the network, fiber
from the central office toward the home, that is where the
technological problem arises.
So when you have line sharing in place, that discourages us
from being able to put fiber in because we don't know how
technologically how to line share in an efficient way when the
fiber is part of the loop.
Chairman Tauzin. The gentleman's time has expired.
Mr. Dingell. Thank you, Mr. Chairman.
Chairman Tauzin. I just want to put on the record that
cable came to rural America, in my part of the world, a lot
earlier than it did to urban American. I don't know where you
got the notion that cable was late into rural America. That
just isn't true.
Mr. McMinn. That is not the intent I intended to say.
Chairman Tauzin. The gentleman, Mr. Ganske, is recognized.
Mr. Ganske. Thank you, Mr. Chairman. In trying to figure
out issues like this, I usually get the advice of fellow
Iowans. So I have the opportunity to question two Iowans on
this panel.
In fact, my hometown of Manchester is halfway between
Dubuque and Cedar Rapids. So I think we will start out with a
question to Mr. Tauke, and we will give Mr. McLeod a chance to
respond, and we will just go back and forth a little bit.
Mr. Tauke, if you could in 1 or 1\1/2\ minutes, just tell
me and the citizens of Iowa why if this bill became law it
would be good for them.
Mr. Tauke. For the citizens----
Mr. Ganske. And let me just interrupt for a minute. And I
want to point out that McLeod is a company that employs a lot
of Iowans. Qwest does, too.
Both companies have significant investment in Iowa, and
furthermore, Qwest has stated on several occasions that they
will be applying for their long distance because have met
Section 271, and they will be applying for that within the next
3 months. So, Mr. Tauke.
Mr. Tauke. If Qwest is going to apply for long distance in
the next 3 months, then will be offering long distance services
before this bill is going to become law, and so I think it is
fair to say that that piece of it wouldn't have much impact on
Iowa.
The other piece, however, the part which provides a
broadband policy for the Nation and addresses how broadband in
the local loop is regulated would have impact. And I think that
for Iowans they are fortunate to have a very strong competitor
like McLeod who is providing services, but a lot of people are
still relying on Qwest and other local telephone companies,
about 150 of them as I recall in the State of Iowa, to provide
broadband services to their homes or the cable companies.
This bill would make sure that those local telephone
companies had a greater incentive and greater ability to offer
broadband services to customers. That would mean that there
would be competition for the cable companies who are offering
broadband services in the State, and the competition between
the cable and the telephony companies in the State, providing
that dual option for broadband services in the local loop has
got to be good for consumers.
Mr. Ganske. Mr. McLeod, would you care to respond to Mr.
Tauke's comments?
Mr. McLeod. Sure. As far as this bill and the State of Iowa
is concerned, with Qwest applying, and if they receive 271,
really they can provide data services throughout the area. But
I might add that they could do that today as well.
There is nothing stopping them from doing DSL services in
any of their markets today, and in fact they are doing DSL
services in those markets. On the other piece of this
legislation, the restriction to access certain pieces of the
Bell network, that could impact us in the State of Iowa, in
that it could impact our ability to use the Qwest network as
part of the last mile facilities to get to our customers.
Now, we have invested--well, billions of dollars in
fiberoptic network, but we have done that to tie together
cities like Dubuque, to Cedar Rapids, so that we can bring
broadband services to those markets.
But we still are dependent on the last mile connection, and
when we get that copper loop, then we can do some pretty nice
things with it. We can bring one megabyte service to the
computer.
Now, that is not broadband service. That is not 45 megabyte
service, but that is high speed Internet service, and the
copper loop is the key to that. We would all have fiber going
to every neighborhood, and that is going to take 20 or 30 years
to get to that kind of point.
What we need to do is get to a point where we can walk, and
that means one megabyte service, and that is delivered on
copper, and we have to have access to the copper to compete.
This bill affects our access to the copper loop.
It is undermining the 1996 Act. However, if Qwest is smart,
they will go and get their 271 and they will have most of what
this bill provides when that happens.
Mr. Ganske. Mr. Tauke.
Mr. Tauke. The fundamental difference in viewpoint here is
that we have a different reading of the Act. I don't think the
Act says a word about his access to the copper loop.
We think that as long as there is a copper loop there that
this Act makes no change about the ability of Mr. McLeod and
his company, or any other competitor, to get access to that
local copper loop. So I don't think there is a fundamental
difference.
Mr. McMinn. Oh, there is, because the telephone companies
can hide the copper loops if you will behind fiber, and say
this is now part of the new deployment of network and no longer
can you get access to the copper loop.
So for a period of time anyway the existing copper network
as it stands is very important for competition, and we can
provide DSL services on it, and we are, and we are moving just
as fast as we can to provide service as broadly as we can
through our markets.
Mr. Tauke. Let me be clear on this. There is no intent to
say that there is--at least from the perspective of this
person, or our company--no intent to have an Act passed which
says that you can't get a loop, a full loop from the central
office to the home, even if there is fiber in that local loop.
The only thing that we believe this Act does relating to
the local loop today is that there is fiber put into the local
loop the line sharing would not be required, but you would
still have the ability to get the full loop.
Mr. McMinn. The difference is that we can only get it for
voice, and we can't use it for data services according to the
bill.
Mr. Tauke. Well, that's great. How are we going to service
customers with an integrated product and only have voice in the
future on a copper network? That's absurd.
Mr. Ganske. Mr. Chairman, do we have counsel to resolve
this difference?
Chairman Tauzin. Which city were you from? The gentleman's
time has expired.
Mr. Ganske. I appreciate it.
Chairman Tauzin. The Chair would recognize Mr. Stupak for a
round of questions.
Mr. Stupak. Thank you, Mr. Chairman. Mr. Mancini, as you
know, I come from Michigan, and last September the Public
Service Commissioners of Illinois, Michigan, Indiana, Ohio,
Michigan, and Wisconsin, issued a joint statement.
And it said--and I am going to read part of it--it said,
``SBC, Ameritech, through its various five-State operating
subsidiaries, has in recent months consistently demonstrated
its inability to effectively operate the local exchange
telecommunications operations that it controls in Illinois,
Indiana, Michigan, Ohio, and Wisconsin. We as the five
chairpersons of the Public Utility Commissions charged by our
respective States with overseeing these local
telecommunications properties, have come together today to
formally call upon SBC, Ameritech, and its senior management to
take further action to address these issues of operational
deficiency which have persisted for an extended period of
time.''
So my question is why should Congress deregulate services
provided by Bell companies when the service records in these
States is so miserable?
Mr. Mancini. Well, Congressman, I don't really think there
is a relationship between the two. After SBC acquired
Ameritech, as you are aware, there were some service problems
and difficulties in Ameritech.
SBC changed management in Ameritech, and SBC committed
hundreds of millions of dollars. We have hired thousands of
technicians, and I believe that you will see and have seen
significant improvements in service.
Mr. Stupak. Yes, but I guess the five Commissioners are
saying that it has been for quite a long time and these five
States have a real problem. So if we deregulate and get into
new services, how can we make sure that they are going to be
properly and proficiently provided to our local areas?
Mr. Mancini. Well, whether Ameritech had service problems
in the 1990's----
Mr. Stupak. Well, they still exist. It is at least 30 to 60
days before you can get any service up in my neck of the woods.
Mr. Mancini. Well, the alternative is that here we have a
competitive market. Those Commissioners have encouraged SBC and
Ameritech to deploy and invest monies in those States to
upgrade those networks.
Part of Project Pronto not only provides the ability to
provide DSL, but it also improves the network. It improves the
reliability and reduces costs.
Mr. Stupak. Sure, but if there was really competition, if
the service was so bad you think that someone else would want
to come in there and pick up the services that according to the
Commissioners that you were not properly providing, right? If
the competition was there at the local level in rural areas,
you would really see that.
Mr. Mancini. Well, there has been and continues to be
competition, and I would just like to make the point that there
seems to be an indication that there is no competition.
Mr. Stupak. Well, there isn't.
Mr. Mancini. Well, in fact, let me----
Mr. Stupak. Let me go back to the bill. Upon that
statement, if you go to page 6 of this bill, Section 232,
Provisions of High Speed Data Services, what it basically says
is that the FCC and the State can't regulate you.
Mr. Mancini. That's correct.
Mr. Stupak. So if they can't regulate you----
Mr. Mancini. Only for competitive high speed Internet
access services.
Mr. Stupak. Right.
Mr. Mancini. But it has nothing to do with local.
Mr. Stupak. Here are the public utility commissioners and
the FCC who do have some control over you, and you are not
providing the service according to local people. And now you
want to get into a new area where there isn't going to be any
regulation. How do we keep some accountability going here?
Mr. Mancini. Well, would you prefer that cable have a
monopoly? That's the alternative. If we don't compete, and if
we don't invest, you are seceding the market to the cable
monopoly.
Mr. Stupak. But if you have sort of monopoly right now, at
least in our five States----
Mr. Mancini. Not in the provision of high speed Internet.
Mr. Stupak. I will agree, but----
Mr. Mancini. Could I just follow up?
Mr. Stupak. Sure, go ahead.
Mr. Mancini. I think there has been somewhat of a
misimpression given that the 1996 Act wasn't successful in
opening the markets. As you recall, there was a 14 point
checklist, and as SBC states, CLECs have captured more than 10
million customers, with provisions of more than 2.8 million
interconnection trunks.
We have exchanged more than 98 billion minutes, and we have
invested more than $4 billion opening those networks. Yes, it
is true that competitors are focused mostly on the business
market, because that is where the profit is.
But if you go down the line, you cannot capture 10 million
customers without giving each and every one of them the 14
point checklist. And to say that there is no competition is not
completely accurate.
Mr. Stupak. Well, let me ask this question of Mr. Tauke,
and maybe he can answer this one for me. Here is this article
again, and how the Baby Bells may conquer the world, and there
was a Times article that Mr. Stearns mentioned that my good
friend, Elliott Engel, was reading that, and so we both had a
chance to take a look at it.
And so the RBOCs that come in our office are very
persuasive in telling us how this legislation will enable to
get it deployed, these high speed services to urban and rural
areas.
But Bell Atlantic and Verizon have been offering long
distance service in New York there for some time now. What is
the current state of the deployment then of these services in
Upstate New York in the rural areas or how about even Harlem?
Has that been covered?
Mr. Tauke. I can't tell you specifically what central
offices in New York have been covered and which ones have not
been covered. I would be happy to come to your office and try
to provide you a map of that.
We are providing and are offering DSL services in New York
to a majority of the lines, but I can't tell you where all of
them are.
Mr. Stupak. So upstate, we are pretty well covered up
there?
Mr. Tauke. No. I would have to be honest and say to you
that there is greater coverage in New York and the suburbs than
there is upstate. But going back again to my analogy this
morning to the wireless market.
When we look at the wireless market back in 1993 and 1994,
the major deployment was first in the big cities, where you put
up a tower and you get a lot of customers per tower.
And then as you go to less populated areas, you go there a
second, and the less populated areas, naturally in the
deployment of most new technologies get the deployment a little
bit later, and I think that is the economics of it, and that is
happening with DSL and broadband services as it did with
wireless.
Mr. Stupak. So really the rural areas can count on almost
being sort of last to get that?
Mr. Tauke. You know, in most areas they are always the
last. There are some other factors that come into play, too.
But I think that generally the competitors in the local market
come first to the big cities.
Why do they come to the big cities? Because they can get a
lot of people in a relatively small geographic area, and----
Chairman Tauzin. The gentleman's time has expired.
Mr. Dingell. Mr. Chairman, I ask for unanimous consent that
the gentleman be permitted to proceed for 1 additional minute
for purpose of yielding to me. Would someone yield to me?
Mr. Stupak. Yes, as long as I can follow up on it.
Chairman Tauzin. One additional minute to you.
Mr. Dingell. Mr. Mancini, I hope that you were listening
closely to what it was that Mr. Stupak was saying, because his
questions are very important to you and to me, and to him. I
think that he was raising two questions to you which are very
important.
The first is that if this legislation passes would your
company be up there providing his constituents with broadband
service; and this is a very important question. What is your
answer to that, sir?
Mr. Mancini. If this legislation passes, it will provide us
with a significantly greater incentive to invest in broadband
and to expand our footprint in Michigan and every other State.
Mr. Dingell. I understand that the upper peninsula of
Michigan is a unique area. Would this move you to get up there
to provide assistance to those people in terms of providing
this kind of service?
Mr. Mancini. In very remote rural areas, the economics
probably make it very difficult for either cable or telephone
company wires to serve those areas. As one of the other
speakers said, in some areas it may be more cost effective for
satellite and wireless to serve those areas.
We are looking at partnering with some of those satellite
and wireless companies to serve those areas.
Mr. Stupak. But to follow that up, cable is actually up
there now doing it for us.
Mr. Mancini. And they can serve it.
Mr. Stupak. So I think the answer to the question is that
you may be willing to do it, but the real question----
Chairman Tauzin. The gentleman's time has expired again. We
have got to move on, guys.
Mr. Dingell. Just tell us what you are doing now and what
you will do to improve services.
Chairman Tauzin. The gentleman is entitled to answer the
question, and we will move on.
Mr. Mancini. We are spending $6 billion to expand the reach
in Michigan in serving 40 percent of the customers to 80
percent of the customers.
Mr. Stupak. But that's Pronto, and you said 20 percent
still would not be covered, and I am sure that the Upper
Peninsula wasn't part of that 20 percent.
Mr. Mancini. And 20 percent would not be covered. That
would take additional investment. If this Act passed, there is
a much greater likelihood that we would go to those areas. If
this Act did not pass, the likelihood is----
Chairman Tauzin. The gentleman's time has expired. The
gentleman from Michigan, Mr. Shimkus, is recognized.
Mr. Shimkus. I didn't think that was my colleague from the
upper peninsula. I thought that was James Earl Jones with that
deep voice that he has today.
Mr. Stupak. I need high speed Internet.
Mr. Shimkus. I have actually enjoyed, although I have not
sat through the entire hearing, I think it has been a very good
discourse and exchange. Let me ask based upon a comment made by
my colleague, Mr. Markey, which raises a question.
I think his point was that prior to the Telecom Act, which
was before I became a Member of Congress, the regional Bells
had the ability to deploy DSL and did not. Mr. Mancini, do you
want to address that?
Mr. Mancini. Yes, I would just like to make a few comments
about that. There is no question that very early versions of
DSL were being worked on in the labs. In the 1990's--actually,
two points--the technology did not exist that exists today.
And, No. 2, there was no market. The Internet had not
developed. We could not spend $6 billion or $10 billion to put
a product out there that no one had or would want to use.
It was only until the Internet developed and DSL
manufacturers and vendors developed a system. In Project
Pronto, we are using a state-of-the-art system which was when
we announced it, it was still being in development. So that
Elcatel integrated line card was not even on the market when we
announced Pronto.
Mr. Shimkus. Let me go on. There has been a lot of hi-tech
discussion and I would like to boil it down to my simplistic
infantry officer perspective. What I see is a debate, and there
is a concern about competition in the local loop. I don't think
that anyone disagrees with that.
Some people say that to prohibit--that we need DSLs and
full coverage, and I agree, and the regional Bells can help
provide that service. Others want to say, no, we need to hold
them hostage so that we continue to force the local loop.
A question would be that if we increased the 251 and 271
aspects of the Telecom Act, and divorced the debate on voice
from the digital aspects, how would that be received? And I
want to go back again to Mr. Mancini.
Mr. Mancini. I'm sorry, I didn't understand the premise. If
you divorced the debate on voice?
Mr. Shimkus. There is a debate on the committee about your
company, sir, which is receiving a lot of fines in Illinois for
service issues that are debatable whether the fines are still
enough to make some movement on service quality.
And so there are debates at the Illinois Commerce
Commission's level, or even within members of the committee,
that maybe the stick is not big enough. Do we make the stick
big enough to address the local loop questions versus using
this whole DSL debate as a whipping boy for access on the local
loop?
Mr. Mancini. Well, I can tell you that we don't need fines
to provide quality service. We have not had service problems
for 100 years in the Southwestern Bell States, nor IMPAC Bell
and Nevada Bell.
We provide quality service because that is what he customer
has demanded, and there is competition, and for a whole variety
of reasons. Yes, we have had some problems in the Ameritech
States after we completed the merger, and we are committed to
improving them, and I think the record shows that there have
been significant improvements.
Mr. Shimkus. And you know, of course, we as Members of
Congress have to represent our citizens, and we must ask on
behalf of our constituents some of these questions.
But, Mr. Tauke, I want to ask a question on an issue that
if some local company requires consumers who subscribe to their
high speed Internet services to also subscribe to the local
telephone service offering, should this type of requirement be
permitted?
Mr. Tauke. Well, today we can't do that, and I don't think
there is anything in this Act which would change that, that you
can't tie the two services together.
Mr. Shimkus. And that would be a problem, but it all stems
to the whole debate of what is the real intent of the
legislation, and I think the intent is to provide competitive
aspects in the high speed Internet services.
Mr. Tauke. Right.
Mr. Shimkus. And there is a problem still which has been
identified as entrance into the local loop or competitive local
exchanges. And that is what I struggle with.
Mr. Tauke. Well, first of all, I think we should or can
talk about competition in the local loop, but on the issue of
tieing the two together, think again of wireless. There is no
tie between giving your wireless phone and your wire line
phone--they are marketed separately and they are separate
entities.
So even though Verizon has a wireless service and we have a
wire line service, we can't tie the two together, as PC can't
do it with singular and I would assume that same rule would
apply here.
Mr. Shimkus. Out of respect, sir, let me stop and yield
back the balance of my time in respect to my other colleagues
who need to move on.
Chairman Tauzin. I thank the gentleman.
Mr. Cicconi. Can I just comment on that last point. The SPC
really does tie these services together today in the State of
Texas. They tie the provision of their DSL to a customer having
their local phone service. You can't have their DSL service
unless you are a local phone service customer of SBC in Texas.
Chairman Tauzin. The gentleman's time has expired. The
Chair recognizes Mr. Green from Texas.
Mr. Green. I will yield for a couple of seconds to my
colleague from Colorado.
Ms. DeGette. Thank you, Mr. Chairman, and thank you, Mr.
Green actually. I have a whole series of searing questions that
I know the panel was looking forward to answering but
unfortunately I am running a meeting in 2 minutes, and so I
have to leave.
So I would just like to make one quick comment. I am sorry
that Mr. Hills had to leave because he was--I mean, I
understand that everyone here has a lot of business issues
relating to competition in this legislation, and he was the
purported consumer representative on this panel, and after all,
the reason that we do this, is for the consumers.
I just wanted to point out to the members that I received
today a letter from two consumer groups, Consumers Union, and
Consumer Federation of America. Consumers Union is the
publisher of Consumer Reports, which is my husband's bible. He
won't even let me buy toothpaste without reading it.
And the Consumer Federal of America is the Nation's largest
consumer advocacy group. They sent a letter to the members of
the committee today urging us to oppose the bill because they
had three reasons.
The proposed legislation undermines the efficacy of the
Telecommunications Act of 1996, because it doesn't encourage
local telephone competition.
And it removes one of the best incentives for the Baby
Bells to open local markets by allow interLATA data traffic,
and it retards the development of strong competition. So I am
finishing up and I'm sorry. I know that you will give him extra
time, Mr. Chairman, out of comity to me.
But I would ask for unanimous consent to insert the letter
that we received from these groups in the record.
Chairman Tauzin. Without objection, unanimous consent is
granted.
The Chair recognizes Mr. Green.
Mr. Green. Thank you, Mr. Chairman, and I just have some
questions. I have a very urban district in Houston, and first I
would like to start with Mr. Tauke from Verizon, because
Verizon is a mobil seller in Houston and not an RBOC.
But I represent a district that is blue collar and very
urban, and how the passage of this legislation by letting Bell
companies provide that Internet backbone benefit urban areas,
because the similarities for very urban areas and rural areas
are the same, and giving them greater access at lower prices of
broadband services.
Mr. Tauke. I don't know the specifics of the situation on
the ground in Houston today, but as a general rule, I think
again what this legislation would do is establish a broadband
policy that would provide for a more level playing field
between telephone and cable, and so both of us would be
deploying and competing on an equal playing field in Houston,
where you would have both competitors trying to get to the
consumer.
And second it would permit SBC in Houston to do a better
job of building or engaging in the building of the regional
networks that hook to the long haul backbone networks, and that
is an area where there is a capacity issue in terms of Internet
capability.
Mr. Green. Mr. Ashton, I read your testimony and that of
Mr. Henry's, and first when it was delivered to my office,
because I believe the Wall Street holds the key to the future
success of the competitive local exchange carriers.
And can you outline the kind of telecommunications company
you personally would recommend as a good buying opportunity,
and more specifically, what business fundamentals need to be
present to make a telecommunications company worth investing
in?
Mr. Ashton. Well, if you broke them out into two
categories, there is service providers and then there is the
telecommunications technology vendors. So they each have
different--you have to analyze them very differently, although
they are tied together, and lately they have not been looked
upon that way.
So what we would like to see from a technology standpoint
is a good rate of return, availability to carriers who invest
in the network, and then we would expect to see technology
spending follow through.
And our concern to that is that you are not seeing that
right now because the rate of return isn't there, which impacts
the metrics that go into a rate of return, which are revenues
and costs, and the costs of capital, and those kinds of issues.
Mr. Green. Okay. Mr. Henry, your testimony was interesting
because you have a completely different view on the current
state of the CLEC marketplace than Mr. Ashton, and you never
fully touched on the issue of regulatory scheme uncertainty.
And you seem to think that one of the driving forces
slowing the flow investment is capital to CLECs. Can I pose the
same question to you? Can you outline the kind of
telecommunications company that you would personally recommend
as a good buying opportunity, and more specifically, what
fundamentals need to be present to make or have that
telecommunications company worth investing in.
Mr. Henry. Certainly. I think the first condition that has
to be present is a great market opportunity, which clearly
local telephony presents in all its forms and facets a hundred-
billion dollars of revenue, and $45 billion plus of cash-flow.
It is an opportunity to dream of and one that the Bells
have enjoyed for a long time, and one that I think presents a
great market opportunity for the CLECs, and to translate that
opportunity into a good business, you need very talented
management, and you need lots of capital.
And heretofore the capital markets, Wall street has been
willing to fund the CLECs to the tune of over a hundred-billion
dollars for their capital expenditures and their operating
losses.
The great uncertainty that has arisen is to some extent to
the uncertainty of the regulatory regime has dried up that
capital, and you see the very unpleasant impact in the
marketplace.
Mr. Green. When you talk about drying up the capital, let
me ask you both the same question, because Ms. Ashton, you have
talked about service providers versus vendors. Service
providers actually has a network, and a vendor is someone who
is a reseller?
Mr. Henry. A vendor would be somebody who sells equipment
to build that network, and so it would be Cisco or Intel, or
somebody like that.
Mr. Green. Well, I am talking about the distance between
someone who has the network, like an RBOC, and somebody who is
selling is reselling or just utilizing it, which would be a
better cap investment, which would be a better environment for
someone who already has that network out there, or someone who
is relying on using someone else's.
Well, we can say that traditionally that investors have
looked more favorably upon funding facilities based carriers,
meaning those that owned and built their own networks.
And so we have not had lot of retail carrier investment,
and so it is has appeared to the collective wisdom of investors
that facilities based carriers ares more valuable. Now that the
competitive facilities based carriers have no longer a kind
of--are attracting a lot of investment and attention, the value
proposition is moved from just owning facilities to other
things, like economies of scales and your ability to raise
capital and those kinds of issues.
Mr. Green. Mr. Henry.
Mr. Henry. I would just add that investors tend to like
those companies which are perceived to be more in control of
their own destinies. Pure resellers that essentially own
nothing and just essentially rebrand the Bell's location
product are not perceived to have a ton of value companies, and
what we refer to as a smart billed CLECS.
So just take the copper loop the last mile and couple that
with their own switching fabric. They are on their own
transmission transactions, and their own transmissional
electronics, and their own get to work intelligence That is
perceived to be an attractive business model, and one that will
ultimately lead to greater facilities deployment, just as it
did in long distance.
Mr. Green. I am almost out of time, and my concern is--my
goal on the committee and I think from 1996 on, was to have
investment capital that would drive the telecommunications
marketplace and I am trying to get a feel from each of you how
the capital would flow.
And what you are saying in the companies month compared to
previous months, it would flow to someone who has the
facilities based effort.
Mr. Ashton. Well, one thing you can say is where does it
flow today? They have raised a lot of money, and put a lot of
money to work, and it has largely flowed where it theoretically
should, which is to large buildings that are highly
concentrated and have more money to spend But it has not solved
the small business and residential issue.
Chairman Tauzin. The gentleman is almost out of time.
Mr. Green. Let me ask one last question, Mr. Chairman. So
if each of you would give me your best prediction about which
telecommunication company each of you would still be operating
a year from now, whether it is an ILEC or CLEC side, and also
please explain the conclusion as briefly as possible so that
other members can follow up.
Mr. Ashton. So if we took a----
Mr. Green. Considering where we are at today, who would be
around a year from now to provide that investment; what
companies, either ILEC or CLEC?
Mr. Ashton. Your ILECs and your cable companies.
Chairman Tauzin. The gentleman's time has expired. Does
anyone want to answer that? Mr. Gregori.
Mr. Gregori. Thank you. As a relatively newcomer to this
playing field, we are building facilities, and we are spending
our capital which is relatively modest compared to many of the
other members sitting before you. We are spending that on
building out data network.
We believe that the future is in data. The convergence of
technologies. However, without access to competition in the
local markets, we would have never put forth the business plan.
It is absolutely a requirement that newcomers to today's
market be able to bundle services and do so effectively and
reach out into the local markets through the use of the
unbundled network elements, UNE-P, and other methods of
aggregating services to build top line revenues, build cash-
flow, and that is what Wall Street requires today.
And you need that totality of support to build good
competitive companies in the future.
Chairman Tauzin. The gentleman's time has expired.
The gentlelady, Ms. Wilson.
Mrs. Wilson. Thank you, Mr. Chairman. Tom, as you know, New
Mexico is not in your area. We are a Qwest or U.S. West,
territory, but you do have some assets in New Mexico. So you
don't need to get approval for long distance to roll out DSL or
do all kinds of innovative things.
And it would seem to me then ideal for rural broadband,
because in a way this skill has already passed for Verizon in
New Mexico. So why are you selling off New Mexico?
Mr. Tauke. Well, actually, the decision related to the sale
of local exchanges in New Mexico was made prior to the merger
of GTE and Bell Atlantic. GTE had made the decision to sell off
access lines in New Mexico, Texas and a number of other states
prior to that time.
And as you know, out of that came the recreation of Valor
Communications. As you may know, during the last year, I have
been the Chairman of the United States Telecom Association, and
one of the things that I think is evident from my activity in
that role is that you see in many cases it is a favor to some
of the more rural areas if they are the focus of a company like
Valor, because Valor is going to focused on those areas , and I
suspect, for example, that they may out broadband services more
quickly as a result.
Mrs. Wilson. In fact, let's focus on that then, and what
you are saying then is that this Act is not a solution for
rural broadband. In fact this is a map that stayed in New
Mexico, and I know that nobody is close enough to see it, but
you can probably see the colors.
The gray hatched area is where you U.S. West territory is,
and all that is in blue is rural telephone co-ops. And if I put
my thumb right her, I just covered about a third of the
population of the State of New Mexico, and for those of you who
are not good in geography, if I drive here from Albuquerque
over to here in Tatum, it would be like driving through the
entire State of Maryland and up through Delaware, and past
Philadelphia, and across New Jersey, and all the way to New
York City.
I guess my question is why can I get DSL in Mescalra, New
Mexico, but it wasn't until 6 months ago that I could get it in
the north valley of Albuquerque?
Mr. Tauke. Well, if you want an honest answer, I will give
you one. The honest answer is that most of the rural small
telephone companies are heavily subsidized by universal service
funds. They are able to draw from those funds in order to be
able to provide high quality service in the rural areas, and
the cooperative has additional advantages under the law in
taxes and in other areas. That's why they were created.
Mrs. Wilson. Tom, I think you made my point real well, and
that is that it is that rural America doesn't need this bill.
It is not going to benefit from this bill because you are not
in rural America.
This little town here of 20,000 in Clovis and Potalis, that
is not a rural area by New Mexico standards. The rural areas of
places the size of Delaware with 857 people in them who already
have these services. And if this is an answer for rural
America, then how come you aren't there?
Mr. Tauke. Congresswoman, I think two points. One is the
cooperative is also not subject to the 1996 Act. They don't
have any of the requirements of Section 251 or any of the other
requirements that we are talking about today. So that is point
one.
Point No. 2 is that Verizon, even though we provide service
in many major cities, we provide service to more rural
customers than any other telecommunications company in the
country.
There area lot of good rural companies who are providing
communication services to rural America, but their most rural
customers are receiving services from one of the companies that
you see sitting at this table.
Mrs. Wilson. One final question, I guess, and maybe I will
ask Mr. Mancini this. Why don't you own significant networks in
other RBOC territory? Why don't the RBOCs compete with each
other?
Mr. Mancini. Well, SBC is in the process of expanding out
of region into 30 major markets, and we have already deployed
in 20 of those markets.
Mrs. Wilson. Local service?
Mr. Mancini. Local service. It is a very difficult
business, however, when we do not have the ability to offer
long distance service to all of our customers. So it is very
difficult when you are handicapped and everyone else can offer
a full service of packages and we can't.
Chairman Tauzin. The young lady is out of time.
Mr. Mancini. Can I complete my answer?
Mrs. Wilson. I actually heard your answer and that you
think that my assumption is incorrect, and that's okay, and
maybe I have the wrong data. But the final question I did want
to ask you was that your statement that you believe that cable
will have a monopoly on broadband if we don't do this Act.
I read in your fourth quarter results that SBC expects to
provide an estimated 77 million Americans with high speed voice
area and video services via DSL service by the end of 2002. How
can that be if you are up against a monopoly?
Mr. Mancini. Well, that growth is Project Pronto, and it is
based on the assumption that we continue it, which of course we
have not continued it. We have suspended it based on the
regulatory uncertainty in Illinois.
We have expanded and are committed to compete in that
market, but because of the uncertainty in the FCC and in other
States, it is causing us to rethink that whole option and
rethink the investment decision.
Mrs. Wilson. Thank you, Mr. Chairman.
Chairman Tauzin. The Chair recognizes Mr. Engel.
Mr. Engel. Thank you, Mr. Chairman. Mr. Tauke, in your
testimony you mentioned that the wireless industry really took
off after it was deregulated. Can you expand on the type of
consumer benefits which resulted, and you obviously believe
that similar benefits will result for broadband deregulation.
Can you talk about that a little bit?
Mr. Tauke. Sure. Wireless service as you know developed
relatively slower early in its history. There were two
competing carriers, an A license and a B license, i most areas.
And back in 1993 with those two players in the marketplace,
Congress decided to essentially move forward with deregulation
of wireless services and the wireless market began to expand
and grow very rapidly at that point.
Three years later in 1996, with the Telecom Act, Congress
lifted the restrictions on interLATA for wireless services. And
about that time new technology such as PCS started coming
along.
And so what we had in this market was a deregulation if you
will of the marketplace, a prohibition on the States that they
could not come in and regulate it, and the establishment of a
national boundryless policy.
Since 1993, the subscribership has gone from 11 million to
100 million, which was a ton of investment. You had to put
towers up all over the country and that has happened. We have
competition for wireless services all over the country.
The price of wireless services has declined, and we have
seen a proliferation of new services offered via wireless, the
latest being a variety of Internet and broadband services.
You are attempting to stop the application again of
telephony rules to the broadband service, and you have a market
that is similar to what the wireless market looked like a few
years ago, with two major players offering services in the
market, and I think if Congress pursues the same policy, you
will get similar results.
Mr. Engel. Thank you. In my home State of New York, in New
York Verizon has already long distance authority, and in
Massachusetts as well, and I understand that Verizon has filed
with the FCC for the same authority in Connecticut.
If this bill were enacted will Verizon continue to push the
long distance approval at the same rate?
Mr. Tauke. Yes. We are going as fast as we can to get
approval next in Pennsylvania, and we hope as soon in the other
New England States and New Jersey. We would like to get all of
those out of the way this year.
Mr. Engel. And you wouldn't see any change at all if the
bill passes?
Mr. Tauke. Well, there will be no change in our commitment
to move as fast as we can.
Mr. Engel. In my opening remarks I had mentioned that one
of the difficulties that I had with the current system is the
wiring of high Internet access by cable companies is not
regulated, and I wonder if the general panel, and I know there
are others with different views, is it really fair or should we
regulate a product such as high speed Internet access in the
same manner regardless of the way a consumer uses it?
Mr. Pitsch. Congressman, I would say this. That unless
there is a situation where the company has a competitive
bottleneck, they should be regulated the same, and the way that
I look at this market is that the Internet access market is the
relevant market, and dial up in the bottleneck. The copper is
the bottleneck. That under the Act and under good public policy
should be made available to the Covads of the world.
But other broadband investment in this last mile should be
deregulated so cable and telephone and wireless and satellite
companies all have the maximum incentive to make this risky
investment.
Mr. McMinn. Again, let's not get into the business of
picking winners and losers. This is about trying to get as much
as choice to the consumers as we can. The history of the cable
plant deployment and the RBOC deployment differ substantially.
One was a guaranteed rate of return funded substantially by the
consumers of that business for 100 years.
The net result is 1.6 billion miles of copper in the
ground. Even in these scenarios where additional fiber and
additional remote terminals are deployed the vast majority of
that copper must be reused to provide high speed services.
All that we are asking for and what this bill substantially
eliminates is the ability to continue to use that copper unless
there is a contiguous run of copper all the way from the
central office to the end customer.
If they shortened that up and if they put fiber in place,
and they put electronics in place, then one company will be
advantaged at offering a much higher class of service to the
end customers. Just give us the opportunity to also put our
electronics in the field and to also put our fibers right next
to theirs, and attach to the existing copper wires.
Chairman Tauzin. The gentleman's time has expired. The
gentleman from Nebraska, Mr. Terry, is recognized.
Mr. Terry. Thank you, Mr. Chairman. I apologize for missing
part of your statements and questions. So if my question has
already been asked forgive me, but it does follow up on what my
colleague, Ms. Wilson, from New Mexico was getting to.
Obviously as some of you know, I am from Omaha, Nebraska,
and I represent just Omaha basically, and so I actually have
more cement than fields. But needless to say, broadband in
rural areas is an important issue.
I have the University of Nebraska, the Med Center, coming
to me and saying we would like to roll out a telemedicine
program, but we can't it into our smaller cities because you
can't stream immediate video teleconferencing with dial up
service. It just doesn't work.
So as they want to provide higher quality medicine using
telemedicine, we are restricted by the infrastructure. So
obviously even though I am from Omaha, and almost every house
in Omaha, Nebraska, is wired with fiberoptics and sometimes
from 2 or 3 different companies, we are blessed in that
respect.
But once you get outside the city limits it is almost a
completely different story. And one of the selling points of
this legislation is that it will provide the more opportunity
to the rural areas to get broadband, and they believe it is
life or death. It is not just telemedicine, but it is maybe a
small business that can compete in a world market.
It may be an employer with 20 or 30 folks, and that is
survival in a small town in Iowa or Nebraska. But I read
through this Act and have learned a little bit about your
industry, and I am having a hard time understanding what this
Act really does to either encourage or force broadband in to
the rural areas without going into what Heather had brought up,
and just forcing Verizon or Qwest, or SPC, to divest some of
the rural lines and let the experts in that small market take
it over, user subsidiaries, and then roll out a higher end
product. Help me with this. Tom, I will let you be first.
Mr. Tauke. Let me start this way. When wireless rolled out,
there was concern expressed in the communications world at that
point that wireless was going to be an urban service, but it
wouldn't get to the rural areas because it was expensive to
erect facilities in rural areas.
But the fact is that it moved into rural areas very
quickly. Why did it move into rural areas? Because it was
deregulated, and there was an effort to try to ensure that
there was a nationwide service, and my cell phone in
Washington, DC became worth more when I could reach you if you
were out in Nebraska and you could receive the call.
Similarly with broadband, it is a similar thing. I think
that if we get the right policy in place that you are going to
get more rapid deployment of the services. If we get rid of the
rules for everybody, I think that is going to help. If we are
in a situation where there is an incentive to invest rather
than a disincentive to invest, that helps substantially.
And then beyond that of course there is the desire that
everybody will have to have everybody else connected. So for a
company like Verizon, it is in our interest to get everybody
connected.
Mr. Terry. What is missing from today that deregulating
this aspect is going to allow quicker buildout in rural
communities? I am missing that component.
Mr. Tauke. Okay. There are a lot of things and maybe others
want to answer, but quickly----
Mr. Terry. Well, your voice is almost gone, and that's why
we are picking on you.
Mr. Tauke. Well, the first thing we can do is that we have
a mechanism in place that allows us to deploy in the last mile
without having the expense and the technological restrictions
that are presently in place because of the regulations that
apply to the last mile.
This is solely for broadband and not for voice or
narrowband services. Getting rid of those technological
difficulties and the final disincentives is bid. The second
thing is that with the interLATA piece we had the ability to
build the connecting networks, which allow the local person to
get connected to the regional and to the cross-country if you
will broadband network.
Mr. Terry. Mr. McMinn.
Mr. McMinn. Again, I come back to this situation that we
have to understand the technology that is being deployed. DSL
technology and broadband technology over wire does not make
economic sense to very rural areas. Alternative technologies
do.
There is a false promise here that somehow magically we are
going to change the economics of telephony or
telecommunications because we grant a more exclusive monopoly
to the service. Choice is what drives this. We should be if we
are encouraging--and I think the goal of encouraging more rural
broadband access is a very good one.
We should subsidize it if that is the case. We should
provide incentives for satellite communications or some of the
alternatives. But offering this pseudo-exclusivity by
prohibiting the use of the copper plant when it is not directly
connected to the central office is not going to make the
economics better for rural America.
Mr. Mancini. If I could just make one comment, because I
don't want there to be any misunderstanding. SBC has never
claimed that this bill alone would ensure that broadband is
delivered to 100 percent rural customers. We don't believe that
is true.
It costs more to service rural customers and what we are
saying is that this bill will encourage us and incent us to
invest more to service a larger number of our customers. We are
not saying that this bill alone would incent us to make it
economical to service 100 percent rural customers.
Mr. McMinn. But right now when I buy an unbundled loop from
an ILEC, I pay them a cost plus a profit. If we determine what
a cost plus a profit is to access unbundled combination fiber
and copper loops, we are happy to pay for that. They are making
money when we offer it. They just don't want to offer in
competition with anybody.
The fastest growing segments of many of the RBOCs are their
wholesale segments today, as more and more CLECs come on to
their services.
Chairman Tauzin. The gentleman's time has expired. But you
have stirred up a bee's nest and let everybody respond.
Mr. McMinn. I just want to make a quick comment and
hopefully I can be succinct. That first that cable pass by is
over 90 percent in this country, and so it is possible to serve
many rural customers with wire line. There should be more done
in this area through wireless. No question.
Second, in my testimony, I indicated that you could explore
benchmarks, build out benchmarks, and when SBC announced
Project Pronto, they said within 3 years that 80 percent of
their customers would get 1.5 megabytes per second download
capability. Half of their customers would get 6 megabytes per
second.
Those are milestones that could be explored and they have
to be reasonable, but it is a way to make this process work
better.
Mr. McMinn. I just want to tell a real quick story that I
think is a little bit appropriate, especially because of the
rural aspects of this discussion. Back in the 1985s when we
were in the long distance business, basically AT&T controlled
all of the lines in Iowa.
So as we continued to compete and get a share using their
lines, we crossed over a point where we could make our own
investment of fiber, and we built the first fiber to span the
State of Iowa. The comment from the monopoly of the day, AT&T
then, was our company was getting all dressed up for a party,
but there was no party in Iowa.
That was the comment from the monopoly of the day, and so
you see, competition drove the investment, and if you try to
get investment being driven by some kind of regulatory scheme,
that's really difficult. Create a competitive environment, and
you will have investments.
And believe me that telephone companies will go after $220
billion marketplace in the United States with all the gusto in
the world. They are going to continue to invest money. They are
not going to give it up.
Chairman Tauzin. Anyone else? Mr. Cicconi, and then we will
move on.
Mr. Cicconi. Just a quick point. This bill as we read it
would not in any way inhibit the Bells or incentivize them from
going into rural areas. They have got all the incentive they
have today. They have just as much if this bill passes.
What this bill would do would be to allow them to keep the
Covads of the world out of the rural areas. It doesn't mean
that they are going to get in there. It allows them to keep
others out, and it is strange credulity to believe that keeping
competitors out of a rural area is somehow going to advance
competition.
The second point is that the DSL providers of the Bell
companies have not led the broadband deployment. They have
followed. It is the Covads, and it is the Northpoints, and it
is the cable companies that have led in this. Mr. Dingell made
a good point earlier about who is ahead in this.
AT&T has got about 1 million out of about 6 million high
speed customers, and not anywhere near 70 percent. I don't know
where this figure is coming from. But the fact is that the
other companies are ahead right now for a reason. They led in
this.
The DSL providers at the Bell companies have followed. They
have only followed because competitors have led the way. They
are behind right now because they were slower, and if you take
away their competition, they are going to slow it down further.
Chairman Tauzin. They might even sign non-compete
agreements. Who knows. Ms. Harman is recognized.
Mr. McMinn. I don't think they need to sign them. They
don't compete with each other.
Ms. Harman. Thank you, Mr. Chairman. I want to commend you
and the panel for your stamina and apologize for being in and
out of this hearing. The conflict with my other committee was
enormous today.
As I watched our colleagues hold up maps, I wondered
whether I was in a hearing on reapportionment. I don't think
so. But I would comment that we may be closer together than it
seems in this way. I think everyone on the committee and every
witness is in favor of broadband access.
I think that everybody on the committee and every witness
thinks that we don't have enough of it. The question is what do
we do, and that is where we differ. As I said in my opening
remarks, my preference is to leave the regulatory framework
that we worked on so hard in 1996 in place, and enforce it
against any and all who violate its provisions.
I think that that framework was a win-win and that changing
that framework changes the paradigm to win for some, and lose
for some, and that is what we have been arguing for 6 hours
today, and obviously for 2 years since this bill was drafted.
So that is my preference, and within that I have a couple
of questions. The firs is about definitions in this bill. I
remember the computer export wars and I was there when we were
debating how many M-tops should be the maximum level for the
export of a computer, and an M-top is millions of theoretical
operations per second.
So we had our colleagues saying that it should be this
level or it should be that level. By the time that we were
done, we had prohibited the export of the normal PC, and that
was clearly a wrong call, and of course now we are revisiting
it.
In this bill the magic number under definitions is 384
kilobytes per second in at least one direction. I am interested
in the panel can enlighten me on whether that is the precise
right number, and why not 383 and why is that the magic
transition number.
And do you think that that number will be valid should we
enact this bill for some period of time in the future, and will
we need to come back here and have 6 more hours of conversation
about whether to change the number, and whether to let more
people win or change the formula in some way.
Mr. McMinn. It is a very much moving target. Any number
that you put in place from a regulatory framework will be
obsolete in 6 months. I mean, this is an industry that has
grown by 3 or 4, or 500 percent a year, depending on which
metric that you measure. So it is very, very dangerous for
regulatory speed to impose technological constraints on an
industry.
Ms. Harman. Other comments?
Mr. Ashton. I could add that the importance of the speeds
in these types of services is based on what services the speed
can support. So this is one of the issues that all of the
companies are grappling with, which is what type of DSL is more
upstream than downstream or vice versa, or should they be the
same.
And certainly the speed of the service is another. If you
want to support video services and streaming video, that will
require a certain type of network, and if you want to basically
limit it to more high speed Internet access along that way,
that would necessitate another. So a lot of it will depend on
what services the carriers expect to use or to offer off of
these networks.
Ms. Harman. So is it fair to conclude that if we pass this
bill with this definition that we will be back here again in X-
period of time--it could be 6 months or it could be shortly--
revisiting our definitions and perhaps trying to fine tune them
again to include some other variation on this?
Mr. Ashton. I think if it said no more than 384 kilobytes,
that would be a problem. But it is set at an entry level at a
number that I think that seems okay. But clearly it is not no
more than.
Ms. Harman. Well, I would remind us all of the great M-tops
debate and how quickly that became outdated, and I think we may
be heading in the same direction here.
Mr. McMinn. Could I add one little point in terms of sort
of the engineering of all of this? I do have a B.S. and an
MS.EE, and I know about the technology. On a single copper
wire, you can get as much as 52 megabytes per second over short
distances.
So to set a limit of 384 kilobytes, which is 1-1500th of
the potential spectrum of the wire is a pretty low hurdle.
Mr. Tauke. Congresswoman, I think one of the--I think the
way you have to look at this particular number--and I don't
know if this is the right number, but the industry has had
various numbers. But what you are really attempting to do is
saying should narrowband regulation apply to what services. So
this is saying anything about this we don't want narrowband to
apply to, and anything below it, narrowband regulation applies.
I don't think that 6 months from now that we are going to
want to change the definition of what narrowband is or what
regulation we want to apply to it.
Ms. Harman. Well, as you know, I read from the floor debate
on the 1996 Act, and my position is that it applied to data,
and we already got there. But I have one more question, Mr.
Chairman. And that is about the DSL business model.
There were four healthy DSL providers a year ago in Los
Angeles to my knowledge. Now there are none. Were they all hit
by the plague?
Chairman Tauzin. I think it was an electricity crisis. I'm
not sure.
Ms. Harman. Well, in that case the answer is simple.
Mr. McMinn. Actually, we offer service to Los Angeles. We
cover somewhere around 5 or 6 million homes and small
businesses in the area, and it is a very viable market for us.
We are making money in the market, and we have thousands or
tens of thousands of customers in that market.
So the only issue is that it takes time for a startup like
us to build out a network, time and money, and then it takes
more time to get profitable. We have made a $3 billion
investment to do that, and we are working through the process
of doing that. So of our competitors didn't make it and that is
not a bad thing. That is competition.
Chairman Tauzin. Thank you, young lady. The Chair
recognizes the gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Thank you very much, Mr. Chairman. Mr. Tauke and
Mr. Mancini, what do I tell all the local ISP people that have
come in to see me over the last few months that are scared to
death about the passage of this bill and if they are going to
be able to stay in business and will be able to thrive if this
bill is passed?
Mr. Mancini. I don't think that this bill in any way is
going to adversely affect ISPs. ISPs will continue to
interconnect with ISPs.
Mr. Tauke. Well, the real concern of the ISPs ought to be
that cable is the dominant player in the market and they have
no right to have access to any cable customer under the current
rules of the game. So what they need is for our companies to be
healthy and to be deploying broadband services so that they can
get access to customers.
They can get access to a customer that is served by DSL
services offered by a telephone company and they have no
assurance of getting access to a customer served by any cable
company.
Mr. McMinn. Can I respond to this notion that somehow cable
modems are the big boogy men here? Cable modem and high speed
services are losing market share every day to DSL. Telechoice
projects that within 2 years the total number of DSL high speed
connections will be greater than the total number of cable
modem connections.
That is because DSL is more pervasively available than
cable modem is, and the plant has been rolled out in the United
States much more pervasively, and it is only because they got a
3 year head start. This is only because this was not the
Telecom Act of 1993 instead of 1996 that DSL doesn't lead
already. We are gaining on cable modem every day.
Mr. Bass. Mr. Tauke, Congressman Engel's talked about this
briefly, and I would like to ask you to elaborate a little bit
more. The FCC granted Verizon approval to offer services in
Massachusetts in that $2 billion market, and on Monday, I guess
Verizon has applied for long distance services in Connecticut.
New Hampshire is a smaller market, and what are your plans
for New Hampshire and the rest of New England, and although I
know that this bill won't be even in your wildest dreams
enacted prior to September-October of this year, does any
aspect of this bill change in any way any plans that you might
have with respect to New Hampshire or any other New England
State to apply and to offer long distance services?
Mr. Tauke. In response to the second part of that question
the answer is no. No change. In terms of where we are in New
Hampshire, we believe we have a tentative understanding with
the New Hampshire Commission as to how we will proceed.
We are completing a PriceWaterhouseCooper analysis of our
systems in New Hampshire and the other New England States to
have a testament from a third party that they are the same as
the Massachusetts' systems, which were just the subject of the
long distance approval.
Once that study is completed, we will take it to the New
Hampshire Commission, along with an application for long
distance approval. We expect a 90 day process in New Hampshire
and we hope that this fall that we will be filing an
application with the FCC for long distance approval in the
State.
Mr. Bass. Very well. Mr. Mancini, my last question. The
other ILEC, Mr. Tauke indicated that they don't believe that
passage of this bill or ongoing network upgrades preclude
competitive access to unbundles services in their network
elements. What is your position on this, and will you make it
clear if that includes fiber deployment?
Mr. Mancini. We believe under this legislation a competitor
like Covad would have access to the loop, all the way to the
house. They could use that access to provide data alone, voice
alone, or both data and voice.
So we don't see that that is a problem. There may be some
issues on why Covad may or may not want to do that, but that is
their option, and that is what would be available after this
Act passed.
Mr. Bass. Okay. Thank you, Mr. Chairman.
Chairman Tauzin. Thank you. Would the gentleman yield for
just a second? Didn't Covad do that at one time? Didn't it
subscribe to the whole loop before the FCC ruled?
Mr. McMinn. Actually, we still do. Half of our lines are
installed where we have at least a second line for business
folks, and in addition we tried or started to do that for
consumers, but we can't compete against a telephone company
that puts one subsidized telephone service and one high speed
data service on a single copper line when we can only put one
data service on it. To add voice, and it is not a subsidized
voice.
Chairman Tauzin. But you did do it at one time for
consumers and then you discontinued it?
Mr. McMinn. Well, I would like to also say that this is
about choice. The consumer ought to be free to choose to get
their voice services from us or the ILEC and their data
services from somebody else. Customers want the choice.
Chairman Tauzin. Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman. Obviously we are
drawing to a close, and I don't know if I will be the last
questioner or close to the next to last one, but to try to put
it in perspective with respect to constituents. We really have
this huge policy choice in front of us of how to shape or how
we can influence or as Congress can influence the future of
broadband.
What I would like to try and get a sense from it, and I
know that there have been some comments to try to be very clear
about this, that if we were to pass this legislation
specifically in terms of changing the way the data on the local
loops for businesses and consumers, and specifically what would
your expectation be both in the short run, medium run, and the
long run in terms of consumer prices for Internet access?
Mr. McMinn. Well, if we don't pass the legislation, the
costs of all of those regulatory requirements that we talked
about earlier, there is a cost. They add a significant cost to
us which we have to pass on to our consumers.
If we could eliminate those requirements, that would
eliminate some of our costs. If you pass the bill, that will
provide us some additional security and certainty, and provide
us with a bigger incentive to expand and to invest. So those
are two things that you can expect if you do or don't pass the
bill.
Mr. Deutsch. And the other side?
Mr. Cicconi. In Texas, where SBC got such relief, DSL
prices have been raised 25 percent.
Mr. McMinn. And I will say before DSL was around the cost
of one megabyte's worth of band was--actually 1.5 megabytes
worth of bandwidth was the cost of the T-1, was measured in
thousands of dollars a month.
We offer one megabyte per second of service for several
hundred dollars a month and on long term contracts for less
than a hundred dollars a month. So the difference between no
competition and competition was a factor of 10 reduction in the
price of service.
And I absolutely agree with AT&T that the price has gone up
recently as competition has been thinned out in the CLEC ranks.
Mr. Deutsch. And maybe again to try to just dialog a little
bit. If you could respond specifically to Mr. Mancini's
comments and Mr. Mancini, if you can respond to specifically
the experience of Texas, and why did the rates go up in Texas?
Mr. Mancini. Our rates went up for a very simple reason.
Our costs are up. We have to structurally separate thousands of
employees. We had to do line share and we had to put in OSS
systems. None of these costs are borne by our cable competitors
or the other providers.
If we could have kept the price at $39 we would have. We
are not competing against Covad. Yes, we are competing at one
level, but we are competing against cable modems. That is where
the competition is. We are competing against satellite and
wireless. The fact that Covad is still in the market, we raised
our prices because our costs increased, period.
Mr. Cicconi. We only have got cable in one market in Texas
and so that is not really the issue. A year ago, SBC got 271
relief for voice and data, the very data relief that they are
seeking under this legislation without meeting the checklist.
And the experience has been that they not only increased
DSL rates by 25 percent after getting this type of data relief,
but they laid off 25 percent of the people that were installing
DSL for them.
Mr. Mancini. It is amazing that AT&T, who constantly raised
cable rates without any competition, talks about our rates.
Number 1, the reason that we could let go some of the
technicians is that we are doing the same thing that Covad is
doing.
A much, much higher percentage of our installations are
self-installed. We didn't need as many technicians. But the
bottom line is that we raised those rates in areas where there
is competition with cable. We simply have not met the
projections on DSL, and we are not making money on DSL today.
Mr. McMinn. Actually, we are. It is like shooting fish in a
barrel. The only reason we are not profitable is because we
don't have enough subscribers. We can't sign them up fast
enough because we can't get adequate performance out of the
ILECs.
One more point. The cost of a line shared line is
significantly less than the cost of a second line. Not just for
us, but also for the ILECs. Their costs should have gone down
as they more aggressively implemented line sharing.
Mr. Dingell. If the gentleman would yield. Have you folks
been down there talking to AT&T about making some space
available to you? You are complaining about the Bells, and you
are not building your own line, but you have not said a word to
dear Mr. Cicconi over here, who has got lots of lines.
Mr. McMinn. Actually, my network is far more expansive in
Texas than AT&T's network. I have a network that covers all of
Dallas, and all of Houston, and all of Austin, Texas, and all
of San Antonio. I don't have the whole list off the top of my
head, and the reason is because the copper was far more
pervasive and available, and tuned up for high speed
connections than the cable plant. The cable plant in that area
is not very good.
Mr. Dingell. Have you talked about telephone lines down
there?
Mr. McMinn. I don't know if he has telephone lines down
there. If he does, he doesn't have very many; or the vast
majority of the copper lines in the ground, Mr. Dingell, are
under the control of one monopoly down there.
Mr. Dingell. Have you talked with him about his cable
facilities? He has got lots of cable space, and lots of good
fiber, too.
Mr. McMinn. Actually, we buy a lot of fiber capacity from
AT&T, but in terms of our network, our DSL network is already
bigger than all of the cable modem networks in the United
States combined. They have not been upgraded. We have more
coverage of more homes and more businesses than everybody who
is in the cable modem business today because we get access to
the copper lines.
Chairman Tauzin. The gentleman's time has expired.
Mr. Deutsch. Just to reclaim my time for a minute. I'm glad
that all of you were able to clarify the answer to that
question.
Chairman Tauzin. I just want to clarify. You said that you
were still unprofitable though?
Mr. McMinn. Absolutely.
Chairman Tauzin. Is it like shooting fish in a barrel and
you are still unprofitable?
Mr. McMinn. We are unprofitable as a total company. In the
first 22 markets we are in, we have----
Chairman Tauzin. But you are still unprofitable?
Mr. McMinn. Because we have to wade through this
interminable cycle to get our lines installed. We can't get
them installed fast enough. I wish we could get them installed
at the rate that they install them for themselves.
Chairman Tauzin. And I was asked by the ranking member are
you building out lines?
Mr. McMinn. We are putting our own equipment, our own fiber
connectivity, our own switching centers. The only thing that we
lease from them is the copper line.
Chairman Tauzin. So you are not putting in the lines
themselves?
Mr. McMinn. Well, it is 1.6 billion miles of it. We can't
afford to put place again.
Chairman Tauzin. Mr. Pickering.
Mr. Pickering. Thank you, Mr. Chairman. Mr. Henry, there
have been several who have asked the different participants
that if this bill passes what will happen as far as deployment
in services.
I would like to ask you what would happen if this bill
passes in the capital markets? What would happen to the
emerging competition and the CLECs in that industry if this--or
what would happen to the value of the other participants in
telecommunications, the Bells and non-Bells, in the capital
markets if this bill were to pass?
Mr. Henry. Well, it is my impression that this would create
first of all even greater uncertainty than already exists in
the telecommunications industry and in the CLEC sector in
particular, on the basis that it would reduce the Bells
incentive in my opinion to open their markets to local
competition on the basis that it would hurt both sides of the
argument.
But I tend to think that the Bells will have the ability to
restrict access to unbundled loops and dark fiber, and remote
terminals, and things like that, which many of the CLECs are
basing their business models on.
Mr. Pickering. Mr. Tauke, as you know, as we have worked
together on the 1996 Act, and everyone sitting at this table,
and with some new people sitting at the table who have joined
in support of the 1996 Act, but in the 1996 Act, we had both
AT&T, and the Bells, and the long distance, and the other
competitors--the lions and the lambs laid down together, and
which is which I don't know--but peace was made and policy.
And my preference is to make peace and good policy. My
concern here is that after 5 years, and I have to confess that
part of this Act is borne out of the frustration of the time
period to get from 1996 to get where we are in the marketplace
today in full competition in all markets, and in the
convergence and the hopes that we had seen.
But realistically 3 years out of that 5 years were spent in
regulatory and court battles. We have had 2 years of the
implementation of the Act, and it is beginning to work.
Chairman Powell the other day testified that any change both in
relation to the capital markets and in regulatory certainty
which the Bells have testified today that it is one of the
inhibitors of their deployment regulatory uncertainty, why
shouldn't we allow the new chairman, Chairman Powell, to
implement the Act?
We have got all those regulatory and court battles behind
us, and he has already moved quickly on a 271 application in
Massachusetts, and it seems to mean that he has committed to
move quickly on the applications that come to the FCC. Isn't
that the best way to have the best policy with the greatest
certainty?
Mr. Tauke. If I could just comment on that quickly. First,
I think it is Congress' responsibility to set national policy.
Congress has not as I alluded to in my opening comments set a
national policy for broadband.
Three appellate courts have looked at it and can't figure
out what it is that is supposed to happen in the broadband
world, and whether these services are telecom services and
Title 2 applies, or in some cases if they are cable services
and Title 6 applies.
There has not been a policy established. I think in all due
respect that Congress has a responsibility to establish policy
for broadband services. This is a huge market, and it is very
important to the growth of the economy and you are derelict in
your duty if you don't say what the rules are for the game.
And it is about time that Congress stepped forward and said
what the rules are, and you shouldn't defer that to the FCC
Chairman who has to do it in the context of an Act that doesn't
really address some of the issues.
And so I think that's why you can't leave it to Powell,
because the Act isn't clear and the courts have not been able
to figure out what it clearly says, and Congress has to set
forth what the rules are.
Mr. Pickering. Mr. Tauke, you said earlier in response to
Mr. Cox that in an ideal world it would better instead of
trying to differentiate on service data, voice, video, that it
should be all distance, all everything. Isn't that the best
policy outcome?
Mr. Tauke. Well, in the ideal world, if we could
reconstruct the world right now, we would say that distance
should go away, and we shouldn't differentiate on the basis of
service provided, and we should say you have capacity, and how
much capacity are you using, and what is the urgency.
If it is e-mail, you don't need it this second, and if you
are exchanging other things, you might need it simultaneous,
and that is the way that services should be priced. But we have
a regulatory structure within which we are working which
doesn't make that possible right now. I don't think that
anybody wants to revisit the narrow band or voice structure.
If Congress does, we would welcome it, but I don't think
that Congress is up to revisiting that. But we do believe that
since there is a lack of policy and there is a policy for
narrowbands, and there is a lack of policy for broadband, that
there Congress should step up to the plate.
Mr. Pickering. Mr. Tauke----
Chairman Tauzin. The gentleman's time has expired, but
proceed with your last question.
Mr. Pickering. Yes, sir, Mr. Chairman. The Act really
didn't make a difference between narrowband and broadband. It
gave open access in local markets regardless of the product,
and we try to be technology neutral, which is one of the
strengths of the bill.
Again, I believe that Chairman Powell has indicated that he
will move quickly and once you get a 271, you can do data, and
you can do voice, and you can do everything. I am the Chairman
of the Wireless Caucus. You mentioned earlier that if we free
you from this that you will go to rural areas.
But really wireless and wire line are apples and oranges.
Wire line is distance and density, and wireless leap frogs over
that, and that is why in rural areas you will have different
technologies and different means of distribution.
It just seems to me for regulatory certainty and the
reality that you really cannot separate voice from data on a
network, that this is the wrong approach. Now, if we wanted to
sit down and try to figure out a way to do all distance, all
everything, convergence, with greater certainty, that we would
try to find agreement on how to enforce the local market
openings, where we can increase and enhance local market
competition, while at the same time giving you greater
certainty for entry into other markets.
It seems to me that that would be a better way to go than a
data only data relief, which is really again a step turning the
clock backwards to segment and segregate policies of the past
that really don't seem to work technically or economically, and
is at the wrong time in an economic situation right now with
emerging competitors. Mr. Chairman, thank you for your time.
Chairman Tauzin. Thank you very much, sir. Before I move to
Mr. Doyle, Chairman Powell has been quoted a number of times
today, but incorrectly, and I want to correct it by reading his
statement.
Mr. Powell testified on page 140 of his testimony, ``I
think my advice, such that it is worth anything, is that I
think that you--any sort of wholesale rewriting to my mind is
ill-advised unless you are very clear as to what it is that you
think you are going to replace it with.''
Mr. Powell was basically not coming out against
``reopening'' the Act. He came out against wholesale rewriting
of the Act as I read his testimony. I just wanted to put that
on the record. Mr. Doyle.
Mr. Pickering. Would the chairman yield?
Chairman Tauzin. I will be glad to yield, my friend.
Mr. Pickering. In Mississippi and in Louisiana, we may have
different definitions of wholesale, but----
Mr. Markey. Mr. Chairman, when you change the definition
from yes to no, we consider that wholesale--and you have a
different definition down in Louisiana. That is a pretty big
change.
Chairman Tauzin. That is retail in Massachusetts. Mr.
Doyle.
Mr. Doyle. Thank you, Mr. Chairman. Thank you for this
hearing and thanks to the panel for sitting through these long
hours. I apologize as my schedule today didn't permit me to sit
through more of it. But rest assured as a new member of this
committee we are reviewing all of your testimony very
carefully.
Mr. Tauke, let me start with you to talk a little more
broadly about the overall state of the deployment. In your
statement, you were very emphatic about the timeliness of this
bill, and tell me, why do you need this bill now? In specific
terms, what is the urgency for long distance relief for data?
Isn't the Act working on any level?
Mr. Tauke. The Act in our view is working on many levels. A
lot of good things have happened as a result of the Act, and
including the development of competition in the local
marketplace.
If you look at a State like New York, we know that 3
million lines are being served by competitors, and we have
100,000 customers a month who are moving, and in other States,
we have very high levels of competition as well.
And a lot of that is a result of the Act and so that is
stuff that is working. What is the sense of urgency here? The
sense of urgency I think is as follows. Every day that
consumers and small businesses and mid-sized businesses do not
have access to broadband capacity, they are losing out on
economic opportunities.
If you are a contractor who is dealing with Home Depot,
Home Depot wants to deal with you over the Internet where you
submit your plans and they send back to you what you need.
If you have broadband connections that works great, and if
you don't, it doesn't work. If you are an auto dealer and you
are dealing with Ford Motor Company, if you have got broadband
connections and you can have great interaction with Ford Motor
Company, you can handle your warranty issues, and your
financing issues, your maintenance issues, on-line with Ford
Motor and it works great. But if you don't have it, you are not
doing so well.
And so every day is an important day for the economic
growth of the country and the delay of broadband hurts the
economy, and I think that the broadband deployment really is
going to improve and help improve the productivity of our
economy as it has in the recent past.
And so in terms of--so that's why this is urgent, and I
think that bringing clarity and certainty to the marketplace by
saying what the rules are, and then having rules that are
appropriate for the marketplace, the combination of those would
result in more rapid deployment of broadband services and
benefits to the consumers.
Mr. Doyle. Let me ask you also in terms of Verizon's
efforts in rural areas. Can you tell me the status of your
divestiture of rural exchanges, and are you committed to
servicing these areas with or without the passage of this bill?
Mr. Tauke. Well, first, just a little history here. The old
Bell Atlantic has not in any recent history divested any rural
exchanges. The old GTE prior to the merger did have a program
of divesting rural exchanges, which they thought was
rationalization of their service territory.
We have at Verizon not divested any service territories
since the creation of Verizon, and we certainly don't have any
plans for any major changes in our service territories, and not
to say that there will never be any divestment of service
territories, but there is going to be no wholesale divestment
of rural exchanges.
Mr. Doyle. Mr. McMinn, I understand that I missed a lively
discussion about line sharing earlier. In someone's statement
it was stressed that broadband deployment disparities not only
exist along rural and urban divides, but they also exist within
metropolitan areas.
And I think that is an important clarification to make I
can tell you personally that I tried to get DSL service, and I
signed up for it in November, and I got it last week. And it
was very frustrating.
Mr. McMinn. Was it from us, or was it from----
Mr. Doyle. No, it wasn't through Covad.
Mr. McMinn. Was it from an ILEC?
Mr. Doyle. From America On Line had an AOL plus.
Mr. McMinn. And they use the ILECs exclusively, and so you
should have come to us for better service.
Mr. Doyle. I will take that into account. I was interested
in your Jump Start Kit just because of some of the frustrations
that I had trying to access broadband services, and it appears
that this kid is focused on providing additional options to
consumers, and by extension deals directly with the concept of
fair competition.
But we have heard different interpretations of what fair
competition means, and how it is equated with successful
deployment. And I am just wondering isn't that the viability of
the jump start kid predicated on line sharing? And if so,
wouldn't this venture be squashed by this bill?
I mean, how would this bill effect that?
Mr. McMinn. Yes, our jump start kid is predicated on the
fact that we can use a line shared line, and so we can mail to
a customer the jump start kit, and they can put it on their
existing telephone line without the need for a technician to
come out to their facility to install a new wire.
That saves the telephone company, the ILEC, money. That
saves us money in terms of putting DSL into service.
And we have talked a lot about DSL to consumers today, but
we just were mentioning DSL to sm all businesses. Let me point
out one other thing. None of the ILECs offer a suite of
services for small businesses. If you tell them that you are at
a business address, they will not offer you DSL. We are the
only ones, CLECs like us, that offer DSL to small businesses.
It takes a different suite of services that the ILECs have
chosen not to do, because they don't want to cannibalize their
existing T-1 and ISD end revenue. So if you are a small
business, with a small business address, you must come to a
CLEC to get DSL service.
Mr. Doyle. Thank you. Mr. Cicconi----
Chairman Tauzin. The gentleman's time has expired, but
proceed with your last question.
Mr. Doyle. Thank you. I didn't want to leave AT&T out of
this. You know, it has been presented in testimony and it was
emphasized that there are two land line technologies that are
provided to residential customers with high speed Internet
access at a reasonable cost being DSL and cable modem services.
And that only DSL was subject to regulation, significant
regulation, and should be deregulated just like cable modem
services. I just wanted you to react to that assertion that has
been made regarding the linkage between DSL and cable, and do
you think this assertion is a fair claim?
Mr. Cicconi. No, I really don't. I think it is a convenient
claim. We see charts thrown up about the regulations that
telephone companies have and that cable companies don't have.
They are regulated differently, but they are both regulated.
They are each regulated under schemes set out by the
Congress to deal with the specific circumstances of those
companies. The one has a bottleneck facility and the other does
not. By the way, I might add that the one is helping drive
broadband deployment in this country and the other is following
their competition in the case of the ILECs.
So I mentioned a few of the distinctions earlier, and I
know that Mr. Mancini made light of having to be regulated by
30,000 local franchising authorities, but it can be pretty
onerous, and $2 billion is not a small amount of money to pay
if you consider that it could be going into actually upgrading
facilities to provide these high speed services.
I don't see any volunteering on the part of the Bell
companies to be regulated in this manner, and I don't see them
volunteering for limitations on the number of subscriber lines
that they can have. I dare say that SBC could probably not have
merged twice with other companies if they had had similar
restrictions.
Mr. Doyle. Thank you.
Mr. Tauke. I am getting a little tired of hearing about how
the Bell companies haven't tried to deploy DSL services, and
with all respect to my former colleagues and some of the
witnesses.
The fact is that Bell Atlantic invested DSL service, and
has the patent on DSL service and tried to put it into place
first for video services, and put a lot of money into the
creation of DSL in order for it to offer video services, and
for a variety of reasons a lot of them due to regulation that
didn't work.
We had then over time as the Internet developed, it became
clear that this application could be put forward and used for
data services. But back in 1993 and 1994, and 1995, there was
no Internet that people were clamoring to hook up to, and so as
a result of applying the service, or deploying the capability
when there was not the service to put on it was not something
that was particularly viable from a business perspective.
And the suggestion that we have been somehow dragging our
feet to get it out to our customers I think is just an
inappropriate suggestion. The second observation I would make
is that Mr. Cicconi has spent most of the last couple of years
fighting against the application of any franchise restrictions
on broadband services. I don't think he wants to suggest that
franchise restrictions imposed by communities are broadband
services.
He went to the 9th Circuit Court of Appeals to make sure
that they didn't apply franchise or didn't apply franchise
restrictions to broadband services. Those kinds of restrictions
just don't apply or he doesn't want them to apply to these
services.
It is only the restrictions that are coming from the
Federal and State authorities that apply to broadband services
and they don't apply to cable, cable oriented broadband
services.
Mr. Cicconi. May I respond.
Chairman Tauzin. Mr. Cicconi, the time is up, but since you
were named here, I think you have a right to respond.
Mr. Cicconi. We went to the 9th Circuit because the
communities have areas where they are allowed to regulate by
Federal statute, and one particular community frankly went well
beyond that and tried to regulate us in an area where the
Congress specifically we felt said in Black Letter Law that
they can't do it.
The 9th Circuit Court of Appeals actually agreed with us in
that case. I am very pleased that Mr. Tauke has actually
indicated that they feel that they have full incentives and are
doing a vigorous deployment of DSL currently, and I think that
raises the question about the rationale for this bill.
Mr. Doyle. Mr. Chairman, I want to thank you and this is
all much clearer to me now.
Chairman Tauzin. I want to acknowledge and announce that we
have the last member who will be recognized for a round of
questions of this extraordinary hearing today, and in doing so,
I want to thank you for your great patience. The gentleman, Mr.
Shadegg, is recognized.
Mr. Shadegg. Thank you, Mr. Chairman. And I compliment you
all on your stamina. It has obviously been an interesting day
with a lot of controversy in the testimony, and I doubt if I am
going to bring a calmness to the waters, because I don't have a
dog in this fight either way, in terms of long distance or
local, or the ILECs, CLECs, and the rest of them, the RBOCs,
and the rest of the alphabet soup.
But what I do have is a letter of frustration and a concern
that when Congress passes a law it ought to see that law works
before it passes a new law in that area, and I have got to tell
you that I don't see that in this circumstance.
I hear some of the witnesses here saying--and particularly
Mr. Tauke, you saying that we don't have an established policy
for broadband, and Congress ought to get in there and do its
job.
And I don't disagree that Congress ought to get in and do
its job. But it seems to me that we did have an established
policy on the other side of the spectrum by the 1996 Act, and
we were supposed to bring about competition. And we were
supposed to bring about competition at the local level.
And I started to look at this legislation, and I support
the legislation, and I am anxious to see us do something, but I
want to see us do the right thing. I can't help but be
frustrated. The reality is and you may sit here and say that we
have competition in your perception at the local level, but I
have to tell you that I think you are crazy.
Maybe it exists in New York, and maybe it exists in a few
other places, but I don't know anyplace across America that we
can point to vast expanses and say, yes, we have got great
competition at the local level.
I asked my staff in Arizona how many providers can you go
to to get local phone service. The answer? Realistically, one.
I asked my staff in Washington how many providers can you go to
to get local service? The answer? Realistically, one.
I had a staffer in Phoenix, Arizona, my chief of staff, who
decided that I am going to give competition at the local level
a chance and he went to Cox Cable, and got his local phone
service. In about 3 weeks I told him that if he didn't switch
back that I was going to fire him, because I literally could
not get a hold of him, and it drove me absolutely crazy.
And ultimately I said this simply isn't working, and I
don't have anything against Cox, but I can't get you on this
phone system that they have sold you, and so you have got to go
back to the baby Bell that he was being served by.
You say that every day consumers don't have access to
broadband, and they are losing money, and I would argue that
every day they don't have access to competition for local
service, they area also losing money.
The reality is that every member of my staff will tell you
that for local service who can they go to, they will say at a
minimum three, and in reality 20. You can't turn on the
television and watch an hour of a program and not see eight ads
for somebody offering you a better deal than the guy who was on
15 minutes ago on long distance service.
I think you were right and that we have to have a public
policy for broadband, but we are not effectuating public policy
for local service. So, let me ask a few questions. Mr. McMinn,
in your testimony, you say that Verizon was fined--and I will
give Mr. Tauke a chance to respond to this, but Verizon was
fined $13 million by both the FCC and the New York Public
Service Commission for violating the law, and quote, losing
thousands of collect orders.
And then you go on to say that Verizon was able to recover
that $13 million in just 3 hours of operating revenues. Is part
of the reason that Cox couldn't get service to my chief of
staff the fact that we are not getting cooperation and access
to the switch, and cooperation for competition to exist in
local service?
Mr. McMinn. There is no question that the CLEC community is
being hampered by the ILECs. They somehow find the capability
to service their own customers at 10, or 20, or 100 times the
speed and the efficiency than they manage to serve CLECs.
We are battling through that and we are taking them to
court, and we have an anti-trust suit out against Verizon, and
we have an anti-trust suit out against Bell South, to try to
enforce what has already been required of them under the Act.
So the notion that they should be given additional
incentives on top of 271 and on top of everything else to me is
not the direction that we ought to be going. One big aspect is
enforce what has already been put into law. Get them to
perform. All I want is parity, and all I want them to do is to
perform as good for us as they do for themselves.
Mr. Shadegg. The San Francisco Business Times also contains
an article that I think you may also want to comment about,
that says that he SBC, and I will let Mr. Mancini respond to
this also, was fined $6.1 million at the end of 2000 by the FCC
for failing to meet performance standards for wholesale service
it provides to the competing companies. You were involved in
that as well.
Mr. McMinn. Yes, absolutely. It is again another example of
where we have to resort to other than an arm's length
arrangements with these companies. I have a real test about
whether I am a customer of an ILEC or not. I want somebody to
point me to the salesmen at the ILEC that gets a commission for
the business that I bring to them. No ILEC yet has assigned me
a salesman.
Mr. Shadegg. Some people have argued that we can't fix the
current bill to deal with that problem. Others say that we
perhaps could. My question of you is or anybody on the panel is
are there things that we can do to fix this current bill to
deal with the lack of competition at the local level short of
simply killing the bill and not asking for it, and then I will
let Mr. Tauke and Mr. Mancini respond.
Mr. McMinn. I think that a clear signal is that the
consumer needs to have choice. Do what you need to do in a bill
to enhance competition, but don't in the process reduce
competition, and in my view there are two things that will
enhance competition. One is to make sure that we continue to
have access to the copper plant, which is the bottleneck, which
is the uneconomically able to be reproduced in any significant
amount of timeframe.
And the second is to make sure that there are very strong
enforcement mechanisms put in place so that the ILECs must
perform for us, rather than just accepting these fines as an
ordinary course of doing business.
Mr. Shadegg. Mr. Tauke, is there anything that you think
can be done in the current bill to enhance competition at the
local level or do you think that is not needed?
Mr. Tauke. First, let me just say a word about competition
at the local level if you might.
Mr. Shadegg. Sure.
Mr. Tauke. I think it is fair to point out that the
telephone business is a tough business. It is a very
technically complex business, and in order to develop
competition you need two players. You need the incumbent and
you need the new competitor coming in.
We have had difficulties, and there is no question about
that in making this competition work. We have had systems
difficulties as you referenced in New York, and we have had
other challenges. So have the competitors had their challenges
as they have tried to get ready for this market.
I think it is remarkable frankly that in 5 years that we
have had so much of the market become competitive. If you look
at what happened in long distance, it took longer for AT&T to
lose the percentage of the market that we have lost, for
example, in local for them to lose it in long distance, even
though the long distance market is not as nearly complex.
We have lost over 10 percent of the market share and that
is in dial tone market. We have lost 30 percent in the toll
market, and we have lost much larger percentages in special
access and other areas of the marketplace, because customers
have gone after the high end pieces of the market.
The dial tone piece is the last to go because much of that
is subsidized, and the rates are very low, and there isn't the
incentive for competitors to come in and still in a State like
New York, we have lost 25 percent of the lines, and in a State
like Pennsylvania, we are losing a percent of the lines every
month.
So I think the fact is that in a lot of cases that
competition is developing and developing rapidly, but it takes
two players, including a healthy competitor who is in the
market and wants to compete.
Now, having said that, in terms of the FCC and its
capability and what can it do, I think what happened in New
York was a good example of what it can do. We had a problem
with our systems in New York.
They hammered us hard, and within a few months after that
problem with the systems was discovered, we had excellent
review from the FCC and the New York Commission, and have had
since, on delivering on the problem that was acknowledged at
that time by us, and which was brought to our attention by the
FCC.
They had the ability to hold our feet to the fire if you
will. I don't think it is wrong for Congress to give the
regulatory agencies the authority for us to hold our feet to
the fire.
We also have performance guarantees, where we have
performance guarantees that we have with the States, and if we
mess up and we don't meet high standards, the more that we have
to pay.
And we have performance guarantees in many of our contracts
with competitors. I will say to you that having said all of
that, however, if there is a problem in the local telephony
market, don't punish the consumers of America by not doing what
is right for the broadband market. Deal with the local
telephony market and deal with that problem, but don't as a
result just delay and not get the services delivered in the
broadband side.
Mr. Shadegg. You don't see any need to add anything to this
to deal with the lack of competition. Mr. Mancini.
Mr. Mancini. I will just make a few quick points as I know
it is late. With regard to the reference to the $6.5 million
fine, that was not a fine. That was part of the performance
measurements on the systems that Tom talked about.
We agreed to put in place a comprehensive set of
performance measurements which measures in detail the service
we provide to CLECs with dollar amounts if we fall short. So if
anything that is an indication of how much under a microscope
we are, and if we do fall short, we pay a performance payment
to the FCC or to the CLECs in a variety of States.
If one of your staffers was having a problem with Cox, it
probably was not the ILEC's problem, because Cox, who is the
cable provider, doesn't rely at all on the LEC. The problem is
usually not at the interconnection, but the problem is usually
at the switch or the loop. So my guess is that they are
providing all the facilities.
The third thing I would suggest is I think it is
instructive of what happened in both New York and Texas as we
got close to completing the 271 process.
In both States, the level of competition increased fairly
dramatically as it appeared that the FCC would approve 271, and
after the 271 approval occurred in both States, local
competition went up significantly and long distance prices went
down significantly, and as we competed in the long distance
market, long distance rates came down, and local competitors
increased their competition and offered bundles. So competition
increased as you got 271 approval.
Mr. Shadegg. Mr. Cicconi.
Mr. Cicconi. First of all, even if you offer phone service
over cable, you have to be able to connect with a Bell company.
So I don't know where the problem was there. But I know that we
have problems with that interconnection even over cable
facilities.
Second, you brought up the question of fine, and putting
aside performance measures, the fact is that the Bell companies
since early last year have been fined a total of $360 million
for falling short of their obligations under law by various
State and Federal authorities.
Now, if you think about that, that is a staggering number,
and what it indicates to me and what we fear is that the Bell
companies are deciding that these fines are a cost of doing
business. That this is a better way to approach it than to
service competitors.
The competitors are gradually going out of business and
they are paying the fines, and it is a cost of doing business
to them, and at the end of the day they end up with a secure
monopoly. That would give me pause, and we fear that this bill
would make that situation far worse.
Mr. Shadegg. And to my other question, are there things
that you think can be done to this bill or is it your position
that it simply has to be canceled?
Mr. Cicconi. No, sir, I think it is irreparable.
Mr. Shadegg. Thank you, Mr. Chairman. I yield back my time.
Chairman Tauzin. Thank you, my friend. I want to mention
for the record that there have been a lot of fines, and we have
not totaled them up, but there have been a lot of slamming
fines as well assessed to the telecom market, and everybody
does make mistakes. We know that.
I will add for the gentleman, Mr. Shadegg, that one of the
things that we have instructed the staff to work with members
on, because we received a number of member requests to do so,
is how we might add new enforcement authorities in the bill,
and that is an area where not only Chairman Powell, but I think
many members agree that we could probably enhance the spirit of
competition a great deal more, and we are looking very
seriously at that.
I would also announce before we adjourn that the record
will stay open obviously, and we want to continue receiving
your comments. If you have additional written comments, you are
more than welcome to supplement your testimony.
If you heard something that you thought was wrong, or
somebody said something that you really didn't agree with, and
you didn't have a chance to respond, please do so on the record
for us. We will keep the record open an appropriate time for
that.
Second, for members who have additional questions, we
really pounded you hard today, and I apologize for this long
day, but we will keep the record open for members to submit
written questions, either one of you or collectively, and
please respond if you do receive such a request timely, and we
would appreciate that.
And there is one thing finally that I would like, Mr.
Tauke, is that in the context of questioning you answered
regarding line sharing, with reference to technical problems in
deployment, and we heard a lot about financial incentives, but
you mentioned technical problems.
If you can elaborate in writing for us those issues,
because we want to understand them in regards to the time
sharing issue, which is indeed a hard call for all of us to
make here. Thank you, and you have illuminated the issue a
great deal, and clouded it in some other areas, and we expected
that, and it was great hearing from you, and I thank you, and
we are all dismissed. The committee stands adjourned.
[Whereupon, at 5:05 p.m., the committee was adjourned.]
The Committee on Energy and
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