<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:66467.wais]
THE INTERNET FREEDOM AND BROADBAND DEPLOYMENT ACT OF 1999
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS,
TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
on
H.R. 2420
__________
JULY 27, 2000
__________
Serial No. 106-132
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
66-467 CC WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
------
Subcommittee on Telecommunications, Trade, and Consumer Protection
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL G. OXLEY, Ohio, EDWARD J. MARKEY, Massachusetts
Vice Chairman RICK BOUCHER, Virginia
CLIFF STEARNS, Florida BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California ANNA G. ESHOO, California
NATHAN DEAL, Georgia ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming BILL LUTHER, Minnesota
JAMES E. ROGAN, California RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
C O N T E N T S
----------
Page
Testimony of:
Cali, Len, Vice President, Federal Government Affairs, AT&T
Corporation................................................ 38
Ellis, James D., Senior Executive Vice President & General
Counsel, SBC Communications................................ 18
Haynes, Arne L., President, Rainier Group.................... 27
Khanna, Dhruv, Executive Vice President, General Counsel,
Covad Communications....................................... 30
Pociask, Steve, Executive Vice President & Chief Economist,
Joel Popkin & Company...................................... 49
Schonhaut, Cindy, Senior Vice President, ICG................. 36
Young, Edward D., Senior Vice President, Federal Government
Relations, Verizon Communications.......................... 23
Material submitted for the record by:
Kennard, Hon. William E., Chairman, Federal Communications
Commission, prepared statement of.......................... 85
THE INTERNET FREEDOM AND BROADBAND DEPLOYMENT ACT OF 1999
----------
THURSDAY, JULY 27, 2000
House of Representatives,
Committee on Commerce
Subcommittee on Telecommunications,
Trade, and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 11:30 a.m., in
room 2420, Rayburn House Office Building, Hon. W.J. ``Billy''
Tauzin (chairman) presiding.
Members present: Representatives Tauzin, Oxley, Stearns,
Gillmor, Cox, Deal, Largent, Cubin, Shimkus, Wilson, Ehrlich,
Bliley (ex officio), Markey, Eshoo, Wynn, Luther, Sawyer,
Green, McCarthy, and Dingell (ex officio).
Staff present: Justin Lilley, majority counsel; Cliff
Riccio, legislative analyst; and Andy Levin, minority counsel.
Mr. Tauzin. The hearing will please come to order. We will
ask our guests to take seats and to get comfortable.
The members are on their way back from a series of votes,
so they will be arriving shortly, but I think we can probably
get started because we are going to have an interruption that I
am going to make clear to all of you in just in a minute.
Let me first thank the panel for assembling today. We
appreciate very much your being here.
Today is the first legislative hearing on H.R. 2420, the
Internet Freedom and Broadband Deployment Act of 1999.
Our ranking member, Mr. Dingell, and I introduced this bill
last year and I believe that it is one of the most important
pro-consumer pieces of legislation that our subcommittee has
considered this session.
To date, the legislation enjoys a cosponsorship of a
majority of the House of Representatives, fully 225 members to
be exact, including a majority of the Hispanic, rural and
western caucuses.
While this overwhelming bipartisan support for the bill
might surprise some, the warm response here in the House to
H.R. 2420 really should not startle anyone. In fact there is a
quite simple explanation of how Mr. Dingell and I have built a
broadband coalition in such a short period of time, and that is
this:
Most members of the House of Representatives understand
that policies put forward in H.R. 2420 are absolutely critical
for American consumers.
We are, after all, a consumer organization here in
Congress. We represent, first and foremost, the consumers of
America, our constituents.
If enacted, most members realize that H.R. 2420 will create
full scale competition in our Internet backbone marketplace and
thereby ensure that the Internet does not further vulcanize our
society of has and has nots. It is as simple as that.
It is no secret that a huge sector of our Nation is not
receiving or is not capable of receiving true, high speed,
broadband services. The reason is because hundreds of
communities are not near or are not linked to any of the hubs
that enable access to Internet backbones, the real information
super highways.
Moreover, very few companies are building high speed
gathering lines all the way back from the backbone points of
access to the rural remote and impoverished areas because it is
simply too expensive and not profitable enough at this time.
What this means, of course, is that those living in areas
that are not near Internet points of presence, or POPs, or that
are not tied into a backbone facility via a gathering line, are
not enjoying the fruits of a new economy.
Without a high speed connection to the Internet backbone,
these Americans in rural areas and inner cities are relegated
to the narrow band dirt road that is so incompatible with the
rest of our high speed infrastructure that the flow of
communications across our national web-based infrastructures
will be significantly impeded.
See, without a UUnet, a spread, a cable wireless or AT&T,
an email that is sent through a standard dial-up access must
pass through a pokey, congested, public access point, rather
than zap through a broadband hub.
Emails back up quickly. Web pages freeze and fold. You can
forget about streaming video. And if we do not operate at these
high speeds, Internet cannot evolve into a fluid nationwide
communications network that all of us are hoping it will be.
Instead, smaller ISP subscribers will continue to encounter
service disruptions, data transfer delays in every instance
where broadband facilitated high speed traffic is thrust upon
narrow band slower speed infrastructures that were designed to
carry only voice for short intervals, not large volumes of data
for extended periods of time.
Consider the case of John Brown of Albuquerque, New Mexico
who runs a small ISP called IHighway. They quote a recent
article about Mr. Brown in Forbes magazine:
``He'd like to give his clients the fastest possible link
to the rest of the world but he can't because UUnet and a few
other giant data haulers that dominate Internet traffic don't
have the fat, 45-megabit lines in Albuquerque,'' and Brown
can't afford the $120,000 a year to lease a pipe running 330
miles to UUnet in Phoenix.
There is also the case of Sheldon Jefferson, CEO of
Net.com, an Internet provider serving residential business
customers in the New York area.
To quote from his testimony to this subcommittee:
``My company is locked out of the broadband Internet market
via cable. Not only can I not get access to local cable
facilities, I must pay inflated prices for transit to the
Internet backbone. These prices are so high because the
concentration of ownership of Internet backbone is in the hands
of a few carriers and companies.''
Once more, Mr. David Cushman, with the Children's National
Medical Clinic here in Washington who said that, ``Even in
Northwest DC, many impoverished residential areas, including
the 100 block of Michigan Avenue, just right up the road, have
no direct links to the Internet backbone facility, must less a
POP, despite the fact that the Nation's Capitol is the most'' I
repeat ``the most wired city in the United States today.''
So we have a digital divide growing because many people do
not have access to backbone due to where they live and the
dial-up access they have is limited or affords them only a
narrow band Internet service.
To solve the problem, H.R. 2420 does something very simple,
very pragmatic. It lifts the 20-year-old LATA restriction to
enable the Bell Companies to haul data traffic from rural and
under-served areas to Internet backbone facilities via their
extensive fiber optic networks that are already in the ground
in most states today.
This makes sense because the Bell fiber infrastructure
reaches just about every square mile in states where Bell
provides local service. Moreover, the fiber is available today
to serve the high speed, broadband gathering lines that are
absent in many rural and under served areas today.
We saw in several of our hearings a map we produced
indicating, in my own State of Louisiana, 2 POPs, 1 in Baton
Rouge and 1 in New Orleans.
And we also saw on those maps and I think Teddy has them
again we saw the interlacing fiber optic lines that have been
laid and paid for by the telephone ratepayers of my State that
have been laid in the ground to serve the telephone network in
our State, but nevertheless are crossed by the black LATA lines
drawn on a map by a court here in Washington, DC in a
settlement of the AT&T breakup.
Those LATA lines separating communities from the POPs that
exist in New Orleans and Baton Rouge also separate those
customers from those high speed POPs.
More importantly, those fiber lines that American citizens
in my State paid for cannot effectively be used by their own
company to deliver high speed Internet services for them to
those POPs.
We also saw a competing map line at the last hearing, and
we may see it again today, accompanied of course by some new
information addressing the state of Internet POPs across the
country.
The contention being made as of yesterday by those opposing
the bill is that 94.7 percent of the Nation lives within 50
miles of an Internet POP of DS3 speed or higher 45 megabits. It
is quite a revelation.
Just a few weeks ago, it was revealed that many of the
POPs, however, represented to be high speed at our last meeting
were in fact no faster than DS1 or T1 speed, not truly
broadband speed, a far cry from the 45 megabits a second.
I know the Internet economy moves fast but I have my doubts
about whether 250 POPs have been upgraded so dramatically in
just a few weeks time.
What concerns me most, however, about the materials being
distributed is that they lack description. Despite being a flat
contention that every POP displayed is at least a DS-3 POP or
greater, the materials being distributed provide no insight as
to whether these so-called POPs actually do.
It is not clear, in other words, whether many of these POPs
represent mere peering points, points at which IXEs access
local traffic or, more importantly, whether any of these POPs
reach rural and under served areas via gathering lines as
opposed to serving only certain IXEs a limited number of cable
modem customers.
So while speed is an important issue, no doubt, purpose is
every bit as important. And equally important is the central
question of why on earth would Washington tell a few
telecommunications companies in this country that it cannot
compete when even foreign countries' providers can come into
America and buy up companies here and compete for customers,
Internet high speed, broadband services.
And why, more importantly, have we paid for fiber in the
ground that we can't use?
Anyway, I am interested in getting into a fuller discussion
about these so-called POPs, and will have a number of questions
about them as we move forward.
But let me just say at the outset that despite the
contentions being made about POPs in the U.S. today, we are
still inclined to doubt that enough of them are actually
providing high speed Internet services to many of the small
ISPs in communities across the country.
If there truly were enough POPs to go around, if in fact
there were enough gathering lines extending to backbones, and
if we did enjoy true competitive choice among backbone
providers today, then I really doubt that folks like John Brown
and Sheldon Jefferson would be up in front of my committee
explaining that they are being shut out of the high speed
revolution.
I wonder why anyone would be talking about a digital divide
and why one exists, or why companies are predicting that as
long out as 4 years from now, fully half of our country will
have, at best, one provider, at worst, no provider, of
broadband Internet services.
I doubt seriously that Dr. Cushner's Children's Hospital
would be so abandoned in the most wired capital city in America
if backbone providers today had a business plan to serve it, or
the ISP it subscribes to.
In the final analysis, the high concentration of Internet
backbone ownership in the U.S. is, even as we hold this
hearing, effectively disenfranchising many Americans, not only
in rural areas but in under served and poor urban areas as
well.
And because of this, there is a glaring need to update the
1996 Act so that our legal framework becomes compatible with
consumer demand and desire to facilitate a new Internet
economy.
H.R. 2420's premise of allowing the Bell fiber to be used
to transport data to and from areas that are being neglected by
the backbone oligopolists is simply the right thing to do for
business, and it is the right thing to do for consumers. It is
the right thing to do for our Nation's economy.
Two-hundred-and-twenty-five members of the House now
recognize this. I am confident that more will soon follow.
One caveat before I yield to my colleagues.
There are those at the FCC who are predicting today that in
as short a period as 12 months to 18 months, all of the country
will be experiencing the 271 relief that has been afforded now
to the Bell Companies in New York and Texas.
We are just a year away or so from full, local and long
distance competition in 271. And yet we are being told that the
fiber that is laid in the ground to serve the data needs of
America has to be held hostage to LATA lines drawn on a map to
separate local and long distance years ago when AT&T was broken
up.
My only point is, the sooner we get this legislation
adopted, the sooner that full blown competition that Texas and
New York are finally enjoying will be available to all parts of
our country, and the sooner I can be satisfied that folks in
Louisiana will have the same advantage of competition that
folks in Texas and folks in New York are enjoying.
The Chair will yield to my friend from Massachusetts, the
ranking minority member, Mr. Markey, for an opening statement.
Mr. Markey. Thank you, Mr. Chairman, very much.
I thank you for calling this extremely interesting hearing
on the broadband revolution that is taking place on the
Internet today. It is happening at a breathtaking pace in its
sweep and its impressive and its rapid revolution.
A few mere years after passage of the Telecommunications
Act of 1996, consumers are reaping the digital dividend of
communications competition. Without the competitive forces
unleashed by the Telecom Act, we probably would not be having
this hearing today.
The feature-rich, information-driven content that is every
day igniting the enthusiasm of our Nation's entrepreneurs and
investors is riding upon a telecommunications infrastructure
that is the envy of the world.
Across the globe, country after country is trying to
emulate the dramatic steps that America has made in opening up
historic monopoly markets to marketplace competition, in
building bandwidth and in bringing the benefits to all sectors
of society.
The cable industry alone makes broadband capability
available to 41 percent of U.S. homes and has over a million
subscribers today. The competitive local telephone companies
have driven broadband deployment on the competing wire and
currently invest roughly a billion dollars per month on new
telecommunications infrastructure around the Nation.
Bell Atlantic has proven it can meet the market-opening
requirements of the Telecom Act in New York and is poised to
file applications in other states in the near future, including
Massachusetts which they expect to have approved by the end of
this year.
In addition, wireless applications promise ever more
capacity and competition for businesses and residential
consumers.
In short, the marketplace is responding and the Telecom Act
is working as we designed it. Moreover, the competitive
telecommunications industry is exerting tremendous effort to
meet the bandwidth needs of the growing Internet usage in our
country.
That is because the goal of the telecommunications policy
is not the deployment of a particular technology or
application, but rather the goal of telecommunications policy
is competition, everywhere and for everyone.
Competition will determine whether consumers prefer
fireless services, DSL, cable modems or any other technology,
and competition will pick winners and losers among
applications.
The fundamental issue before us is whether we will continue
our successful policy or instead insert uncertainty back into
the marketplace.
The so-called carrot-and-stick approach contained in the
Telecommunications Act clearly contains enough incentives to
the Bell companies to open up their local telecommunications
monopolies to free market forces as long as Congress does not
entice them with some alternative.
So I thank you, Mr. Chairman, for giving me this
opportunity, and I look forward to hearing from our witnesses.
Mr. Tauzin. I thank my friend.
The Chair recognizes the gentleman from Richmond, Virginia,
the chairman of the full Committee on Commerce, Mr. Bliley.
Chairman Bliley. Thank you, Mr. Chairman.
Today the subcommittee returns to the topic of broadband
deployment. I am looking forward to hearing from our
distinguished panel of witnesses.
I am particularly interested in learning how parties might
be impact if Congress were to deregulate the incumbent phone
companies. These same companies tell the committee repeatedly
that they need relief and that they need it now.
But as I said at the last hearing, I am puzzled because, as
far as I can tell, this industry and its consumers are
prospering under the current set of rules.
Indeed, much has happened over the past year alone. We have
seen a real commitment to rolling out broadband service by
competitors and incumbents alike. The numbers are astounding.
Let's take SBC, who is with us today, as an example. In
November 1999, SBC pledged $6 billion to update its network.
SBC assured shareholders that Project Pronto would pay for
itself by delivering cost savings and generating substantial
revenue growth.
SBC has already condition 15 million customer lines for DSL
service, and the company aims to install between 4,000 and
5,000 DSL lines each day during the second half of 2000. That
is right between 4,000 and 5,000 DSL lines per day.
SBC's customers are not the only ones who should be
pleased. By every measure, its shareholders are doing quite
well too.
In the second quarter of this year, SBC Data Services
revenue grew by an impressive 38 percent, and SBC also
announced a $1.8 billion of data services sales in just 3
months.
Verizon has also made great strides in just 1 year,
reporting a 47 percent increase in the number of DSL
subscribers since the first quarter of this year.
Morgan, Stanley projects that by 2002, a full 92 percent of
Verizon's lines will be DSL capable. In fact, I have read that
the real challenge for carriers like Verizon and others if
finding enough technicians to fill the orders that are pouring
in.
Covad is with us today too. And it has an equally
impressive story to tell. Morgan, Stanley recently estimated
that Covad is 6 months ahead of the competition in terms of
market penetration and new product offerings.
It is worth noting that future job creation for Covad and
others is dependent on the ability to share lines with
incumbents like SBC. But the legislation before us today would
extinguish new entrants' rights to share lines.
I look forward to an explanation as to why it would be good
for the Congress new entrants' ability to share lines,
particularly in light of the fact that future job creation in
this industry is so dependent on line sharing.
So forgive me if I remain unconvinced that there is a
problem that requires the help of the Federal Government. These
facts lead me to conclude that competition is working, and that
the 1996 Act is working.
Indeed, SBC and Verizon themselves have proved it is
working. They are now offering a full bundle of services to
consumers in New York and Texas. They are both putting downward
pressure on long distance prices.
I look forward to Virginians enjoying this kind of price
competition, and I yield back the balance of my time.
Mr. Tauzin. I thank my friend. He is just a hard guy to
convince.
But I want to thank the chairman for this hearing today and
for his participation and his continued interest in the
resolution of the issue.
And the Chair wishes now to make a unanimous consent that
the statement of the ranking minority member of the committee,
Mr. Dingell, and the written statements of all members who
would like to submit written statements for the record be
accepted in the record without objection, it is so ordered.
[The prepared statement of Hon. John D. Dingell follows:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Thank you, Mr. Chairman, for holding this hearing. I would also
like to thank the Chairman of the Full Committee, Mr. Bliley, for his
help in scheduling this important hearing today on H.R. 2420, the
Internet Freedom and Broadband Deployment Act.
Chairman Tauzin and I introduced this legislation just over a year
ago. Many changes have taken place in the telecommunications
marketplace since then, but at least one thing has remained constant.
Consumers are still chomping at the bit for faster access to the
Internet, and continue to bemoan the ever-increasing ``World Wide
Wait.''
Despite the tremendous growth in the sale of broadband Internet
connections over the past year--both in the form of cable modem and DSL
services--the clamor for higher surfing speed persists. The president
of IP services for Nortel Networks put it best when he said, and I
quote, ``having a broadband pipe doesn't guarantee a broadband
experience.''
The reason for this disconnect (so to speak) is that the Internet
is growing increasingly congested. And any connection between two
points is only as fast as its slowest link. Experts say the solution to
this problem lies in strengthening the most vulnerable points of the
network. H.R. 2420 is designed to do just that.
By allowing Bell companies to transport data across LATA
boundaries, this legislation will unlock the vast potential of existing
fiber networks that are already built, in the ground, and ready to go.
These existing networks are capable of alleviating the severe
bottleneck that U.S. Internet traffic faces today. Unfortunately, the
current regulatory scheme prevents these companies from fully utilizing
this valuable investment and, in the process, deprives consumers of the
benefits additional competitors would bring to this market.
Opponents of H.R. 2420, argue that allowing Bells to transport
interLATA data will reduce the incentive for them to comply with the
market-opening provisions of the Telecom Act. This is illogical,
irrational, and simply at odds with the facts. It is not surprising
that more than 220 Members of the House recognize the fallacy of this
argument and flatly reject it.
First, Congress need not provide an ``incentive'' for any person to
obey the law. The Bell companies are required by statute to open their
local networks to competition through various means. If they break the
law, stiff penalties can and should be imposed swiftly. I would point
out that non-Bell incumbent local exchange carriers, such as the former
GTE, Frontier, Alltel, Sprint and others are all subject to the same
Telecom Act mandates, but are not prohibited from offering long
distance service. As one might expect, these companies are fully
complying with the law without the need for any so-called
``incentives'' to keep them honest. The threat of heavy fines, adverse
publicity, and the loss of goodwill are more than enough to do the
trick.
Second, the long distance voice market generates nearly $100
billion in revenue each year. Any Bell company that leaves that much
money on the table by not aggressively pursuing Section 271 entry into
this market will be dealt with harshly by the financial markets and is
likely to suffer the ultimate punishment for bad management.
Finally, those who say the Bell companies will purposefully avoid
Section 271 long distance entry by offering voice telephone service
over the Internet simply ignore the cardinal rule of doing business:
which is, always make sure you get paid. H.R. 2420 flatly prohibits
Bell companies from billing, collecting, or marketing voice long
distance service. If a Bell company also is forbidden from spending a
dime on TV commercials, telemarketers, frequent flier miles or rebate
checks, how many customers is it likely to steal away from AT&T or
WorldCom each of whom spends millions each year just to convince
consumers to switch carriers?
H.R. 2420 is a sensible solution to a serious problem confronting
consumers and policymakers today. The New Economy simply will not
survive and prosper in a 56K dial-up environment. Congress must remove
obstacles to the deployment of broadband technologies whenever and
wherever it finds them.
Thank you, again, Mr. Chairman, for holding this hearing. I look
forward to working with you to move this important legislation forward.
Mr. Tauzin. The Chair now recognizes the gentlemen from
Maryland, Mr. Wynn, for an opening statement.
Mr. Wynn. Thank you, Mr. Chairman.
In view of the shortness of time and the importance of this
hearing, I would defer an opening statement and submit in the
hopes that we can at least get some of the witnesses before we
have to recess.
And with that, Mr. Chairman, I would relinquish my time.
Mr. Tauzin. I thank the gentleman.
The gentlelady has an opening statement, Ms. Wilson?
Ms. Wilson. Yes, Mr. Chairman. I will just be very brief.
I am of the belief that the 1996 Telecom Act is working and
that competition is growing both in Albuquerque and around New
Mexico.
As it happens, my local Albuquerque office gets our local
phone service from ESPIRE and I think that more competition
should be the goal of any changes to the Act.
I support the idea of more competition in the data backbone
market, and I am concerned though about the bill that it might
result in less competition in local exchange Internet service
providers and broadband access markets.
I have heard from a lot of consumer groups, Internet
service providers, competitive local exchange providers, public
utility commissioners, small businesses all across New Mexico
about this bill, and almost unanimously they either outright
oppose the bill, or they have grave concerns that have to be
addressed before it should move forward.
I would like to hear from the witnesses today about the
need for the legislation. As I understand it, the Bell
Companies are reporting record profits, and usually crediting
their movement into the data world for these record profits.
I would also like to hear more about the impact this bill
is going to have on backbone competition. And I would like to
hear about the impact it is going to have on our burgeoning
competitive telecommunication market across the country and
specifically in New Mexico.
I would also like to make a clarification to a recent
Forbes Magazine article that suggested that Albuquerque has no
high speed Internet access.
Contrary to the Forbes article, my constituents in fact can
receive high speed Internet access. UUnet, a subsidiary of
Worldcom, provides high speed access. There are several DSL
companies in Albuquerque including Covad, Rhythms, and ESPIRE.
Comcast Cable is rolling out high speed cable modems.
In Des Moines, New Mexico, which has I think it is now 400
telephone customers in 2800 square miles, you can get DSL from
the telephone co-op.
U.S. West, however, does not yet offer a high speed
Internet access in Albuquerque. They have announced plans to
roll out DSL, however.
I think that is an important point. All of these things
would not have happened and high speed access would not be
available in New Mexico yet if it were not for competition. And
I do not want to do anything that would jeopardize the future
vitality and competition within this industry and those will be
the nature of my questions.
I yield the balance of my time.
Mr. Tauzin. The Chair thanks the gentlelady.
The gentlelady from Missouri is recognized, Mrs. McCarthy.
Mrs. McCarthy. Thank you, Mr. Chairman.
I am very grateful for this hearing and I am going to be
very brief and put my extended remarks in the record so that we
can get on with the panel.
There are a lot of very positive developments happening for
consumers in my district because of competition, and I do not
want to change or act prematurely a law that is in place and
working well. Any change that might reduce competition I think
would be very adverse and it could lead to increased costs and
stifling innovation, and if it ain't broke, don't fix it.
So, Mr. Chairman, I will yield back the balance of my time
and put my remarks in the record.
[The prepared statement of Hon. Karen McCarthy follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress
from the State of Missouri
Thank you Mr. Chairman and Representative Markey for holding this
hearing on H.R. 2420, the Internet Freedom and Broadband Deployment
Act. I look forward to the witnesses' testimony on the current state of
broadband deployment and how this legislation will affect deployment in
the future.
In 1996, Congress enacted the Telecommunications Act, which laid
the legal framework for deregulating the telecommunications market. The
removal of regulatory barriers was expected to promote competition and
benefit the public interest. It was expected that the long term
benefits to such deregulation would include increased consumer choice,
decreased consumer prices, increased efficiency, the spurring of
technological advances, and increased investment in the Nation's
information infrastructure. I believe the Act is working and that we
must ensure its continued success by allowing for the ongoing
competition among telecommunications providers. Such competition
benefits all consumers.
We are in the midst of an exciting time from a communications
perspective. The communication tools people now have at their disposal
due to the Internet is truly astounding. What is even more amazing,
though, are the things we will be able to do in the future once
broadband Internet access is more commonplace throughout the United
States. That is why I am so interested in the state of broadband
deployment.
One of the many benefits of the Telecommunications Act of 1996 is
that it created a competitive telecommunications marketplace, as
evidenced by the competitive local exchange carrier (CLEC) industry's
success. There are currently over 375 CLECs in the United States,
including 333 facilities-based CLECs, employing more than 70,000
people. These companies operate over 820 voice and 1,400 data switches,
10.4 million access lines, and over 4 million miles of fiber.
The CLEC industry's rise, in turn, created an amazing increase in
broadband deployment. Competitors were the first to aggressively roll
out broadband services, and are still among the industry leaders in the
provision and deployment of Digital Subscriber Line (DSL) service. In
fact, CLECs supply over 100,000 DSL lines, which represents about 20%
of the total number of DSL lines currently in service.
Further, CLECs are deploying to smaller cities and towns. For
example, Missouri-based BroadSpan Communications, which operates in my
district, also provides broadband service to the 40,000 residents of
Cape Girardeau, Missouri. As a result, CLECs are now able to offer DSL
broadband service to approximately 25% of the country.
Local phone companies, on the other hand, had DSL technology for
some time, but only began to deploy DSL in response to CLEC deployment.
Now, however, every regional Bell operating company (RBOC) and GTE are
deploying broadband services in their home regions. In fact, SBC has
announced that, through its ``Project Pronto'' initiative, the company
will provide DSL service to 77 million customers by 2002.
Other industries are also contributing to the current state of
broadband deployment. For example, cable companies, wireless
technologies, and other new entrants, including electric utilities, are
all now offering broadband services. In fact, there currently are
approximately 2 million U.S. cable modem customers, and 7,000 new cable
modem customers are being added per day.
These companies are leading the way in broadband service. Greater
Kansas City area customers are lucky to be the first in the country to
benefit from these emerging technologies which the Telecommunications
Act of 1996 has fostered.
I look forward to monitoring the innovations which competition
brings through the effective implementation of the Act. I believe any
attempt to change the Act prematurely will only hurt consumers by
reducing competition, increasing costs, and stifling innovation.
Allowing the Bells to transmit high speed data over long distance
networks without requiring them to meet the 14-point competitive check
list of open-market requirements in Section 271 of the Act will ensure
less competition in the telecommunications market. In Chairman
Kennard's testimony before the House Judiciary Committee on July 18,
2000, he 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 Chairman
Kennard's assessment and I do hope that Congress allows the Act to work
by not reopening it.
Thank you Mr. Chairman, and I yield back the balance of my time.
Mr. Stearns [presiding]. I thank my colleague.
The gentleman from Texas is recognized.
The gentleman from Oklahoma is recognized.
Mr. Largent?
Mr. Largent. Thank you, Mr. Chairman.
The chairman of the subcommittee said the chairman of the
full committee may be a hard guy to convince; I may be
impossible.
In preparation for this hearing, this month I visited an
SBC central office in Tulsa, and it is something that I would
recommend that every member of this subcommittee do is take a
central office tour, if they have not done so. It is extremely
educational, and helps to put into context what we are doing
with this legislation.
I came away from the tour with the favorable impression
that Southwestern Bell has made a good faith effort in Oklahoma
to abide by the intent of the 1996 Telecommunications Act. More
than 50 companies have been approved by the Oklahoma
Corporation Commission to provide local service.
Seventy-three interconnection agreements with SBC have been
approved. Competitive local exchange carriers provide
competitive local service in 66 of the 72 counties that SBC
serves.
It is my understanding that SBC is very close to filing its
271 application in Oklahoma to provide long distance service.
I was left with the distinct impression that the Act is
working as intended. CLECs have invested $30 billion in new
networks since the passage of the Act, and continue to invest
over a billion dollars every month in their networks.
Despite the CLECs' significant growth, incumbent local
exchange carriers continue to serve between 93 and 95 percent
of the local telephone market.
Since passage of the Act, the Bell companies and GTE have
also done quite well in the data market. In the first quarter
of this year, SBC, Bell Atlantic, Bell South, U.S. West and GTE
posted anywhere from 32 to 41 percent growth because of data.
Why have competitors been able to make inroads in an
industry that has been traditionally dominated by a few large
monopolies? Largely because of Section 251 which lays out the
interconnection requirements that incumbent local exchanges
must comply with.
H.R. 2420 makes some significant changes to Section 251 as
it pertains to data services. I believe these changes could
hinder competition rather than help it.
I refer members to page 7 of the bill, beginning on line 7,
it says, and I quote. ``The Commission shall not require an
incumbent local exchange carrier to a] provide unbundled access
to any network elements used in the provision of any high speed
data service other than those network elements described in
Section 51.319 of the Commission's regulation as in effect on
January 1, 1999, or b] offer for resale at wholesale rates any
high speed data service.''
So in essence, what we would be doing if we were to enact
this legislation is to say to those companies who have invested
billions of dollars to spur competition and develop innovative
technologies, Congress really did not intend that data should
be considered as a telecommunication service. Throw your
business plan out the window and start over.
In my view, that is poor public policy. If we enact this
legislation, why should those in the telecommunications
industry or any other industry, for that matter, that comes
before this committee, have any certainty about how to
construct a business model if we change the rules of the road
because one side does not like the rules.
As members of this subcommittee our first goal when
developing legislation should be to do no harm. I fear that
H.R. 2420 would do significant harm. The Act is working, and if
it ain't broke, don't fix it.
I yield back my time.
Mr. Stearns [presiding]. I thank my colleague.
I understand that the gentleman from Minnesota does not
have an opening statement. Okay.
The Chair recognizes himself. Let me just compliment the
Chairman, who just stepped out momentarily, for his alacrity.
He has 220 cosponsors. He deserves to have a hearing, and I
think he has done great work in trying to present his case.
I, like my colleague from Oklahoma, am not one of the 220
members who are on the bill but I believe that this hearing is
very important and I compliment him for having this hearing.
Like others, I am disappointed that the FCC has not sent a
representative. I understand Mr. Kennard could not make it for
personal reasons, and we respect that. I would remind him,
though, that this is the sixth time this year he has not
appeared before this subcommittee, and I think it is very
important if he cannot come, that he send someone who shares
his feelings about this, so that we have the full benefit of
his sage wisdom.
The Telecom Act of 1996 I think is working. And I think the
landscape is continuing to change. Consumers now have mind-
numbing options. I mean, it is almost either from DSL or ISDN
on long-distance providers and packages. Cable of course now is
a legitimate competitor with Copper Voice and Data Services.
Competitive local exchanges have sprung up around the
country, effectively competing with incumbents and bringing
competition to the local phone market.
Additionally, new sectors have given birth to in the area
of data, broadband and bandwidth, with data being one of the
key components driving the telecom revolution, and the demand
for bandwidth and broadband is growing day-by-day, if not, my
colleagues, second-by-second.
Bandwidth now is even being traded as a commodity.
Americans are electing to do away with their dial-up modems for
lightening fast speeds being offered through cable and DSL to
access the Internet, and this demand is being met not only by
the incumbent phone companies but also by the cable providers,
the CLECs and the LECs.
Furthermore the Commission, the Commission itself, has
finally approved 271 applications for Bell operating companies'
entry into long distance.
In the last year alone, Bell Atlantic won approval in New
York and SBC approval in Texas. Bell South will soon be filing
in Georgia, and the flood of applications will soon make its
way to the FCC.
Now that the Bells finally have a clear blueprint for
interLATA entry, I anticipate the landscape to be significantly
different 12 months from today.
So clearly, it is an exciting time for telecommunications,
for this revolution, and I appreciate the hearing, as I
mentioned.
But the real question, members, we have to decide is do we
want to go back and change the Telecom Act of 1996? That is the
main question before this hearing.
Or, should we continue to let this percolate and try to let
competition solve the problem without more government
regulation?
And that concludes my opening statement.
The gentleman from Ohio, Mr. Sawyer, is recognized for an
opening statement.
Mr. Sawyer. Well, thank you, Mr. Chairman. I assume that
you have already sought unanimous consent for members to insert
their statements into the record?
Mr. Stearns. The Chairman had already done this, yes, sir.
Mr. Sawyer. Well, I thank you for the opportunity to speak,
but I will take advantage of that opportunity and we can get on
with the hearing.
[The prepared statement of Hon. Tom Sawyer follows:]
Prepared Statement of Hon. Tom Sawyer, a Representative in Congress
from the State of Ohio
The future of broadband is full of uncertainty, as competing
companies and industries try to anticipate technological advances,
market conditions, consumer preferences, and even cultural and societal
trends. Congress should work to ensure that broadband deployment is
timely, that industry competes fairly, and that service is provided to
all sectors and geographical locations of American society.
H.R. 2420, the Internet Freedom and Broadband Deployment Act, would
ease certain legal restrictions and requirements imposed on incumbent
telephone companies to encourage the growth of broadband services.
Specifically, H.R. 2420 contains two important provisions. First it
allows the Bell companies to provide interLATA data service without
completion of the 14 point check list outlined in section 271. Second,
it exempts the Bell companies from unbundling and resale requirements.
Those supporting the lifting or modification of restrictions claim
that action is needed to promote the deployment of broadband services,
particularly in rural and under served communities. These communities
argue that present regulations under section 271 are overly burdensome
and discourage needed investment in broadband services. First,
unbundling and resale requirements, when applied to advanced services,
provide a disincentive for incumbent local exchange carriers (ILECs) to
upgrade their networks. Second, the Bell operating companies (BOCs)
interLATA data restrictions unnecessarily restrict the development of
the broadband network. Third, ILECs are the only entities likely to
provide these services in low volume rural and other under served
areas. Therefore, proponents claim, until these regulations are
removed, the development and the pace of deployment of broadband
technology and services, particularly in unserved areas, will be
lacking.
Opponents claim that the lifting of restrictions and requirements
will undermine the incentives needed to ensure that the BOCs and the
other ILECs will open up their networks to competition. Present
restrictions, opponents claim, were built into the 1996
Telecommunications Act to help ensure that competition in
telecommunications will develop. Modification of these regulations,
critics claim, will remove the incentives needed to open up the
``monopoly'' of local services. A major change in existing regulations,
opponents claim, would not only remove the incentives needed to open up
the local loop but would likely result in the financial ruin of
providers attempting to offer competition to incumbent local exchange
carriers.
However, this belief that the RBOC's will not want to move forward
in the Sec. 271 process is unfounded. There is a very clear trend line
that has been developing within the telecommunications industry
indicating a need to offer a complete bundled service to consumers.
Consumers want to be able to receive one bill for all their
telecommunications services and lacking a long distance component would
be a significant impediment to offering a bundled service. RBOCs will
still be required to complete Sec. 271 if they plan to offer long
distance services. Therefore, regardless of the relief in H.R. 2420, it
is in the RBOC's best interest to move forward with the Sec. 271
process in order to offer long-distance among their other services.
Along these lines, it is also interesting to note that several
large and medium sized local exchange carriers--such as GTE, Cincinnati
Bell, and Frontier--which have the same market incentives as the RBOCs,
are free of section 271 obligations and continue to focus much of their
business in local services. There is also robust investment and
vigorous competition from new entrants in markets served by these
medium sized companies.
I look forward to hearing from our witnesses today on the
deployment of broadband services and the pros and cons of H.R. 2420.
Mr. Stearns. All right. The gentleman from California, Mr.
Cox, is recognized for his opening statement.
Mr. Cox. I have no opening statement.
Mr. Stearns. All right.
The gentleman from Ohio, Mr. Oxley, is recognized.
Mr. Oxley. Thank you, Mr. Chairman, and welcome to our
distinguished panel.
I strongly support efforts to promote broadband deployment
through deregulation which is why I have co-sponsored this
legislation.
If a regulation has outlived its usefulness for protecting
consumers, whether due to technological innovation or market
competition, it ought to simply be repealed. That is why I
favor data relief for the Bell Companies and it is why I am
against imposing open access regulations and horizontal
ownership caps on cable systems.
I believe that when we look at the issue of broadband, we
need to step back and make sure we are seeing the big picture.
We want to make sure that we are closing the so-called digital
divide in both urban and rural markets. And we want to be sure
that we remain technologically neutral and not promote on way
of addressing the problem over other alternatives.
So in addition to ILEC deregulation, which is an order, in
my opinion, we should look at promoting wireless and cable
solutions as well. No options should be ignored.
As usual, the best thing we can do is pursue deregulatory
parity and let the consumer pick the winners and losers.
The most perfect mechanism for choosing technologies is not
the Commission or the Congress, it is the competitive
marketplace.
I am sure we will hear lots of suggestions today on how to
help the market work its magic, and I am anxious to hear them
all in due course. I am less interested in hearing about the
need to maintain or even increase regulations based on a
competitor's view of fairness, although I am sure we will hear
a fair amount of that too.
Mr. Chairman, this is a very interesting issue and critical
to the long-term deployment of broadband. I congratulate you
for the effort, and I yield back.
Mr. Tauzin. I thank the gentleman and I thank him for his
support and his strong statement.
Are there any other members wishing to make an opening
statement?
[No response.]
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Gene Green, a Representative in Congress
from the State of Texas
Mr. Chairman: I want to thank you for holding a third hearing on
this important piece of legislation.
With over 220 cosponsors the need to act upon this measure is
apparent.
Mr. Chairman, after this weeks hearing on the status of HDTV, I was
struck by how a lack of competition can undermine quality of services
delivered to consumers.
Yesterday, the members of this subcommittee were treated to a
demonstration of the blame game on who was responsible for the slow
rollout of Digital TV.
I walked away from that hearing wondering what would happen if
there were two digital standards for consumers to choose from.
That lack of choice is, I believe, what we are faced with today.
Many consumers in heavily urban and rural areas do not have enough
options when trying to gain access to a high speed Internet connection.
Lack of Internet options means that new business ideas are slower
to develop, economic redevelopment of our inner-cities and rural areas
are hampered, and children are denied a valuable educational tool.
My primary concern is how we can increase competition to address
these types of issues as rapidly as possible. H.R. 2420 is important
because it will further increase competition by allowing greater use of
existing infrastructure.
We need to look no further than the cable industry to understand
the importance of using existing infrastructure to deliver to consumers
with this important service.
Allowing the Regional Bell Operating Companies use of their
existing infrastructure to cross Inter-LATA boundaries to deliver high
speed Internet services would provide consumer with more Internet
options. Let me make one point very clear, I want vigorous competition
in the Internet marketplace.
Mr. Chairman, we must not lose focus in all the rhetoric
surrounding this issue.
At the end of the day, it is not which company may or may not gain
an advantage over another.
The issue is are we going to increase the speed of broadband
deployment to consumers.
Mr. Chairman, I again want to thank you for holding this hearing
and I look forward to an informative panel discussion.
Thank you and I yield back the balance of my time.
______
Prepared Statement of Hon. Anna G. Eshoo, a Representative in Congress
from the State of California
Thank you, Mr. Chairman for holding this hearing and offering
another opportunity to appreciate the stunning success of the 1996
Telecommunications Act.
I had the honor of serving in Congress and on the Commerce
Committee when the '96 Telecom Act was drafted and I served on the
Conference Committee that put the Act together.
Our respected colleague, Congressman Tauzin, was also on the
Commerce Committee when the Telecommunications Act was shaped in 1996.
When Congress passed the Telecom Act, we intended that legislation to
deregulate a communications industry in which competition had been
choked off by years of monopolistic practices.
Mr. Tauzin, Mr. Goodlatte, Mr. Boucher and I agree that open and
rigorous competition among telecommunications companies is the best
guarantee that consumers will receive the broadest range of services at
the best prices--and by definition, it is the most effective means to
end monopolistic practices.
Since the 1996 Act was signed into law, we've seen the
telecommunications revolution occur with breathtaking speed. No sooner
does one technology seem to offer more speed and capability, when along
comes another advancement that offers more data, faster.
We know the Telecom Act has resulted in a larger menu of broadband
delivery options. It has increased competition and produced lower
prices for the consumer.
One of the best examples of this is seen in the development of the
Competitive Local Exchange Carriers--or CLECs. These companies--
companies like Covad--are children of the Telecom Act.
And why do I call them this? These companies provide DSL-based
access to the Internet through local loops or on their own high-speed
fiber networks. Before the Telecom Act, these companies could not exist
in a regulated environment. Only the Bells could offer this technology.
It's important to note that the Bells had DSL technology but did not
offer it. Instead, they offered the more expensive ``T-1'' lines to
businesses.
But the Telecom Act deregulated the industry and allowed these
companies to offer the DSL service. And once the Telecom Act allowed
these companies to offer their services, what happened? Telephone
companies that before had only offered the more expensive T-1 lines,
began to rapidly expand their DSL service--a service they could have
offered much earlier. The result was increased broadband services to
consumers at a cheaper price.
And more dramatic successes are just around the comer. For example,
there is a company in California called Next Level Communications
offering VDSL that's faster than DSL and no more expensive for the
consumer.
So I hope, Mr. Chairman, that Congress will let time be our advisor
on this issue. We should be patient. We should refuse the temptation to
change course in order to meddle in the marketplace while this
revolution in telecommunications is happening around us.
I don't believe clear or convincing evidence has been offered that
consumers are suffering because of the Act. In fact, when I listen to
testimony before this Subcommittee what I often hear is ``the Telecom
Act is working . . . but.'' If the Act is working, as I believe it is,
I am inclined to let it progress unimpeded by what may be well-
intentioned but hasty Congressional intervention. While consumers are
now getting more choices and lower prices, I'm concerned that the
evidence also points to something else--namely, the different segments
of the telecommunications industry are using the Internet as a reason
to reopen the old debate that long distance companies and the RBOCs had
regarding deregulation.
I believe Congress decided in 1996 the forum for that debate is in
the marketplace, not the legislature. The development of the Internet
is not a reason to reverse this decision. In fact, the one way to
guarantee harm to the consumer is for Congress to try and re-insert
itself into this competition. The best form of regulation is
competition.
The incredible rate of convergence should stand as a signal to
proceed cautiously and allow the Act to work. If we move hastily we may
find ourselves confronted with an even more difficult set of issues and
at a time sooner than we, or the industry, would prefer.
History can also give us reason to tread slowly. Recall that the
law amended by the Telecom Act of 1996, the Communications Act of 1934,
was actually based on economic principles contained in the Interstate
Commerce Act of 1887 which regulated railroads. The principles to which
we refer today, fair and nondiscriminatory interconnection and price
oversight, originally were associated with the railroads and have been
with us for a very long time. They have been around for almost as long
as the incumbents enjoyed monopoly status during which time they built
up significant economies of scale and scope. It was this entrenched
status that the Telecom Act recognized when it sought to stimulate
competition by requiring the incumbents to make their network elements
available on an unbundled basis. This bill seems to forget that
background and ultimate objective.
Broadband deployment has been stimulated because, using the
timeworn principle of nondiscriminatory access, along with the ability
to collocate and enter into line-sharing agreements, local markets have
been opened. Consequently, broadband deployment is expected to increase
exponentially over the next year.
I also want to try and put to rest a myth that some parties in the
telecommunications industry are working hard to create--and that is
when Congress was writing the Telecom Act of 1996 no one knew about the
Internet and how it would impact the telephone industry. Therefore,
goes the argument, we should re-open the Act to take the Internet into
account.
On prior occasions I have cited to testimony from the 1995 Hearings
before the Subcommittee on Telecommunications which demonstrates that
the Internet not only was well documented, but also that its potential
was appreciated at the time of the hearings.
And so I submit that the legislation being considered by you today
may be premature. The so-called ``incentives'' for RBOCs to roll out
DSL are unnecessary because clearly there are signals that competition
already exists in this market.
And finally Mr. Chairman, let me lay an important marker down by
asking this Committee how Internet telephony will effect the
legislation it's being asked to consider. If we're being asked to
reopen the Telecom Act because of the Internet, how will this
legislation effect the developing market that allows telephone calls to
be made over the Internet? This technology which is already in use,
could have a dramatic effect on how we define something as basic as
what a telephone call is.
I suggest the wisest course is to see where this technological
revolution will lead. To do otherwise I believe will engender
unnecessary marketplace disruption.
Mr. Chairman, again, thank you for holding this hearing on this
important issue. I hope if this legislation is reintroduced next year
you will have more hearings on it so we can fully explore the issues
before us.
Mr. Tauzin. Then I am pleased to begin the testimony of our
witnesses.
As I do, let me announce that there is a special mass in
memory of the life of our good friend Mr. Stupak's son who lost
his life this year, which starts at 12:10.
And we will begin taking the testimony of the witnesses but
members obviously will be excused if any would wish to go and
attend that service, and we will try to complete the round of
the witnesses and hopefully, by that time, members will have
returned and we can begin the round of questions of our
witnesses.
So if members feel as I would love to personally attend--if
you want to attend, you are certainly excused to do so as we
take the testimony of the witnesses.
Any further opening statements from anyone?
[No response.]
Mr. Tauzin. Then the Chair is pleased to introduce the
panel.
The panel is indeed a distinguished panel and pursuant to
the request of the chairman of the Commerce Committee, we have
tried to build a balanced panel. We will hear support and
opposition to the bill that is before us today, and we will
hear strong support and strong opposition. And that is as it
should be.
The panel consists of Mr. James Ellis, Senior Executive
Vice President and General Counsel of SBC Communications; Mr.
Edward D. Young, Senior Vice President, Government Affairs of
Verizon Communications; Mr. Arne ``Skip'' Haynes, President of
Rainier Group; Mr. Dhruv Khanna who is the counsel for Covad
Communications; Ms. Cindy Schonhaut, Senior Vice President of
ICG of Colorado; Mr. Len Cali, the Vice President, Federal
Government Affairs, of AT&T Corporation; and Mr. Steve Pociask
of Joel Popkin & Company here in Washington, DC.
Let me also indicate that we did receive a call suggesting
that two people who would love to attend could not make it here
today, and I just wanted to let you know that they did want to
make.
The CEO of AT&T had called us and let us know that he would
personally have liked to have made it and hopefully we can hear
from him at a future date, Mr. Cali.
And also the Chairman of the FCC called and expressed his
regrets that he could not be here. This of course is the fourth
or the fifth time that it has happened, and I assured my
friend, Mr. Kennard, that this is the first time he really had
a good excuse, not only a real authentic one but one I support.
He is attending the adoption hearing for his new son, and
it is kind of a big day for him, and an exciting day, and I
wanted to acknowledge that today and wish him and his new son
and his family all the best wishes. It is a very big day for
him and his family and I want to wish him well. And he is
certainly excused from being here today.
We will begin with Mr. James Ellis, the Senior Executive
Vice President and General Counsel for SBC Communications.
Mr. Ellis, all written statements of the panelists are part
of our record, and so if you will kindly just summarize your
statement within the 5 minute rule.
Mr. Ellis, the lights will indicate to you green, yellow,
and red when you have just about completed your 5 minutes
before the committee.
Mr. Ellis, please.
STATEMENTS JAMES D. ELLIS, SENIOR EXECUTIVE VICE PRESIDENT &
GENERAL COUNSEL, SBC COMMUNICATIONS; EDWARD D. YOUNG III,
SENIOR VICE PRESIDENT, FEDERAL GOVERNMENT RELATIONS, VERIZON
COMMUNICATIONS; ARNE L. HAYNES, PRESIDENT, RAINIER GROUP; DHRUV
KHANNA, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL, COVAD
COMMUNICATIONS; CINDY SCHONHAUT, SENIOR VICE PRESIDENT, ICG;
LEONARD J. CALI, VICE PRESIDENT, FEDERAL GOVERNMENT AFFAIRS,
AT&T CORPORATION; AND STEPHEN B. POCIASK, EXECUTIVE VICE
PRESIDENT & CHIEF ECONOMIST, JOEL POPKIN & COMPANY
Mr. Ellis. Mr. Chairman, members of the committee, good
afternoon. I appreciate the opportunity to share my company's
views on this important legislation.
We support the bill because we believe it will lead to
increased deployment of advanced services, particularly in the
rural areas. It will mean more competition for advanced
services, and with that will be more customer choice and
competitive prices.
It could not come at a more critical time. The experts say
that the amount of traffic on the Internet doubles roughly
every 90 days, and certainly the demand for high speed access
is exploding. It is becoming increasingly clear that the role
of the Internet and high speed access is vital to all segments
of the economy.
We believe, in considering the legislation, a beginning
point is a recognition of two fundamental facts. First, there
is no bottleneck for advanced services.
Cable modem, which is provided by the cable companies,
competes directly with our xDSL services. Cable Modems provided
over their networks, their facilities, are completely
independent from ours.
In addition, we have terrestrial wireless alternatives,
satellite alternatives. They provide their services completely
independent of our facilities.
Large customers have access to AT&T and Worldcom and others
who provide direct access to the Internet over high speed
capacities, and again without resort to the telephone company
facilities.
There simply is no bottleneck.
In addition, we do not have even a leadership, let alone
dominant position with respect to advanced services. Perhaps
the best evidence why there is not a bottleneck is our
competitors have four or five customers for every one we do.
But despite the fact that there is no bottleneck, no
control, and despite the fact we are not even in a leadership
position, we are subject to asymmetric regulation. The result
of that asymmetric regulation is, on the one hand our
competitors are completely free to operate the most efficient
way they can; at the same time, we are subject to pervasive
regulation.
It means we are handicapped. It means competitors are
protected from competition. And ultimately it means the
consumers, the customers, are denied a competitive marketplace
and the benefits.
Now there are many aspects to this but the one that is the
subject of this bill is of course the long distance
restriction. Because of that restriction, we have significant
handicaps in deploying broadband services to our customers. It
takes many forms, but let me give a specific example.
Illinois has 12 LATAs. We go in there to provide advanced
services. That means, because of the long distance restriction,
we have to put an ATN switch in each LATA and we have to put a
point of presence to the Internet in each LATA.
It is very expensive. We cannot operate in an efficient way
where you would follow normal traffic algorithms and combine
demand and use a combination of switches and trunks. You can't
do that.
Likewise, we cannot take demand for high speed access in
one community and combine it with another community and in that
way operate more efficiently and have a broader base
deployment.
The discussion has mentioned project Pronto. We have been
handicapped. We could have done it more efficiently. We could
have reached many more customers without that restriction.
Another example is in the backbone. You have all heard of
the backbone discussed, the backbone of the Internet. Well,
that is the high level connection between the Internet hubs.
And as was indicated several weeks ago when the Justice
Department and the government took a position against the
Worldcom merger, that was a principal reason because of the
heavy concentration in three companies, the provision of that
backbone. We have the facilities. They are in the ground. We
are not permitted to participate in it.
Now there have been several suggestions in the comments
today and in other places that we are seeking to turn around
the Telecom Act. That is not true.
Advanced Services, DSL and Cable Modem, were not in
commercial operation at the time that legislation was debated,
and certainly the marketplace and technology have gone well
beyond the situation that existed at the time of the Act.
Furthermore, I would tell you, we are not even seeking in
any way to change our obligations to open the network. Indeed,
it is absolutely critical that we be able to offer a complete
package or we are not going to have a business. We must have
the opportunity to offer voice telecommunications. In fact, 70-
80 percent of our revenues are from voice. That will not
change, we will continue to have that obligation.
But the fact is, the basic underlying principles behind the
1996 Act that is, the existence of a bottleneck and a dominant
control of the local exchange simply do not apply in a case of
advanced services. That is, we have neither a bottleneck nor
dominant position.
I would make one other point.
There has been reference to how many POPs there are. I
would simply say that the real question is whether the rural
customer has access to high speed access to the Internet. And
the fact is, according to NTIA, about 5 percent of the rural
customers have that access, and we would like to change it.
Thank you.
[The prepared statement of James D. Ellis follows:]
Prepared Statement of James D. Ellis, Senior Executive Vice President
and General Counsel, SBC Communications Inc.
I am Jim Ellis, Senior Executive Vice President and General Counsel
of SBC Communications Inc.
I want to compliment Chairman Tauzin and Ranking Member Dingell for
their leadership in sponsoring HR 2420. SBC strongly supports HR 2420
and encourages this Committee to move this legislation to the full
House. HR 2420 will have the effect of increasing competition in the
market for high-speed data and Internet access services, by eliminating
much of the regulatory disparity that currently exists between
providers of these services.
There are two fundamental principles that should guide Congress in
considering any legislation in this area. First, competitive markets
should be free from governmental regulation. Second, if there is some
public policy reason for regulating a market, all service providers
should be subject to symmetric regulatory requirements.
In the market for high-speed data and Internet access services,
these are the undisputed facts. First, there is no ``bottleneck'' in
obtaining access to the customer. Second, the incumbent local exchange
carriers (ILECs) are way behind in the provision of high-speed data and
Internet access services. Third, the ILECs are required to assist their
competitors in entering this market. Fourth, SBC provides high-speed
data and Internet access services through separate affiliates. Finally,
SBC's advanced services affiliates and the other Bell companies are at
a competitive disadvantage in that they cannot provide high-speed data
and Internet access services on an interLATA basis.
The effects of these regulatory disparities include 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 ILECs in general
and the Bell operating companies (BOCs) in particular, and their
competitors is essential to fulfilling the fundamental principles
outlined above.
Background
Historically, the only telecommunications pathway or wire to nearly
every home and business in this country was the local copper loop.
Until recently, the local loop was part of a circuit-switched network
that was capable of transmitting only narrow-band 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 services to the customer. 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 ILECs' local copper loops, in that it was capable of
transmitting broadband video and high-speed data services.
Recently, additional telecommunications pathways to homes and
businesses rapidly developed through various wireless technologies--in
the form of digital satellite service, cellular and PCS service, and
fixed wireless.
Meanwhile, as competition was developing in the telephone industry,
the Internet began to evolve as a source of new high-speed broadband
``advanced services.'' When the '96 Act was being debated in Congress,
the scope of the Internet and the precise nature in which these
advanced services would be provided to the public was uncertain.
Congress sought to address this new telecommunications phenomenon and
the promising new services it had to offer 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, the FCC has not actively sought to eliminate, or
even reduce, regulation of the ILECs' offering of advanced services.
Cable Modem versus xDSL 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 broadband 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 equipped to provide high-speed broadband
services. Hence, they had to develop a new technology called Digital
Subscriber Line or xDSL service, in order to provide digital
information at high bandwidths over copper loops.
While the ILECs were developing xDSL service, the cable industry
was rapidly deploying its cable modem technology. The ILECs are now
playing catch-up and are scrambling to deploy Asymmetrical Digital
Subscriber Line or ADSL service as a competitive alternative to cable
modem service. But, the cable industry is far ahead of the ILECs in the
actual provisioning of advanced services to consumers. At the end of
the first quarter of 2000, there were approximately 2.5 million
residential broadband subscribers in the United States, of which 1.9
million or 77% were cable modem subscribers and only 21% were xDSL
subscribers.
Thus, the consumer market for the delivery of high-speed broadband
Internet access and data services is a highly competitive market
between the cable industry and the ILECs. It is a market in which cable
modem service and xDSL service will provide the same high-speed
Internet access and offer to the same residential and small business
customers the same advanced and high-speed data services.
Most importantly, the ILECs had no ``head-start'' in the deployment
of advanced service technologies. The ILECs possess neither de facto
nor de jure monopoly in the provision of broadband Internet access,
advanced services, nor high-speed data services. And finally, it is
absolutely clear that the ILECs' local copper loop is no ``bottleneck''
in the provision of these services to consumers.
Asymmetric Regulation
Unfortunately, the rules and regulations that apply to the
provision of advanced services by the cable industry and the ILECs 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 is not required to interconnect with its competitors,
nor unbundle its facilities and make them available to competitors, nor
resell its services. Moreover, the cable industry is not currently
required to give its customers a choice of an Internet service
provider. This unparalleled ability of the cable industry 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 Time Warner alone 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. Time Warner directly and through its ownership of RoadRunner
provides cable modem service to approximately 38% of cable modem
customers. Together, the Time Warner and AT&T consortia also own 8 of
the top 15 video programming services, including 4 of the top 5. In
addition, it is no secret that AT&T has been trying to negotiate a
joint venture with Time Warner, and Time Warner and AOL, the largest
Internet service provider, are planning to merge. This creates a
situation where the cable industry could well develop a dominant
position in the provision of certain forms of broadband Internet
access, advanced services, and high-speed data services.
This is in stark contrast to the telephone industry, where the
ILECs remain pervasively regulated today. Under Title II of the
Communications Act, they 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
their competitors in offering competing xDSL services through the
interconnection, unbundling, and collocation requirements of Section
251(a) and (c) of the '96 Act. 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 resale under Section 251(b).
Unfortunately, under such an asymmetric regulatory scheme, the
regulators frequently determine the winners or losers in the
marketplace, and not the consumer. This significantly affects the
growth of new services and the availability of choice. Accordingly, any
legislation addressing high-speed data and Internet access services
should eliminate the regulatory disparity between the cable and
telephone industries.
HR 2420 goes a long way toward accomplishing this objective by
exempting high-speed data and Internet access service, and the
facilities used to provide such services from regulation, and by
eliminating any further unbundling requirements and the resale
requirement in respect to high speed data service.
InterLATA Restrictions
One of the key regulatory disparities in the market for high-speed
data and Internet access services is the interLATA restriction. Section
271(c) of the '96 Act prevents the Bell operating companies (BOCs) and
their affiliates from providing these services across LATA boundaries
and Internet backbone service itself. Neither the cable companies, the
interexchange carriers, nor the CLECs are subject to this restriction.
The interLATA restriction thus places the BOCs at a significant
competitive disadvantage in the provision of these services,
particularly to business customers.
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 a full
service provider to these large business customers.
There is no need for the interLATA restrictions in respect to 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.
---------------------------------------------------------------------------
\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 artificially inflates the BOCs'
costs of deploying advanced service technologies, and renders that
deployment less efficient. 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 interLATA relief, the
BOCs will be in a position to connect these communities to the
Internet, thus providing rural consumers and businesses with access to
the same Internet access and high-speed data services that are
available in urban areas.
Conclusion
HR 2420 has gained the support of many members of this Committee
and over 220 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.
Mr. Tauzin. Thank you very much, sir.
We would now like to welcome the Senior Vice President for
Government Relations for Verizon Communications here in
Washington, DC, Mr. Edward Young.
Mr. Markey. Mr. Chairman?
Mr. Tauzin. Mr. Markey, I will yield for a second.
Mr. Markey. When I was a boy growing up, Mr. Chairman, we
had a nice company. It was called New England Telephone, and we
all knew how to pronounce that and it was passed on to us by
our mothers and our fathers.
And then, about 15 years ago, Mr. Chairman, after paying
about a million dollars, they decided to change the name into
something that was absolutely unpronounceable, NYNEX. And it
took us about 10 years to figure out how to say this word,
okay, because it is some kind of test that you would give to,
you know, to someone who was in some advanced foreign language
course. This would be the last word you would give someone
learning the English language, NYNEX. And so we all finally
mastered it.
Then Bell Atlantic purchases or merges, I'm sorry, merges
with NYNEX and they decide to give up this word. And then we
all have to learn, in my home town, a new word, Bell Atlantic,
which we have just about gotten used to saying.
Then, this year, paying another million dollars,
notwithstanding the fact that 98 percent of all people who look
at it say ``Varr-a-zon'', which is probably how they should
pronounce it if that is how the public wants to pronounce it.
There is a new name called ``Ver-eye-zun.'' Now it captures
a whole bunch of concepts that are supposed to be subliminally
influencing us toward this horizon.
Mr. Tauzin. It is pronounced ``Her-i-zon.''
Mr. Markey. Yes, Mr. Chairman.
So now after another million dollars, we now have a new
name for this company all providing the exact same services in
my home town with the hope that they will receive relief by the
end of this year so they can move into the new horizon of new
services, but the company is ``Va-reye-zun.''
Mr. Tauzin. Thank you very much, Mr. Mokey.
As you know, both Mr. Bliley and I suffer from the below-
the-Mason-Dixon-line pronunciations.
Mr. Young of Verizon Communications.
STATEMENT OF EDWARD D. YOUNG III
Mr. Young. Thank you, Mr. Chairman.
Good afternoon and good afternoon to the members of the
committee. And Congressman Markey, thank you for correcting
that. It is a combination of horizon and veritas, which we can
talk about later.
I should note that this is the first appearance before the
subcommittee by Verizon. We were formed by a merger with GTE at
the end of last month, and I am delighted that this first
appearance is in support of H.R. 2420, the legislation that
you, Mr. Chairman, and Mr. Dingell have introduced to assure
that all Americans will realize the benefits of the Internet as
fast as possible and affording more choices.
That the bill has already gathered 225 cosponsors is a
testament to your leadership and the importance of this issue.
In my brief time, I would like to emphasize two key points.
First, H.R. 2420 will help bring more quickly advance Internet
services to more Americans and at competitive prices.
And then second, I want to emphasize that this bill does
not, does not undercut the incentives that were put in place in
the Act to open up local markets to competition.
Okay, how will 2420 accelerate deployment of Internet
services? Well, the Bell Companies have the unique ability to
provide vital pieces of the high speed Internet infrastructure,
the links and hubs in the middle of the Internet architecture.
At one end, you have the high speed Internet backbones and
at the other end, you have the local connections that connect
towns and businesses to the Internet. But in between, there is
a whole host of links, hubs, interconnections, interoffice
facilities, that the Bell companies have at their disposal, as
a result of providing ubiquitous local service, that could be
used to increase the capacity of the Internet and to provide
more access to more customers.
A good analogy is, if you think of the big Internet
backbone as an interstate highway, what we provide is we
provide the State roads, the access roads that run next to the
highways, and the on-ramps that allow that interstate to get to
the local communities to provide Internet service.
So we have hundreds of thousands of miles of fiber among
all the local exchange companies to help provide these
services. And the benefits that H.R. 2420 provides is it allows
us to use those facilities for a very narrow purpose, and that
is just to provide Internet data services.
It allows us to use these backbones in places where there
are not facilities today. Charleston, West Virginia; Duluth,
Minnesota; Fayettville, Arkansas, where we will be able to use
those facilities, once this bill passes, so that anybody can
deploy high speed Internet services.
And I emphasize, anybody, Covad, Rhythms can take advantage
of this local architecture, they will have equal access to it,
to offer their own services under the Internet, so they will
not have to go as far to get high speed connections, they will
be able to provide services as well as we will, and therefore
the customer wins.
Now, I say this is a narrow exemption because it only
applies to data. This does not affect at all the requirement
that we meet the 271 requirements for long distance relief for
voice services. So what we are focusing on is a narrow
exemption, an incidental interLATA exemption in the same way
that you saw fit to allow us to provide cellular long distance
service.
So if this bill has a narrow focus and benefits everyone,
why do people oppose it? Well the main opposition comes from
those who claim that this bill would gut the incentives in the
Act to open up our local markets, and that is just simply not
so for a number of reasons.
First of all, this bill does nothing to eliminate Section
251 of the Act. Section 251 contains the market-opening
provisions, the 14 point checklist, if you will, that the Bell
companies have to meet in order to get into long distance
business.
The interconnection obligations still remain. The bill does
nothing with respect to that.
With respect to voice service, there is still a valuable
incentive for us to get into that market. It is a $100 billion
plus market a year. We have every incentive to get into it.
Second, under our merger conditions, we have every
incentive to get into it. Verizon, for example, cannot offer
long distance service through its data affiliate, which it had
to separate in its merger with GTE until it meets the 271
requirements.
So the point here is that there are lots of options for us,
lots of incentives, excuse me, for us to continue to meet the
251 requirements.
The FCC has enforcement authority under which it can
continue to monitor the hundreds of measures that we have to
report to them every month to demonstrate that our markets are
open.
So in sum, Mr. Chairman, we support this bill. We think
that the incentives to open up the markets remain, but we think
that the benefits to all Americans of getting more access to
the Internet should start now.
[The prepared statement of Edward D. Young III follows:]
Prepared Statement of Edward D. Young, III, Senior Vice President,
Federal Government Relations, Verizon Communications
Mr. Chairman, thank you for this opportunity to testify before the
Committee. I am Edward D. Young, III, Senior Vice President, Federal
Government Relations for Verizon Communications, the new company formed
by the merger of Bell Atlantic and GTE. I am before you today to tell
you that H.R. 2420 will accelerate the deployment of high speed
Internet access to all Americans.
Mr. Chairman, the Internet is a wonderful tool that has developed
far faster than anyone could have imagined. But its continued
development and evolution into a technology that can handle any form of
communications and any type of service anywhere in this country is
threatened.
The current infrastructure on which the Internet rides is
insufficient to handle the explosive growth, and the danger is that we
won't recognize the scope of the problem until it seriously impairs our
economic growth. Policy makers must avoid applying old regulatory
models to an entirely new, competitive technology. The consequences of
inaction are very serious. The entire Internet economy rests on the
ability of businesses to reach consumers. Without Bell company
broadband deployment and provision of high-speed Internet connections
many local communities will never realize the promise of high-speed
Internet, and Internet companies will not be able to reach their
markets. This will have a serious impact on the value of the Internet
economy itself--the sector that everyone agrees is driving economic
growth.
In some all-too-important respects, today's policies for the
Internet and broadband services are those that were intended for a
local voice telephone market. This will slow deployment of broadband,
inhibit competition and risk slowing investment at the very time when
we need every possible player involved to help advance the capabilities
and capacity of the Internet.
the state of the industry
A few short years ago, the Internet was something that only
researchers and computer experts knew about. Electronic commerce was
not part of our vocabulary. In the last five years, the growth of the
Internet has been astounding, far outstripping the predictions of most
experts. A University of Texas study estimated that the Internet
economy was more than $500 billion last year.
With this growth, there has been increasing demand for bandwidth
and speed. The 14.4k modems that were state-of-the-art a few years ago
are the slowpokes, with 56k being the top speed achievable by most
mass-marketed dial-up modems. As more and more people use the Internet
and more complex information and bandwidth-intensive applications
appear, it is clear that 56k just is not fast enough.
Moreover customers need to be assured of high-speed service from
end to end. If the data is slowed at any point in the transmission,
data can be lost, the connection may drop and some of the more exciting
applications for education and telemedicine involving video, for
example, will simply be impossible. The current regulatory scheme is
not designed to provide the needed capabilities. We need competition
and investment in the Internet from end-to-end--from the local
connection to the nationwide and global backbone.
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, and economic development will be stunted in
areas without high-speed connections. The Internet has driven the
growth of the high tech sector and is increasingly important to
American industries such as video and filmmaking. Disney, for example,
recently testified to the Judiciary Committee about the importance of
broadband deployment to its future. There is a very real danger that if
the Internet does not advance to a new level, one capable of providing
higher speed, higher quality connections, the growth and
competitiveness of our economy based on the explosion of information
technology could well be undermined.
the weakest link
The Internet is an end-to-end system based on hundreds of
connections between different networks. At the top of this system is
the Internet backbone, which links together thousands of web sites and
Internet providers and takes traffic back and forth at high speeds
across the United States. At the bottom are the local networks of wires
and cables that bring the Internet into homes and businesses. Between
the two are a variety of connection points and transport facilities and
systems operated by local exchange carriers, ISPs, interexchange
carriers and others.
There has been much talk in recent months about the first link--the
one that connects the customer to her ISP. Local telephone companies
and cable operators are upgrading their networks to provide high-speed
local services, broadband services. These can transport information to
customers at many times the speed of 56k modem that is becoming the
standard. H.R. 2420 contains several provisions to make sure this
deployment is completed.
There has also been some focus on the Internet backbone. It was the
degree of concentration in this market that caused the Justice
Department to intervene to challenge WorldCom's takeover of Sprint.
This market is plainly in need of new entry and more competition, and
H.R. 2420 will allow this as well.
But less attention is being paid to the link in the middle, a link
that is every bit as important as the ones on either end. The speed at
which a consumer gets her data--a web page being transmitted to her
home--is only as fast as the slowest link in the communications chain.
Even if the consumer has the best available high-speed DSL or cable
modem service and even if the backbone is operating well, she will not
be able to get all the benefits of that service if the intermediate
link to the Internet backbone is too slow.
There are vast areas of the United States that simply have no
nearby high-speed connection to the backbone. Boardwatch Magazine, the
standard authority on Internet backbone networks, reports that there
are 43 Internet backbones that have major hubs (hubs with connectivity
of 45 Megabits or greater). While Boardwatch shows more than 1000 major
hubs, many of them are in the same city. For example, the Commonwealth
of Massachusetts has 29 of these hubs, but every one of them is in the
Boston metropolitan area; this leaves the western part of the state
without any high-speed Internet connection point. Missouri has 38 hubs,
but all are in its two big cities, with none in between. Illinois has
44, but all are in the northern part of the state. When this
duplication is factored out, Boardwatch Magazine shows hubs in fewer
than 130 cities.
The largest backbone providers have little incentive to connect
their systems with smaller providers or to locate hubs away from major
urban centers. 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.
This is happening all over the country. Forbes last month told the
story of Mr. Brown and his ISP in Albuquerque, New Mexico. Mr. Brown
wanted to gives his customers in Albuquerque the kind of high-speed
Internet services available to businesses and consumers elsewhere, but
he couldn't do that. The reason was that WorldCom and the other
Internet backbone giants did not provide enough high-speed capacity to
Albuquerque. To get that capability, Mr. Brown's only alternative would
be to pay $120,000 a year to lease a circuit running to the WorldCom
hub in Phoenix, Arizona. He can't afford to do that, so his ISP,
therefore, uses a public interconnection point in California, which is
slow and often congested.
This is not peculiar to New Mexico. There are no high-speed hubs in
communities like Shreveport, Louisiana, Springfield, Illinois, and
Jefferson City, Missouri. If an ISP in those cities wants to give its
customers high-speed, reliable Internet access, it must buy high-
capacity circuits of its own to carry its traffic to the nearest
Internet hub. These charges are distance sensitive, so the farther away
the ISP is, the more it pays to get to the Internet. And because these
links to the Internet are almost always interLATA, the ISP pays the
very same long distance companies that operate the Internet backbones.
However, the Bell companies already have high-speed fiber-optic
facilities connecting virtually every city and town they serve. A Bell
company could use this network to solve this Internet connection
problem, and its incentives to do so are strong because of its local
customer base. The Bell company could build Internet hubs in or near
Shreveport, Springfield and Jefferson City, closer to the ISPs in these
communities, and use the fiber that is already in place--but which
cannot now be used for these purposes--to connect these hubs to the
Internet backbone. That same fiber-optic facility could also be used to
transport the Internet traffic collected by other hub providers in
those areas. The Bells would compete in the regional and national
backbone market place creating more hubs and offering more choices to
ISPs. ISPs in these communities would get better service at a lower
price, to the obvious benefit of their customers.
Rural areas, in particular, lack high-speed connections to the
Internet backbone. Without these connections, it will be difficult for
rural areas to retain businesses or to attract new businesses,
especially those in the high growth area of today's information
economy.
Companies like Verizon have the resources and the capabilities to
make new backbone capacity and interconnection points available quickly
to improve Internet services. But, today, the government says we may
not do this.
Keeping Verizon and other new entrants out of the Internet backbone
business has other harmful effects. In particular, it slows the
deployment of high-speed local Internet access technologies (such as
DSL), particularly in rural areas. Many rural areas of the country have
no connections to the Internet backbone. In these areas, interLATA
restrictions aimed at long distance voice services have had the
inadvertent effect of preventing Verizon from providing high-speed
Internet services, including DSL access. The reason is simple: There is
little reason that Verizon or any other company would invest to provide
DSL in a remote area if there is no cost-effective way to get the data
to the Internet.
Finally, these restrictions do more than merely prevent us from
improving the Internet--these restrictions, and the resulting high
level of market concentration, have anticompetitive consequences as
well. The Big-Three long distance companies can dominate the market,
discriminate against other backbone providers and drive customers to
their own backbones. This enables backbone providers to leverage
downstream their backbone market power into the ISP and content
markets. For example, the Big Three's backbone interconnection prices
are about 50% higher than the average of the 43 backbone providers. As
Shelton Jefferson, the CEO of Netcom, recently told this Committee,
``These prices are so high because of the concentration of ownership of
Internet backbone in the hands of a few long-distance and cable
companies.'' Bell company entry into the Internet backbone market would
preserve competitive parity, however. With their resources, Verizon and
the other Bells could rapidly enter the backbone market and be treated
as peers by the existing major backbone providers.
The Internet has stimulated economic growth and can continue to do
so if we continue to invest in the necessary infrastructure and allow
all to participate. It can also spread this growth to our smaller
cities and rural areas. Passage of H.R. 2420 can make this happen.
Thank you.
Mr. Tauzin. Thank you very much, Mr. Young.
We are next pleased to welcome Mr. Arne Skip Haynes,
President of the Rainier Group.
Now what is interesting about Skip here is that in his bio,
he tells us that his great grandfather, Pete, won the company
in a is that pinochle or pinochle?
Mr. Haynes. Pinochle, sir.
Mr. Tauzin in a Pinochle game in 1912. So your great
grandfather actually won the company in a pinochle game in
1912?
Mr. Haynes. Yes, sir.
Mr. Tauzin. That is amazing.
Mr. Haynes. The actual story is, they are not sure if he
won the company or if he won enough change to buy the company.
Because I can also tell you I am fourth generation manager
of our company and when my father took over the company in
1954, the gross revenues were $32,000 a year.
Mr. Tauzin. Wow.
Mr. Haynes. And we are still very small.
Mr. Tauzin. Well. Mr. Haynes, you are recognized, sir, for
5 minutes.
STATEMENT OF ARNE L. HAYNES
Mr. Haynes. Thank you very much.
The point of my testimony here, sir, is to support H.R.
2420. I thank you, Mr. Chairman and members of the committee,
for the opportunity to give that support.
I have submitted a record of the testimony. And just for
the record, my son just graduated from college. He has joined
the firm in our interactive media business and we have a
commitment to telecommunications in small communities.
Mr. Tauzin. You are not doing pinochle on the Internet yet,
are you?
Mr. Haynes. No, no.
We also have a lot of small company friends around the
country, for example, Smokey Scanlon down in ETEL is competing
with Bell South in New Orleans. And many of our friends
throughout the country, small companies, are competing.
I am going to be moving into Mr. Stearns' area and
competing in Ocala with high speed wireless data and am anxious
to do that and am looking forward to it.
Again, I want to stress we are a small company. Our
incumbent phone company has 3,800 access lines and that is
fewer than the number of employees of most of the companies
here.
We have about a thousand cable customers, those we have
acquired since the Act was started. The Act was passed in 1996.
We have about a thousand Internet customers and we have about
400 CLEC customers, and those are primarily residential and
small business. I think our largest CLEC customer so far is six
lines.
We are excited about being in telecommunications, staying
in telecommunications, and I would note that our employee base
is now up to 50 individuals which is about triple what it was
when the Act passed in 1996.
I am testifying on behalf of our company, as well as the
United States Telecom Association of which I am vice chairman.
The competitors we have include AT&T, Qwest, with their
former U.S. West operations. We also provide long distance
service so we compete with IXCs and a myriad of Internet
service providers.
We need relief from regulation, both at the Federal and the
State level, and I would like to point out, that is extremely
important and there are some aspects of deregulatory effort
here and more of that should continue for small companies as
well as all companies.
There is no digital divide in the operations that we serve.
We have Cable Modem service available to our cable customers.
We will be rolling out DSL within 90 days to 100 percent of our
incumbent customers as well as our CLEC customers, and that is
in the State of Washington.
Our wireless they have not even got the technology to where
they are selling it for public use yet, but that is where we
are going soon in California and Florida.
I am either a very bright person for working the last 10
years to develop a data-oriented telecommunications network, or
I am really stupid because I invested millions of dollars of
our shareholders' money to make a data-ready network.
And I would like to invite Mr. Largent and any member of
the committee to come to the foothills of Mount Rainier so that
I can show you why line-sharing, as the FCC put it forward,
would devastate the operations of our company and be absolutely
a bad thing for residual customers who only want to use voice
services.
The line-sharing concept is flawed. I have submitted some
of the details in the record, and I would be happy to explore
those with anyone.
And I would also like to suggest that while the record
indicates our costs are high in our incumbent area, approaching
a hundred dollars a month to serve a customer, 20 or so of
which we get out of local rates, those are not unusual or
unrealistic costs in rural areas.
Any RBOC will also have high cost areas to serve as any
mid-sized company would. It is a question of geography and the
cost of facilities and the cost of employees who have to
maintain these networks.
So again, it costs money to run these businesses.
Competition is opening a lot of opportunities. It would be
better served without any regulation but the regulation needs
to be much lighter and much more fair than what it has been to
incumbents.
I think that H.R. 2420, if passed, would allow us to
continue to expand our operations in Washington State. If that
and other regulatory efforts continue, we will be in trouble,
and that is not good for any of our customers.
I am amazed and I see my red light has already come on, but
a couple of points, if I could just have a second.
State regulators are drooling to fill a vacuum that any FCC
regulation relief might come with, so I plead that every effort
you make will be to reduce State regulation as well.
Relieving the large companies of the interLATA obligation
is very positive for our customers because, as Mr. Young
pointed out, there is a link that is broken, and it is not at
our end and it is not in the middle, and we need high speed all
the way through, and that will benefit our customers.
Thank you, Mr. Chairman.
[The prepared statement of Arne L. Haynes follows:]
Prepared Statement of Arne L. Haynes, President and CEO, The Rainier
Group
My name is Arne L. Haynes. I am President and CEO of The Rainier
Group. We have served telephone customers in the foothills of Mount
Rainier (Washington) since 1910. My Great grandfather Pete won the
Company in a pinochle game in 1912. I am the fourth generation manager
and my son just joined the Company to lead our Interactive Media
effort.
I am testifying for The Rainier Group and the members of The United
States Telecom Association (USTA) of which I am Second Vice Chairman.
Our operations include: Mashell Telecom 3800 access line; Rainier
Connect: 400 facilities based CLEC customers; 1000 cable television
customers; 1000 Internet customers; 2600 long distance customers;
MercedNet: Merced, California fixed wireless and CLEC; Ocala, Florida
fixed wireless and CLEC; Merced Interactive Media--web content.
We compete with AT&T, Qwest (US West), a myriad of other IXCs and
Internet Service Providers. We will soon compete with Pacific Bell and
Bell South
We have 50 employees, triple our size since the 96 Act
WE NEED RELIEF FROM REGULATION! (Federal and STATE)
Regulation impedes our growth
Regulatory costs are obscene
There is no ``Digital Divide'' in our Washington State operation.
We provide cable modem service and will roll out DSL to 100% of our
service area in the next 90 days.
I am either very bright for developing a data ready network or
STUPID for investing millions of shareholder dollars in plant that I
must give to ``competitors'' at below cost rates. When the ``Line
Sharing'' rule was passed by the FCC, I feared I had been stupid. Here
is why:
Line sharing is a concept that concludes that since voice services
paid for the facility, the incremental cost for someone else to put
their DSL and Internet in the unused space is very low.
The concept is flawed because voice service was only part of the
business case to support the investment we made. Our average cost per
month to provide service in our rural ILEC is $100.00 per month. Our
local revenues cover about 20% of the cost and direct support from
Federal and State USF pays another 25%. The remaining 55% comes from
access revenue. Our IXC customers want access to come down. USF is
capped at the Federal level and restrained at our State level. Our
State ordered us to reduce access rates. We either need new revenue
sources or we need to raise local rates.
We designed our data-centric plant with the plan to reap revenue
from end user customers who need higher speed data. It is a higher cost
network. Higher speed data is a service only some customers demand. We
took the risk of investing more with the expectation that the data
users would pay for the service. Anyone can pick their preferred ISP.
We just want to be paid for the real cost of connecting at higher
speeds. We don't think voice only customers should cross-subsidize high
speed data users. Line sharing creates that cross subsidy. HR2420
corrects the problem.
I believe the provisions of HR2420 will allow us to continue to
expand our operations. Without the deregulatory aspects of The Bill, we
fear that our Washington operations will be severely harmed and
expansion curtailed.
Simply stated, a competitor using our facilities at ridiculously
low costs, can price their services below ours. Few, if any, of our
costs go away. Residual customers will have to pay much higher rates.
This is Robin Hood stealing from the poor to give to the rich!
I started our data focused expansion at the same time I rejoined
the Company. I never dreamed that regulators would become so unfair and
unreasonable. If the current regulatory climate persists I may not be
able continue to invest shareholder money in our ILEC beyond the
minimum required to meet plain old telephone service (POTS)
obligations.1Meanwhile, our competitor, little old AT&T, has little or
no regulation or requirement to unbundle their digital facilities.
Subsequent to the 9th Circuit Court decision, why should my advanced
services be subject to regulation and not theirs?
The elimination of regulation included in this Bill will allow me
to better see the future opportunities to expand our services in our
Washington operations. Today, the uncertainty and unreasonableness of
regulation makes further investment considerably more risky. It took
our Company ten years to build a data ready network. Regulatory errors
could destroy that in months.
State regulators get many of their misguided notions from the FCC.
Further, they are anxious to fill any vacuums created by less Federal
regulation. Frankly, they are a bigger threat to our companies than the
FCC. Any one of my employees knows better how to meet our customers'
needs than anyone in regulation.
HR2420 also provides the RBOCs with the opportunity to provide
InterLATA data services. This is a good feature that may allow small
ISPs better rates for Internet backbone connections. I note that it
does so while still forcing the RBOCs to meet existing criteria for
entering the InterLATA toll business. The RBOCs will also have to
pursue long distance voice through the 271 process because I know from
my own experience you have to offer one stop shopping.
We do have a request into to Mr. Tauzin's office (attached) to
modify the ISP co-location language. This language takes into account
some challenges our small company members face with accommodating co-
location. We do ask inclusion of that language.
Please let market forces work by passing HR2420 with the requested
ISP Co-Location Amendment.
Thank you.
Mr. Tauzin. Thank you very much, Mr. Haynes.
Next, we are pleased to welcome Mr. Dhruv Khanna, the
Executive Vice President and General Counsel of Covad
Communications, I understand one of the founders of Covad, and
you actually helped create it not even in a pinochle game.
We welcome you, Mr. Khanna.
STATEMENT OF DHRUV KHANNA
Mr. Khanna. Thank you very much. Good afternoon. I am Dhruv
Khanna. I am co-founder and EVP and general counsel. I helped
start Covad from my living room.
Mr. Tauzin. If you can get the mike real close, because we
have got a recorder who has to pick up your words.
Mr. Khanna. I recall sending NYNEX an interconnection
request from my home fax machine on March 7, 1997.
Thank you, Mr. Chairman, and members of the subcommittee.
Thank you very much for the Telecom Act of 1996. But for the
Telecom Act of 1996, Covad would not exist.
When the Telecom Act was being debated in Congress in 1995,
the first of the Internet stocks, Netscape, went public back in
the fall of 1995.
There were a couple of things that we knew. I was in-house
counsel at Intel at the time. I knew about the massive demand
for bandwidth. I knew about the massive PC penetration into the
homes across the United States.
I also knew about the Netscape IPO and about the Internet
revolution that we brewing at the time. I also knew about DSL
technology, a technology that the local phone companies had
hoarded, had put in mothballs, because they did not want to
deploy the service that would radically cut their T1 revenues.
The Telecom Act of 1996 allowed us to break into that
marketplace and compete with the phone companies, and we have
done so reasonably well.
To date, standing here today or sitting here today, Covad
provides service to almost 40 percent of all homes and
businesses in the United States. By the end of this year, we
have gone on record saying it will be 50 percent. By the end of
next year, we have gone on record promising it will be 75
percent of all homes and businesses in the United States.
So I am proud to sit here today and state that our
footprint, our network deployment exceeds that of SBC's and
that of Bell Atlantic with respect to DSL.
While we were busy exercising our entrepreneurial wit and
growing our footprint, the phone companies chose instead to
merge. There was the No. 2 employee at U.S. West, Mr. Bob
Knohling, who decided to quit that company and join Covad as
our CEO.
We recently acquired Blue Star, a small data CLEC based in
the southeast that competes in rural areas with Bell South.
To give you an idea of our growth, we are today one of the
fastest growing companies in the United States. Our quarter-
over-quarter line and revenue growth is approximately 40
percent. We did this, as I said, through our enterprise and
based on the Telecom Act of 1996.
Our footprint dwarfs that of Bell Atlantic and of SBC. We
beat them to marketplace. We were the first to offer two-wire
DSL. We were the first to cut prices. We brought prices down
for consumers, for example, in the U.S. west territory from
$200 a month for ISDM to $20 a month for greater bandwidth.
We are today providing service from almost 2,000 offices
nationwide, and we are today the largest national local
telephone company. Thirty-three percent of our lines are
consumer lines. Even without the implementation of line-
sharing, our consumer base has grown rapidly up from 15 percent
earlier this year, and by next year we expect to see our
consumer business exceed our business business.
Our success has been based on two things that the FCC did
in 1999. The first was cageless co-location. The Telecom Act,
in several places, speaks about non-discrimination. But, sir
and madames, we have been discriminated against.
We were denied cageless co-location by the phone companies
upon request. We were denied line sharing which is something
that the incumbents use to provide data services themselves.
They are able to do so at much reduced costs at a much better
price to consumers because they are able to share lines with
themselves. Our requests for line-sharing were ignored.
We went to the FCC and were successful in persuading the
FCC to take the pro-consumer actions to in fact implement your
intent of nondiscrimination by giving us cageless co-location
and line-sharing, and those are the two devices that have
promoted Covad, have prompted Covad to go into the consumer
space, and we shall soon be competing very vigorously with the
phone companies and the Cable Modem service using our right to
line-sharing, which is something this bill would take away.
This bill would also take away cageless co-location in
addition to line- sharing.
If Congress is serious about bringing broadband services to
rural areas, what Congress should do is to eliminate the
exemption from competition that has been granted to the rural
carriers.
And we would also request that Congress take far more
seriously the enforcement of the Telecom Act as it exists
today. My company has been subjected to not only violations of
the Telecom Act, we have had our contracts breached and fraud
has been committed on our company as well.
There was a central office in Menlow Park in which Mr.
Ellis' company denied us space for over a year-and-a-half. We
proved that. We won a $27.5 million verdict from the
arbitration and that is the first success that we expect to see
in the series of legal actions that we have been forced to
undertake to enforce our legal rights.
Thank you.
[The prepared statement of Dhruv Khanna follows:]
Prepared Statement of Dhruv Khanna, Founder, Executive Vice President
and General Counsel, Covad Communications Company
Thank you, Mr. Chairman for the opportunity to testify today. I am
Dhruv Khanna, Founder, Executive Vice President and General Counsel of
Covad Communications Company. I have one simple and concise statement
to make today: Thank you.
Despite the incessant litigation, despite the seemingly endless
implementation process, and despite the continuing lobbying battles,
the Telecommunications Act of 1996 is a stunning and startling success.
The Act has touched off a boom in telecommunications infrastructure
investment never seen before. Broadband services are being deployed to
residential consumers nationwide. With regard to DSL, now that firms
like Covad can exist and enter the market, there has been a ``Copper
Rush,'' as companies vie to sign up as many DSL subscribers as quickly
as possible. Today, as I testify here, Covad installation technicians
will hook several hundred homes and small businesses to the Internet.
And incumbent giants like SBC, according to their General Counsel's
testimony yesterday before the Senate Commerce Committee, will sign up
between 3,000 and 5,000. To use his words, we can't keep up with
demand.
Consumers have been the big winners under the policies of the
Telecommunications Act. But H.R. 2420--the Tauzin/Dingell bill--would
fundamentally undermine the market-opening, pro-consumer provisions of
the 1996 Act and subsequent FCC rules. This bill is not a ``technical
fix'', as I have heard some folks describe it. Nor is this bill
directed at promoting broadband deployment in rural areas. Make no
mistake--H.R. 2420 is a direct blow to broadband entrants like Covad.
Rather than ``promote deployment,'' the bill would actually stifle
competitive deployment, limit our rights to provide services to
consumers--and would even require us shut down our service to many
homes. And it will not help most rural areas.
The Covad Story
Covad is the nation's largest competitive provider of broadband DSL
services in the United States. Our service is available now in over 70
cities, to over 40 million homes and businesses. That is quite an
accomplishment for a company that didn't exist four years ago.
Immediately after the Act was signed and the FCC issued
implementation rules, I helped found Covad in the Fall of 1996. For
nearly a year, we had no money--and while we were arranging for
financing, I was negotiating contracts with Pacific Bell, Bell Atlantic
and others. I am pleased to report that Covad was the first company in
America to deploy DSL on a commercial basis, back in December 1997.
During our founding, I personally had to answer the questions of
the investment community related to our legal ability to provide DSL
services over leased phone lines. And I had to fight the Bell companies
every step of the way--over our legal rights to lease phone lines and
provide DSL, over arcane collocation rules, and over delays in DSL loop
delivery.
We have aggressively enforced the legal rights Congress, the FCC
and commissions gave to us on behalf of consumers. And the signs of our
success are beginning to show. For instance:
As of June 30, 2000, Covad has over 139,000 DSL lines installed.
Covad service is now available in 35 states, to over 37 million
homes and 4 million small businesses. This represents 38% of American
households.
Next year, Covad DSL will be available to 75% of the homes in
America.
Our deployment footprint reaches far and wide. As a residential
provider, we must deploy in areas far from urban centers. For example,
in the Baltimore/Washington area, Covad's DSL footprint stretches from
Manassas to the Eastern Shore, and from Frederick to Fredericksburg.
Competition is occurring in small towns. Covad recently entered
into an agreement to acquire a company called BlueStar, a DSL provider
that was serving smaller cities in the Southeast--places like Lebanon,
Tennessee, and Easly, South Carolina. Other start-up CLECs, like
NewEdge Networks, are serving places like Durango, Colorado, and
Prescott, Arizona. And NewEdge is just getting started. Entrants like
NewEdge, BlueStar and Covad are in these towns well before the Bell
companies begin to provide service there.
Our market penetration matches up with the offerings of the
telephone companies:
------------------------------------------------------------------------
DSL Lines in
Company Service (March
31)
------------------------------------------------------------------------
SBC.................................................. 201,000
Verizon (Bell Atlantic/GTE).......................... 148,000
Qwest (formerly US West)............................. 136,000
Covad................................................ 93,000
BellSouth............................................ 49,000
------------------------------------------------------------------------
We launched a residential DSL service last year and a substantial
percentage of our users are ordinary folks at home. Residential users
are a key part of our business plan.
Our network build-out proves the genius of the 1996 Act. Indeed,
our network relies heavily upon the unbundling and collocation
provisions of Section 251 of the Act, and we truly appreciate the
efforts of Chairman Bliley, Congressman Tauzin, Congressman Markey,
Congresswoman Eshoo, and other members of this Committee and Congress
who were instrumental in making sure that those provisions became law.
Broadband Deployment is Happening
Covad and other new entrants took a technology that was stagnating
on the shelves of the Bell companies and are using it to breathe new
life into the existing copper loop plant. The Bell companies are now
following us and other new entrants into these new markets. So rapidly,
in fact, that Credit Suisse expects SBC to be adding 15,000 DSL lines A
DAY by the end of the year.
It is very simple to understand how this would happen. Basic
economics tell us that monopolies have the incentive to restrict output
of services and raise prices. This is what was happening with DSL
technology before the 1996 Act--incumbents were selectively deploying
only one form of DSL--called HDSL--and charging businesses upwards of
$1000 to $1500 per month for this ``T1'' service. In the pre-1996,
monopoly era, residential consumers and small businesses were simply
priced out of high-speed broadband services. They were restricted to
dial-up or perhaps ISDN, which left them out of e-commerce.
As the following table shows, since 1996, the price of residential
broadband services has continuously dropped.
Source: ``NxGen Data Research--DSL & Broadband Markets, 1999--
2005'' July 1999
With these price decreases, an entirely new set of small businesses
can now afford dedicated, high-speed connections to the Internet. The
world of ``e-commerce'' is now open to the small, local, family-owned
flower shop, because it can afford to take orders over the Internet.
With a service like Covad SDSL, a start-up graphical design firm can
now send large image files to its clients, without incurring huge per-
minute ISDN bills. And a software programmer can telecommute from home,
and spend more time with his or her family.
In my opinion, Congress should take credit for these steep price
decreases and expanded availability of services. The pro-entry
provisions of the 1996 Act, and the efforts of the FCC and state
commissions to implement those provisions, are changing the lives of
your constituents for the better.
H.R. 2420 Will Not Bring Broadband To Rural Areas
I understand that H.R. 2420 is being touted as a solution to the
rural digital divide. This is simply not the case. Make no mistake,
H.R. 2420 affirmatively undermines key principles of the 1996 Act and
overrules important decisions by the FCC and the states. This bill is
neither a ``technical fix'' nor a reasonably tailored measure to spur
the construction of fiber networks in rural areas--the biggest losers
under H.R. 2420 are data CLECs like Covad.
For instance, H.R. 2420 proposes a new section 232(j)(1)(A) of the
Act that would eliminate linesharing. Linesharing is a vital means of
ensuring that competitive LECs can offer broadband services in rural
areas, where a second standalone line to the home is often not
available. With linesharing, Covad can offer consumers in rural areas--
even areas where the incumbent in not offering advanced services--
access to broadband capability over the existing voice line. Without
linesharing, such rural consumers would have no access to competitive
broadband services.
Allow me to make a few additional points. First, as I demonstrated
above, broadband is being deployed in rural areas. Secondly, there are
only four companies in America that are bound by the interLATA
restriction: Verizon, Qwest, SBC, and BellSouth. In many cases, these
companies do not serve the truly rural areas of a State. Therefore,
waiving the Section 271 requirements will do nothing for consumers in
those areas because the companies that operate there already are free
to offer whatever type of service their customers demand. As an
example, examine the enclosed maps of Ohio and Minnesota. The Bell
company does not operate in the rural areas of the State. It is
abundantly clear that freeing the Bells from their Section 271
obligations will not help the rural customers of those states. And
competitors like Covad often have no legal right to offer service in
those areas.
Remember, any Bell company can operate free from regulation outside
of its serving area. Yet to date, not a single Bell company has
forcefully entered a market outside its territory. Bell companies are
not entering the lucrative urban markets in other serving areas, let
alone rural areas.
In addition, and perhaps most importantly, the FCC has adopted
rules permitting a Bell Operating Company to request a modification of
LATA boundaries in order to provide broadband services in rural
communities. The BOC must simply prove to the FCC that no other
broadband provider is willing or able to serve that rural market, and
that the BOC actually intends to serve the rural community. Again, no
RBOC has taken advantage of this rule. Given these facts, I am forced
to ask if the Bell companies are truly interested in serving rural
America, or if their motives lie elsewhere.
Enforce the Act, Don't Undermine It
Covad operates in the service territory of every Bell operating
company and GTE. When we first started this odyssey in 1996, our
business plan was fairly simple: buy DSL equipment, collocate it in the
central offices of the incumbent, and lease unbundled copper lines from
those central offices to our customers. [Along the way, we have
struggled with repeated breaches by the incumbents of the Act, FCC
rules, antitrust law, and our interconnection agreements with the local
telephone companies.] We have been reasonably successful to date in
getting the FCC and state commissions to pay heed to our concerns over
collocation and loop delivery. These efforts culminated in several
significant rulings and decisions in 1999 and this year.
Section 4(b) of H.R. 2420 would affirmatively repeal several of
those decisions and would preempt the FCC and states from further
addressing competitive concerns that we or other CLECs bring to their
attention. I see no redeeming value to that portion of H.R. 2420--all I
see is Covad and other CLECs left crippled in the marketplace, unable
to grow and succeed.
Even when we get clear rules from the FCC or state commissions,
incumbent telephone companies undermine them at every turn. For
example--
GTE entered into a interconnection agreement with Covad to provide
the 24 hour a day, seven day a week, access to central offices as
required by the FCC's rules. GTE subsequently informed Covad that GTE's
interpretation of ``access'' meant that Covad employees could only do
work necessary to offer service between the hours of midnight and 4 AM.
BellSouth recently informed Covad that it did not have sufficient
collocation space in several central offices to house Covad's
equipment, and it rejected Covad's applications for collocation space
in those central offices. BellSouth then informed Covad that a smaller
amount of space, insufficient for Covad's needs, may be available in
certain central offices, and that Covad should submit new applications
for smaller space. When Covad requested the central office tours to
which it is entitled by FCC rule, BellSouth refused to submit its
central offices to inspection, stating that it had not actually
``rejected'' Covad's collocation applications, but rather had offered a
chance at smaller amounts of space. When the FCC intervened, BellSouth
not only agreed to provide tours, but relented in advance of those
tours and admitted that sufficient space was available.
These are only a few examples of the obstacles that new entrants
like Covad must overcome in order to provide service to your
constituents. In thinking about enforcing the Act, you must keep in
mind that since the incumbent carrier starts with nearly 100% market
share, it wins for each day it delays entry. As a result, when an
incumbent interprets the legal right of ``24/7 access'' to mean
``between 12 am and 4 am'', the onus is now on the entrant to enforce
this legal right in any forum possible. Currently, Covad has pending
two antitrust lawsuits and multiple state and FCC enforcement
proceedings, and enforcement is still not happening fast enough for our
end users, and your constituents.
I would also call your attention to the desires of your state
regulators. At its annual summer meeting this week, the
Telecommunications Committee of the National Association of Regulatory
Utility Commissioners (NARUC) adopted a resolution on broadband
deployment. Specifically, the NARUC Committee, comprised of state
regulators from around the country, called on Congress to leave intact
the market-opening provisions of the 1996 Act. In addition, the
Committee called on Congress and the FCC to utilize enforcement tools
to ensure that Bell Operating Companies and other incumbent LECs
satisfy their obligations under existing law to open their monopoly
territories to competition, which will guarantee all Americans access
to innovative broadband services. Thus, the States are concerned not
that existing laws are insufficient to provide consumers access to
broadband services, but rather that incumbent monopolists are failing
to meet their obligations, delaying competition and denying consumer
choice. NARUC calls on Congress to reassert its dedication to
competition by ensuring the Act is enforced properly, not by undoing
the beneficial market-opening provisions of the Act.
Conclusion
In conclusion, H.R. 2420 would substantially undermine the market-
opening provisions of the 1996 Act. New entrants like Covad are
building business cases around those market-opening provisions of that
Act and are deploying broadband services throughout America to the
benefit of consumers nationwide.
Indeed, the model of collocation and unbundling adopted by the
104th Congress is being emulated throughout the world. Earlier this
month, the European Commission issued a directive that would require
incumbent telephone companies such as France Telecom, BT, and DT to
implement local loop unbundling by the end of the year. Interestingly,
U.S. local telephone companies have actually supported local network
unbundling initiatives abroad--advocating as ``pro-competitive'' the
very same rules that they are trying to eliminate at home. In addition,
U.S. treaty commitments pursuant to the WTO oblige us to unbundle local
networks--a treaty commitment that US trade negotiators are currently
seeking to enforce on other WTO member states.
In conclusion, what stands between the competitive industry signing
up millions of broadband subscribers is not the lack of interLATA
``backbone'' facilities or the ``lack of POPs''--what holds companies
like Covad back is the fact that the incumbent local telephone
companies have not fully implemented the 1996 Act. I urge you to let
competition work. Your constituents will benefit from innovation,
greater choices, and cheaper broadband access. The Telecommunications
Act is working; let it work.
Mr. Tauzin. Thank you very much, Mr. Khanna.
Next is Ms. Cindy Schonhaut. I understand the Executive
Government and External Affairs Vice President for ICG. Have
you just been promoted?
Ms. Schonhaut. No, but last promotion was a tough one to
get. It took a while.
Mr. Tauzin. That is a long title. But welcome and you are
recognized for 5 minutes, Cindy.
STATEMENT OF CINDY SCHONHAUT
Ms. Schonhaut. Thank you, sir.
I am Cindy Schonhaut and I work for ICG Communications. I
am also here representing two trade associations representing
competitors, COMPTEL and ALTZ.
ICG is a competitive local telephone company that has
actually been around since the late 1980's. We started in
Denver, and that is where we are headquartered now.
Myself, I have been in Telecom almost exactly 20 years and
10 of those years, I have worked in local competition. So
myself and the company really do both predate the Telecom Act.
Yesterday I was sitting on the Senate side in Senator
Brownback's hearing on his broadband deregulation bill, and
someone passed me a note and asked me if I could testify here
today because a witness became unavailable.
Well, I really did jump out of my chair because I have been
wanting to talk to this subcommittee for a really long time,
first of all to tell you what I know, and what I have learned
in my experience, and second of all, to also thank you, like
Mr. Khanna did, for the Telecom Act that you passed, not just
because it keeps me employed, although of course I like that,
but also because it has done so much for this country and given
this country an opportunity to see the economic benefits of
competition.
Before the Act passed, there were local competitors. ICG
existed. We could provide very few services to very few people
in very few places. There was no way our industry was going to
survive and really we were not going to be able to thrive at
all.
But we opened up the market, and what we did in return, to
thank you for passing the Telecom Act, is that we instigated
the technological revolution that we have today in
telecommunications. It just would not have happened without
competition.
And that is why I am sort of puzzled by this bill. Because
deregulating the ILECs and the Bell Companies to allow them to
provide data services in order to incent and instigate the
broadband deployment of more data services does not make sense
to me. A monopoly is just not going to do it.
And here is a good example:
When the Act passed, right after the Act passed, Ameritech
came to Colorado and got certified to be a local competitor.
They never did use that certification. And of course they are
not the RBOC there, that is U.S. West.
So Ameritech was thinking of competing in Denver. They
never did it. And when they came along and decided to merge
with SBC, Ameritech said, well, we could not have gone to
places like Denver because we did not have the critical mass
necessary to compete in Denver against U.S. West.
We only had 35 million access lines. When we merge with SBC
and we have 65 million access lines, we will have the critical
mass to come and compete against U.S. West in Denver.
Well you can only imagine how that is received by investors
in my company because we have no critical mass whatsoever. We
are there and we are competing. We are struggling, but we are
going to make it. And an RBOC cannot even comprehend how to go
about doing that unless they have something like 65 million
lines.
Mr. Young says the bill will not deregulate services
because voice services will remain subject to the provisions of
the Telecom Act. But that misses the point.
What is happening right now today is that voice services
are fading, they are going to be given away free. I do not know
if anybody watched any of the NBA games but NetZero was
sponsoring those shows and they said they give away free voice
long distance service. It is already here today.
It is going to be given away free and 90 percent of the
revenue within 3 years in the telecommunications industry is
going to be from data. Data and voice are going to be
intertwined. That is what we are talking about today. Voice
will continue to be regulated but nobody will be using it. So
it is really not a relevant point.
I just want to make one point about the bill, and I am
trying to sort of comprehend how I can persuade you to sort of
wait out until competition does reach all these places with
broadband services.
The problem I see with the bill is that it treats
competitors like we are the problem when we really are the
solution. And I think we have proven that where we compete now,
and we are starting to raise more money and compete further.
I want to speak briefly about interLATA relief. The Bell
Companies know exactly how to get interLATA relief. They know
how to do it. Even SBC did it in Texas. If the Bell Companies
comply with the checklist, they will get interLATA relief, and
my company will be able to succeed.
We both want the same goals. We are not in the long
distance business. I do not care if they provide long distance
service, but I care if they comply with the checklist. And if
they do, my company will succeed.
I have the same goals. I will come here. I will be the
first to tell you they should be allowed to get into long
distance, but they have not made it yet, and it is not in their
business interest to meet it unless you make them, and unless
the regulators that you rely on also make them.
I will just end by saying:
Congress, you created us. You created my company. You gave
us the opportunity. You also have the power to destroy us. And
I am worried about that. And I want you to know that we will be
able to make it. We will be able to become a profitable
industry and survive as long as you do not change the Act.
And I thank you for giving me this time, and I hope that we
have the opportunity to discuss this further.
Thank you.
Mr. Tauzin. Thank you, Ms. Schonhaut.
And now we welcome Mr. Len Cali, Vice President, Federal
Government Affairs, for AT&T Corporation.
Mr. Cali?
STATEMENT OF LEONARD J. CALI
Mr. Cali. Mr. Chairman and members of the subcommittee, it
is a pleasure to be with you today. Thank you for this
opportunity to share AT&T's views.
H.R. 2420 raises an issue of profound interest. We all want
broadband services deployed more quickly, more cheaply and more
broadly.
The question is how best to achieve this outcome. For the
reasons set forth in my written statement, we do not believe
that H.R. 2420 is the right approach. As you consider this
bill, we ask you to consider in particular the following five
points.
First, the marketplace for broadband is working. It is
generating unprecedented investment in new infrastructure and
services, and giving millions of customers new choices, quality
services and lower prices for broadband services.
Today, more than 3 million Americans subscribe to high
speed data services up many fold from just 2 years ago.
Analysts estimate that high speed Internet access will be
available to 54 percent of U.S. households by the end of this
year, and more than 80 percent by 2002.
Dozens of competitive providers have blanketed the Nation
with over one thousand high speed DS3 Internet points of
presence, and nearly 95 percent of Americans now live within 50
miles of one of these competitively provided POPs.
The cable companies have invested more than $36 billion to
date of private risk capital since 1996. And the CLECs have
installed 1400 data switches and laid 162,000 route-miles of
fiber.
This competition has spurred the incumbent local carriers
finally to deploy their decade-old DSL technology. We now hear,
for example, as we have heard earlier, that SBC will devote $6
billion to provide 80 percent of its customers with DSL service
by 2002.
Verizon, formerly Bell Atlantic, will invest $1 billion per
year until 2005 to develop its fiber network. And U.S. West
will expand its DSL services to 30 new cities. And while
deployment is expanding, prices are plummeting, at least where
competition exists.
Bell Atlantic recently announced that it is lowering its
DSL rates from $49.95 to $39.95. Other Bell companies have
similarly slashed prices. In fact, in one instance, Pacific
Bell was charging $89 a month in 1998; today it is charging
$39.
And rural customers have not been forgotten. In addition to
the efforts of the many competitors, satellite providers are
racing to provide high speed Internet access on a national
basis.
For example, Pegasus Communications Corporation has
announced that, in conjunction with direct PC, it will begin to
offer high speed Internet access by satellite to rural
households in the fourth quarter of this year. Pegasus goes on
to state that the service will enable consumers to obtain high
speed Internet connections, ``virtually anywhere in the
Continental United States, no matter how remote.''
There is no public reason to change the rules that have
given rise to these benefits.
Second, these facts confirm that the Bell Companies do not
need long distance relief in order to deploy broadband
services.
Moreover, under the existing law, the Bell Companies hold
the keys to any interLATA authority they desire. The FCC grant
of long distance authority to Bell Atlantic in New York and SBC
in Texas confirms that the requirements of the 1996 Act can be
met if the Bell Company will take steps to open its market.
Third, the proposed interLATA relief would undermine
prospects for local exchange competition by reducing the Bell
Companies' incentives and some of their obligations to open
their markets to competition. This is particularly significant
because, notwithstanding the growth of broadband competition,
the Bell Companies continue to dominate the provision of local
exchange services, particularly for residential customers.
Passage of this legislation would particularly hurt
consumers in the 47 jurisdictions where the Bell Companies have
not yet obtained long distance authority.
If the legislation is enacted, the Bells in those states
would have no incentive to open their markets. As a result,
competitive investment dollars would flow toward New York and
Texas and away from the remaining states where fewer
opportunities would exist.
Fourth, the interLATA relief proposed in this bill would
not necessarily enhance deployment of broadband in the Internet
backbone or anywhere else.
As to the backbone, Bell Atlantic is already affiliated
with GENUITY, SBC with Williams, and U.S. West and Bell South
with Qwest, all of which are existing Internet backbone
providers.
In addition, Bell Companies today can provide connections
between their local exchanges and interexchange carriers who
can then transport traffic across LATA boundaries.
In this regard, the problem is not the LATA boundaries, it
is the inflated prices the Bells insist on charging for those
access connections. Nothing in this legislation would change
that.
Fifth, even if I am wrong on all of the points, this
legislation is overbroad. It would gut the carefully considered
incentive-based structure of the 1996 Act in order to enhance
the extraordinary broadband deployment that is already
occurring. If there is a problem with broadband deployment, the
solution should be tailored to the problem.
The FCC has established an expedited process to target LATA
boundary relief if a Bell Company can demonstrate that such a
modification is appropriate for the deployment of advanced
services. Yet, the FCC has not received any requests for LATA
modifications under this process.
In short, we respectfully urge the subcommittee to promote
continued deployment of broadband that is swift, widespread,
and in a commercially reasonable manner by maintaining the
competitive incentives provided under the 1996 Act.
Thank you.
[The prepared statement of Leonard J. Cali follows:]
Prepared Statement of Leonard J. Cali, Vice President-Federal
Government Affairs, AT&T
Thank you, Mr. Chairman and Members of the Subcommittee, for
inviting me here today to share AT&T's views on H.R. 2420, the Internet
Freedom and Broadband Deployment Act of 1999. I think that most of us
would agree that allowing the competitive marketplace to work is the
best way to spur the widespread deployment of broadband facilities and
services. As a result of the competition generated by the 1996 Act, we
are witnessing unprecedented investment in new infrastructure and
services that is giving millions of consumers new choices, quality
services, and lower prices for broadband services. The success of these
competitive market forces renders this legislation unnecessary. Indeed,
the legislation would jeopardize this remarkable success by disrupting
the careful balance of the 1996 Act, subverting its incentive-based
framework, and undoing the reforms that made this progress possible.
The Broadband Marketplace Is Working
Taking advantage of the new opportunities created by the 1996 Act,
and with increasing certainty about what the Act provides, industry
participants have devoted tremendous resources and staggering
investments to the development and deployment of advanced technologies
and services. These participants include cable companies, competitive
local exchange carriers, satellite providers, wireless providers, and
the incumbent local phone companies. There is, in fact, a broadband
race underway that is perhaps the most significant development
resulting from the 1996 Act, and one that is having a very real impact
on consumers. Prior to enactment of the 1996 Act, there were only a
handful of potential local exchange competitors, and incumbent local
companies only offered consumers access to the Internet via dial-up
access or an expensive T-1 line. Today, as a result of the growth of
investment and competitive activity during the last four years, many
consumers can choose to access the Internet using competing and high-
speed technologies, such as those offered by DSL, cable modems,
satellite, and fixed wireless offerings.
The cable industry provides a particularly compelling illustration
of how the 1996 Act and the marketplace is supposed to work--and how it
is in fact working. Cable had long been viewed as a likely potential
facilities-based competitor to local telephone monopolies, because of
its widespread deployment of facilities to residential customers across
America. Until the Act, however, cable companies evidenced little
interest in competing with the local telephone monopolies (and the
local telephone companies likewise seemed content to avoid competing in
the video distribution business). Because of the 1996 Act, this is now
changing rapidly, to the benefit of consumers. Led by AT&T's massive
investments, cable facilities are being upgraded and the services
offered over those facilities are expanding. Indeed, it is now safe to
conclude that cable companies represent the single most promising hope
for facilities-based competition in local telecommunications for
residential users--precisely as Congress hoped and expected.
In particular, the cable industry has taken a leadership role in
bringing broadband offerings to residential consumers and has more than
2 million cable modem subscribers today. Cable modems will be available
to 54 percent of U.S. households by the end of this year, and more than
80 percent by 2002.\1\ Cable modems provide Internet access at speeds
up to 100 times faster than dial-up telephone modems. Since 1996, the
cable industry has invested more than $31 billion--and the number is
growing everyday--to enable this technology by rebuilding cable plant
and making cable facilities two-way interactive systems through the use
of hybrid fiber coax networks.\2\ Analysts project that 7,500 high-
speed cable modem service subscriptions are being added every day in
North America, with an overwhelming majority of those in the United
States.\3\
---------------------------------------------------------------------------
\1\ Morgan Stanley Dean Witter, The Broadband Report, May 1 2000,
p. 8.
\2\ Remarks of James Ewalt, Vice President of Public Affairs,
National Cable Television Association, to the Economic Development
Forum, Economic Development Administration and the U.S. Conference of
Mayors, Albuquerque, New Mexico, June 1, 2000.
\3\ C.E. Unterberg, Towbin, Broadband Communications Providers,
June 14, 2000, p. 8.
---------------------------------------------------------------------------
Fixed wireless providers, including companies such as AT&T,
Winstar, Nextlink, and Teligent also are investing significant
resources to develop technologies that will use radio frequency to
transmit large amounts of data and permit American businesses and
consumers to obtain high speed Internet access. Broadband satellite
providers are also competing to provide high-speed Internet access.
Gilat-To-Home, in partnership with EchoStar, will begin offering two-
way broadband Internet service later this year,\4\ and DirecPC is
working with a number of ISPs in providing high-speed Internet access
service.\5\ In fact, Pegasus Communications Corp. has announced that,
in conjunction with DirecPC, it will begin ``to offer high-speed
Internet access by satellite to rural households in the fourth
quarter'' of this year, that the service will have ``full two-way
satellite Internet access'' beginning in 2001, and that the service
``will enable PC users to obtain high-speed Internet connections
virtually anywhere in the continental United States, no matter how
remote.'' \6\
---------------------------------------------------------------------------
\4\ Reuters, ``EchoStar invests in satellite Net service,'' CNET
News.com (April 10, 2000) <http://news.cnet.com>.
\5\ Jim Hu, ``AOL Speeds Towards Satellite Service,'' CNETNews.com
(May 31, 2000) <http://news.cnet.com>; Erich Luening, ``Juno, Hughes
team on Net satellite service,'' CNETNews.com (July 12, 2000) <http://
news.cnet.com>.
\6\ ``Pegasus to offer satellite internet access,'' (July 20, 2000)
<http://www.direcpc.com/consumer/scoop/pr14.html.>
---------------------------------------------------------------------------
In addition, competitive local exchange carriers that have come to
be known as ``data LECs'' or ``DLECs'' are rapidly deploying DSL
technology for high-speed Internet access. (See attached chart of
annual investment in infrastructure.) As of June 2000, more than one
million Americans subscribe to DSL services provided by competitive and
incumbent local exchange carriers, and analysts project that number
will exceed 2.1 million subscribers by year's end.\7\ The analysts also
tell us that DSL service should be available to over 36 percent of U.S.
homes by year-end, and 65 percent in 2002.\8\ As of the end of the
first quarter of this year, three of the top eight DSL service
providers are competitive carriers, representing 22 percent of DSL
subscribers. Some of these companies, like Covad Communications, did
not even exist prior to enactment of the 1996 Act.
---------------------------------------------------------------------------
\7\ Telechoice, One Millionth DSL Customer!!!, June 6, 2000; see
also C.E. Unterberg, Towbin, Broadband Communications Providers, June
14, 2000, p. 7 (DSL Line Chart).
\8\ Morgan Stanley Dean Witter, The Broadband Report, May 1 2000,
p. 8.
---------------------------------------------------------------------------
All this investment in broadband facilities and services has served
as a powerful competitive spur to the incumbent telephone companies,
multiplying the benefits of the investment across platforms and
services and driving down prices. DSL technology has existed for more
than 10 years, but until recently the incumbent monopoly telephone
companies had no incentive to deploy it. Spurred by growing broadband
competition, however, the incumbent carriers have responded with their
own burgeoning DSL deployment in the past 18 months. For example, SBC
announced last October that it will devote $6 billion to provide 80
percent of its customers with DSL service by 2002. Bell Atlantic has
also announced that it will invest $1 billion per year until 2005 to
further develop its fiber network. And just last month, US West
announced that it was expanding its DSL service to 30 new cities.\9\
---------------------------------------------------------------------------
\9\ US West News Release, US West Jumps Out of the Blocks in the
Race to Speed Super-Fast Internet to Mass Market-30 New Cities, Hot
Multi-Media Portal & World's Fastest Man, June 19, 2000.
---------------------------------------------------------------------------
Developing competition is not only driving the incumbent carriers
to deploy DSL, but where competition exists, it is also forcing the
incumbent carriers to reduce their DSL charges to consumers. Bell
Atlantic, for instance, just announced that it is lowering its DSL
rates from $49.95 to $39.95 per month. Other Bell companies have
similarly slashed their charges, with one Bell company having been
forced to reduce its monthly charge from $89 in 1998 to $49 in 1999 and
again to $39 in 2000. (See attached chart of RBOCs DSL pricing
changes.) While these companies might be commended for these efforts,
it is only the growth of competition since 1996--and the prospect of
greater competition--that is driving these aggressive roll-out
strategies and price reductions.
That kind of competitive marketplace response is good for
consumers, good for the economy, and good for public policy.
Unfortunately, the incumbents' response to this unprecedented
competition has not all been to the good. The incumbent monopolies are
leading the charge for new regulations that would free them from their
market-opening obligations, hamstring new competitors, and otherwise
delay or prevent the 1996 Act's promise of local telephone competition.
The bottom line is that market participants in all regions of the
country have greatly increased their deployment of various broadband
technologies. This competition means more choices and lower prices--
clear evidence that the marketplace is meeting the very needs that this
bill seeks to address. The deployment to date has required vast sums of
capital that companies have been able to raise in the marketplace
because of the growing regulatory certainty and framework provided by
the 1996 Act. Congress should not jeopardize the further deployment of
these technologies nor the competition that exists today by passing
legislation that would re-open the 1996 Act and undercut its incentive-
based framework.
InterLATA Data Relief Is Not Necessary for the Deployment of Broadband
Facilities and Services
Just as the market, under the auspices of the 1996 Act, is
fostering competition in the deployment of broadband facilities ,
interLATA data relief is also not necessary to ensure adequate
investment in broadband backbone facilities. There are ample backbone
facilities throughout the United States and a wide variety of
companies, including Qwest, Level 3, Williams, Cable and Wireless,
Global Crossing, and NEXTLINK, that are currently adding fiber and
deploying new transmission technologies to expand the capacity of
existing networks. For example, Qwest recently announced that it had
completed construction of an 18,500 mile fiber network connecting 150
cities in the United States.\10\ Level 3's high-speed network has over
16,000 miles of fiber optic lines and connects 50 U.S. cities.\11\ In
1999 alone, twelve new companies began providing national Internet
backbone services, for a total of 46 providers in the United
States.\12\ There is no support for the claim that section 271 is
somehow depriving the country of needed backbone capacity.
---------------------------------------------------------------------------
\10\ Qwest News Release, Qwest Communications Completes 18,500 Mile
Nationwide Network and Shifts Construction to 25 Local Fiber Networks,
Sept. 13, 1999.
\11\ ``Teligent to Buy Network Services from Level 3
Communications,'' CNETNews.com (May 9, 2000).
\12\ Boardwatch Magazine's Directory of Internet Service Providers
(11th ed., 1999).
---------------------------------------------------------------------------
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 (as
depicted in the attached maps of the United States). 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.
In all events, this legislation is unnecessary because, under
current law, the BOCs themselves hold the key to obtaining the
authority to provide any long distance service by opening their local
markets to competitors. For example, in December, the FCC granted Bell
Atlantic permission under Section--271 of the Act to provide interLATA
service in New York. More recently, the FCC also granted SBC approval
to provide interLATA service in Texas. 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 immediate interLATA data relief without regard to the
development of local competition would harm the very competition that
Congress is seeking to promote. As this Subcommittee 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 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 travelling 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 did not understand and intend
for the interLATA restriction to extend to broadband or advanced data
services. Even Section 271 itself acknowledges and accommodates
concerns with Internet access. Specifically, Section 271(g)(2) of the
Act carves out incidental interLATA services that may be provided by
the BOCs without FCC approval, including ``Internet services over
dedicated facilities to or for elementary and secondary schools.''
These were the only Bell company Internet services that were exempted
from the interLATA restrictions of Section--271. Other provisions of
the Act, such as Sections--230 and 254(h)(2) and associated conference
report language, also acknowledge and accommodate concerns relating to
the ``Internet'' and ``advanced services.''
Too much remains to be done for Congress now to reopen the Act and
remove or lessen the incentives provided by Section 271. The Bell
companies and GTE continue to dominate the local exchange market,
particularly 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, H.R. 2420 would
substantially reduce the likelihood that this dominance will end.
In particular, passage of this legislation would harm consumers in
the 47 jurisdictions where the Bell companies have not yet sufficiently
opened their local markets to obtain interLATA authority. Recent press
reports indicate that other Section--271 applications may soon be
filed.\13\ 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.\14\
---------------------------------------------------------------------------
\13\ Communications Daily, Bell Companies Predict Increase in Sec.
271 Applications, July 10, 2000.
\14\ Mike Mills, ``Holding the Line on Phone Rivalry; GTE Keeps
Potential Competitors, Regulators Price Guidelines at Bay,'' Washington
Post, Oct. 23, 1996, at C12.
---------------------------------------------------------------------------
The bill's attempt to ``limit'' the interLATA relief to data
transmissions would, moreover, be unavailing. With the growth of
services like IP telephony, the functional distinctions between
``voice'' and ``data'' services will start to break down. From a
practical standpoint, even if the distinction remained clear, there is
no effective way to determine whether the BOCs are transmitting only
interLATA data. The data ``exception'' 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.
Weakening the ILECs' Obligations to Provide Unbundling and Permit
Resale Are Not Necessary to Encourage Them to Deploy Last Mile
Broadband Facilities
The aggressive deployment of broadband facilities by a wide range
of providers confirms that, notwithstanding their claims to the
contrary, the Bell companies do not need regulatory relief to encourage
them to deploy last mile broadband services. Under the spur of
competition--indeed, only under the spur of competition--the Bell
companies are already investing in broadband facilities and services.
There is no evidence that the ILECs' obligations to provide unbundled
network elements and permit resale of services has hindered the
deployment of advanced facilities and services. To the contrary, full
implementation and enforcement of Sections 251 and 252 are necessary to
promote the widespread and rapid deployment of broadband services by
competitive LECs. And there is no evidence that the 1996 Act or the
regulatory structure built upon it has discouraged the ILECs from
investing in broadband facilities. Indeed, as I detailed above and FCC
reports confirm, the ILECs are investing substantial sums in broadband
technologies in response to the competitive forces unleashed by the
Act.
Significantly, under the FCC's existing rules, ILECs generally are
not obligated to offer unbundled access to packet switching and
advanced services equipment, including digital subscriber line access
multiplexers (``DSLAMs'') and routers used to provide DSL service.
Although AT&T disagrees with the FCC's legal and policy determinations
in this regard, it is clear that the FCC has provided the ILECs
significant regulatory freedom in connection with advanced services and
facilities. Extending such an exemption even further, to facilities
that are used both to provide basic telecommunications and advanced
services--as the bill would do--would permit ILECs to leverage their
legacy market power in basic services to achieve dominance in the
provision of advanced services, by denying competitive carriers access
to these facilities. These are not hypothetical concerns. Pacific Bell
has been required by an arbitration board in California to pay
competitive DSL provider Covad Communications $27.2 million because the
ILEC violated the Communications Act by failing to timely deliver
collocation space and operable loops.\15\ In Texas, another arbitration
board ordered Southwestern Bell to begin processing Covad's and ACI's
requests for DSL provisioning immediately and ultimately imposed a
$850,000 fine on Southwestern Bell for abuse of the arbitration
process.\16\
---------------------------------------------------------------------------
\15\ Covad News Release, ``Covad is Awarded $27.2 Million in
Arbitration Against Pacific Bell,'' May 16, 2000.
\16\ John Barland, ``SBC Record Dump Draws Feds' Probe,''
CNETNews.com (November 8, 1999); Covad News Release, ``Businesses and
Consumers Win in Minnesota and Texas,'' December 2, 1999.
---------------------------------------------------------------------------
As written, the bill could ultimately exempt even the most basic
network elements from the 1996 Act's market opening requirements, if
these elements are used to provide high speed data services. Such a
result would undermine one of the cornerstones of the Act, by enabling
incumbent carriers to avoid the fundamental obligation to open up their
networks to competitors. Consumers should not, and as described earlier
need not, be forced to pay such a high price for the deployment of
advanced facilities and services.
Conclusion
The marketplace for broadband offerings is working. Increasingly,
consumers throughout the Nation are enjoying the new technologies and
lower prices for broadband services that competition provides. As a
result, there is no need for this legislation. Moreover, because the
Bell companies continue to dominate the provision of local exchange
services, 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, and that have
led to the burgeoning broadband competition that we are witnessing
today. There is no public interest reason to do this. Rather than
eliminate the most important incentive for the Bell companies to open
their local markets, Congress should give the process that it
established in the 1996 Act an opportunity to continue to work.
[GRAPHIC] [TIFF OMITTED]66467.001
[GRAPHIC] [TIFF OMITTED]66467.002
[GRAPHIC] [TIFF OMITTED]66467.003
[GRAPHIC] [TIFF OMITTED]66467.004
Mr. Tauzin. Thank you very much, Mr. Cali.
And finally, Mr. Steve Pociask, Executive Vice President
and Chief Economist of Joel Popkin & Company here in
Washington, DC.
Mr. Pociask?
STATEMENT OF STEPHEN B. POCIASK
Mr. Pociask. Mr. Chairman and members of the subcommittee,
thank you for inviting me here today to give my views on the
Internet market and broadband competition.
In our study, entitled ``MCI WorldCom's Sprint Toward
Monopoly'' published by the Economic Policy Institute, Dr. Jack
Rutner and I find InterLATA data restrictions to be a barrier
to entry, in effect contributing to the concentration of the
backbone market.
The first chart in my written testimony, over here to the
side of the room, by various measures, show that much of the
Internet is in the hands of a few backbone providers.
That is not due to the lack of desire among potential
entrants. In general, barriers act to maintain market power,
restrict supply, and increase market prices.
Our study finds evidence of anticompetitive effects in the
Internet backbone, and I would direct you to my written
testimony for examples of rejected orders of high speed
circuits, degraded service quality, price discrimination and
problems with cooperative interconnection.
These problems negatively effect small ISPs, rural ISPs,
and ultimately their customers. Now, do not get me wrong. Big
can be good.
And if you look at the second chart here.
[Charts shown.]
Mr. Pociask. When increases in the volume of production
lead to falling per-unit costs, large firms can be more
efficient. This is commonly referred to as economies of scale.
However, as the next chart shows, the reality is that
prices are upward sloping with respect to size, not downward
sloping, as you would expect in a competitive market.
This is the result of network effects where dominant
backbone providers have no incentive to cooperatively
interconnect with smaller ISP networks.
Since large backbone providers see their networks as more
valuable, they demand higher prices from smaller backbone
providers and ISPs. Thus, large Internet backbone providers
have an advantage, not from productive efficiencies and not
from economies of scale, but from their ability to extract
value from not interconnecting with smaller firms on equal
terms.
These network effects lead to tipping whereby large firms
stay large and small firms stay small. The interLATA
restrictions contribute to this problem by limiting supplier
choice.
The final piece of evidence that the market is not
competitive is demonstrated on the last chart, which shows the
super normal profits of the large three interstate backbone
companies.
This chart shows that the earnings-to-assets ratio has been
going up rapidly, compared to that of other non-financial
corporations.
In economics, high profits normally attract entry and lower
prices, but this is not the case of the interstate backbone
market of voice and data where interLATA restrictions prevent
market entry.
So I ask you, does this look like an industry that needs
protection? H.R. 2420 will encourage the RBOCs to invest in
backbone facilities and interstate points of presence.
Interestingly enough, what I see is that once these
investments become sunk, the desire to leverage their presence
beyond the local market into a full range of telecommunications
services should increase.
Therefore, the RBOCs will urgently seek Section 271
approvals. After all, the $105 billion long distance market is
a much greater prize in the smaller $6 billion wholesale
broadband market that we see in the backbone.
As fast as the Internet market is growing, the market is
big enough for all comers. As far as local competition is
concerned, the State regulators still have Section 251 to open
things up.
Consumers should have more choice. Having interLATA data
relief gives customers choice, and that is why I support H.R.
2420. Permitting full ownership of investments will keep costs
lower and lead to higher broadband penetration.
Let me explain to you why low regulatory costs are very
important here.
Broadband services appear to be much more price-sensitive
than telecom services, like local services. What that means is
that small increases in taxes or regulatory costs will have
large decreases in economic benefits. They can have very big
impacts in reducing the number of subscribers.
On the other hand, reductions in regulations, such as those
proposed in H.R. 2420, will have large stimulative effects and
therefore huge economic benefits or consumer benefits.
You have seen the empirical evidence today. Regulations
need to stop protecting competitors. Instead, they need to
promote competition and the market will do the rest and
consumers will benefit.
In closing, I support H.R. 2420.
Thank you.
[The prepared statement of Stephen B. Pociask follows:]
Prepared Statement of Stephen B. Pociask, Executive Vice President and
Chief Economist, Joel Popkin and Company, Washington, DC
Mr. Chairman and members of the subcommittee, thank you for
inviting me here today to give my views on the Internet market and
broadband competition.
Strong Demand with Restricted Supply
The Internet economy is growing by some reports at 1000% per year,
fueling economic expansion, job growth and productivity improvements.
Internet Service Providers (ISPs) provide consumers with access to
entertainment, communications and information in the form of data or
news. The problem with the Internet does not stem from a lack of
demand, but a problem with supply in the Internet backbone. Let me
explain.
The current interLATA data restrictions on the RBOCs result in
reduced market entry. In general, barriers to entry concentrate
capacity in the hands of a fewer producers. This leads to supply
shortages and usually results in price increases. This is exactly what
Dr. Jack Rutner and I have observed with respect to the Internet
backbone market, in our book entitled ``MCI WorldCom's Sprint Toward
Monopoly'' and published by the Economic Policy Institute.
Specifically, we find that interLATA data restrictions are, in effect,
entry barriers that support the concentration in the backbone market,
maintain market power, lead to restricted supply, and likely higher
prices to ISPs and ultimately consumers.
Besides higher prices, Internet consumers are not getting the
quality services they desire. Estimates show that consumers are
spending nearly one-third of their time waiting for computer screens to
fill. Consumers are abandoning their online shopping carts,
disconnecting, reconnecting and reloading screens. It's a little
reminiscent of long lines in the old USSR. There's lots of demand, but
supply is controlled and regulated.
Market Barriers Always Hurt Consumers
The justification for the barriers is not based on enhancing
consumer benefits. It is based on protecting competitors. It is also
not based upon normative economic evidence--there is no empirical
evidence to support these regulatory barriers to entry. Instead, it
originates from an archaic regulatory mindset that comes out of a
consent decree placed upon AT&T eighteen years ago. That decree
divested, most notably, AT&T's circuit switched voice
telecommunications operations based on whether or not voice traffic
remained within designated geographic boundaries. That distinction of
local and long distance for circuit switched voice traffic is still in
use today, at least in the U.S. Amazingly, the distinction is being
used to justify the entry barriers for the RBOCs into new markets,
while no restrictions apply to AT&T.
In general, an Internet online session does not require a telephone
to call out. It does not require a circuit-based switch. It does not
even require a called-party at the other end. Unlike toll, it does not
result a billable conversation minute. It is not a toll service.
The result of interLATA data restrictions is evident in a highly
concentrated Internet backbone market. The first chart shows the high
concentration for frame relay services and for ATM services. These are
services that are provided to predominantly large business enterprises.
The chart also shows the high concentration in the Internet backbone
market, as measured by the market share of ISP connections and backbone
revenues. In short, by the various measures shown here, much of the
Internet backbone is in the hands of a few providers. This is not due
to a lack of desire among potential entrants. It is not market failure.
It is the interLATA data restrictions that have contributed to the
concentration in the Internet backbone market.
[GRAPHIC] [TIFF OMITTED]66467.005
This market concentration is significant. By calculating
industry concentration indexes and using the Department of
Justice's (DOJ) Guidelines, we find the data backbone market to
be highly concentrated, as defined by the DOJ. This conclusion
reflects today's market conditions and is consistent with the
DOJ's recent complaint regarding the MCI WorldCom proposal to
merge with Sprint.
Concentration can lead to anti-competitive effects,
particularly when entry barriers prevent the market from being
contestable. High prices, restricted demand and increased
profits are all symptomatic of anti-competitive effects.
There is mounting evidence that large Internet backbone
providers place strict conditions for interconnection to
smaller ISPs. Large Internet backbone providers charge smaller
ISPs for interconnection, provide smaller ISPs with lower
quality of service and price discriminate against smaller ISPs.
In our study, we cite some of this evidence, including that
large Internet backbone providers provide poor service quality,
delay service repairs and reject orders for high-speed
connections.
As for cooperative interconnection, we conclude that larger
Internet backbone companies are reluctant to interconnect with
smaller ISPs. While providing free-peering among themselves,
large Internet backbone companies charge smaller ISPs for
transit, and smaller ISPs who can't pay the transit must
complete their traffic at congested public peering points.
Those that pay transit charges often complain
about degraded services that sets them apart from the services
provided by the Internet backbone provider's own ISP. In our
study, we quote a Yankee Group report that one ISP claimed to
have 50% of its DS3 orders rejected and another ISP cited
delays in OC-3 orders that exceed three-months.<SUP>1</SUP> In
short, congested Internet service, higher circuit costs and
lack of capacity, keep smaller ISPs small. Furthermore, rural
customers are less likely to have access to high-speed hubs and
their ISPs tend to pay more for connections to the Internet.
---------------------------------------------------------------------------
\1\ MCI WorldCom's Sprint Toward Monopoly, Stephen Pociask and Jack
Rutner, Economic Policy Institute, Washington, DC, 2000, p. 27.
---------------------------------------------------------------------------
Are Large ISPs Just More Efficient?
Let's take a look at Chart 2. When increases in the volume
of production lead to falling per unit costs, large firms can
be more efficient. This second chart shows what is commonly
referred to as economies of scale. In this case, Internet
backbone firms that connect more ISPs to the Internet can have
lower costs per connection. If this were the case and if the
market were sufficiently competitive as some claim, then prices
should be normally aligned with costs. Therefore, we should
expect to see larger firms with some price advantage, which
would possibly explain how these large backbone providers
continue to hold onto their market share.
[GRAPHIC] [TIFF OMITTED]66467.006
However, as Chart 3 shows, the reality is that prices are
upward sloping with respect to size, and not downward sloping,
as we would expect in a competitive market. This is the result
of ``network effects'' where dominant backbone providers have
no incentive to cooperatively interconnect with smaller ISP
networks. Since large backbone providers see their network as
more valuable, they demand higher prices from smaller backbone
providers and ISPs. Thus, large Internet backbone providers
have a cost advantage not based on productive efficiencies and
not based on economies of scale, but the ability of dominant
firms to extract value by not interconnecting with smaller
firms on equal terms. These network effects lead to ``tipping''
whereby large firms stay large, and small firms stay small.
Thus, larger Internet backbone providers can charge ISPs more
for Internet connections and not worry about losing market
share. This is market dominance. The interLATA data
restrictions contribute to this problem.
[GRAPHIC] [TIFF OMITTED]66467.007
The final piece of evidence that the market is not
competitive is demonstrated in the last chart, which shows the
supernormal profits of the largest three interstate backbone
companies. We show earnings (measured in what Wall Street
analysts call EBITA--earnings before interest, taxes
depreciation and amortization) on tangible assets compared to
non-financial corporations. Chart 4 shows that the earnings-to-
assets ratio has been going up rapidly compared to that of
other non-financial corporations, whose rates of return have
been essentially flat in the same period. In economics, profits
attract new entrants and should result in lower prices that
bring returns toward normal levels. But this is not the case
for the interstate backbone market (voice and data), where
interLATA restrictions prevent market entry.
[GRAPHIC] [TIFF OMITTED]66467.008
H.R. 2420 provides for interLATA data relief. The passage
of the bill will encourage the RBOCs to invest in backbone
facilities and interstate points of presence. Interestingly
enough, once an RBOC invests, its costs become sunk, and so the
desire to leverage its presence beyond the local market and
into a full range of telecommunications services should
increase. If that is true, then the RBOCs will want Section 271
approvals more urgently than before, rather than less urgently.
After all, a $105B long distance market is a much greater prize
than a smaller $6B wholesale backbone market. In any case, as
far as local competition is concerned, state regulators will
use Section 251 to keep the RBOCs firmly moving toward open
markets, regardless of their investment decisions.
What's the Worse that Can Happen?
Let's say, hypothetically, that the RBOCs turn out to be
miserable failures as an Internet backbone provider. Then,
there is no harm done to consumer or existing producers. So
there is no risk to the market if the RBOCs are inefficient,
have high costs or provide low quality of service. In the end,
the market will determine the efficient quantity and price.
Let's examine the other extreme. Let's say the RBOCs are
wildly successful and consumers demand their services. The
result would be a dramatic increase in consumer benefits. This
can only happen if the existing firms currently charge higher
prices or have poor service quality. Why protect the
inefficient at the expense of consumers?
The fact is that the demand for Internet service is growing
at 1000% per year by some accounts. So the existing backbone
companies will have plenty of opportunity to win over
customers, regardless of how the RBOCs ultimately fare. Keep in
mind that the RBOCs have 0% market share in the Internet
backbone market and pose little threat to efficient providers.
At this growth rate, the market is big enough for them all.
In Summary, Put Consumers First
Total consumer welfare can only increase when competition
increases by natural market forces. Consumers should have more
choice. Having interLATA data relief gives customers choice and
that is why I support H.R. 2420. Regulations need to stop
protecting competitors. Instead they need to promote
competition. The market will do the rest and consumers will
benefit.
In closing, I favor competition for determining market
share and production decisions, and I oppose rules that
preordain winners and losers. Therefore, I support H.R. 2420.
Mr. Tauzin. Thank Mr. Pociask.
The Chair recognizes himself and members in order for 5
minutes.
Let me first of all make the argument, Mr. Pociask, the
opponents of 2420 made.
And that is, even though the bill specifically retains the
requirements on the Bell Companies that they open up their
markets in order to get into the long-distance market, which as
you point out is worth $105 billion, even though the incentives
are still in the bill to open up the market to get to this $105
billion long distance market, they argue that if we give
interLATA data relief through this bill that somehow this $6
billion wholesale backbone market is going to eliminate the
incentive for the Bell companies to continue their progress on
271 petitions and open up their local markets.
You say that is poppycock.
Mr. Pociask. In fact the opposite may be true because----
Mr. Tauzin. Could you pull the mike a little closer, Mr.
Pociask, so we can hear you?
Mr. Pociask. In fact, the opposite may be true because once
you begin building out interstate facilities and points of
presence, the want to provide the full range of services
increases. So to that extent it may be an incentive to build
out.
Mr. Tauzin. Your argument is that once they have sunk all
the money they have to sink into building Internet backbone
facilities for the broadband market that currently is worth
considerably less than the long distance voice market, that
they will be incentivized to maximize profits from that
investment by completing their efforts to get 271 relief?
Mr. Pociask. That is exactly right.
Mr. Tauzin. And therefore the bill will actually serve as
an incentive for the Bell companies to continue opening up
their local markets.
Is that right?
Mr. Pociask. That is right.
Even if it is not the case, 251 is still there to make sure
Mr. Tauzin. It is still there.
You make a heck of an analogy in your written statement. I
want to read it.
You indicate that fully one-third of the customers today
are spending fully one-third of their time, rather, waiting for
computer screens to fill because they are at low speed and
cannot get high speed services.
And you make a point that customers are abandoning their
on-line shopping carts, they are disconnecting, reconnecting
and reloading screens. It is a little reminiscent of the long
lines in the old USSR. Lots of demand but supply is controlled
and regulated. Big lines at the supermarkets but no cabbage or
potatoes in the store.
Mr. Pociask. Thirty-one billion dollars of lost time is
taken up on the Internet.
Mr. Tauzin. And you also conclude, in your economic review,
that the current interLATA data restrictions are entry barriers
that support the concentration of ownership in the backbone,
which you point out is very high.
They maintain market power in those concentrations and they
lead to restricted supply, likely higher prices to ISBs, and
therefore ultimately to consumers.
Do you conclude that this bill is very definitely pro-
consumer?
Mr. Pociask. Absolutely.
Mr. Tauzin. Let me turn to you, Mr. Cali, to questions
submitted by a colleague who cannot be here, and he asked me to
ask it of you:
In your testimony, you argue in favor of each of the
regulatory requirements, including the interLATA data
restrictions that currently exist in the law this bill would
repeal. You argue that the ILECs should continue to face them
until they finally get 271 relief.
The question is. As the industry increasingly converges
around similar products and services, you, AT&T, are in fact
providing many of the same services to your own customers by
cable modem but you are not saddled with the same regulatory
burdens.
And the question is. If you do believe that the presence of
these regulations is essential for the Bell companies, why
wouldn't you want those same regulations applied to your
company when you provide the very same services?
Mr. Cali. Okay. Let's look at why the regulations were
applied.
But if I may, first, so we are careful not to overstate the
regulatory burden on the Bell companies, let me make clear that
the FCC has been very careful to ensure that there is some
flexibility for the Bell companies when providing advanced
facilities and services.
Consequently, packet switching and data facilities, such as
the D-SLAM, are not subject to the unbundling obligation. And
when a Bell company provides advanced services through a
separate subsidiary, it is treated like a CLEC in terms of
obligations.
With that said, you are quite correct. There are a number
of obligations imposed on the Bell Company designed to open
their local telephone markets to competition. Those obligations
were imposed in an effort to erode a near century old, very
resilient monopoly, one that persists to this day; that is, a
good public policy goal.
The long distance restriction, in particular, was needed to
provide incentive to the Bell companies to give up this
monopoly, to provide them some reward for opening their
markets. These are good goals.
In addition, when on recognizes, as Verizon has done in New
York and SBC has done in Texas, that the path to parity, or the
keys to long distance relief lay with the RBOCs, and that those
keys will also unlock the local telephone markets to
competition, there is good public policy reason to pursue those
goals.
Mr. Tauzin. And so you think they still ought to be applied
to the Bell companies but not to AT&T when it provides the same
service.
I just want to make a point because my time is up.
Mr. Cali. Sure.
Mr. Tauzin. I had this conversation with FCC officials just
recently.
I think we can each draw our own conclusions from the New
York and Texas experiences. It is possible, as Chairman Bliley
did, to conclude that finally the Bell Company in New York and
Texas opened up their markets enough for the competitors to
really go after the residential customers finally, and
therefore they are doing it today.
It is equally possible to conclude that competitors who
could have gone after the residential customer withheld doing
so until they had to, until it was very clear that the Bell
Company was going to get its relief in Texas and in New York.
And therefore this question arises, and I will just leave it as
a rhetorical question for the record, because my time has
expired.
If in fact, when 271 relief is finally granted on voice,
which is a bigger market as Mr. Pociask points out, the
competition really heats up at that point.
If I am right in my conclusion, and if the FCC speeded up
the process of 271, we would already have healthy competition
for residential customers going on right now, because you guys
would have to be competing in all markets.
I think Mr. Pociask is equally correct, that if we are
smart enough to pass this bill, we are going to get more
incentives for full blown competition, not less, because that
is the nature of removing barriers to entry.
Mr. Pociask, I think you put your finger on it. Entry
barriers protect competitors, they do not protect consumers.
There is no case I can make for keeping stores out of my town
in an effort to protect my consumers. I can make a huge case
for bringing more stores and more competition into my town. But
I find it very difficult to argue in preserving restrictions on
one competitor, helping my consumers get a better deal. That is
the problem with the current law.
And I finally want to say, if, in fact, we are really going
to get 271 relief over the next 12 months to 18 months for
everybody in America, as the FCC is now saying is possible, if
that really is going to happen, then it is time for us to cut
this thing lose and let competition flow.
The Chair will yield to the gentleman from Texas, Mr.
Green, for a round of questions.
Mr. Green. Thank you, Mr. Chairman.
I was surprised I was the only Democrat left here.
Mr. Tauzin. Let me again say, I want to recognize again
that we have excused members to attend that memorial service.
And I want to apologize to any members who had to leave and
could not hear this testimony but we were obliged to do so
because we have some witnesses who have schedule arrangements,
and I wish you would convey that to any member who might have
been offended by our decision.
Mr. Green. No problem, Mr. Chairman. In fact, for our
colleague on our committee, Bart Stupak, there is a memorial
service, although I was actually on the floor on the rule a few
minutes ago, and I appreciate the forbearance of our panel.
Mr. Ellis, first I want to congratulate you on SBC's 271
application and hopefully your approval will be used as an
example for future 271 applications and allow the FCC to
expedite what so far has been a very laborious approval
process.
And I know the committee shares that desire, having watched
that experience.
In reference to your 271 approval in Texas, if H.R. 2420
had passed say to 2 years ago, and you were given the ability
to cross the interLATA boundaries, would you have still gone
ahead with your 271 application?
Mr. Ellis. Absolutely, Congressman.
I think it has been discussed here that we have no choice
under the law but to open our networks. But beyond that we have
a tremendous incentive to pursue the voice market, not just
because in and of itself there is $100 billion there in
revenues, but it is an essential to our ability to market our
full range of services to offer the complete package, the one-
stop shop. That is what is driving our industry.
Mr. Green. That takes care of my next question. And while
we are on that topic of long distance, are consumers currently
able to purchase software that allows them to make long
distance calls through their personal computer?
Mr. Ellis. Yes, they are, they do, and of course they
bypass the whole regimen of access charges, and that is a
reality today.
Mr. Green. I know Chairman Kennard recently stated this
ability to make these long distance calls over the Internet is
one of the main reasons not to give interLATA relief.
What is your response to Chairman Kennard's solution?
Mr. Ellis. Well, my response is that with respect to the
world of data and data high speed advance services, there is no
bottleneck. It was not contemplated under the Act. The CLECs
are seeking to take an unfair competitive advantage of the Act
that did not contemplate DSL, did not contemplate the growth in
the Internet, and that ultimately the high speed access is
something that is going to happen, and the question really is
whether particularly the rural areas are going to be denied
that benefit for some period of time, or whether they are going
to enjoy the same benefits that the urban and less rural areas
are.
Mr. Green. Thank you.
Mr. Young, I know my staff Mr. Chairman, I understand we
had a difference on the pronunciation of the new Bell Atlantic,
but at least in my area of Texas, GTE is now Verizon? Is that
correct, Mr. Chairman, how we pronounce it?
Mr. Tauzin. We have got several variations here if you want
to play with it.
Mr. Green. Okay.
Mr. Tauzin. Verizon is correct.
Mr. Green. Verizon, okay. Sounds pretty good until our
colleague the ranking member comes back. In Massachusetts, I
have always had trouble with some of their pronunciations.
And my California folks have trouble with mine.
To date, the FCC has approved the two 271 applications,
taking into account the length of time the FCC has needed to
complete their reviews, do you believe that the FCC is capable
of completing more than one 271 each year?
And again, coming from the Bell Atlantic arm of Verizon?
Mr. Young. Yes. I believe they are capable of handling more
than one application at a time. Otherwise it would take about 9
years to get through, literally, if they were to handle one
right after the other in the statutory period.
Mr. Green. And then it would be time for us to do another
Telecom reform act.
Mr. Young. Well, there's be the Internet 3 or something at
that point.
I do believe that they have the ability to do that and that
is why I am confident that the 271 process will go forward for
voice.
It is a large market, $100 billion plus. Our customers
require us to be full service providers. That is, to offer
local, long distance, wireless, and data all in one convenient
form for them to use and to be billed for.
So there is a tremendous incentive to continue the 271
process. We believe that the template has been identified. We
have two examples of it. New York and Texas. We are going to be
filing in Massachusetts and Connecticut this year, and then we
will be able to roll that template along into other states.
So I am quite confident that the 271 process will continue.
Mr. Green. Thank you. Mr. Chairman, I yield back my time.
Mr. Tauzin. I thank the gentleman.
The gentleman from Florida, Mr. Stearns, is recognized for
5 minutes.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Khanna and Ms. Schonhaut, this question is for you.
When we passed the Telecom Act, we talked about the 14
points that the Bell Operating Companies would have to comply
with before they get into long distance.
And over the years, they found that the FCC has increased
these points beyond the 14 and, depending on which State you go
in, the public service commission has made additional
requirements.
So what would you say to the argument that they are having
trouble complying with the 14 original points in the Telecom
Act because the FCC has made it more difficult for them and so
they are at a disadvantage?
Ms. Schonhaut. I think I would say to that that that is a
superficial view, frankly.
Mr. Stearns. That is a what?
Ms. Schonhaut. A superficial view of how the 271 process
works. In each State and this happened in New York and Texas
the competitors and the Bell Companies attend what is called
workshops, which are really cooperative processes of
discussing----
Mr. Stearns. Can you keep this real short. I have got about
three or four questions here.
Ms. Schonhaut. Okay. I think my point is Ms. Stearns.
Because I understand.
Ms. Schonhaut is that the states work with the RBOCs. The
RBOCs are very involved in how the 271s are granted, and they
influence the process and it is a compromise process.
Mr. Stearns. Okay.
Ms. Schonhaut. And so I do not think that you could say
that it is unfair.
Mr. Stearns. You just do not agree?
Ms. Schonhaut. No, I do not.
Mr. Stearns. Okay.
Mr. Khanna?
Mr. Khanna. Well, I think it is very simple.
They ought to have implemented the Act on non-
discriminatory terms. That was one of the checklist items. So
they should have given me cageless co-location. They should
given me line-sharing. I should not have had to go to the FCC
to get it.
They have gotten the 271s. I would have supported them 6
months ago or, you know, 3 years ago, had they given me what I
had asked for.
Mr. Stearns. Okay. And Mr. Young, would you like to reply?
I mean, you obviously agree with what I said, I assume?
Mr. Young. Yes. The process at the State level has been
very thorough. A lot of what is in the act came out of the New
York regulatory process before the Act was introduced.
The collaborative process gives companies an opportunity to
present their views and have them taken into account. It is
quite unprecedented but it has worked successfully.
Mr. Stearns. Okay.
Mr. Cali of AT&T had mentioned the waiver process.
Let me ask, Mr. Ellis, have you taken advantage of the
waiver process for the long distance data for the rural
locations?
Mr. Ellis. We have joined in a Mr. Stearns. Just answer yes
or no.
Mr. Ellis. Yes. We joined in a 706 petition. Bell Atlantic
filed for a specific waiver and the FCC applied a set of rules
that make it virtually impossible. You can only get a waiver to
provide a cross LATA if you show there is no other long
distance interLATA carrier in that LATA, and it is impossible;
you cannot. That is not a solution to this problem.
Mr. Stearns. Okay, Mr. Pociask, let's talk about the
investment that these other folks have made. You have supported
the bill but what happens to this investment, in your opinion,
in the event that this bill is passed? Wouldn't all these folks
be hurt?
Mr. Pociask. No, not really, because by various accounts
you have the Internet doubling every few months and others have
said Mr. Stearns. So Covad has an investment of $4- or $5
billion in one area like that Mr. Pociask. I think there is
plenty of growth.
Mr. Stearns and you think that that would not affect their
business at all?
Mr. Pociask. Only to the extent that when the backbone
operates as a cartel, that there is umbrella pricing.
But I think the more important thing here is that we have
competitive prices. I do not think we need to inflate those
prices or protect them. And if that is the case, in their
business cases I do not know, but I think what we really need
is competitive prices. And am sure that backbone is not going
to go to waste, believe me.
Mr. Stearns. Okay. Mr. Khanna, do you think your company
would be affected financially if this bill is passed?
Mr. Khanna. Absolutely. We would be denied the cageless co-
location. We would be denied line sharing. We would not be able
to compete for consumers.
Mr. Stearns. Okay. Ms. Schonhaut?
Ms. Schonhaut. The way I look at it is that when the
elephants dance, the mice get crushed. I saw three large
companies up on the board when Mr. Pociask talked. There are
two of the RBOCs here. We are little mice, and if one relies on
competition from all those companies, we will really be
destroyed.
Mr. Stearns. Okay. In New York, they have approved your
company going in. I was just curious, Mr. Young, how that is
going? I mean, are you happy with how that is going? Is it
going quickly enough? Are you excited about it? Because you are
the bellwether here.
Mr. Young. Well, actually it has been quite successful. We
are ahead of projections in getting long distance customers.
One of the main reasons is we are targeting a market that has
been largely ignored, and that is the sort of low-volume
consumers that usually get stuck with the minimum usage fees.
We eliminated minimum usage fees for them. We have given
them flat rate pricing so they see exactly what it is they are
paying, and it has been quite a bit hit in New York.
Mr. Stearns. There have been some claims here on this panel
that the RBOCs had violations and committed these violations
with the intent here, and I would certainly want to have you
have the opportunity to respond because you used the word
``fraud,'' and I thought that you should have every right to
respond to that.
Would you like to comment?
Mr. Young. I do not believe Mr. Khanna was referring to
Verizon.
Mr. Stearns. No, I know he was not but I mean he was
saying, in a vernacular sense, that they have had a very
difficult time implementing and getting agreements and once
they have, they have found it difficult because the lines are
being shifted and being transferred and so forth like that, so
I was curious if you would like to comment?
Mr. Young. I think that given the enormous number of
transactions that are being handled on a daily basis, it is
tens of thousands in New York, inevitably claims arise.
I did not hear Mr. Khanna say that there was a lack of
forums that he could go to to have his claims considered. And I
think that he will make his claims, and in some cases he will
be victorious, in other cases others will win.
But the point is, and I want to hammer this home, the
requirements of Section 251 will exist after this bill has
passed and there will be recourse at the FCC and appropriate
Federal district courts, in the event that people believe that
they have been wronged and that markets are not open.
In addition, both SBC and Verizon, under our merger
conditions, have to file regular reports to demonstrate that
our markets are open. So you combine the enforcement activities
that the FCC engages in under Section 251, you combine the
availability of reports that can demonstrate that our markets
are open. You combine the market incentives to continue to get
271 relief.
I think that these are all going to benefit consumers, and
that the bill can only be positive.
Mr. Stearns. Mr. Chairman, could I have unanimous consent
just to ask one more question?
Mr. Tauzin. The gentleman's time has expired. Without
objection, the gentleman asked for an additional minute, and
without objection.
Mr. Stearns. Mr. Cali, you know what the RBOCs are saying,
they have all this regulation and the other folks do not. Isn't
that a legitimate argument of how can they compete if they are
trying to compete with cable, Direct Television, people like
Covad and yet they have all this burdensome onerous regulation.
Isn't that a valid argument?
Mr. Cali. When set in context, it is not.
Mr. Stearns. Say again?
Mr. Cali. Set in context. Let's look at the history.
These are broadband services they did not deploy. They did
not deploy them until competition spurred them into deploying
them. Now that they feel the spur of competition, they are
deploying quite well, and they are competing quite vigorously.
And again, we have to look at the other public policy
concern here that the rules of the 1996 Act were designed to
open the local exchange market's competition, something that
remains unachieved, undone.
Mr. Stearns. Mr. Ellis, is there anything you would like to
comment to that?
Mr. Ellis. Yes, I sure would. Thank you, Mr. Congressman.
Just so everyone is clear, there are two sets of wires that
go into most residences, cable and telephone. The cable people
provide the exact same kind of advanced service over their pair
of wires. They do it with their own network, completely
independent of our facilities.
At the same time, we want to provide the exact type service
over our pair of wires, and what we have now is a system of
asymmetric regulation. We are totally regulated and they are
unregulated and we are in the same market.
And what is important I think as a public policy matter for
the future, they are permitted to absolutely discriminate, to
refuse to interconnect, and they do.
Mr. Stearns. Who is ``they''?
Mr. Ellis. They being the cable companies and in particular
AT&T.
They also have the right to refuse to provide open access.
They have the right to acquire content. If you want to see in
the future and have access to instant messaging to talk about
AOL, for a minute, AOL and Time Warner merge.
If you want access under instant messaging from Time
Warner, they have the right whether they do it or not is
another question they have the right to tell you, as a
subscriber, the only way you get access is if you take our
cable modem access as opposed to the telephone company's. They
have the right, in other words, to leverage content over
transmission and transmission over content. That is something
we do not have.
Our position is simply this. In a competitive market, there
should not be government intervention over the rates, terms,
and conditions. But if you are going to have regulation, then
it ought to apply equally to all providers in that market
specifically; the cable people and the DSL people and the
wireless people and the satellite people, either regulate us
the same or do not regulate anybody.
Mr. Tauzin. The gentleman's time has expired.
Anyone else who wishes to respond may certainly do so.
Ms. Schonhaut. Again, the elephants are yelling at each
other, and I am a mouse here. I will say that my company will
volunteer to be regulated exactly as the RBOCs are. I will
unbundle, I will interconnect, I will do telework, whatever it
is, if that is what it takes to keep the Act the way it is.
Mr. Tauzin. Without passing of the bill?
Ms. Schonhaut. Yes.
Mr. Cali. May I make one point? I think it is particularly
telling that some of the most vocal proponents for forced
access to cable systems or regulating the systems are the
incumbent local carriers.
And one has to ask why is that? What benefit do they gain?
They are, by and large, not ISPs. Why are they doing this?
The reason they are doing this is the cable industry is
investing tens of billions of dollars of capital at risk to
create local telephone competition. To the extent they can
create costs, impose delay, and otherwise create marketplace
uncertainty, they will slow the cable industry down. And right
now the cable industry, as far as residential local telephone
service is concerned, is the greatest hope that consumers will
have that facilities-based choice for telephone service.
Mr. Tauzin. Anybody else who would like to throw any
invectives at anybody else?
Mr. Haynes. If I may----
Mr. Tauzin. The gentleman's time Mr. Haynes might respond,
and Mr. Pociask. We will let you both respond, and then the
gentlelady from California.
Mr. Hayes first, and then Mr. Pociask.
Mr. Haynes. Mr. Chairman, are you still restricting 251 or
can I say something about line sharing?
Mr. Tauzin. Please do.
Mr. Haynes. The line sharing issue, when I listen to Covad
worrying about being a small company, sort of gets my
attention. Our equity is somewhere between 2 and 5 percent of
the equity of Covad and we are a privately held company.
Most of that money came from competitive enterprises since
1983, when we started getting involved in cellular. We provide
our own loops everywhere we provide service. We intend to
provide our own loops wherever we go. The line sharing is
devastating to existing customers and I just do not get this
I'm-too-small-at-their-size argument.
Mr. Tauzin. Mr. Pociask, we will have to wrap this up. I
need to go to the gentlelady from California.
Mr. Pociask. Just two short things.
One, we should point out that it was the FCC that initially
denied video dial tone which was the ADSL. So when we say who
came first, it was I believe Bell Atlantic that had to go to
the Supreme Court to have a right to provide video content over
an ADSL line.
So that is one thing we should point out.
The last thing is back to the initial question. We should
point out that if you look at the 3 days before the 271
approval in New York to the 3 days after, to see how the stock
market reacted to the business cases, the CLECs had over a 5-
percent increase in growth over that period, whereas the long
distance and local incumbents were negative on average.
So I would say that the market will not blink. There is
plenty of growth out there.
Thank you.
Mr. Tauzin. The Chair now yields to the gentlelady from
California, Ms. Eshoo, and I will be as generous with time as I
can be.
Ms. Eshoo. Thank you, Mr. Chairman, and good afternoon to
you, my colleagues and to everyone that is here to testify.
First I am assuming that you have done a unanimous consent.
There has been a request, a unanimous consent request for
statements to be placed in the record. And I will place my full
statement in that record.
Mr. Tauzin. Without objection.
Ms. Eshoo. Mr. Chairman, I want to thank you for holding
this hearing. It is a very important issue.
I know, or I am sensing that there was some apparent
confusion today and some last minute changes regarding this
legislative hearing.
Many of us were at St. Peter's for the memorial mass for
B.J. Stupak.
For the witnesses that are at the table, Art Stupak is a
member of this committee and he and his wife lost one of their
sons, so we joined together over there.
I feel like I am diving into the ocean instead of, you
know, one of the feeders for this.
So if I am asking questions that have been asked before, I
do not think very many people really came to this. We were
going to take a break to accommodate.
What I am after is another legislative hearing on this
issue when we come back.
Mr. Tauzin. Will the gentlelady yield?
Ms. Eshoo. I would be glad to.
Mr. Tauzin. Again, let me apologize to the gentlelady. Our
problems basically were compounded when we had to start 40 some
odd minutes late. We have witnesses who have commitments to and
time slots at the airport. I could not do anything but move on.
I apologize for that.
Ms. Eshoo. I understand that.
Mr. Tauzin. The gentlelady is recognized.
Ms. Eshoo. Everyone is wondering what the two of us are
talking about. We had a lovely chat yesterday on the floor and
there was going to be a break taken ``lunch'' in quotes, while
we went over for the mass. But at any rate, thank you, Mr.
Chairman, and I look forward to a continuation of this
legislative hearing on this very important issue.
Now let me get to my questions.
To Verizon and whomever else would like to jump in, it is
my understanding or view from the information that I have
gathered that the 271 process is working. SBC in Texas and in
New York and that this can indeed work nationwide.
Now that the two applications have been approved, would you
comment on what you think what we will have in terms of a
national blueprint in this area?
Let me get another question down because I used quite a bit
of time on my conversation with the Chairman.
I would like to ask Mr. Khanna from Covad about the court
cases. I do not know whether this has been touched on but I
want to get some of this down for the record.
Both Pac Bell and SBC have been found guilty of bad acts.
Are you still facing co-location problems and what is the
status of these antitrust cases and what forced you to file
them?
If you could comment on that.
And then I have another question but let's see if we can
get to these first.
Mr. Young. Okay. I do believe that there is a pattern, a
blueprint, a road map, if you will, for other companies to get
271s approved, and you know, the aspects involve some sort of
testing of your systems to demonstrate that they do operate in
a non-discriminatory way, and that they can handle the volume
of orders placed by competitors over your systems.
Both SBC in Texas and Verizon in New York have demonstrated
that.
I am pleased to report that we plan on filing additional
applications this year in Massachusetts and Connecticut based
on the same blueprint, if you will, that was successful in
Texas. And it is for that reason that I believe that, you know,
initially when the Act was passed, you sort of had the
incentive for Bell's companies to get into long distance, was
open up your markets.
What we are seeing now is we are opening up our markets
anyway, and that we now have the blueprint for the 271. But
there is this additional benefit that could be realized if we
had interLATA data relief, and that is is that we could bring
advanced high speed services closer to the local communities,
provide more capacity, and you can do that without sacrificing
the incentive that is inherent in the 271 process.
And that is why I was emphasizing the market is $100
billion market. The Internet backbone business, if you will, is
only a $6 billion market.
So what we are trying to do here is preserve the incentives
to open up the local markets, which is happening, while at the
same time providing Internet access to others.
One additional point, but SBC and Verizon have been through
mergers. As a result of those merger conditions, we also have
additional incentives to open up the marketplace.
Mr. Chairman, I did want to clarify a comment I made
earlier. I misspoke when I said that part of our merger----
Ms. Eshoo. I do not want you to use my time clarifying. You
can do that after. Maybe the Chairman can ask you what you want
to clarify, because I think that I am getting close to running
out of time.
Let me just ask you, since you are just finishing up on
that, how does the elimination of line sharing accomplish the
purposes of the legislation?
Mr. Young. Well, one of the challenges, when you are
deploying high speed services, is there is a lot of innovation
involved. There is a lot of investment in equipment involved,
and one of the challenges for companies that want to deploy
this new technology, as well as for regulators in trying to
make sure that things are deployed in an evenhanded way, is how
do you permit companies to benefit from their innovation and
from their commitment to investment while, at the same time,
making sure that markets are open?
Ms. Eshoo. I think you are giving me a response and not an
answer, but we will get to that another time, because we are
going to have another legislative hearing on this gigantic
issue.
Mr. Khanna, can you address yourself to the issue I raised?
Mr. Khanna. Thank you. I would be pleased to.
With respect to our court cases, we have several
arbitration proceedings pending with the SBC Company, Pacific
Bell.
In the first instance, they were found to have engaged in
pervasive and fundamental bad faith in addressing our co-
location and other issues.
There was a subsequent award of $27.5 million, that is
excluding attorneys' fees and costs that we were awarded.
Our antitrust case is currently pending and is set for
trial for September of next year. Our case is against Bell
Atlantic. We filed an antitrust case which has continued to
proceed toward trial. Their counter lawsuit against us on
patent infringement was dismissed on a summary basis.
So at this point, it is fair to say that we have won 100
percent of our actions against the phone companies.
Ms. Eshoo. What forced you to file these cases?
Mr. Khanna. It was a pattern of behavior that we saw, for
example, excluding us from central offices on the grounds that
there was no space when in fact we were aware that there was
space in those central offices.
So when we do not have access to a central office, we are
unable to provide service to anybody served by that central
office.
Similarly, we were put in a position of a price squeeze
with respect to the denial of line-sharing, which we now have.
That line-sharing does not require any innovation. It is simply
a physical division of the frequencies on the use of a copper
wire. It is plain old copper wire that has been in the ground
for about a hundred years.
And we were denied line-sharing until the FCC expressly
ordered it, and that has allowed us to serve consumers and
bring competition for consumers and really brings Covad into
the consumer space in a big way.
Ms. Eshoo. Thank you.
And thank you, Mr. Chairman, for your commitment to have a
further hearing on the issue. I appreciate it. And this is, I
mean, we are where we are on these issues. Some members really
have not made up their minds on what you are offering
legislatively, but I think that we all benefit when many of us
are here.
We have some very lively it is always lively at your side
of the table because we have excellent witnesses but we need
more members engaged in this and I appreciate your commitment.
Mr. Tauzin. I thank the gentlelady. And I would respond
that of course we did have a hearing on the issue. It was much
more widely attended, and we had some interesting give-and-take
in that hearing.
This is not over yet, but we are certainly well on our way
I think to building consensus around it.
I thank the gentlelady.
The Chair recognizes the vice chairman of the committee,
Mr. Oxley, for a round of questions.
Mr. Oxley. Thank you, Mr. Chairman.
Mr. Khanna, is this your map? Is this part of your
testimony, the map of Ohio, showing the services of SBC and
non-SBC Ameritech?
Mr. Khanna. I believe it is.
Mr. Oxley. And I am not quite sure exactly where this is,
but it is my understanding that this map indicates that the
Bell companies do not serve areas like my home county of
Hancock. But I have seen the articles in the paper that
Ameritech serves Findlay and our neighboring communities, many
of them rural.
And in fact, Ameritech is installing DSLAMs in order to
provide DSL service this year.
Was your testimony prepared before that was the case?
Mr. Khanna. I am not exactly certain as to when Ameritech
was rolling its or SBC were rolling out their DSLAMs in those
central offices. But I do know that in most markets, we have
been first to market, prior to the incumbent offering their DSL
services from those central offices.
Mr. Oxley. Well, as you know, Findlay and Springfield in
Ohio are separated by an interLATA barrier. And with the
passage of this legislation, Ameritech would be able to combine
high speed services and equipment in Findlay, and also be able
to provide new services in Springfield, which is probably about
65 or 70 miles south of Findlay.
And if, indeed, Ameritech were able to do that, wouldn't
that open up the market then for Covad to provide DSL
competitive services in Findlay and Springfield?
Mr. Khanna. I believe the markets are currently already
open to Covad. The markets would be open to the incumbents as
soon as soon as they comply with the 271 process which is
frankly an area where we would like to see them comply.
And it is a disappointment frankly to us that only two of
the incumbents have in fact complied and have demonstrated
compliance with the Telecom Act. We would frankly like to see
more of them do that.
Mr. Oxley. What kind of service do you have in those
regions I mentioned?
Mr. Khanna. My understanding of our standard configuration
for our DSLAM service is to afford at least five versions of
DSL service. We offer not only ADSL, we also offer SDSL
services, which is a symmetric DSL service so we offer our
customers a menu of DSL services that is far more rich than the
range of services afforded and offered by the incumbents.
Mr. Oxley. And where are those services available?
Mr. Khanna. I do not have a detailed list in front of me.
That list is being revised every day. We were opening up new
central offices.
My belief is that we are today offering service in terms of
in Columbus, Cincinnati, Cleveland, and Akron. Those are
definitely----
Mr. Oxley. Those are all urban areas?
Mr. Khanna. We provide service both in the urban areas, as
well as the suburbs and going into what we sometimes call rural
areas. In fact, we have an IDSL service which allows us to
serve our customers that are served by long loops.
In rural areas, for example, you will typically have a
customer----
Mr. Oxley. Where would you, in these rural areas that are
apparently the white parts of the map, what part of those,
particularly in northwestern Ohio do you serve?
Mr. Khanna. It would depend on which point in time we are
talking.
Currently, for example----
Mr. Oxley. I am talking about right now. This reminds me of
a story. People asked Yogi Berra what time it was and he said,
do you mean right now?
That is a fair comment. Our business is changing. We are
expanding very, very quickly, but at this point in time, I am
aware that we are offering service in Columbia, Cincinnati,
Cleveland, Akron, both in the urban and suburban areas.
Mr. Oxley. Okay. Well, that is pretty urban and suburban.
And this issue is rural, of course.
Let me turn to Mr. Cali.
Mr. Cali, by your estimation, by how long did the
litigation that followed passage of the 1996 Act set back the
process of opening local and long distance markets to
competition?
Mr. Cali. It is difficult to estimate and it is continuing
to set back, to some extent, local competition. There was an
Eighth Circuit order recently concerning the pricing
methodology.
And that is one of the problems. The marketplace needs
certainty to invest. There was extensive litigation following
passage of the Act.
We have started to move beyond that. As I said, there is a
recent Eighth Circuit decision which introduces more
uncertainty and more concern currently.
Mr. Oxley. But you say there is still some vestiges of that
litigation still hanging out there?
Mr. Cali. Right. It is being resolved as we move forward,
but there is still some vestige.
Mr. Oxley. Mr. Young, GTE was never subject to the long
distance restriction, as you know, under the MFJ or Section
271.
In the wake of your company's merger with GTE, Verizon now
serves a substantial portion of my district including Marion,
Wyandot, and Hancock Counties. As a matter of fact, GTE has a
substantial presence in Marion, as you know.
What steps has or is or will the newly merged company be
taking to offer high speed data service in those areas?
Mr. Young. Well, we have a DSL offering underway in those
areas.
We have signed, despite the fact that there is no 271
requirement hanging over GTE, GTE has signed over 1400
interconnection agreements nationwide. So the point is that our
markets are open.
Mr. Khanna was able to use them to get in first, as he so
noted.
Mr. Oxley. But precisely because we do not have that
concern Mr. Young. Right.
Mr. Oxley my question was specifically to those areas, and
it seems to me that despite the litigation and all of the stuff
that went on, you lost a lot of time in providing high speed
Internet access service to those particular areas, did you not?
Mr. Young. Yes, we did.
Mr. Oxley. And you are trying to play catch-up now?
Mr. Young. That is correct.
Mr. Oxley. Hopefully?
Mr. Young. Yes.
Mr. Oxley. Thank you. I yield back.
Mr. Tauzin. I thank the gentleman.
The Chair will recognize himself for another round and I
believe Mr. Dingell is on his way down, and I know he wants to
engage you all as well, so we will keep this going a little
longer.
Let me turn to the question of capacity of the broadband
networks, and Mr. Cali, I want to talk with you just a second
about that.
Two studies done by AT&T's own engineers entitled
``Internet Growth: Is There Moore's Law for Data Traffic?''
which we are done July 11 the preliminary version came out in
July 11, 2000 points up the need for indeed a great deal more
backbone capacity simply to make sure we do not face a serious
backup.
And this is the observation your own studies made.
``The conventional wisdom is that the exploding increase in
Internet traffic is the main driver of the expansion of the
networks, backbone networks.
``It also seems to be implied that the ever increasing
capacities of WDM, wave length division multiplexing systems,
both in terms of the number of channels and individual channel
rates, coupled with the forecasted fiberglut will result in the
national networks being easily able to accommodate whatever
growth rate the Internet throws at it.
``We do not think the carrying capacity of the network, at
least the long-haul national backbone networks, can or will
grow to accommodate arbitrary traffic growth rates.'' And here
is the real kicker.
``In fact, we believe that if traffic grows by factors of
more than 2 or 3 times a year for any sustained period, the
transport backbones are likely to become a serious
bottleneck.'' The point again is that with the ever-increasing
growth rate of broadband usage that is predicted, if in fact we
have this explosive growth once Americans feel the full
capability of backbone, once broadband, once in fact video
becomes part, as it appears to be real soon to be a part of the
broadband Internet systems, your own studies indicate we are
going to be in trouble. We are going to have real problems with
capacity.
And your own studies seem to indicate that the more players
out there investing in backbone, the more likely the whole
systems are going to work better, yours as well as the systems
that your competitors in this marketplace will need in order to
give all Americans full access to full backbone marketplaces.
What is your comment about again your own studies in that
regard?
Mr. Cali. Let me say this, and I am unfamiliar with the
specifics of those studies. But we do know that there are more
than 40 Internet backbone providers.
This year and next, six new networks are coming on line
that represent an $18 billion investment. Capital has been
pouring into the industry, and the reason it has been pouring
into the industry, and the Congress should be very proud of
this, is because of the framework and certainty provided by the
Act.
We believe the growth will continue if we have the
marketplace certainty we need and we rely on the competitive
market to drive investment.
And the final point I would make is the point I made in my
opening statement, that we should recall that the Bell
companies are currently affiliated with Internet backbone
providers and it is not at all clear that this Act would drive
more deployment than those affiliates are currently providing.
Mr. Tauzin. We also see in these studies an indication that
while there are controversies about how many POPs exist and how
many of these POPs are fully capable at high speeds, and
depending upon whose definition of what high speed is, and we
all hear different definitions of it, we are told that there
are an average of 17 router HOPs on Internet connections today.
That is an indication that the so-called POPs, if they are
out there, they are not as connected to as many ISP backbones
and they are not as certainly as close to where the users live.
What is your comment about that statement?
Mr. Cali. Well the point, and the point we make with our
map of the more than a thousand POPs being deployed is what is
relevant for a customer to access a high speed node that would
deliver and traffic, its data, to the Internet at high speed.
And that seems to be the most relevant measure to whether
customers dispersed across the country can get access to the
Internet at high speed.
Mr. Tauzin. Well the point the studies made, the point we
are seeing here, is that capacity supposedly widely available
is in fact strained. And that, ironically, your own studies
seem to back that up.
And let me turn quickly to Mr. Pociask.
If that is correct, if AT&T's studies about capacity being
strained, if the reports we have of router HOPs and strained
conditions and lack of interconnections to those POPs are true,
and yet the demand is there for these services, are we facing a
problem for consumers where a few companies own the only
backbone that is available and the backbone ain't enough to get
around?
Mr. Pociask. What the observation that there are shortages
is typical of is what you would see in something that is a
cartel or an oligopoly, in the sense where you have limited
supply and higher prices as a result.
I should direct you to a PR News December 6 news report
that AT&T announced an agreement with three telecom companies
to construct 16,500 miles of fiber to an existing 30 cities. It
would not be there, they would not be building this if there
was not a shortage.
I think what we are seeing is that there is a lot of demand
out there, and it is important that we get some supply.
Mr. Tauzin. As a final question, Mr. Ellis, would you like
to respond to Congresswoman Eshoo's concerns with the Pac Bell
and SBC problems?
Mr. Ellis. Thank you, Mr. Chairman, I would.
I would point out that SBC has well over 2000
interconnection agreements across the country with hundreds,
literally hundreds of carriers.
And the almost 5 years since the Act has passed, we have
this single arbitration decision in California that was adverse
to us. That is on appeal. We are in the courts challenging it.
I am hopeful that it will be set aside.
But I believe, when you look at our record of the thousands
of transactions that have taken place with countless carriers
in Texas alone, for instance, we have almost 400 carriers,
interconnection agreements, interactions all the time.
We have a record we are proud of in meeting our obligations
under the Act. I regret deeply that the arbitrators reached a
different conclusion. We are on appeal, and I am hopeful that
we will eventually prevail.
Thank you, Mr. Chairman.
Mr. Tauzin. Thank you, Mr. Ellis.
The Chair yields to the ranking minority member, Mr.
Markey, for a round of questions.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Ellis, do you believe that Mr. Tauzin's bill is a bill
of attainder?
We are going to check from now on.
The last time SBC testified, they were encouraging us to
pass the bill, then they sued on it.
So it is a bill of attainder?
No?
Mr. Ellis. Unfortunately, we lost that one.
Mr. Markey. That is what I am saying. That is what I am
wondering about. I mean, how many----
Mr. Ellis. The Chairman is a bill of attainder. Good
question, Mr. Markey.
Mr. Markey. Mr. Ellis, I see that both of you have
statements in your testimony on the first page that I would
like to read and ask you a question about to get to the heart
of your philosophy.
Mr. Ellis, on the first page of your testimony, you say.
All service providers should be subject to symmetric regulatory
requirements.
And Mr. Young, you state, however, that policymakers must
avoid applying old regulatory models to an entirely new,
competitive technology.
So my question to you guys is, is how these statements
reflect on whether there should be per minute charges, access
charges on Internet telephone calls, IP telephony.
Should we treat everyone the same and apply such charges to
Internet calls forbear from applying them to a new, competitive
technology, or take the opportunity to revamp the old, bloated
access charge regime that today exists, and deregulate charges
and drive out historic subsidies.
Which way would you go on that?
Mr. Ellis. Well, Congressman, the first point I would say
our basic position is in competitive markets there shouldn't be
any regulation by government rates, terms and conditions. That
is the threshold point.
But to get to your point----
Mr. Markey. So you would agree to get rid of those
subsidies, then? No longer would the government be able to
protect?
Mr. Ellis. No. My position is the government can have it
either way. Either you can have a deregulatory regime and that
is fine.
If you are going to have pervasive regulation, the fact is
there are subsidies that are reflected in those access charges
that are not reflected in local rates.
In Texas, our local rate, after 110 years, is less than ten
dollars. No one would contend the local rate, the cost is ten
dollars. It is 20, 30, we could argue about it, but it is
substantial. The difference between the ten dollar rate and the
$30 of cost in round numbers in our jurisdiction in
Massachusetts, everywhere, there are different levels of
subsidy.
It is not something that we dreamed up, it was a public
policy.
Mr. Markey. So you would keep the old access charges.
Would you have access charges for IP too?
Mr. Ellis. No. I am saying I am comfortable, let's go to a
deregulatory model. Fine. Let's do it.
Mr. Markey. So you get rid of the old access charges?
Mr. Ellis. That is fine, get rid of them.
Mr. Markey. It will not be so low, but they are you are
being subsidized. Would you get rid of all those subsidies
coming from the competitive companies?
Mr. Ellis. The system that you all put in place was
supposed to get rid of those subsidies, called a universal
service. We have been waiting for five, almost 5 years for that
to happen.
We are not here to argue for subsidy. What we are here to
say, let's have deregulation, but what I submit the country's
not ready for is to have a local rate in my State of Texas to
go from $9.85, which is on average Mr. Markey. Will you help us
to get rid of those subsidies, though, that are built into the
system for the local companies?
Mr. Ellis. The FCC was charged by----
Mr. Markey. So you would support us in that, getting rid of
subsidies?
Mr. Ellis. I would support, I would support the
rationalization of the subsidies, absolutely.
Mr. Markey. That is important.
Let me ask one final question.
I am sorry, Mr. Young.
I do not want to take up too much time.
But there is a lot of emphasis being placed in the debate
on getting broadband services to rural America, something on
which I am not as familiar as I am with urban and suburban
America.
The Telecom Act is working quite well in fact in urban and
suburban America. I do not think there is any debate about
that. It does work there.
But critics of the Telecom Act allege that competition and
high speed capability lag in rural communities.
My question is how much of this alleged problem is that the
Bell companies have not been permitted long distance carriage
to and from those rural communities?
How much of it is due to a national time line for growing
competitive alternatives to grow out into rural America?
And how much is due to the fact that the Telecom Act
largely exempted rural communities from competition at the
request of the rural members here in Congress?
That is something that I acquiesced to because that was a
request made to me.
Mr. Young?
Mr. Young. Well, the issue of service to rural America has
historical roots in how companies chose to deploy services
based on the ability to recover those costs, and obviously
there has been a system of subsidies that is designed to make
sure that rural America has had voice grade telephone service.
Now the question arises, as we get to high speed data
services, how should we make sure that rural America is
connected.
And the interesting thing here is that this bill helps
because the local companies already have those little inner
office facilities that are needed; the State roads, the on-
ramps, the access roads. They are already in place to serve to
provide local service, so it is just a question of turning them
on to cross the line of boundaries to provide high speed data
service.
Let me give you an example. Charleston, West Virginia,
there was no high speed POP. Customers in West Virginia came to
us and said, can you provide the service. Well, Pittsburgh is
the nearest high speed Internet facility, so we asked the FCC
for permission to cross the line of boundary to go to
Pittsburgh to haul a facility back into Charleston. That was a
706 request that you all authorized us to ask.
What happened at the end of this situation is that, faced
with this request, suddenly where no inter-exchange character
had in the past offered to provide the service, suddenly one
appeared and the FCC said, oh, well there is someone here to do
it, and so they denied our petition.
Now the fact of the matter is, if that is the way we are
going to deploy high speed data or data services in rural
America, I think that is unacceptable that we have to wait for
someone to come in and provide it when in fact we have the
facilities already in place and can do it much cheaply.
So I think that the time is now. I think that in the
context of this bill, it is appropriate to make that narrow
exception to allow us to do it.
Mr. Markey. Okay, Mr. Khanna, could you just respond to the
same question?
Mr. Khanna. I am itching to respond.
If the rural area is served by a Bell company, I have no
problem because I can go in there and compete with them. So
just as we have brought competition to urban and suburban areas
within the Bell operating companies, we will do that. So I
submit to you that this bill has it backwards, which is this
bill should eliminate the exemption for rural carriers because
you can rely on competition.
And we have demonstrated, I stand on our record; 40 percent
today, 50 percent by the end of this year, 75 percent by the
end of next year, and on thereon.
So my point is competition and the Telecom Act will bring
competition to the Bell operating areas that include the rural
areas, but will not reach the areas from which I am excluded
which are the areas that are exempt under the existing law.
Mr. Tauzin. Thank the gentleman.
The Chair recognizes the gentleman from Michigan, the
ranking minority member of the full committee for a round of
questions.
Mr. Dingell. Thank you, Mr. Chairman.
This question is to Mr. Cali, yes or no.
Your company, AT&T, provides high speed Internet services
using cable modems?
Mr. Cali. Yes, sir.
Mr. Dingell. Mr. Ellis, your company, SBC, provides high
speed Internet or DSL service using telephone wires, yes or no?
Mr. Ellis. Yes.
Mr. Dingell. And Mr. Young is that true in your case?
Mr. Young. Yes.
Mr. Dingell. Now, Mr. Ellis, this again is a yes or no. I
understand that there may be differences in the relative
technologies but these are functionally equivalent services,
are they not?
Mr. Ellis. Yes.
Mr. Dingell. Mr. Young?
Mr. Young. Yes, they are.
Mr. Dingell. How about you, Mr. Cali, yes or no?
Mr. Cali. I hesitate to answer yes or no, only because I
know that many of the Bells, or at least one of the Bells is
currently in an ad campaign competing with cable modem service
pointing at the differences.
Mr. Dingell. Can't you just give me a yes or no answer?
Mr. Cali. They do both provide high speed internet access.
Mr. Dingell. Pardon?
Mr. Cali. They do both provide high speed Internet access,
yes.
Mr. Dingell. Okay, and you do too?
Mr. Cali. Yes, yes.
Mr. Dingell. Functionally equivalent?
Mr. Cali. To my knowledge. I hesitate to say functionally
equivalent, we are a shared medium, they are not a shared
medium.
Mr. Dingell. Functionally equivalent.
Mr. Cali. It is high speed Internet access.
Mr. Dingell. The same services the same people.
Can you tell me a reason why AT&T has such great difficulty
in answering a question yes or no?
Mr. Cali. Because I am unsure of the meaning of
functionally identical.
Mr. Dingell. I see.
Mr. Pociask, do you agree?
Mr. Pociask. I think they are a functional equivalent.
Mr. Dingell. Thank you.
Now, let's look at the regulatory situation here.
Mr. Ellis, your company is subject to interconnection
obligations with competitors when it provides high speed
Internet service, yes or no?
Mr. Ellis. Yes.
Mr. Dingell. Is that true with regard to you, Mr. Young?
Mr. Young. Yes, it is.
Mr. Dingell. Okay.
Now how about you, Mr. Cali? Is that true with regard to
you?
Mr. Cali. Yes.
Mr. Dingell. It is?
Mr. Cali. I am sorry, can you repeat the question?
Mr. Dingell. The question is, your company, AT&T, let me
say your company is subject to interconnection obligations with
competitors?
Mr. Cali. I am sorry. No.
Mr. Dingell. It is not.
So then, yes or no again, AT&T is subject to the same
obligations to interconnect with competitors when it provides
high speed Internet service using cable modems?
Mr. Cali. No.
Mr. Dingell. No.
So I guess I am coming to the conclusion that you are
treated differently than these other two companies. Is that
right?
Mr. Cali. That is correct.
Mr. Dingell. I see.
Now, Mr. Ellis, is DSL required to be sold to competitors
at wholesale rates that are determined by the FCC?
Mr. Ellis. Yes.
Mr. Dingell. Mr. Young, are you subject to the same
burdens?
Mr. Young. Yes, we are.
Mr. Dingell. Mr. Cali, are you subject to those burdens at
AT&T?
Mr. Cali. No, we are not.
Mr. Dingell. Ah.
Mr. Cali, is AT&T required to sell its cable modem service
to competitors at wholesale prices, or does the free market
dictate your company's choices in this regard?
Mr. Cali. It is free market.
Mr. Dingell. Free market.
Mr. Ellis, are Bell companies required to unbundle their
networks and lease out pieces or parts to competitors at cost-
based rates for the purpose of providing high speed Internet
service?
Mr. Ellis. Yes.
Mr. Dingell. Is that true with your company, Mr. Young?
Mr. Young. Yes, it is.
Mr. Dingell. Mr. Cali, AT&T is not subject to similar
obligations under the law, is it?
Mr. Cali. That is correct.
Mr. Dingell. Now, Mr. Cali, H.R. 2420 would provide a level
playing field between telephone and cable companies by
deregulating high speed Internet services offered by both types
of companies.
Is that correct?
Mr. Cali. No, I do not believe if it, sir.
Mr. Dingell. You don't.
Well, I guess AT&T is incapable again of a simple yes or no
answer.
What is the answer to that, Mr. Pociask?
Mr. Pociask. H.R. 2420 will put the different services on
the same playing field.
Mr. Dingell. Put them on the same playing field.
Do you agree with that, Mr. Cali? Yes or no?
Mr. Cali. The reason I am not going to give you a yes or no
is we have different facilities, different context----
Mr. Dingell. Please. I have limited time and I want to help
you because you have great difficulty answering my questions.
And what I am trying to find out is, would H.R. 2420 put
AT&T and the former baby Bells on a level playing field?
Mr. Cali. My concern is that we are comparing different
networks, different histories, and I do not believe it would be
a level playing field.
Mr. Dingell. But you are providing identical service?
Mr. Cali. We are both providing high speed Internet access.
Other carriers are also providing high speed Internet access.
Mr. Dingell. Functionally, functionally identical services?
Mr. Cali. Congressman, the issue is this Mr. Dingell.
Functionally identical services? We have already agreed on
that.
Mr. Cali. The point I made earlier was that the Bell
companies----
Mr. Dingell. Mr. Cali, I think you are a fine fellow, but
is it impossible for you to just answer these questions simply,
rather than obfuscating the matters?
Mr. Cali. I think it is more complex, Congressman, and that
is my concern. There were two points I made earlier that were
worth noting.
Mr. Dingell. I am sure it is, but if you do not mind, I
will ask the questions.
Now, Mr. Cali, do you think that existing regulatory
mandates on telephone companies are necessary to ensure
competitive roll out of broadband services to consumers?
Mr. Cali. Yes.
Mr. Dingell. You do.
Now, if regulation of high speed Internet services results
in these benefits, would not the same benefits flow to the
public if these regulations are also applied to cable companies
offering similar services?
Mr. Cali. They would not because of the different history
and different context.
Mr. Dingell. Now why do you say that? What is the
difference between telephone and cable? And what is the
difference between AT&T when they offer a service and the
service that is offered by Mr. Ellis' and Mr. Young's
companies?
Mr. Cali. There are a couple of bases for the difference,
sir.
Mr. Dingell. Well, one of them is clear to me. And that is
that it gives your company an economic advantage. I am sure you
wish to hold on to that.
But what are the other differences?
Mr. Cali. In implementing the Act, the FCC has gone to
great lengths to ensure that the Bell companies, when providing
advanced services and facilities----
Mr. Dingell. You are having great difficulty----
Mr. Cali. [continuing] enjoy the same flexibility as other
carriers providing those same advanced services.
Mr. Dingell. You are having great difficulties giving me a
simple yes or no answer, or a simple explanation.
Mr. Cali. I am because I believe the issue is more complex.
Mr. Dingell. I am sure that you are happy to make it so.
But to me, you have a service which is offered by AT&T, one
which is offered by SBC, one which is offered by Verizon. They
are the same systems.
Mr. Young. ``Va-rey-zun.''
Mr. Dingell. They are the same----
Mr. Tauzin. We went through----
Mr. Dingell. They are also----
Mr. Tauzin. Would the gentleman yield? Would the gentleman
yield for a second?
We went through an extensive----
Mr. Dingell. I appreciate that, Mr. Chairman. It is always
difficult to function in the face of obfuscation.
Mr. Tauzin. I was just saying that even before any of that
had begun, we had trouble with Verizon, so we just wanted to
make the gentleman aware that we agreed on the pronunciation as
Verizon.
Mr. Dingell. I am not a defender of anybody, nor am I a
defender of obfuscation.
Mr. Tauzin. Let me ask unanimous consent here. The
gentleman's time has expired.
Does the gentleman which to proceed?
Mr. Dingell. I would. I would ask 2 minutes to assist Mr.
Cali who is having great difficulty.
Mr. Tauzin. Is there any objection?
[No response.]
Mr. Tauzin. The gentleman is recognized for 2 additional
minutes.
Mr. Dingell. Now, Mr. Cali, what is the argument for giving
different treatment to SBC, Verizon, and AT&T?
Mr. Cali. Okay, the argument is this.
Mr. Dingell. Why shouldn't the same service to the
consuming public be priced the same way to all of the above?
Mr. Cali. Four years ago the Congress imposed certain
obligations on incumbent carriers in an effort to erode their
monopoly, a near century-old resilient monopoly that persists
till today.
The FCC, in implementing those rules, has attempted to
reduce the regulation where it relates to advanced services and
facilities while it has continued to adhere to the requirements
of the Act in an effort to open the local markets to
competition.
That is an important public policy goal that is worth
adhering to.
Mr. Dingell. Mr. Cali, I have only got 2 minutes and you
have used a lot of it.
You do have essentially a monopoly on cable, do you not, in
this country?
Mr. Cali. No, we do not. We do not agree with that.
Mr. Dingell. In the markets you serve, you do, don't you?
Mr. Cali. In the markets we serve, there is a strong public
policy to introduce competition for cable and I would submit
that public policy is far more advanced than for local
telephone service.
Mr. Dingell. What is your market share for cable in the
markets you serve?
Mr. Cali. In the markets I serve, I do not know. I could
give you an overall----
Mr. Dingell. It is on the order of 100 percent. It is on
the order of 100 percent.
Mr. Cali. No, that is incorrect. The satellite industry has
taken 15 to 20 percent of the multi-channel video market.
Mr. Dingell. So 85 percent then?
Mr. Cali. That is correct. And the satellite industry is
winning 2 out of 3 customers.
Mr. Dingell. My 2 minutes is rushing toward expiration.
Mr. Pociask, you are a man of enormous patience, and you
are sitting next to that nice Mr. Cali, and I know you and I
both want to help him.
We have this awkward problem that Mr. Cali is offering an
identical service to that which is offered by Mr. Ellis and Mr.
Young, and also by cable people in other parts of the country,
and also by other carriers.
Is there any reason why these all ought not be treated the
same way for regulatory purposes?
Mr. Pociask. As I pointed out in my oral testimony today,
because of the price sensitivity, if you impose a cost on these
services, you will have a big drop off in subscribership, so it
is no surprise that Cable Modem service commands almost 90
percent of the market today.
I think the answer is to have a level playing field, to
have these services go head-to-head. I really hope Cable Modem
service does well.
Mr. Dingell. The consumer benefits from this, doesn't he?
Mr. Pociask. Absolutely.
Mr. Dingell. And if the playing field is slanted a little
bit toward Mr. Cali, Mr. Cali has a huge benefit, doesn't he?
Mr. Pociask. That is right.
Mr. Dingell. And that comes at the expense of Mr. Ellis and
Mr. Young and at the expense of the consumers. Isn't that
right?
Mr. Pociask. My concern is consumers, that is right.
Mr. Dingell. Yes. So therefore it is plain why Mr. Cali
likes this situation so well: that he and his company are
deriving an immense benefit at the expense of consumers and at
the expense of their competitors, isn't that right.
Mr. Pociask. I cannot speculate for his motives, but----
Mr. Tauzin. The gentleman's time has expired again.
Mr. Dingell. I thank you, Mr. Chairman.
And thank you, Mr. Cali.
Mr. Tauzin. Thank you.
The Chair would ask any of the members who would like a
second round. Let me first ask the gentleman from Texas. Would
you request a second round, Mr. Green?
Mr. Green. [Nods in the negative.]
Mr. Tauzin. The gentlelady from California.
Ms. Eshoo. Thank you, Mr. Chairman.
I want to go back to some of the things that our colleague,
Mr. Markey, was exploring. I just flipped this switch to have
my microphone go on.
Let's just pretend that we flipped the switch and the
legislation that is on the table is law right now.
Let me ask the Bell people, what is your plan for rural
America, and when would it be implemented?
Mr. Ellis. We have a plan that by 2002 we will have service
to 80 percent of our customers. If this legislation passes----
Ms. Eshoo. I am talking, when you say customers, who are
they? Identify them?
Mr. Ellis. Well our customers are in rural and urban and--
--
Ms. Eshoo. I am not talking about urban and I am not
talking about suburban.
See the reason that I raise this, and this is one of the
things that I have grappled with in this whole discussion of
broadband, is that when anyone comes to the Congress and says,
do I have a deal for you, your constituents in rural America
and there are many Members of Congress that have totally rural
districts or some parts of their district are rural that you
are automatically going to get their ear because of course they
want their constituents to enjoy the best of what another
Congressional district already has.
And so it kind of puts a hook in them. And every American
goes for open versus closed. So these are very powerful words
that are used relative to this whole argument.
I don't think this argument is really about the Internet
because believe it or not the worldwide web was up and we knew
an awful lot about the Internet when we passed the Telecom Act.
But very specifically. We have flipped the switch.
What do you have for rural America?
What are you going to do?
What is the plan?
Mr. Ellis. The plan is, NTIA has a study that says 5
percent of the rural population has access to high speed
advanced services, cabel modem or ours.
Ms. Eshoo. I want to know what you are going to bring to
them. Because remember we have flipped the switch now. This
legislation is law, and the promise of this legislation is to
bring something to rural America because they are not getting
it.
Tell us what you are going to deliver and by when.
Mr. Ellis. What we will do is take the $6 billion
investment that we are making and use that money more
efficiently to expand to go into areas that we cannot afford to
do it, it does not make financial sense to cover that other 24
percent.
Ms. Eshoo. If you cannot afford to deliver it today, why is
it that you can deliver it because we just flipped a switch?
Mr. Ellis. I will give you a specific example.
Congressman Oxley was mentioning Ohio. There are eight
LATAs in Ohio, eight. That means we cannot combine demand
across those LATA boundaries. Today, under our plan, under the
law, we would have to put eight switches, eight ATM switches,
eight internet hubs in each LATA. Each one would have to have
one.
If you pass this piece of legislation, we will be able to
follow conventional networking plans, the same that our cable
competitors can plan, and probably get by in Ohio with maybe
two by doing conventional engineering.
That saves money, lets us build out, lets us close that
gap, then give to the customers that, in our areas, the
opportunity to have not slow speed but high speed.
Ms. Eshoo. Excuse me. Let me just excuse me.
Can you give to us, to members of this committee, your plan
for rural America, the rural communities, so that we have, we
can see how the promise will be kept.
Because you know, being at this side of the table, I am
very sensitive about advertising, about marketing. We are in
the marketing and in the communications business at this side
of the dias as well.
And I want to really pull back the layers on onion skin
here. I want to test what the promise is from your part. If you
can convince members that you are really going to do what you
are promising to do, then it becomes something else.
I am not convinced of it, I really am not. And when you say
``rural,'' I am not talking about the businesses, I am talking
about the homes that are way out in the middle of nowhere.
I mean, what do you have for Turlock, California and
Tulare, and the back waters of Bakersfield? I mean, I would
really like to know that. I am just naming off some communities
in California.
I am not convinced of that. I think that this is under the
guise of something else, myself, because you have not, you did
not even do what you were supposed to do, what you signed off
with in the Telecommunications Act. That is where you lose me.
That is where you lose me.
There was a checklist. You all came to town. You lobbied
for God knows how long, and you never and as soon as the ink
was dry, you sued on what you agreed to.
Now I do not know where your competition is in the local
market with what you promised before you get into the long
distance. You didn't even do that.
Mr. Ellis. May I tell you?
Ms. Eshoo. Well I do not know. I think my time is running
out. I see a red light. You have time to talk, I don't, so yes,
you can respond to that. But I really want to press on this
rural business----
Mr. Tauzin. Would the gentlelady yield for a second?
Ms. Eshoo because I do not see it and there are veiled
references to it. And yet, that is what the advertisement to
the bill is.
Mr. Tauzin. The Chair would ask the gentlelady to yield
just a second. I am going to extend the time to the gentlelady
because I would like everybody have a chance to respond who
wants to.
We are going to have some problems with witnesses having to
make plane connections, and I want to let you all know, that if
you have to leave, kind of raise your hand and let me know. I
do not want any of you to miss that.
The gentlelady has asked if anyone else wants to respond.
Mr. Haynes, please?
Mr. Haynes. Mr. Chairman, thank you.
Congresswoman Eshoo, I would like to tell you want we plan
to do in Merced County.
We intend to compete with Pacific Bell/SBC with high speed
wireless to residences initially starting with businesses with
closer-in; new businesses don't startup immediately but we have
a county-wide license. We are a CLEC in the State of
Washington. We provide high speed data services in the State of
Washington.
I have built a network that I could show any member of the
committee how line-sharing could devastate incumbent customers
who do not use high speed data, and I can show you, ma'am, how
we can provide competitive high speed data services.
Two things are going to happen if H.R. 2420 passes. The
Internet will become more valuable. I have a cable modem on my
desk at my office, a DSL in my home, and I still get bogged
down because of the State and the county links that do not
work. This improves the State and county links.
And the rest of us, my 800 and some peers, as small
companies are itching to get the competitive ball further
rolling. We have already started it.
And I thank you for the opportunity to comment.
Mr. Tauzin. Anyone else?
Mr. Young? Mr. Cali?
Mr. Young. There are 2 phases or 2 parts to the rural
issue.
As I mentioned before, all of our offices today are
interconnected with fiber, but we have to artificially
constrain traffic across LATA boundaries so the day that you
flip the switch and we have the legislation, we can flip the
switch and end those constraints, so that that provides more
high speed data, more interconnectivity.
So day one, there is a benefit when this bill passes.
Then my colleague, Mr. Ellis, points out the other piece.
And by the way, Verizon has more rural customers than any
other local telephone company, so this is a very real problem
for us, is we can now do the sort of regional planning.
Congressman Markey mentioned New England Tel. Well, that is
an operational entity that historically has planned its
services as a regional group.
So for example, there might be a hub in Massachusetts.
There might be a hub in Maine or New Hampshire, that is used to
serve the whole region.
Again, because of the interLATA restrictions, we cannot
engage in that sort of regional engineering that historically
we have been able to do for local telephone service.
In Charleston, West Virginia, which now we have to go to
Pittsburgh, it is an interLATA link, in order to provide high
speed service. We could provide those kinds of services.
So there's sort of two pieces. what we can do today and
then what we could do as a result of the planning that we could
now do without the interLATA restrictions.
Mr. Tauzin. Mr. Khanna wanted to respond.
Mr. Khanna. The first point I would like to make is that
the SBC $6 billion investment has to do with remote terminals.
This is in an area between the central office and the
customer premise. This has nothing to do with ATM switching,
which is what Mr. Ellis was talking about.
I also want to talk about what Covad is doing today. Our
IDSL service goes the distance. It goes five miles, six miles
beyond that. So we are able to provide service to customers in
Half Moon Bay, in Santa Cruz, people who are commuting into
Santa Clara, who software developers out in Half Moon Bay in
Santa Cruz, regardless of the distance there from the central
office, and they are able to get IDSL service from Covad today.
None of the incumbents, rural or urban or suburban, none of
the Bells, not GTE, offers IDSL service in combination with our
high speed service. That is an innovation that Covad has
brought to the marketplace. Other CLECs have copied us but we
have brought that innovation to people who live in remote
locations who are not close to the central offices today.
Ms. Eshoo. Mr. Chairman, could I just ask one quick follow-
up question?
Mr. Tauzin. The gentlelady certainly may.
Would you like to let all the witnesses respond first to
your first question, or?
Ms. Eshoo. I am dying to ask this one.
Mr. Tauzin. Go ahead.
Ms. Eshoo. Now what happens to what you just described if,
again, we flip the switch, if this bill becomes law. What
happens to you and what you just described?
Mr. Khanna. Two things happen.
One, our ability to co-locate in central offices in rural
areas rapidly diminishes because the cost of cageless co-
location is much lower than the cost of caged co-location.
Second, we would lose line-sharing. Line-sharing is nothing
but unadulterated 100 percent consumer benefit. There is no
negative impact to any consumer from line sharing, because if
there were, the incumbents would not have deployed it
themselves.
The consequence of denying us, taking line-sharing away
from us, which is a consumer benefit we are providing today,
would be to adversely affect consumers in urban, suburban, and
rural America.
Ms. Eshoo. So, Mr. Ellis, why do you want to snuff him out?
Mr. Ellis. That is absolutely not the case.
Ms. Eshoo. Well I mean that is what he is suggesting,
right?
Mr. Ellis. Well, he is wrong.
Ms. Eshoo. I am just paraphrasing.
Mr. Ellis. He is wrong.
Let me address line-sharing for just a minute so everyone
understands.
First of all, our position on line-sharing is simply this.
For a long time, Covad and every other carrier can take the
loop from the local company, put voice and data on it, just
like we do. They have had that right and nothing here is going
to change that. This piece of legislation does not change it.
What Covad and other companies do not want to do, they do
not want to offer the voice piece, the less attractive piece.
So when they talk about line-sharing, it's they want to take
the line that we provide the voice on, and while we provide the
voice, in my example, the $9.85 voice line in Texas, the one
that is subsidized, they want to then put their data on it.
That is what they mean by line-sharing.
Our position on that is, as far as we are concerned, they
can continue to do line-sharing. We are committed to that, and
we will let them keep doing line-sharing regardless of what
happens with this piece of legislation.
Mr. Tauzin. We are going to run out of time because we have
a vote on the floor.
Let me recognize the gentleman from Massachusetts for
closing comments.
Mr. Markey. Thank you, Mr. Chairman, very much.
First of all, I want to congratulate SBC and Bell Atlantic
for their success in Texas and in New York. Much like George
Bush and Al Gore, you are both going where the Electoral
College piles up the most credit for industry and for
Presidential candidates.
And I expect that by this time next year, we will see a lot
more success in those delegate-rich electoral states.
I think that it is most likely that at the end of the day,
we will come back here in a year and we really will have a
rural issue, because you each have a stake in solving the large
State issues.
Like Presidential candidates, you just do not tend to spend
as much money in those smaller states if you are going to try
to maximize your dollar.
So we will have that left over.
We have, I think, something that will be viewed a success,
but there will be a rural kind of anomaly that is partially
driven by the exemption which we were requested to build into
the Act, which as an urban American, I had very little ability
to analyze in terms of its impact upon those residents.
And with regard to again the cable industry, I do believe
that the Telecom Act quite specifically said that all
telecommunications services should be treated and regulated
identically, and I do believe that Internet access is a
telecommunications service.
So my goal is now and continues to be, you know, attempting
to reach that point in which everyone is doing everything and
ultimately we can just pull the Federal Government out of this
whole area and let the free market determine what is in the
best interest of the consumers.
I thank you all for the fabulous hearing today.
I yield back the balance.
Mr. Tauzin. I thank the gentleman.
Let me first, for the record, on behalf of Mr. Dingell,
introduce a comparison of regulatory requirements, as he went
through the list with the witnesses, prepared by SBC
communications into the record.
[The information follows:]
DSL v. Cable Modem Service
The regulatory disparity between ILECs and cable operators when
providing functionally equivalent services is most graphically shown
when the regulatory requirements of DSL services are compared to
functionally equivalent cable modem services.
------------------------------------------------------------------------
DSL Service (an
interstate Cable Modem
telecommunications Service (a cable
service) service)
------------------------------------------------------------------------
Common Carrier Duty............ Every common carrier No Comparable
must furnish Requirement
communications
services upon
request and
establish physical
connections Sec.
201(a).
Discrimination and Preferences. It shall be unlawful No Comparable
for any common Requirement--Loc
carrier to make any al franchise
unjust or authority only
unreasonable regulates basic
charges, practices cable television
or classification rates and
Sec. 202(a). equipment; no
rate regulation
of cable modem
service
Tariffs........................ Every common carrier No Comparable
must file with the Requirement-
FCC schedules Cable operator
showing all charges must file rates
for services for basic tier
provided Sec. and equipment
203(b)--FCC with local
limiting tariffing franchise
to dominant authority
carriers.
Extension of Lines............. No carrier shall No Comparable
construct a new Requirement--Loc
line nor terminate al franchise
an existing line authority
without FCC negotiates build-
approval Sec. out requirements
214(a). with cable
operator
Annual Reports................. The FCC is No Comparable
authorized to Requirement
require carriers to
file annual reports.
Depreciation................... The FCC may No Comparable
prescribe Requirement
depreciation
charges Sec.
220(b).
Accounts....................... The FCC may No Comparable
prescribe the forms Requirement
for any and all
accounts and
establish a uniform
system of accounts
Sec. 220(a).
Subscriber List Information.... A telecommunications No Comparable
carrier shall Requirement
provide subscriber
list information
available on an
unbundled and
nondiscriminatory
basis Sec. 222(e).
Interconnection................ Incumbent Local No Comparable
Exchange Carriers Requirement
(ILECs) have a duty
to interconnect
with the facility
and equipment of
any requesting
telecommunications
carriers Sec.
251(c)(1).
Resale......................... ILEC must offer its No Comparable
telecommunications Requirement--Lea
services at sed access
wholesale rates obligations--10-
251(c)(4). 15% based on
channel capacity
Number Portability............. Local exchange No Comparable
carriers (LECs) Requirement
must provide number
portability to the
extent technically
feasible Sec.
251(b)(2).
Dialing Parity................. LEC must provide No Comparable
dialing parity to Requirement
competing providers
Sec. 251(b)(3).
Reciprocal Compensation........ LECs have the duty No Comparable
to establish Requirement
reciprocal
compensation
arrangements Sec.
251(b)(5).
Duty to Negotiate.............. ILECs have the duty No Comparable
to negotiate access Requirement
to their networks
with any requesting
telecommunications
carrier.
Unbundled Access............... ILECs have the duty No Comparable
to provide any Requirement
requesting
telecommunications
carrier with non-
discriminatory
access to network
elements on an
unbundled basis
Sec. 251(c)(3).
Collocation.................... ILECs have a duty to No Comparable
provide physical Requirement
collocation of
equipment necessary
for interconnection
or unbundled access
Sec. 251(c)(6).
Universal Service.............. All No Comparable
telecommunications Requirement
carriers shall
provide schools,
libraries, and
health care
providers access to
services at
discounted rates
Sec. 254(h).
InterLATA...................... No Bell operating No Comparable
company may provide Requirement
interLATA DSL
services without
prior FCC approval
and competitive
checklist
compliance Sec.
271.
Separate Subsidiaries.......... BOC InterLATA No Comparable
telecommunications Requirement
and information
services must be
provided through a
separate affiliate
Sec. 272(a)(2).
Electronic Publishing.......... BOCs may provide No Comparable
electronic Requirement
publishing only
through a separate
affiliate Sec. 274.
Alarm Monitoring............... BOCs cannot provide No Comparable
alarm monitoring Requirement
until 2001.
Computer III/ONA............... BOC/GTE required to No Comparable
provide access and Requirement
unbundling for ESPs
(ISPs).
------------------------------------------------------------------------
Mr. Tauzin. Let me also, by Mr. Blunt's request, introduce
a similar comparison that we I think talked about at our
previous hearing into the record that was prepared by I think
the United States Telephone Association.
[The information follows:]
Is there Regulatory Parity Between DSL and Cable? No.
------------------------------------------------------------------------
Applies to
Regulatory Requirement Applies to Cable Modem
DSL Service Service?
------------------------------------------------------------------------
Common carrier duty......................... Yes No
Prohibition against discriminatory treatment Yes No
Required to file tariffs.................... Yes No
FCC approval to extend lines................ Yes No
Annual reports.............................. Yes No
Prescribed depreciation charges............. Yes No
Prescribed uniform system of accounts and Yes No
accounting forms...........................
Duty to provide subscriber list information. Yes No
Duty to interconnect........................ Yes No
Duty to offer resale........................ Yes No
Duty to provide number portablilty.......... Yes No
Duty to provide dialing parity.............. Yes No
Duty to establish reciprocal compensation... Yes No
Duty to negotiate access to network......... Yes No
Duty to provide unbundled access............ Yes No
Duty to grant physical collocation.......... Yes No
Duty to support universal service........... Yes No
Approval to provide interLATA DSL services.. Yes No
Requirement to use separate subsidiaries for Yes No
interLATA telecommunications...............
Requirement to use separate affiliate for Yes No
electronic publishing......................
Prohibition against alarm monitoring until Yes No
2001.......................................
Duty to unbundle for ISPs................... Yes No
------------------------------------------------------------------------
Like services should be subject to like regulation. Support S. 877.
Mr. Tauzin. And let me also say a few words in conclusion
with a great deal of thanks to our witnesses. I know you have
to move. We too.
Let me point out that the Department of Justice findings in
the Court challenge to the WorldCom/Sprint merger give us I
think a very important view as we go into legislative action on
this piece of legislation.
It basically said about the backbone, the most important
part of this whole system we are discussing, that it is
dominated by several key players.
In fact, in paragraph 32 of the June 28 filing, it says
UUNET is by far the largest here one. By any relevant measure,
it is approaching a dominant position in the backbone market.
It is critical, I believe, as Mr. Pociask has pointed out
to us, that we have more competition, as your own studies I
think point out, Mr. Cali. More competition in creating the
backbones, more competition in creating the infrastructures.
And I would say to my friends who are concerned about what
kind of proposals are going to be made for rural America, rural
America is always unfortunately going to be the last to be
served.
But where there is fiber in the ground, and where there are
systems prepared to deliver services to rural America, it is
insane for us to retain Federal restrictions that prevent the
use of that fiber to bring those Americans into the loop.
And what we are suggesting is that if over the next 12 and
18 months, 271 relief is finally going to come to places like
Louisiana and Wyoming, which are not delegate-rich states and
have to wait in the back of the line before we can join the
high speed world of commerce, that the sooner we can pass
legislation to introduce, as many of my consumers in Louisiana
and in Wyoming and in other western states to this high speed
commerce world and in fact to this new economy, then the
better. That is why this legislation is and remains so
important.
Again, I want to thank you for your contributions today. I
want to thank my friends who have joined in the spirited debate
and the hearing must unfortunately be adjourned.
[Whereupon, at 2:15 p.m., Thursday, July 27, 2000, the
hearing was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of Hon. William E. Kennard, Chairman, Federal
Communications Commission
Thank you Mr. Chairman and Members of the Committee. I appreciate
the opportunity to testify before the Committee this morning.
I would like to state at the outset that I agree wholeheartedly
with the objective of speeding deployment of broadband services to all
Americans regardless of where they live. Nobody should be left behind
in the broadband revolution.
Despite the old saying, however, sometimes you do have to look a
gift horse in the mouth, particularly if it is a Trojan Horse. I am
afraid that is what this legislation is. It appears to be a gift horse
to competition, but it is really just the opposite.
The genius of the Telecommunications Act of 1996 (1996 Act) is the
delicate balance it strikes between regulation and deregulation to
achieve competition in all forms of communications, and to deploy the
fruits of that competition to all of the American people. The process
has worked well, and consumers are better off as a result.
I am sure that increased competition is the well-meant intention of
the proposed legislation. Inadvertently, however, I believe this
legislation will not only upset the balance struck by the 1996 Act, but
it actually would reverse the progress attained by the 1996 Act. In an
effort to move us forward, this bill mistakenly moves us backward.
The 1996 Act Is A Model For the World
Recently, the European Commission (EC) issued a bold package of
proposed legislation and directives aimed at bringing the Internet
revolution to Europe. It is no coincidence that the EC's initiative
looks like a close cousin of our Telecommunications Act of 1996. The
European Commissioners have concluded that in order to chart a course
towards American-style Internet growth they must build a vessel not
unlike the 1996 Act. This course includes such staple items included in
our Act as local loop unbundling and collocation.
We are setting the example for the rest of the world. Changing
course midstream by diminishing the Bell Operating Companies' (BOCs)
incentives to open the local markets would not only be detrimental to
American consumers, but would also put at risk the leadership role the
United States has played in the global telecommunications market.
A Fabric
The 1996 Act is a fabric, with the thread of each part connected to
every other part. Unravel one thread, and you risk unraveling the
entire fabric.
Pull the thread of data traffic, and the seams of the Section 271
provisions are weakened. Pull the thread of data traffic, and the
threads of telephony, video transport, and wireless transmissions will
fray. As I tell regulators from other nations, you cannot cherry-pick
the 1996 Act. In this age of convergence, no network is an island, and
the conduit and content of each is entwined with every other.
Under our system, the 1996 Act had to be carried out in three
stages: rules had to be written, the rules were tested in court, and
now the rules are being implemented. Now that implementation is fully
underway it would be tragic to change directions.
My message to you today is simple: the Telecommunications Act of
1996 is working. Because of years of litigation, competition did not
take hold as quickly as some had hoped. The fact, however, that it is
now working is undeniable. Local markets are being opened, broadband
services are being deployed, and competition, including broadband
competition, is taking root.
The Commission has a long history of fostering innovation and
investment in new technologies, such as the Internet. Specifically, we
have consistently refused to impose legacy telecommunication
regulations on providers entering new markets. For example, in 1983 the
Commission declined to subject information service providers to access
charges, concluding that such regulation is unnecessary and would be
harmful to the development of the industry. More recently, in order not
to stand in the way of successful advanced services deployment, we
declined to require incumbent LECs to unbundle packet switched and
other advanced services equipment. The Commission found that in a
dynamic and evolving market, regulatory restraint was the best way to
further the Act's goal of encouraging facilities based investment and
innovation. Similarly, as I discuss later, we have thus far refused to
impose legacy telecommunications regulation on cable broadband service
providers.
Rapid Growth of Broadband Deployment
The Commission's faithful implementation of the Act has resulted in
an explosion of broadband deployment. As of the beginning of the year
2000, we estimate there were 2.8 million actual subscribers to
broadband, high-speed telecommunications services at speeds of at least
200 kbps in one direction. About 2 million of those lines were serving
residential subscribers.
The DSL business is growing so fast that the BOCs are struggling to
keep up with demand. The Wall Street Journal reported that SBC is
installing about 3,500 DSL lines each day. At the end of the first
quarter of 2000 there were approximately 800,000 DSL lines in service
in the United States. About 75 percent of those lines are provided by
incumbent LECs and 25 percent by competitive carriers. These numbers
are growing. For example, Verizon (formerly Bell Atlantic) alone
reported on July 21, 2000, that it has already reached 221,000 DSL
customers at the end of the second quarter of this year.
These trends show no sign of slowing down. Analysts project that
deployment of DSL will increase by 300 to 500 percent over the next
year. Analysts also estimate that subscribership to cable broadband
services will at least double by the end of this year, and by the end
of 2005 will have 20 million subscribers. Incumbent LECs and cable
operators are predicted to invest over 25 billion dollars in
infrastructure improvements over the next four years to bring broadband
services to their customers.
The market-opening 1996 Act sparked infrastructure investment in
telecommunications facilities by incumbent LECs as well as competing
carriers. For example:
<bullet> Incumbent LEC investment in infrastructure was flat or
declining until the passage of the 1996 Act;
<bullet> After the 1996 Act, incumbent LEC investment jumped
approximately 20 percent;
<bullet> Aggregate industry investment subsequent to passage of the
Act, including both incumbent LECs and competing carriers,
nearly doubled, increasing from 30 billion dollars to 60
billion dollars.
These statistics do not paint a picture of incumbent companies
prevented by legal requirements from deploying new services to
consumers.
The vision of the Act and the vision shared by the FCC--that
consumers will have a choice of providers offering a choice of pipes
into the home or workplace--is being realized. It is being realized
through the opening of markets required by Congress in the 1996 Act.
The rapid growth of broadband services is tangible proof that the
market-opening requirements of the Act are working.
The Section 271 Incentives to Open Local Markets
The opening of local markets is absolutely critical for
accelerating broadband deployment. Exempting data traffic from Section
271 would eliminate a crucial incentive for the incumbent BOCs to open
their local monopoly markets. This is not an insignificant exemption.
In fact, as I discuss below, data traffic has already surpassed voice
traffic on long haul networks.
Simply stated, the Act requires the BOCs to open their local
markets to competitors. Section 251 states the rules of the game and
Section 271 provides a structured incentive for BOCs to play by the
rules. At its core, Section 271 is a simple yet clever proposition: in
exchange for opening their local facilities to competitors, the 1996
Act provides the BOCs with the substantial reward of the long distance
``carrot.'' Altering this balance by exempting data traffic from the
restrictions in Section 271 would inhibit, rather than further, the
Act's goal of fostering robust broadband deployment.
As local markets are opened, broadband deployment is both
stimulated and accelerated. Specifically, it is the opening of those
local markets that is driving broadband deployment and innovation. This
is true because nondiscriminatory access to the ``last mile'' and the
ability to collocate--both components of the competitive checklist--are
critical inputs for the provision of DSL service.
Unfortunately, the first three years of the implementation of the
1996 Act were characterized not by cooperation but by confrontation.
Litigation instead of collaboration. The result was uncertainty,
confusion, and delay. We lost valuable time. Then, in January of 1999,
the Supreme Court largely affirmed the Commission's implementation of
the market-opening provisions of the Act. Once the smoke cleared, we
began to witness a sea change. Finally, the battles began to move out
of the courtroom and into the marketplace.
Within approximately the last six months, the Commission has
unanimously approved Section 271 applications for both New York and
Texas. We need only review the state of competition in New York and
Texas to know the Act is working. More activity is on the horizon. The
BOCs have indicated that they intend to file applications for numerous
states across the nation within the next six to nine months. The
Commission welcomes, and looks forward to, these filings.
As I have stated before, opening markets can be difficult work, and
establishing competition is not easy or fast. But both Verizon and
Southwestern Bell have shown that it is well within the grasp and
control of the BOCs. I commend both of these companies, and the New
York and Texas Commissions, for their dedication and hard work in
ensuring that the fruits of competition are enjoyed by local and long
distance consumers in Texas and New York.
As envisioned by the 1996 Act, the Section 271 carrot has fueled
the growth of local and long distance competition. Because Verizon and
Southwestern Bell opened their local facilities to competitors in New
York and Texas as required by the Act, competition in the local
telephone market has flourished in those states. One analyst estimates
that competitors will serve about 20 percent of the local lines
(approximately 3 million lines) in New York by the end of this year.
That is a substantial increase from the 7 percent of the local lines
that competitors served in New York at the end of 1999 (approximately 1
million lines). Verizon is completing over 270,000 local orders each
month for competitors in New York. Local competition is thriving in
Texas as well. The Department of Justice estimated that competitors
served over 800,000 lines in Texas at the end of last year. That is
about an 8 percent market share. Competitors' customer base, however,
has been steadily increasing. For example, in May--the most recent
month for which we have data--competitors added over 170,000 new lines
in Texas. And, I am happy to report, that a large portion of the
increase in local competition in these states since Section 271
authorization has been in the residential and small business markets.
The hard work of satisfying Section 271 has not only benefited New
York and Texas consumers of local services. In the first six months
after gaining Section 271 approval, Verizon captured nearly 900,000
long distance customers in New York. Analysts estimate that Verizon
will take as many as 1.5 million long distance lines in its first year
alone (about 10% of the market)--well ahead of the 1 million lines
Verizon set as its goal for the year. Verizon expects to capture 25 to
30 percent of the long distance market within 5 years. Analysts predict
that they will meet this goal easily. Many predict that Southwestern
Bell will have similar success in Texas. This is no small prize. Texas
alone represents about 10 percent of the nation's long distance voice
and data market.
The opening of local markets drives competition, innovation, and
produces a breadth of offerings. Although DSL technology has been
available for years, it was not until the passage of the Act that
competitive providers--called data LECs or DLECs--specializing in DSL
deployment were born and began offering DSL service to consumers.
Competitors need to collocate their equipment in BOC central offices
and require conditioned local loops before they can even offer
facilities-based DSL services. Then, to be competitive, DLECs require
timely and cost-based loops and collocation. Once the DLECs had access
to the inputs necessary to offer their DSL products to consumers, the
threat of such competition spurred the BOCs to develop their own DSL
products. Competition from the incumbent monopolies, in turn, is
spurring the DLECs to develop even more new and innovative broadband
products, services, packages, and prices. It is precisely this sort of
competitive cycle that will accelerate the availability of broadband
technology for all Americans.
Of course, competition among technologies as well as providers is
also driving this investment. Wireless technologies--both terrestrial
and satellite--are also on the scene. High-speed Internet service via
satellite is available today virtually everywhere in the United States,
including rural areas. Analysts project that wireless technologies will
have 6 to 12 percent of the broadband market by 2004. Analysts also
project that DSL will overtake cable as the overall leading technology
for delivery of broadband services as early as 2002, with cable
retaining its dominance amongst residential and small business
customers until 2004, when cable and DSL will have equal market shares.
I am proud of the FCC's record in holding firm on the requirements
of Section 271. As our experiences with New York and Texas have shown,
there is no substitute for the hard work of compliance. The rewards of
Section 271 compliance are plentiful. For the first time in history
consumers are able to choose their local service provider and take
advantage of increased competition for their long distance calls as a
strong new competitor enters the market. The rewards do not end there.
Competitive markets are also bringing consumers new choices in
technology for the 21st Century.
Removing Incentives By Exempting Data
The great competitive success stories we have been witnessing as a
result of the incentive structure established by Section 271 would be
few and far between if the proposed legislation becomes law. As
currently written, Sections 251 and 271 do not draw a regulatory
distinction between voice and data services. Carving out interLATA data
traffic from the prohibitions in Section 271 would remove a potent
incentive from the 1996 Act.
Currently, the majority of traffic travelling over long haul
networks is data--as opposed to voice traffic. Indeed, analysts expect
that data traffic will comprise approximately 90 percent of all traffic
within four years. The wholesale data service market is expected to
generate 41.3 billion dollars in 2005, up from 9.9 billion in 1999. In
a world where data is experiencing explosive growth and is rapidly
outpacing voice traffic, allowing the BOCs to carry long distance data
traffic before they have satisfied the requirements of Section 271
would severely undermine the BOCs' incentive to open their markets.
Changing the rules of the game at this juncture would also undercut
the substantial infrastructure investment being made by competitive
telecommunications providers. For example, competing carriers have
invested 30 billion dollars in new networks since the passage of the
Act and are now investing over 1 billion dollars every month in their
networks. In 1999, competing carriers have spent over 15 billion
dollars on overall capital expenditures, up from about 9 billion the
year before. Investors will cut off the spigot when competitors are
forced to try to compete with monopoly incumbent providers without full
and fair access to the BOC's bottleneck facilities.
I disagree with the notion that further deregulation is the only
way to enable incumbent LEC deployment of broadband services in rural
and high cost areas. The BOCs simply do not need to provide access the
entire way from the customer to the Internet backbone in order to
provide broadband access to their rural customers. Rather, they can
provide such broadband services to those customers the same way they
serve their urban and suburban customers--by handing data traffic that
is headed out of the LATA off to another provider who can carry it
across the LATA boundary. That provider then carries the traffic to the
Internet backbone.
Is this the most efficient way to provide service to customers? No.
Is it the most cost effective? Certainly not. Does it preserve the
incentives of the BOCs to open their local monopoly markets to
competitors faster than they otherwise might? Absolutely.
The simple reason why rural customers, and other customers in
unserved and underserved areas, are not yet being served as robustly as
we would like is not caused by legal impediments. Rather it is largely
about simple economics. Providing customers with sophisticated services
in areas of low density is an expensive undertaking. . As such, we are
mindful that some rural customers face more limited competitive choices
for broadband services at this time. Accordingly, to the extent that
there may be instances where a LATA boundary is standing in the way of
consumers getting broadband services from BOCs, the Commission has set
up a LATA boundary modification process. For example:
<bullet> A BOC that provides advanced services to customers within a
state may demonstrate that it cannot obtain an interLATA
provider to connect its in-state network to the Internet and
request a LATA modification to allow it to connect its network
to the nearest out-of-state Network Access Point;
<bullet> A BOC could also request a LATA boundary modification to allow
it to serve a particular customer, such as a hospital or
university, where the customer cannot obtain an interLATA
connection for its network; or
<bullet> A BOC may also demonstrate that it would not be able to deploy
xDSL service to a LATA within a multi-LATA state unless the BOC
is allowed to aggregate traffic from one LATA to another, or
may be the advanced services provider of last resort for
residential customers within a particular state. The BOC may
then argue that it is uneconomical to deploy advanced services
to such customers without a LATA boundary modification.
Notably, we have not received any requests for LATA modification
since adopting this procedure in February 2000, and have received no
requests to refile prior petitions. It is difficult to understand how
LATA boundaries are a barrier to broadband deployment when no BOCs have
even attempted to obtain such relief in the past five months. The
Commission has stated its commitment to reviewing, in an expeditious
manner, all LATA boundary modification requests that would provide
consumers with advanced services.
Conclusion
In conclusion, the 1996 Act is working. The explosive growth in the
deployment of broadband services and the vigorous local competition in
New York and Texas prove that the Act is working. Passage of the
proposed legislation at this critical juncture would disrupt the Act's
delicate balance between regulation and deregulation, postpone the
benefits of competition to consumers by creating uncertainty and
litigation, curtail the flow of investment into new markets, and
inhibit the Act's goal of fostering broadband deployment. For all of
these reasons, I urge you let the Act continue to work.