[Senate Hearing 106-1139]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1139
S. 2902, BROADBAND INTERNET REGULATORY RELIEF ACT OF 2000
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HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JULY 26, 2000
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Ann Choiniere, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
C O N T E N T S
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Page
Hearing held on July 26, 2000.................................... 1
Statement of Senator Breaux...................................... 43
Statement of Senator Brownback................................... 1
Statement of Senator Dorgan...................................... 42
Statement of Senator Gorton...................................... 40
Statement of Senator Rockefeller................................. 39
Witnesses
Ashdown, Sue, Co-owner, XMission, and Executive Director,
American Internet Service Providers Association................ 50
Prepared statement........................................... 53
Bryan, John Shelby, Chairman and Chief Executive Officer, ICG
Communications, Inc............................................ 7
Prepared statement........................................... 9
Duesterberg, Thomas J., Ph.D., President and Chief Executive
Officer, Manufacturers Alliance/MAPI Inc....................... 54
Prepared statement........................................... 57
Ellis, James D., Senior Executive Vice President and General
Counsel, SBC Telecommunications, Inc........................... 16
Prepared statement........................................... 18
Glassman, James K., Resident Fellow, American Enterprise
Institute, and Host, Techcentralstation.com.................... 60
Prepared statement.......................................... 68
Haynes, Arne L., President and Chief Executive Officer, The
Rainier Group.................................................. 21
Prepared statement.......................................... 23
Kennard, William E., Chairman, Federal Communications Commission,
prepared statement............................................. 2
Pitsch, Peter, Communications Policy Director, Intel Corporation,
on behalf of the Information Technology Industry Council (ITI). 70
Prepared statement........................................... 72
Strumingher, Eric, Managing Director, Paine Webber Incorporated.. 74
Prepared statement........................................... 76
Taylor, Robert, President and Chief Executive Officer, Focal
Communications, and Chairman, Association for Local
Telecommunications Services.................................... 24
Prepared statement........................................... 27
S. 2902, BROADBAND INTERNET REGULATORY RELIEF ACT OF 2000
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WEDNESDAY, JULY 26, 2000
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:37 a.m. in room
SR-253, Russell Senate Office Building, Hon. Sam Brownback,
presiding.
OPENING STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. The Committee will come to order.
The Committee today will hear testimony on S. 2902, the
Broadband Internet Regulatory Relief Act of 2000. The
legislation would eliminate unnecessary regulations that
currently inhibit the deployment of broadband services in rural
and other areas. I welcome all of you to the hearing. I look
forward to the testimony.
Broadband services have the potential to dramatically
change the way we communicate, learn, obtain medical treatment,
shop, and entertain ourselves. As much change as the Internet
itself has wrought in our society, having high-speed access to
the Web increases the types of applications that can be
provided over the Internet.
But before they can be realized, we need to ensure that all
Americans, whether they live in urban or rural areas, whether
they live in flat or mountainous areas, or whether they live on
the coast or on the Great Plains, have access to broadband
services. That is what the hearing is about.
The problem is that, while broadband services are being
deployed at an increasingly rapid pace, they are not being
deployed in rural and other high-cost, low-profit areas. A
recent study conducted by NTIA and the RUS found that:
``Deployment in urban and rural areas is not proceeding at a
comparable pace. The major cable and DSL providers are both
concentrating on serving metropolitan urban areas with high
population densities. Residents in rural areas will generally
be the last to receive the service.''
In addition, a recent Sanford Bernstein-McKenzie study
found that: ``Many of the cable upgrades to date appear to be
targeted at the most attractive neighborhoods, i.e., high
density and high household incomes.''
According to one survey, more than 73 percent of cities
with populations of 500,000 to 1 million have cable modem and/
or DSL service, but less than 5 percent--less than 5 percent--
of towns of 5,000 to 10,000 have cable modem service, and less
than 2 percent of such towns have DSL service. All the cities
surveyed that had populations greater than one million had both
cable modem and DSL service, while less than \2/10\ of 1
percent of towns of less than 1,000 people had either cable
modem or DSL service.
The NTIA-RUS study found a plausible explanation for this
disparity: ``The costs of high speed cable data deployment and
operation in rural areas are high and, because the subscriber
base in rural areas is more dispersed than in more densely
populated areas, there is less economic incentive to connect
rural areas.''
Some members of the competitive community argue that
competition will drive broadband deployment into rural areas.
That is simply not the case. As the NTIA-RUS study found:
``There is little evidence to date that competition among wire-
based and terrestrial wireless-based systems has promoted near-
term deployment of advanced services in rural areas outside of
towns.''
In addition, the Sanford study previously mentioned found
that: ``Wireless will not be a factor in the residential
broadband market until at least 2002.'' The Bernstein-McKenzie
report further stated that fixed wireless ``will primarily
address residential customers and markets in areas where
advantageous climates and topographies permit filling in holes
that cable and DSL find less economical to serve.''
Competition will therefore not drive broadband deployment
in rural areas. The economics of broadband deployment in rural
areas simply do not facilitate the type of competition that we
currently are witnessing in urban and densely populated
suburban areas. As a result, Congress needs to provide an
incentive to companies to deploy broadband services in rural
areas.
Different people have looked at this and said there are
different ways we could go. Some Senators have proposed
subsidies to facilitate deployment. Others have proposed tax
incentives. But before we explore either of these avenues,
Congress needs to take a look at how we regulate companies when
they provide broadband services. By eliminating unnecessary
regulations, we can provide the proper incentives for companies
to make broadband as ubiquitous as the telephone.
As even FCC Chairman Bill Kennard has acknowledged,
broadband is a nascent market, in which no company or
particular technology is dominant.
[The prepared statement of Chairman Kennard follows:]
Prepared Statement of William E. Kennard, Chairman, Federal
Communications Commission
Thank you Mr. Chairman and Members of the Committee. I appreciate
the opportunity to submit written testimony to 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. It would slow down
the delivery of broadband services to rural areas by impeding the
growth of competition.
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, 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 incumbent carriers' obligations to
open the local markets to competition 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.
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.
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.
Now that implementation is fully underway it would be tragic to
change directions. That is my concern with the bill before you. It
proposes to exempt an incumbent local exchange carrier (ILEC) from the
Section 251(c) unbundling and resale requirements, with respect to
advanced services, if 80 percent of the local loops in a given service
area are ``DSL-capable'' within 3 years or 100 percent are ``DSL-
capable'' within 5 years. But, without unbundling and resale,
competitors seeking to provide broadband services would be frozen out
and rural consumers would soon be forced to pay higher rates. This is
not a step I can endorse.
I would also note that the issues surrounding inter-carrier
compensation for ISP-bound traffic are before the Commission in a
formal rulemaking proceeding. We have compiled a record, the analysis
is currently under way, and we expect to resolve the issues
expeditiously. Therefore, I respectfully request that the issue of
reciprocal compensation continue to reside, in the first instance, with
the Commission. I will keep you apprised of our progress in this
proceeding.
Rapid Growth of 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.
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 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 could reach as many as 20 million subscribers. 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:
Incumbent LEC investment in infrastructure was flat or
declining until the passage of the 1996 Act;
After the 1996 Act, incumbent LEC investment jumped
approximately 20 percent;
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
deterred 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.
Competition Drives Broadband Delivery to All Areas
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.
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.
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 are estimated to 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.
The simple reason why rural customers, and other customers in un-
served and under-served 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, the
Commission has consistently acted to remove barriers to infrastructure
investment and promote competition in broadband. For example, the
Commission has:
Convened a Federal-State Joint Conference to provide a forum
for dialogue between the Commission, the states, and local and
regional entities regarding the deployment of advanced
telecommunications capability;
Strengthened our collocation rules to encourage facilities-
based advanced services by competitors;
Encouraged the resale and unbundling of advanced services,
but clarified that xDSL services are not subject to the resale
discount when sold in bulk to ISPs;
Encouraged the competitive delivery of xDSL services through
line sharing;
Ensured non-discriminatory access to facilities through
separate affiliate conditions in the SBC/Ameritech and Bell
Atlantic/GTE mergers;
Established a comprehensive reporting requirement for
providers of broadband services in order to seek greater
insight into the development of broadband markets within
particular geographic areas;
Completed a successful auction of LMDS licenses that can be
used for the provision of advanced services, and established a
filing window for applicants to apply for authority to provide
two-way MDS services.
In addition, 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:
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;
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
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. 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. 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.
Senator Brownback. If no company or technology is dominant,
then no carrier should be regulated like a dominant carrier
when it offers broadband services. The rules imposed on
incumbents by section 251(c) of the Act should continue to
apply to telephony and the old parts of the telephone network,
but when it comes to new broadband services and new pieces of
the network the incumbent local exchange carriers, the ILECs,
should be subject to no more regulation than any other company.
The current disparity in regulatory treatment is most
striking with respect to cable companies, which have a
comparable customer base as ILECs, yet are almost completely
unregulated with respect to high speed cable modem service.
According to the Bernstein-McKenzie study again: ``Under the
status quo, cable has thus enjoyed a benefit, namely freedom
from regulation, relative to the telcos on high speed
services.''
Regulatory parity would provide the ILECs with the same
economic incentive to invest in new services, technology, and
equipment as any other broadband provider. ILECs could
aggressively deploy new equipment and offer new services
without enabling their competitors to borrow the ILECs'
facilities. ILECs would recover their costs as quickly as the
market permitted.
The Broadband Internet Regulatory Relief Act would address
these issues. Primarily what it would do is require the large
ILECs to provide advanced services to 80 percent of their
serviceable customers within 3 years and to 100 percent of such
customers within 5 years. ILECs would no longer be subject to
stricter regulatory requirements that do not currently apply to
cable companies or CLECs for the provision of advanced
services. There is a number of other provisions in the bill
which we will talk about here from panel members today.
Very few companies would ever enter a new market by serving
less profitable areas first. But with the right incentives, the
ILECs could be poised to enter the broadband market in rural
areas now and prevent thousands of rural communities from being
denied high speed access to Internet. The Broadband Internet
Regulatory Relief Act provides such incentives and I hope that
my colleagues will give it their consideration.
I would note before we go to the panel that Senate Bill
2902 does not in any way, shape, or form prevent the payment of
any compensation to competitive carriers for their cost of
transporting traffic to the Internet. While the legislation
precludes the application of reciprocal compensation to
Internet-bound telecommunications traffic, S. 2902 does not
prevent the FCC from crafting a new formula for compensating
CLECs for handling such traffic on their networks, and I would
hope that our witnesses, to the extent that they have stated
otherwise, would correct their testimony in their oral remarks.
With that, we have a number of panelists here to testify on
two panels on this very important topic of how we get broadband
high speed Internet access out to rural areas and broadly
dispersed across this country. On panel one we have: Mr. John
Shelby Bryan, Chairman and CEO of ICG Communications; we have
Mr. James Ellis, Senior Executive Vice President and General
Counsel of SBC Telecommunications; Mr. Arne Haynes, Skip
Haynes, broadband, The Rainier Group; and Mr. Robert Taylor,
President and CEO of Focal Communications.
All cell phones will be turned off during the hearing if
you could, or put them on stun if you would, instead of on the
other route, if possible.
We will run the clock on--let us put it on a 5 minute
interval to give you some idea of where you are. We will take
your full written testimony into the record if you would like
to submit it as such. But I would appreciate your directing
your attention as to how can we address this topic of getting
the broadband high speed Internet access out to the broader
dispersed areas, the rural areas across our country that are
being left out in this current expansion.
So with that, Mr. Bryan, if you would be willing to
testify.
STATEMENT OF JOHN SHELBY BRYAN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, ICG COMMUNICATIONS, INC.
Mr. Bryan. Good morning. Thank you for the opportunity to
appear before you today and discuss the implications of the
proposed broadband and reciprocal compensation legislation for
national telecom policy. I am Jay Shelby Bryan, Chairman and
Chief Executive Officer of ICG Communications, Inc., and I am
here also on behalf of COMTEL and ICG is a member of ALTS.
ICG is the largest independent facilities-based CLEC,
meaning that it is not affiliated with any cable company, long
distance provider, or, importantly for today's hearing, any
Internet service provider, ISP.
I begin with one point on which I believe everyone in this
room can agree: competition in the local telecommunications
market yields numerous customer benefits, including
technological innovation, lower prices, and improved quality.
Congress brought these very benefits to customers by passing
the 1996 Telecommunications Act. My experience has been that
the act embodies a great vision that has just begun to be
realized.
In many ways, ICG's story is just what Congress intended by
the act. We are deploying brand new technologies to provide
innovative services. We are building out an extensive
nationwide telecommunications network using fiber optics and
packet switching facilities, and we are deploying broadband
services at a high rate. In addition to all types and sizes of
business customers, we also play an important role serving the
ISP market. In fact, we are handling 10 percent of nationwide
ISP traffic and carry 30 percent of ISP traffic in California
alone.
ICG cannot effectuate the pro-competitive goals of the act
by itself. We are joined by over 375 CLECs in the United
States, including 333 facilities-based CLECs, employing over
70,000 people. The capital that we raise has been spent
deploying over 820 voice switches and 1400 data switches, 10.4
million access lines, and over 4 million miles of fiber.
These figures represent no small feat by new competitors
who have benefited from almost every provision of the act. I
think it is fair to say that there would be no DSL if it were
not for CLECs. Virtually the entire Internet backbone network
is being provided by competitors. Data CLECs supply over
100,000 of the 500,000 total DSL lines in service, a market
share of 20 percent.
More importantly, CLECs instigated the ILECs to deploy DSL
themselves, to the benefit of all consumers. SBC says it will
make DSL service available to 77 million customers by the year
2002. Would this have happened without the act, without
competition? I think not.
In that context, what about the proposed bill?
Unfortunately, it would put telecommunications competition in
reverse and would severely handicap competitors at the very
moment they are beginning to see profitability on the horizon.
The central premise of the bill is that the incumbents should
not have to unbundle or permit competitors to interconnect with
their advanced telecommunications network. It is improbable
that ILECs would build a new advanced network that does not
depend significantly on the existing network which was built
with captured ratepayer dollars.
Moreover, to fence off new network from competitors is bad
policy. Do we tell the clever innovator in San Jose with an
idea that he cannot connect to Bell's new packet switches to
complete calls to his customers, even though it may create a
tenfold savings to the ultimate customer? Are we going to wall
off networks that are used to provide advanced services,
leaving only the old network accessible to innovators and
competitors? Such a result makes no sense.
The reciprocal compensation provisions of the proposed
legislation would cause serious harm to local competition and,
perhaps worse, significant harm to the Internet. How did the
dial-up access market develop? Senator Brownback, you were
referring to the fact that there is limited service in the
rural areas. Well, 3 or 4 years ago the ISPs wanting customers
to reach them were not also being adequately served by the
ILECs. Their failure created an opportunity for my company. We
did a good job in serving the market and won customers. We
saved the ILECs from deploying billions of dollars in capital
and helped prevent customers from moving off the telephone
network to other providers like cable telephone companies.
In spite of the technical and legal complexities, the crux
of this issue is simple. While the ILECs want to collect lots
of money for the services they provide to CLECs, the ILECs find
it inconceivable that they must pay CLECs for the same
services. In the simplest terms, CLECs must get paid somehow
for the costs they incur.
But let us remember what competitors have had to go through
to get this business. Before we can provide service to ISPs, we
have to spend at least $10 million for a single circuit switch
so people can connect to the Internet. Then we have to deploy
fiber or trunking to the Bellco central office and in turn we
have to deploy connection to the ISPs. Then we must market the
ISPs and sell them our service.
Only after we have made this significant capital investment
and these expenses do we earn the right to terminate ILEC
customer traffic on our network. While ILECs and CLECs may
disagree and litigate about what those costs are, no one
actually denies there are costs.
So how should CLECs get paid for these costs? CLECs cannot
charge ISPs access charges, as they would a long distance
carrier. The FCC has appropriately prohibited the use of that
compensation mechanism. What are the other options? The ILECs
suggest that the CLECs should bear the burden of these costs
themselves. This is not possible. CLECs are constantly seeking
capital from the debt and equity markets to build network
infrastructures. If CLECs face uncompensated costs, they will
be forced to think carefully about serving ISPs, to the
detriment of all users of the Internet.
Could CLECs just get the money from ISPs' customers, as the
ILECs suggest? We have a grave concern that raising the cost of
using the Internet by passing additional costs on to the ISPs
will have a dampening effect and the exciting growth in the
Internet services. Second, we would worry about the negative
impact on the many small but innovative ISPs who may not be
able to compete against the ILEC-owned ISPs.
Alternatively, if we are not compensated for our network,
we would have to evaluate whether it made sense to serve that
market. ISPs could be left to search for network capacity,
capacity they may not find in the marketplace. Without
competition in the fastest-growing segment of the
telecommunications market, Internet access, and insufficient
capacity on the incumbents' network, where could they go?
Nowhere, and the development of the Internet would stop dead in
its tracks.
The way I see it, when ILECs pay CLECs for costs of
services the CLECs provide, which costs the ILECs actually
avoid, what harm could possibly result? Simply because ILECs
pay money, even a significant amount of money, to the CLECs
does not in and of itself mean something is wrong with the Act.
If this is such a problem for the ILECs, they can avoid it
by deploying their own network. Instead of coming to Congress
seeking legislation that protects them from competition, they
can do what we did: build out a network, invest billions of
dollars. And if the ILECs want to get rid of reciprocal
compensation so badly, do it the way the Act intended, the old-
fashioned way, by competing in the marketplace for Internet
access.
If Congress truly is committed to promoting competition,
innovation and consumer choice in telecommunications throughout
the nation, you should not amend the Act as Senator Brownback
proposes. Instead, Congress must allow the marketplace to
continue to develop, with competitors and incumbents competing
on fair and just terms.
Due to the competition that currently exists in the
broadband marketplace, it is only a matter of time before all
Americans have the ability to receive broadband access. No
changes in the Act are needed to accomplish this goal. ICG
urges you to continue to support competition in the
telecommunications marketplace and its resulting benefit to
consumers.
Thank you for the opportunity to testify here today. I
would be glad to answer any questions.
[The prepared statement of Mr. Bryan follows:]
Prepared Statement of John Shelby Bryan, Chairman and Chief Executive
Officer, ICG Communications, Inc.
I. Introduction and Summary
Good morning. Thank you for the opportunity to appear before you
today to talk about telecommunications policy and the reciprocal
compensation and broadband legislation the Committee is considering. I
am J. Shelby Bryan, Chairman and Chief Executive Officer for ICG
Communications, Inc.
Based in Englewood, Colorado, ICG Communications is the country's
largest, independent, facilities-based competitive local exchange
carrier (CLEC). ICG is not affiliated with any cable company, long
distance provider, or--importantly for today's hearing--any Internet
service provider (ISP). ICG operates a nationwide communications
network that provides integrated telecommunications services to over
700 cities. ICG primarily serves small to medium sized businesses,
interexchange carriers (IXCs), and ISPs. ICG is an industry leader,
furnishing services to more than 500 ISP customers, and providing
Internet access for approximately 10 percent of the nation's dial-up
Internet traffic. In fact, in 1999 approximately 30 percent of all
Internet traffic in California traveled over ICG's network.
When I look at the Commerce Committee's roster, I see a number of
Senators in whose state ICG operates. ICG has a significant presence in
Texas and several states in the Southeast, including Georgia and
Tennessee, and is expanding its service offerings to new markets,
including Phoenix, Boston, Seattle, Las Vegas, and Portland, Oregon.
I look forward to speaking with all of you today in an effort to
resolve the important reciprocal compensation and broadband deployment
issues before us.
A. LICG Opposes Senator Brownback's Proposal Because It Would Hurt New
Competitors in the Telecommunications Marketplace
The reciprocal compensation and broadband provisions in Senator
Brownback's bill would block CLECs' ability to compete effectively in
the telecommunications marketplace. First, the reciprocal compensation
provisions would prohibit CLECs' from recovering the very real costs of
terminating ISP calls on their networks, thereby threatening CLECs'
competitive position and even their viability. As incumbent local
exchange carriers (ILECs) have said repeatedly, termination costs are
real and, in accordance with longstanding cost recovery principles,
should be paid by the entity causing the costs--in this case the ILEC.
CLECs, which are just beginning to see profitability, cannot bear these
ILEC-imposed costs themselves. Instead, CLECs likely would have to pass
along price increases to ISPs, who in turn are likely to increase their
monthly Internet access fees to consumers by as much as six dollars (in
addition to monthly fees of approximately $10 to $30 per month). CLECs
may choose to exit the ISP market because it no longer would be cost
effective to serve ISPs. A dwindling number of CLEC competitors would
diminish the quality and choices all customers now enjoy. ILECs would
be allowed to leverage their monopoly position into the ISP market.
Federal legislation to end reciprocal compensation is a drastic
move, especially in a context in which most regulatory bodies already
have grappled with the issue. The states, represented by the National
Association of Regulatory Utilities Commissioners (NARUC), have told
Congress that this issue should be resolved by the state public
utilities commissions. Indeed, 38 state commissions have already
resolved the issue--33 in favor of reciprocal compensation for ISP
calls. The Federal Communications Commission (FCC) has told Congress
that the issue is complex and should be considered in the context of
the myriad other intercarrier compensation mechanisms currently in
place. Federal and state courts have considered and are continuing to
decide the issue; seven Federal District Courts and three Federal
Appellate Courts have ruled in the CLECs' favor.
Perhaps most importantly, the marketplace already is working to
resolve the issue. Most contracts (known as interconnection agreements
under the Telecommunications Act of 1996 (Act)), had 3-year terms and
are beginning to expire. During implementation of the Act, ILECs
negotiated relatively high reciprocal compensation rates, assuming most
of the payments would flow from CLECs to ILECs. But now, as the
original contracts are being renegotiated, ILECs are bargaining for
lower rates. Some new contracts have rates as low as 10 percent of the
rates under the old contracts. Given that reciprocal compensation rates
are falling, and that the states are using their authority under the
Act to resolve conflicts when they arise, Congress need not change the
law with regard to reciprocal compensation.
As to the broadband provisions of the bill, they are equally
unnecessary as the Act and the market ultimately are working to bring
technology and competition to consumers everywhere. The bill's
broadband provisions eliminate some of the Act's local market opening
requirements as they apply to packet-switched or advanced services.
These requirements have allowed the CLEC industry to provide
competitive alternatives, particularly in the broadband marketplace.
This success has come despite a dizzying array of ILEC--and especially
Regional Bell Operating Company (RBOC)--stall tactics, baseless
lawsuits, and anti-competitive business practices that pre-date the Act
but have worsened since the Act's inception. By eviscerating these
requirements for packet-switched and advanced services, Senator
Brownback's bill would limit CLECs' ability to offer broadband services
via a packet-based system with many negative results. Competition for
broadband services would be impeded, ILECs could re-dominate the
market, and the very consumer benefits the Act sought to bring about
through competition (e.g. lower prices, high quality services, and
increased technological innovation) could be lost. Further, given that
the CLEC industry is the driving force behind national broadband
deployment, and that Senator Brownback's proposal would impede CLECs'
ability to deploy broadband networks, the bill actually would have
severely adverse unintended consequences.
II. LThe 1996 Telecommunications Act's Local Market Opening Provisions
Have Allowed CLECs to Drive Broadband Deployment, Despite
Continued Anti-Competitive ILEC Actions
The Act was designed to open the local telecommunications market to
competition and create the consumer benefits that can only come through
competition. The Act accomplishes this through a number of means,
including interconnection, unbundling, and resale provisions. The Act
allows CLECs to utilize, to a limited degree, and at cost-based rates,
the network that ILECs constructed using captive ratepayer money
acquired during the ILECs' monopolistic reign.
Following the Act's passage in 1996, CLECs were not immediately
able to take advantage of the Act's market opening provisions. Despite
the fact that the Act is a series of compromises to which the ILECs
undeniably agreed, ILECs reverted to a variety of stall tactics,
baseless lawsuits (fought at both the federal and state levels) and
anti-competitive business practices to prevent full implementation of
the Act's market opening provisions.
As a result of these ILEC actions, local competition has been
seriously impeded. Nevertheless, the last few years have seen the rise
of the CLEC industry and, with it, a dramatic increase in competition
in the telecommunications market. As of the end of 1999, there were
over 375 CLECs in the United States, including 333 facilities-based
CLECs, employing over 70,000 people. These companies have deployed over
820 voice switches and 1,400 data switches, 10.4 million access lines,
and over 4 million miles of fiber. In 1996, the combined CLEC market
capitalization was $3.1 billion. Today, that number is $85 billion.
Further, both institutional and private sources are investing record
amounts in CLECs at all stages of the capital formation cycle. By
undermining fundamental provisions in the Act, Senator Brownback's bill
jeopardizes CLECs and the competitive benefits they have brought to the
market.
A. LThe Reciprocal Compensation Provisions of Senator Brownback's Bill
Would Harm Competition, Consumers and the Development of the
Internet
1. LReciprocal Compensation Pays For Real Costs and Repealing ILECs'
Obligations to Pay These Costs Will Result in Great Harm to
Competition
At the outset, it bears emphasizing that reciprocal compensation
pays for real costs--it is not a suspect revenue source, but rather a
legitimate, regulator-sanctioned method for recovering these real costs
when two local carriers handle a call. A reciprocal compensation system
initially was adopted at the insistence of the Bell companies, when the
traffic was imbalanced in their favor. Now that there is an imbalance
in the favor of competitors, the Bell companies have attacked the
system as somehow illegitimate.
The costs of terminating calls to ISPs are the same as the costs of
terminating any local call; the transport from the hand-off point (or
``point of interconnection'') to the terminating switch, plus the
switching and delivery of the call to the called number. From a cost
point of view it is irrelevant whether the call is terminated to a
residence, a business, or an ISP. All calls appear as local calls that
are terminated to a local customer--and ISPs are simply local customers
of a local exchange carrier. Since 1983, the FCC has enforced a policy
that allows ISPs to purchase local service rather than access service
and, as a result, when consumers access ISPs, they dial a local number
and do not pay toll charges.
Congress, the FCC, the states, and the industry all have recognized
that termination costs are real and should be compensated. Congress has
found that reciprocal compensation is ``integral to a competing
provider seeking to offer local telephone services over its own
facilities.'' \1\ Congress provided under the Act that each local
exchange carrier or ``LEC'' (whether the incumbent or a new competitor)
is required to pay the other for these costs.\2\ The FCC has found that
``carriers incur costs in terminating traffic that are not de minimis,
and consequently bill-and-keep [the absence of reciprocal compensation]
arrangements that lack any provisions for compensation do not provide
for recovery of costs.'' \3\ Thirty-three of 38 states that have
considered the issue have held that dialing a local number to reach
your ISP should be treated like a local call eligible for reciprocal
compensation. No federal court which has reviewed this issue has
decided against payment of reciprocal compensation. Even the incumbents
have recognized that a terminating carrier incurs real costs that
should be compensated.\4\
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\1\ H.R. Rep. No. 104-104, pt.1, at 72 (1995).
\2\ 47 U.S.C. 251(b)(5).
\3\ See First Report and Order, Implementation of the
Telecommunications Act of 1996, 11 FCC Rcd 15499, para. 1112 (1996),
modified on recon., 11 FCC Rcd 13042 (1996).
\4\ See, e.g., Implementation of the Local Competition Provisions
in the Telecommunications Act of 1996, Reply Comments of Bell Atlantic
at 20 (May 30, 1996) (``The most blatant example of a plea for a
government handout comes from those parties who urge the Commission to
adopt a reciprocal compensation price of zero, which they
euphemistically refer to as `bill and keep.' A more appropriate name,
however, would be ``bilk and keep'' since it will bilk the LECs'
customers out of their money. . . . [A] regulatorily mandated price of
zero--by any name--would violate the Act, the Constitution, and sound
economic principles.'').
---------------------------------------------------------------------------
Forcing CLECs to incur uncompensated costs by eliminating
reciprocal compensation for ISP traffic will weaken the CLECs'
competitive position. CLECs have begun to prosper in the local market,
due in large part to the pro-competitive provisions of the Act, and
Congress should not act to threaten this progress. CLECs have been more
successful than ILECs in attracting ISP customers because CLECs provide
state-of-the-art fiber-based infrastructure, better rates, and services
(such as collocation) that are more tailored to ISPs' demands. ISPs are
particularly telecommunications-intensive businesses, given that the
Internet depends on telecommunications for its very existence.
Therefore, ISPs have enormous needs for high volume, high capacity, and
high quality services. The ILECs have failed to address adequately the
high growth Internet access market and, in doing so, have lost out to
the CLECs. Because of this success by competitors, the ILECs seek to
strangle competition by making it economically impossible for CLECs to
serve ISPs. This motivation is even more clear when one considers that
every ILEC also is an ISP.
Let me give you one example of the power of competition in the
local telephone market. In June, a part owner of a small family-run ISP
from the rural town of Mt. Shasta, California spoke at a Congressional
briefing about his experience receiving service from a CLEC. He
recounted the following. First, he found that switching from the ILEC
to a CLEC enabled his company, SnowCrest, Inc., to collocate its
equipment at the CLECs premises, providing enhanced quality and greater
efficiency. SnowCrest also purchased local points of presence (POPs)
from the CLEC to enable SnowCrest's customers to reach the Internet
without incurring toll charges by dialing a local telephone number. The
ILEC did not provide these services. SnowCrest reported that it took
the ILEC 30 days to fulfill an order for new lines and one to three
weeks to repair any problems resulting from improper installation.
Orders placed to a CLEC took only seven to 10 days to fulfill and
repairs on improper installations were made in one day. This story is
but one example of how competition has brought benefits to consumers
and has spurred the development of the Internet.
If CLECs are forced to incur uncompensated costs, they inevitably
will respond in one of several ways. First, CLECs could simply bear the
costs. As a result, CLECs would become less viable local exchange
competitors than ILECs, who will not bear such uncompensated costs.
Second, CLECs may be forced to pass along price increases to ISPs, in
which case those ISPs likely will increase their monthly Internet
access prices to consumers. It is estimated that eliminating reciprocal
compensation for ISP calls could cause Internet prices for consumers to
rise by more than six dollars per month in addition to monthly fees
that range from $10 to $30. Congress has made it a matter of national
policy to close the ``digital divide'' and has manifested its intention
that access charges not be levied on the Internet. Congress clearly
recognizes the importance of maintaining reasonable Internet access
prices. An increase of more than six dollars per month for an average
consumer could have a wide impact. Right now, 129 million Americans
have access to the Internet--over 125 million of whom use a local
telephone connection to gain that access. At a time when ubiquitous
access to the Internet is a national priority, Congress should not pass
legislation that would make the Internet more expensive for American
consumers.
A third CLEC response to the burden of uncompensated costs would be
for CLECs to decline to serve the ISP market. Fewer CLECs serving ISPs
naturally would result in fewer choices for ISPs. This outcome is
especially disturbing since the ILECs also are ISPs, which motivates
them to stifle the availability of quality services to their competitor
ISPs. Ultimately, ISPs could be left to rely solely on the ILEC for
service in a monopoly environment, the very situation the Act sought to
correct by encouraging the development of local competition.
Finally, changing the reciprocal compensation mechanism now, once
the CLECs have begun effectively to serve this market, will have
serious effects on CLECs' continuing ability to raise capital. If
Congress changes the competitive landscape, investors surely will
become hesitant to fund CLECs. Because local services (wired or
wireless) are extremely capital intensive, CLECs must regularly seek
additional capital from both debt and equity markets, and they rely on
a predictable regulatory framework to reassure investors. Forcing
uncompensated costs on the competitive industry will endanger
investment in the short term and in the long term will send a negative
signal to capital markets about the stability and the future prospects
of CLECs. Further, if CLECs become less viable in the market, raising
capital to expand into broader telecommunications markets, including
residential and business services, will become increasingly difficult.
CLECs would be crippled in their efforts to build the very facilities
that are needed to bring about Congress' pro-competitive vision when it
passed the Act.
2. Congress Should Defer to the States, the FCC, and the Marketplace
Congress should allow the states and the FCC to resolve reciprocal
compensation issues. The legislation unreasonably usurps state
regulatory authority and prevents regulators from ensuring that CLECs
are compensated for their costs. The state public utilities commissions
(PUCs), guided by the Act, have significant experience determining
rates for a number of components of an interconnection agreement, of
which reciprocal compensation is just one. States also have authority
under the Act to resolve disputes arising from interconnection
negotiations and to set rates for interconnection. The majority of the
states have exercised the authority given to them by the Act to
consider and resolve reciprocal compensation issues and have completed
their proceedings. Given the history of the PUCs in resolving
reciprocal compensation issues, there is no reason to isolate
reciprocal compensation now and remove it from the states' authority.
The states, represented by NARUC, testified before the House of
Representatives on June 22, 2000. NARUC told the House
Telecommunications Subcommittee that
The reciprocal compensation issue is best addressed through the
existing statutory and regulatory framework in the Act. Under
the Act, incumbent and competitive carriers are required to
negotiate reciprocal compensation payments. If these
negotiations break down, state commissions are given the
responsibility to arbitrate any disputes.\5\
---------------------------------------------------------------------------
\5\ Hearing of the U.S. House of Representatives Committee on
Commerce, Subcommittee on Telecommunications, Trade, and Consumer
Protection, Regarding ``H.R. 4445, to exempt from reciprocal
compensation requirements telecommunications traffic to the Internet''
(``House Reciprocal Compensation Hearing'') Written Testimony of The
Honorable Joan Smith, Commissioner, Oregon Public Utilities Commission
and Chair, NARUC Telecommunications Committee at 4.
CLEC claims about the detrimental effects of legislation to
eliminate reciprocal compensation for ISP calls have been seconded by
NARUC. NARUC testified that such legislation would raise ISPs' costs,
in turn raising prices for access to the Internet for most consumers.
Further, CLECs are required by law to transport and terminate all
calls; thus, preventing CLECs from recovering the associated costs may
constitute a ``taking'' of their property without compensation.
According to NARUC, ``it changes the Act so that a business is required
to provide a service for free to its competitors.'' \6\ The states have
determined that CLECs should be compensated for their costs and
Congress should not usurp the states' authority to do so.
---------------------------------------------------------------------------
\6\ Id. at 3.
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States play a key reciprocal compensation role. In fact, the states
have a critical role in regulating other aspects of how, and if, CLECs
can operate. One of the more spurious arguments against reciprocal
compensation for ISP traffic is that there are ``sham'' CLECs that
operate only to receive reciprocal compensation payments for their ISP
affiliates. The states have--and always have had--the authority to
determine which competitors will be authorized to compete in their
state and under what terms and conditions. If ISPs were to attempt to
become CLECs for purposes of collecting reciprocal compensation only--
with no intention of providing local service--they would be hard
pressed to pass muster with the states. The states have the authority
to require competitors to provide local service to non-ISP customers or
to impose other requirements on behalf of the public interest. If there
were, in fact, ``sham'' CLECs, states are well equipped to discipline
them.
The FCC currently is considering intercarrier compensation, and
opened a rulemaking on June 23, 2000, to solicit comment on a
reciprocal compensation case recently remanded by the U.S. Court of
Appeals for the D.C. Circuit. Larry Strickling, the FCC's Common
Carrier Bureau Chief, testified before the House Telecommunications
Subcommittee that resolution of the issue is complex and must
necessarily be made in the broader context of all intercarrier
compensation mechanisms.\7\ Mr. Strickling cautioned the Subcommittee
against singling out ISP calls and setting up a separate regime. He
further testified that state commissions and state courts are well-
equipped to dispose of any cases of fraud by an ISP. The FCC's
testimony reinforces the fact that the resolution of reciprocal
compensation issues is a complex task that should not be dealt with
through legislation that dramatically restructures intercarrier
compensation for just one segment of the telecommunications market.
Against this backdrop, the House Commerce Committee has given the FCC
until September 30, 2000, to act, and Members of the Senate also have
urged the FCC to act by that time. The FCC has stated its intention to
meet that deadline.
---------------------------------------------------------------------------
\7\ House Reciprocal Compensation Hearing, Testimony of Lawrence
Strickling, Chief, Common Carrier Bureau, Federal Communications
Commission, Federal News Service Transcript.
---------------------------------------------------------------------------
Not only have regulatory bodies successfully tackled reciprocal
compensation, but the market also is working to set reciprocal
compensation rates at the appropriate level. The original
interconnection agreements that govern the payment of reciprocal
compensation are in the process of being renegotiated. As new contracts
are negotiated, ILECs are asking for lower reciprocal compensation
rates. Some new contracts have rates as low as 10 percent of the rates
in the original interconnection agreements. As the competitive market
continues to develop, rates naturally will reach the appropriate level
that reflects costs, as would happen in a free market. Given time, the
market will resolve the issue on its own.
In the past, ILECs have recognized that a truly competitive market
will operate to regulate the level of reciprocal compensation rates.
During the implementation of the Act, when ILECs argued that they must
be compensated for the use of their networks by competitors, those
competitors worried that incumbents--believing that they would be the
recipients of the bulk of the payments--would set reciprocal
compensation rates unreasonably high. To assuage the FCC, Bell Atlantic
argued:
If these rates are set too high, the result will be that new
entrants, who are in a much better position to selectively
market their services, will sign up customers whose calls are
predominantly inbound, such as credit card authorization
centers and Internet access providers. The LEC would find
itself writing large monthly checks to the new entrant. By the
same token, setting rates too low will merely encourage new
entrants to sign up customers whose calls are predominantly
outbound, such as telephone solicitors.\8\
---------------------------------------------------------------------------
\8\ Reply Comments of Bell Atlantic, supra note 4, at 21.
Ultimately, the incumbents negotiated relatively high rates,
thinking they would collect more than they paid, but instead they ended
up paying more than they collect and asking Congress for relief. It
bears noting that in cases in which the ILECs have stood to gain from
reciprocal compensation, they have argued not only for high rates, but
also have defended imbalances in traffic when that imbalance is
financially in their favor. In the wireless context, for example, most
wireless customers use their phones to dial wireline customers, but do
not receive very many calls from the wireline network. ILECs terminate
about four times as many calls from wireless networks as wireless
providers terminate from the wireline network. Despite this dramatic
imbalance in traffic, ILECs have argued that the ratio of traffic is
immaterial, and that only the costs imposed on the terminating carrier
should be considered.\9\ The ILECs' current statements that reciprocal
compensation should not be paid when traffic is imbalanced should be
viewed in the context of their arguments to the contrary when they are
the beneficiaries. In reality, these payments are based on real costs
and their rates should be negotiated by the parties in the market.
Where, as here, market forces are at play, Congress need not intervene.
---------------------------------------------------------------------------
\9\ See, e.g., Letter by Michael K. Kellogg to FCC Chairman William
Kennard enclosing report by Professor Richard A. Epstein, Matter of
Interconnection Between Local Exchange Carriers and Commercial Mobile
Radio Service Providers, CC Docket No. 95-185, 15-16 (May 16, 1996)
(Bell Atlantic and SBC Communications recognized in 1996 that 85
percent of all wireless calls originate via wireless telephones and are
terminated on the ILEC network. Bell Atlantic and SBC nonetheless
argued that ILECs should be compensated for the costs of terminating
wireless calls.).
---------------------------------------------------------------------------
Congress has stated its intention to foster the growth of the
Internet by creating an environment where no additional costs are
imposed on Internet access. Congress also has manifested its commitment
to creating a competitive telecommunications market through its passage
of the Act by an overwhelming margin. Given the important objectives
embodied in the Act, Congress should not pass legislation that
threatens the growth of the Internet, the prices Americans pay for
Internet access, and the viability of competition for local
telecommunications services.
B. LThe 1996 Telecommunications Act's Market Opening Requirements Are
Working to Stimulate Broadband Deployment
1. CLECs Are Driving Broadband Deployment
The competitive telecommunications industry currently is deploying
broadband service at a staggering pace and CLECs are among the industry
leaders in the provision and deployment of Digital Subscriber Line
(DSL) service. Recent figures indicate that CLECs supply over 100,000
DSL lines, and the CLEC market share of DSL lines at the end of 1999
was approximately 20 percent. As a result, CLECs now are able to offer
DSL broadband service to roughly 25 percent of the addressable market
in the country, a number that will grow as the competitive industry
continues to deploy broadband networks.
This push by competitive carriers to deploy broadband service has
created a tremendous amount of competition within the broadband
marketplace, and has resulted in the proliferation of advanced service
offerings by both competitive and incumbent carriers, aggressive
broadband service deployment schedules, and the significant benefit to
consumers of high-speed Internet access at rates that are declining
remarkably quickly. For example, SBC recently announced that it will
slash rates and waive installation fees for its residential DSL
service. Through its ``Project Pronto'' initiative, the company says it
will provide DSL service to 77 million customers by 2002. Further, the
RBOCs all have announced a significant acceleration of their broadband
deployment schedules to counter CLEC deployment. Just as the Act
intended, the incumbents are being forced to respond to competition
initiated by CLECs.
Other industry segments also contribute to the rapid increase in
broadband deployment. For example, cable companies, terrestrial and
satellite wireless telecommunications providers, fixed and mobile
wireless companies and other new entrants, including electric
utilities, now offer broadband services. Currently, approximately 2
million U.S. customers access the Internet through cable modems with
7,000 new cable modem customers being added every day. The spread of
broadband services has even reached rural communities and previously
underserved areas. Many rural telecommunications companies, both
private and cooperatives, are upgrading their systems to provide
broadband services. Thus, rewriting the Act to increase the deployment
of broadband services in rural areas is unnecessary.
2. LThe Bill's Broadband Provisions Would Limit CLECs' Ability to
Compete in the Broadband Marketplace, and Ultimately Would
Impede Broadband Deployment
Senator Brownback's bill would undermine the Act's local
competition provisions. First, Senator Brownback's bill would remove an
ILECs interconnection, unbundling, and collocation requirements for
packet-based networks, and remove its resale requirements with regard
to the provision of advanced services, provided that the ILEC meets
certain build out requirements. Further, the bill would remove ILEC
interconnection and unbundling requirements for optical fiber used to
provide residential telecommunications service where the fiber is
capable (or will be capable through an electronics upgrade) of
providing high-speed data, VHS-quality video, and telephone exchange
service, again dependent on build out requirements. The impact of these
provisions on CLECs' ability to offer broadband services would be
devastating. Denied access to ILECs' networks, CLECs would suffer.
Competition in telecommunications cannot happen without the
interconnection of competing providers' networks on fair terms and
conditions and at reasonable rates. Without interconnection, no
competitor could raise funds to deploy broadband services.
Second, if the FCC finds that an ILEC operates in an exchange in
which a competitor also provides advanced services, the FCC must grant
that ILEC unconditional pricing flexibility. The bill does not require
actual competition to be present for ILECs to attain this pricing
flexibility. Instead, as noted, the mere presence of a single
competitive provider, regardless of the actual extent of competition in
that exchange, will trigger pricing flexibility. As a result of this
provision, in areas where an ILEC faces competition only from a single,
small competitor, the ILEC would be able to lower its prices for
advanced services to anti-competitive levels that the competitive
provider could never match. In this way, the ILECs would assert their
market power to restore their monopoly.
Third, ILECs that use remote terminals \10\ to supply advanced
services must provide competitors access to subloop network elements
used for advanced services (such as a Digital Subscriber Line Access
Multiplexer (DSLAM)) but would not be required to provide collocation
at the terminals. The inability to collocate would force CLECs desiring
to offer broadband services through a remote terminal to use the ILECs
DSLAM located in the remote terminal. CLECs that use an ILECs DSLAM are
locked into the service and technology the ILEC offers through that
DSLAM. Thus, the CLEC would be prevented from offering the very
innovative, technologically advanced services that the Act sought to
promote, and consumers would be stuck with whatever service the ILEC
decided to offer. The inability of competitors to collocate at ILEC
owned remote terminals would, as a practical matter, seriously hamper
CLECs' ability to offer DSL and other services.
---------------------------------------------------------------------------
\10\ Remote terminals are the gray or green metal boxes incumbents
install near consumers' homes to aggregate traffic from several
customers.
---------------------------------------------------------------------------
Fourth, pursuant to Senator Brownback's bill, ILECs would not be
subject to the Act's network elements unbundling requirements unless
the elements in question ``are to be used predominantly to provide
telephone exchange service,'' and telephone exchange service may not
encompass broadband services. Although the language is not precise,
this provision seems to limit CLECs' ability to buy network elements on
an unbundled basis depending on what type of service is provided using
those elements. As a result, data CLECs and traditional CLECs offering
data services would not be able to purchase unbundled network elements
necessary to offer broadband service, again severely limiting
consumers' choices.
The bill does preserve CLECs' ability to gain access to ILECs'
local copper loops. The value of this guarantee, however, is
questionable. First, the bill implies that the Act was not meant to
address packet-based and other advanced service networks. In actuality,
Congress did intend for the Act to encompass packet-based networks. FCC
Chairman William Kennard recently supported this view when he said that
``There was discussion of the Internet at that time [i.e. during
consideration of the Act].'' \11\ Packet network technologies have been
available and deployed for at least a decade. Further,
telecommunications services are quickly migrating to a predominantly
packet-based architecture that offers increased quality of service and
cost efficiencies. Under Senator Brownback's proposal, the CLEC
industry would be relegated to using the older, less efficient copper
based network when using ILEC unbundled network elements. Obviously,
this result creates a distinct, unjustified, competitive advantage for
the ILECs over their CLEC competitors.
---------------------------------------------------------------------------
\11\ House Judiciary Committee Hearing on Legislation Dealing with
the Internet, Statement of William Kennard, Chairman, Federal
Communications Commission, Federal News Service Transcript.
---------------------------------------------------------------------------
IV. Conclusion
If Congress is truly committed to promoting competition,
innovation, and consumer choice in telecommunications throughout the
nation, it should not amend the Act as Senator Brownback proposes.
Instead, Congress must allow the marketplace to continue to develop as
it has, with incumbents and competitors interconnecting their networks,
passing traffic back and forth, and competing on fair and just terms.
I wholeheartedly agree with the goal of providing broadband
services to every American. There is, however, a right way to go about
doing this, and a wrong way. Targeted, specific solutions, such as the
FCC's Advanced Services Order \12\ allowing limited LATA modifications
to support the deployment of advanced services to rural and underserved
areas, is representative of the right way. Wholesale gutting of the
Act, causing certain crippling of the competitive local
telecommunications industry, is the wrong way.
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\12\ Deployment of Wireline Services Offering Advanced
Telecommunications Capability, CC Docket No. 98-147, Fourth Report and
Order (adopted January 28, 2000, and released February 11, 2000).
---------------------------------------------------------------------------
Congress instead should permit the market to resolve this issue.
Decision making bodies with expertise and experience, such as the FCC
and the states, will guide this process. In the end, consumers will
continue to access the Internet at affordable prices.
ICG urges you to continue your longstanding commitment to
competition in the telecommunications marketplace, and its resulting
benefits to consumers, and oppose the Brownback bill. Thank you for the
opportunity to testify here today.
Senator Brownback. I appreciate your testimony. I will look
forward to asking you the question of how do I get my rural
areas served. If you would, Mr. Ellis.
STATEMENT OF JAMES D. ELLIS, SENIOR EXECUTIVE
VICE PRESIDENT AND GENERAL COUNSEL, SBC
TELECOMMUNICATIONS, INC.
Mr. Ellis. Good morning, Mr. Chairman. I am Jim Ellis,
General Counsel of SBC Communications. Thank you for the
opportunity this morning to share my company's views on this
important legislation.
SBC in analyzing legislation that affects our business
really follows two broad principles: First, competitive markets
should be free from government regulation of the rates, terms,
and conditions for the services that are offered in those
competitive markets. Second, where for some public policy
reasons regulation is imposed, it should be imposed on all
service providers equally, symmetrically, for the services they
all offer in those markets. I am pleased to say the legislation
that is before us is going in the right direction with respect
to both those principles.
I am not going to take a lot of time talking about the
history of advanced services or even current market conditions.
But there are a couple points that I think are of fundamental
importance in evaluating this legislation. The first one has to
do with what people refer to as a bottleneck: Is there a
bottleneck for advanced services? Many people talk in terms of
the justification for asymmetrical regulation, regulation of
the telephone company, is based on the contention that there is
a bottleneck.
Well, I submit there is no such bottleneck for advanced
services. If we look at the residence market today, cable
modem, as we all know, is a direct competitor for the xDSL
services provided by the telephone company and others. The
provision of cable modem services and xDSL services are
provided independently. They do not use our networks and we do
not use their networks--completely independent. In addition to
cable modem and xDSL, we know that we have wireless
alternatives, terrestrial and satellite are coming on. They do
not depend on us. They are provided completely independent of
the telephone company operation.
To the business market there are even more alternatives.
AT&T and the long distance companies provide direct access to
their customers without resort to telephone company facilities.
The point is there is no bottleneck as it relates to telephone
company control of facilities necessary for advanced services.
A second point: We do not even have a leadership, let alone
a dominant, position with respect to advanced services. If
there is any evidence of absence of a bottleneck, it is simply
that we have in the marketplace four or five customers of the
cable modem people for every one we have for DSL. There is no
bottleneck. We do not have a dominant market position.
Despite that, what we have is asymmetric regulation,
regulation that directly handicaps SBC and the
telecommunications telephone companies' ability to deploy
advanced services and serve the advanced services market at the
same time that asymmetric regulation protects our competitors
from full competition and deprives the public of the benefits
of a fully competitive marketplace.
Let me give a specific example of what that means. The
regulation of the cable modem people is virtually nonexistent.
They do not have common carrier obligations, they do not have
to interconnect their facilities, they do not have to permit
resale. They do not have to--and this maybe in the future will
be the most fundamental point--they do not have to provide open
access. They can dictate the ISP they want to use, the terms
and conditions. They can subsidize, they can bundle, and so on.
The telephone company does not have that capability. It is
burdened and the public is denied the benefits of a fully
competitive marketplace. It does not have to be this way. I
would encourage the Committee to look at the experience in the
wireless industry. In 1983 there were two providers. Today we
have five or more in every market, five or more facility-based
competitors. That happened with almost no regulation in that
industry--competitive prices, alternative new services. That
can be a model for advanced services as opposed to asymmetric
regulation.
Now, with respect to reciprocal comp, we fully support the
bill. Reciprocal comp was intended, designed to compensate the
terminating carrier for its costs, if they were otherwise not
recovered, for completing a local call. That is not what is
happening. The reciprocal compensation today is not paid for
completing a local call when it goes to the Internet, the World
Wide Web. Second, it has no relationship to the costs of
completing them.
I will give a specific example in my own case why it is not
a sustainable system. My daughter was in law school several
years ago and she came to me at Christmas, and I said: What do
you want for Christmas? She said: I would like a second line. I
said: Well, that is not bad; that is about $15 in Texas; that
is reasonable. I said: Why do you want it? She said: Well, I
want to leave my computer on, hooked up to the Internet, so I
can get e-mail all the time. I said OK.
So I got her the second line. Southwestern Bell collected
$15 or so from me for that second line. I then find out that if
her Internet service provider is behind a CLEC--ICG, Focal, or
one of the others--and she does exactly what she said, at that
time we would have paid that CLEC $450 for a customer from whom
we collected $15. Now, that is not sustainable.
My company will spend something like $750 million. Ninety-
some percent will be in the area of reciprocal compensation. It
is money that could be spent to deploy broadband faster to the
very communities that Senator Brownback is talking about. We
are a company that is committed to spend $6 billion to bring
broadband to 80 percent of our market. I wish it could be 100,
I wish it could. I wish we could take that $750 million and
deploy it to that other 20 percent, many of which involve rural
communities.
I would ask the Committee to consider these points and I
would be happy to answer questions.
[The prepared statement of Mr. Ellis follows:]
Prepared statement of James D. Ellis, Senior Executive Vice President
and General Counsel, SBC Telecommunications, Inc.
My name is Jim Ellis. I am the Senior Executive Vice President and
General Counsel of SBC Communications Inc.
There are two fundamental principles that should guide Congress in
its analysis of telecommunications legislation. First, competitive
markets should be free from governmental regulation. Second, if there
is some public policy reason for regulating a market, all service
providers in that market should be subject to the same regulatory
requirements.
In respect to the market for high-speed broadband Internet access
and advanced services, there are certain undisputed facts. This is a
new market offering new services, in which no service provider
possessed a ``head-start.'' It is a market in which new entrants will
provide the same high-speed Internet access and offer the same advanced
services to the same residential and business customers. It is also a
market in which the cable industry is unregulated and is ahead of every
new entrant in deploying the necessary technology to provide these
services. This regulatory disparity has significant market impacts and
imposes a competitive disadvantage upon the incumbent local exchange
carriers (ILECs), such as additional costs, inefficiencies in the
deployment of new technologies, and the inability to package content.
In addition, ILECs are inappropriately being required to pay
reciprocal compensation on Internet traffic. The reciprocal
compensation provision of the Telecommunications Act of 1996 ('96 Act)
was designed to compensate local carriers for the costs of terminating
local exchange calls originated by other local carriers' customers.
Calls originating in a local exchange and terminating on the Internet
are not local exchange calls. The current application of reciprocal
compensation, whereby ILECs are forced to compensate competitive local
exchange carriers (CLECs) for calls to Internet service providers are
not related to the costs of terminating local calls. They are simply a
subsidy of the CLEC industry.
I want to compliment Senator Brownback for his leadership in
crafting this legislation. S. 2902 is a step in the right direction
toward fulfilling SBC's fundamental principles in the market for high-
speed broadband Internet access and advanced services.
Background
Historically, the only telecommunications pathway or wire to nearly
every home and business in this country was the local copper loop. The
local copper loop is part of the circuit-switched network owned and
operated by local exchange telephone companies that, until recently,
was capable of transmitting only narrow-band voice, and slow speed
switched data services. The local exchange telephone companies are
subject to pervasive regulation of the rates, terms and conditions
under which they offer services at both the state and federal level.
Historically, this regulation was based upon the fact that these
companies operated pursuant to a legally franchised monopoly, and the
local loop was considered a ``bottleneck.''
Approximately 25 years ago, cable service began to emerge as an
alternative to broadcast television service. It is provided through
antennas located at the cable provider's head-end that receive
programming from satellites, which is then transmitted over coaxial
cable to homes and businesses. Coaxial cable is different from the
ILECs' local copper loops, in that it is capable of transmitting
broadband video and high-speed data services. Thus, the cable industry
provides an alternative telecommunications pathway or second wire to
the home.
In the past 15 years, additional telecommunications pathways to
homes and businesses rapidly developed through various wireless
technologies--digital satellite service, cellular and PCS service, and
fixed wireless. We also began to see a convergence of these
technologies, whereby the telephone, cable and wireless industries
explored ways in which they each could provide customers a package that
would include all of these services.
Most recently, the Internet--an interconnected network or web of
computer data bases operating upon packet-switched technologies and IP
protocols--evolved and made possible a new form of high-speed data
communications and ``advanced services.'' When the `96 Act was being
debated in Congress, the Internet and advanced services were still in
their infancy. The precise nature in which these advanced services
would be provided to the public was still uncertain. Congress sought to
address this new telecommunications phenomenon and the promising new
advanced 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.'' In the case of the ILECs'
provision of high-speed broadband Internet access and advanced
services, such regulatory forbearance has not been forthcoming.
Advanced Services Market
The market for the delivery of advanced services is different from
the market for narrow-band services.\1\ Broadband services support
speeds of 200 kbps and greater, and are typically 10 to 100 times
faster than narrow-band dial-up or ISDN telephone lines. High-speed
broadband services are also used much more than narrow-band services,
because users of such services spend many hours ``on-line'' in a single
session. They will tie-up telephone company facilities for longer than
typical voice calls, and hence cost much more to provide.
---------------------------------------------------------------------------
\1\ See K. Werbach, FCC Office of Plans and Policy, Digital
Tornado: The Internet and Telecommunications Policy at 73-75, OPP
Working Paper No. 29 (March 1997).
---------------------------------------------------------------------------
The business market for high-speed broadband services is also
separate and distinct from the consumer market for the same services,
which consists of small business and residential customers.\2\
Virtually all business customers have access to high-speed broadband
service that is typically provided over T-1 lines that are not
available to the residential customers, and business customers have
many competitive alternatives for obtaining that high-speed broadband
access.\3\
---------------------------------------------------------------------------
\2\ 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).
\3\ Id. at para. 26.
---------------------------------------------------------------------------
Cable Modem versus xDSL Service
The two industries with wires that pass the majority of homes and
businesses in this country--cable and telephone--have been in a race to
develop the technologies to provide their customers with high-speed
broadband access to the Internet and to the new advanced services.
The cable industry developed cable modem service to work with their
broadband coaxial cable, and has been rapidly deploying its cable modem
technology. The ILECs were at a competitive disadvantage in this race,
because their narrow-band local copper loops were not equipped to
provide broadband services. The ILECs had to develop a new technology--
Digital Subscriber Line or xDSL service--that would enable their
narrow-band local copper loops to carry high-speed broadband advanced
services.
The ILECs are now scrambling to deploy Asymmetrical Digital
Subscriber Line (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.
Asymmetric Regulation
Against this background, the rules and regulations that apply to
the provision of advanced services by the cable industry and 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,
unbundle its facilities and make them available to competitors, or
resell its services. Furthermore, the cable industry is not subject to
the same open or equal access requirements as the telephone industry in
that it is not currently required to give its customers a choice in the
selection of an Internet service provider.
This unparalleled ability of the cable industry to control both the
means of access to the Internet and the content that is delivered to
the customer provides it with an unparalleled advantage in the
marketplace, when compared to the ILECs which are trying to play catch-
up with cable modem service. 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
provides cable modem service directly to approximately 21% of all cable
modem customers, and indirectly to an additional 17% of cable modem
customers through its ownership of Road Runner. Time Warner and its
content affiliates own 4 of the top 15 video programming services, and
the largest premium TV network. Time Warner also operates Warner
Brothers, one of the largest movie and television studios. AT&T and its
content affiliates have ownership interests in 4 of the top 15 video
programming services. Together, the Time Warner and AT&T consortia thus
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 that 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 high speed Internet
access and advanced services.
The ILECs, on the other hand, remain pervasively regulated today.
Under Title II of the Communications Act, the ILECs are subject to
common carrier regulation in their provision of advanced services. 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. In the case of
SBC's advanced services affiliates, which are regulated as non-dominant
telecommunications carriers, there is an interconnection obligation
under Section 251(a) and a resale obligation under Section 251(b).
Reciprocal Compensation
Section 251(b)(5) of the `96 Act provides that each local exchange
carrier has a duty to compensate other local exchange carriers for the
costs of transporting and terminating calls originated by their
customers. However, as a result of a patchwork of regulatory and court
decisions interpreting Section 251(b), the ILECs have paid enormous
sums of money for traffic terminating on the Internet.
Some CLECs have ``gamed'' the system by signing up Internet service
providers, and claiming that calls to the Internet consist of two
calls. The CLECs argue that the ``first'' call is from the ILEC
customer and to the CLEC location within the local exchange, with a
``second'' call originating at the CLEC location and terminating on the
Internet. The CLECs have largely been successful in convincing some
regulators and courts that reciprocal compensation should be paid on
the ``first'' call.
The problem with this scenario is that reciprocal compensation
payments are calculated on a minute-of-use basis. This means that when
a customer logs on to his/her computer to access the Internet, the CLEC
is paid reciprocal compensation for every minute the customer is ``on
line.'' Since the average Internet call results in the customer being
``on line'' for 30 minutes or 10 times as long as the average local
call, the compensation being paid by the ILECs to the CLECs amounts to
billions of dollars a year. In Texas alone, 92% of the minutes-of-use
delivered by Southwestern Bell to the CLECs is bound for the Internet,
with the number dropping to only 80% in SBC's region as a whole.
Moreover, there is nothing reciprocal about this arrangement, because
the Internet service provider served by the CLEC never calls
Southwestern Bell's customer. The economics of this arrangement are
simply not sustainable.
More importantly, it sends the wrong signals to the marketplace.
The receipt of reciprocal compensation for Internet-bound traffic has
become a new line of business for CLECs, thus creating an incentive for
them to sign-up Internet service providers and to avoid residential
customers. That is because, if a CLEC signs up large numbers of new
residential customers two things will happen. First, the CLEC loses the
reciprocal compensation revenues it had been receiving from calls those
residential customers made to Internet service providers served by the
CLEC. Second, if these new residential customers in turn call customers
of the ILECs and/or Internet service providers served by other CLECs,
the CLEC will have to pay reciprocal compensation to the ILECs and
those other CLECs.
Thus, the current application of the reciprocal compensation
obligation is nothing more than a transfer of wealth from the ILECs to
the CLECs with no corresponding public benefit. Congress should clarify
that reciprocal compensation is only available for the transport and
termination of local telephone exchange service, and thereby create the
proper incentive for CLECs to invest in facilities-based local
competition.
In conclusion, SBC will support any legislative initiative that
eliminates the current disparity in regulation that exists between the
cable and telephone industries in the market for the provision of high-
speed broadband Internet access and advanced services, or provides
symmetrical regulation of that market. In addition, SBC supports
elimination of the loophole that currently exists in the application of
reciprocal compensation. We look forward to working with the Committee
and the Congress to achieve these objectives.
Senator Brownback. Thank you very much, Mr. Ellis.
Mr. Haynes, thank you for joining the Committee today.
STATEMENT OF ARNE L. HAYNES, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE RAINIER GROUP
Mr. Haynes. Thank you, Mr. Chairman, Senator Rockefeller.
My name is Skip Haynes. I am the President of the Rainier
Group. We are an incumbent local exchange carrier in the
foothills of Mount Rainier some 16 miles from Seattle in
Washington State. We have been in the business since 1910. My
great-grandfather won it in a pinochle game in 1912 and I am a
fourth generation manager, and my son just joined the company
to run our interactive media operation.
Senator Brownback. The family still plays pinochle?
Mr. Haynes. We gave it up; it is too dangerous.
In my written testimony I have given you some idea of how
small we are, but we have less than 4,000 incumbent phone
company access lines that we serve. We have approximately a
thousand cable TV customers that--we have started a cable TV
company after the act was passed in 1996. We compete with AT&T,
the former TCI. We also have 400 facilities-based CLEC
customers. We are an Internet service provider and we provide
long distance.
We are very much a startup operation. We have two other
operations going. We will soon be competing with Pacific Bell
in Central California and with Bell South in Florida. Again, we
compete with AT&T, Qwest, the former U.S. West properties, a
myriad of IXC's, and Internet service providers. We have 50
employees. Again, we are very small. We are triple our size
since the Act passed in 1996. So we are aggressive and excited
about the new opportunities competition brings.
What we like about the bill, Senator Brownback, is its
relief from regulation, and we support relief from regulation
in every form, both Federal and State. We believe and we know
from experience that regulation impedes competition and that
regulatory costs are obscene, and anything we can do to reduce
those, including the participation they would like to have in
our competitive markets, is important.
Senator Rockefeller. Do you feel that way about the FAA
also?
Mr. Haynes. No, sir, but they are doing a different
service, Senator Rockefeller. That is a public safety thing in
my opinion.
Senator Rockefeller. Thank you.
Senator Brownback. Please proceed with the testimony.
Mr. Haynes. Thank you, Senator Brownback.
There is no digital divide in our Washington State
operations. We provide cable modem services now. We are rolling
out DSL services and we have conditioned our plant to serve 100
percent of our customers. That means the end of the Scott
Turner Road as well as downtown Eatonville with its 1600
customers. That is the world headquarters, by the way.
I am either very bright for starting 10 years ago to
develop a data network or I am really stupid for having
invested shareholder money in something that we may be forced
to give away to competitors. I believe the Brownback bill will
allow us to continue to expand our operations. Without the
deregulatory aspects of the Brownback bill, we think our
operations in Washington could be severely 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 at that juncture. Residual
customers will have to pick up the difference. This is like
Robin Hood stealing from the poor and giving it to the rich.
I started our data-focused expansion 10 years ago when I
rejoined the company. I never dreamed that regulators would be
so unfair and so unreasonable. If the current regulatory
climate persists, I may not be able to continue to invest
shareholder money in our incumbent LEC beyond the minimum
required to provide plain old telephone service.
Meanwhile our competitor, little old AT&T, has little or no
regulation or requirement to unbundle their digital facilities.
Subsequent to the Ninth Circuit decision, why should my
advanced services be subject to regulation and not theirs?
The Brownback bill has something I am a little more
schizophrenic about. That is reciprocal compensation. Our first
CLEC does not have a reciprocal comp component. I do not
receive it or do not pay it. Our newest one will. We could make
a lot of money with reciprocal compensation, but a business
plan that is built on windfall profits makes no sense to me,
and ultimately justice will prevail and I believe your
provisions are correct, Senator Brownback. This is an
unreasonable loophole and needs to be eliminated.
One part of the bill that I would recommend some
enhancement, please, is preemption of State regulation in the
same manner as you are recommending for Federal. State
regulators get many of their misguided notions from the FCC. It
is also true, based on my experience, that the rules applied to
the large companies trickle down to the small companies.
Furthermore, the State regulators are drooling to fill the gap
where any Federal regulation will go away. So, frankly, the
States are more of a concern to us and we request that whatever
language is required in this bill to make State and Federal
regulation comparable would be very helpful.
I just want to say one more thing. Any one of our employees
can better serve our customers than anyone in regulation. So
let market forces work, and I believe the Brownback bill will
help.
Thank you very much.
[The prepared statement of Mr. Haynes follows:]
Prepared Statement of Arne L. Haynes, President and Chief Executive
Officer, The Rainier Group
Mr. Chairman, Members of Committee, thank you. I support the
Brownback bill.
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.
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)
We were strictly an ILEC prior to The Act.
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.
I believe The Brownback bill 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 to continue to invest shareholder money in our ILEC beyond the
minimum required to meet plain old telephone service (POTS)
obligations.
Meanwhile, 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 Brownback bill has one other aspect that I am more
schizophrenic about. Our first CLEC operation does not have a
Reciprocal Compensation element. Our newest one will. We could make a
lot of money with Reciprocal Compensation.
However, Reciprocal Compensation is unsustainable. When business
plans require windfall profits for success justice will ultimately
prevail. This bill justifiably eliminates an unfair and unreasonable
loophole in existing regulation.
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.
One aspect of the bill that needs enhancement is the pre-emption of
State regulators in the same manner as federal.
State regulators get many of their misguided notions from the FCC.
Further, they are drooling 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.
Please let market forces work by passing the Brownback bill with
the requested State regulatory pre-emptions.
Thank you.
Senator Brownback. Thank you, Mr. Haynes, for joining us
today. Mr. Taylor, thank you for being with us.
STATEMENT OF ROBERT TAYLOR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FOCAL COMMUNICATIONS,
AND CHAIRMAN, ASSOCIATION FOR LOCAL
TELECOMMUNICATIONS SERVICES
Mr. Taylor. Thank you, Mr. Chairman and Members of the
Committee. My name is Robert Taylor. I am the CEO of Focal
Communications, as well as the Chairman of the Association for
Local Telecommunications Services, also known as ALTS. ALTS
represents approximately 100 facilities-based CLECs across the
United States, including wire line companies that offer both
circuit-switched, packet-switched, and wireless connectivity to
circuit-switched and Internet-based networks, as well as DSL
companies that provide many of the broadband services we are
talking about today.
Focal itself is a facility-based carrier offering services
in 19 markets across the United States, with plans to enter 24
by the end of next year.
I certainly welcome the opportunity to appear here today on
behalf of these competitive carriers and to explain why S. 2902
is in our minds anticompetitive and unnecessary. Certainly if
any Congressional action is needed, it is action that will
provide for stronger enforcement of the Act. I think as you
have heard from the other three panelists here, a lot has been
done in the last four years. We have accomplished a lot.
Companies like SBC have rolled out DSL to millions of their
potential customers.
We are seeing it happen in both big cities as well as in
rural markets. Some ALTS members serve rural markets. Companies
like McLeod USA are providing broadband services in Iowa and
other rural States today.
The Act certainly is and was the most important piece of
telecom legislation since the original Communications Act of
1934, and you the members of this committee should take great
pride in what you have accomplished. Since the act was passed,
over $30 billion of new capital has been raised and put in the
ground to provide new broadband services to customers across
this country. The competitive bricks and mortars have meant
lower prices, better services, and the revenues of the
competitive telecom industry have exploded from less than a
billion dollars before the act to almost $6.5 billion in 1999,
and CLECs now employ over 70,000 people across the United
States. Clearly, a fabulous success.
ALTS and its member companies believe that there is really
no need for new legislation, that competition is happening, we
are beginning to see the results of it, the numbers are very
measurable, and the successes are growing every day.
For example, in one recent Wall Street report SBC was
listed as offering DSL services to 14.5 million customers as of
June 30th of this year. That is up from 12.8 million customers
at the end of the first quarter. In three months they added two
million potential subscribers to their network. That is a
pretty fast rollout of high speed broadband technology and I
think companies like SBC should be commended because they are
fulfilling the mandate of the Telecom Act.
All of this deployment is occurring without any changes. We
are all as a competitive industry, both the RBOCs, the small
incumbents, and the competitive carriers, building network as
fast as we possibly can. You can go knock on the door of Lucent
or Cisco or Nortel and look in their warehouses; there is not
technology sitting on the shelves. Every bit of chips and fiber
and switches being made today is being put in the ground by one
of the companies represented here today. We are building and
working on the mandate that you gave us in 1996 as fast as we
possibly can. It simply cannot go any faster.
Now let me turn to the specific concerns. First, we think
the legislation attempts to establish a different regulatory
regime based upon the technology deployed. This is going to
create some significant problems between the have's and the
have-not's simply defined by the technology that they use. S.
2902 would limit the provisions of the 1996 Act as it was
designed to open competition not only in the circuit-switched
arena, but in all aspects, because when we look at DSL service
today, while there are many different providers, all of the
facilities, all of the access to the customer, is controlled by
the Bell operating company. So there still is a bottleneck out
there that needs regulatory oversight.
The distinction based upon service or technology would
virtually ensure the monopoly control, Bell's continuing
monopoly control, not over older services but over all of the
new services. Redefining the pieces of the network that they
use today and calling it broadband simply changes their ability
and their need to open it up to new competitors, represented by
ALTS.
Second, the legislation removes State and Federal
regulatory oversight for almost all of the services provided by
the local incumbent exchange carrier, even though that carrier
today is still virtually a monopoly. In most markets the
incumbent still has over 95 percent of the customers in the
market. Competition is beginning. It is not there yet. When we
look at the CLEC industry as a whole, I think as of the end of
last year, there was only one CLEC out there today that was
profitable. This is a long-term business. It takes long-term
investments and it is going to take a while for this to be a
profitable business. But we think the investments are there,
the opportunity is there, and it is a sound business to be in.
Third, the bill would prohibit any payment of compensation
related to the transportation and termination of calls to the
Internet service providers as it is defined today in reciprocal
comp. Reciprocal compensation was not the CLECs' design. The
rates were not set by the CLECs. The rates were set by the Bell
operating companies. The CLECs had asked for zero. The payments
that are being made today would have been zero if the plans
that the CLECs had proposed four years ago would have been put
in place.
But, given that, the rates have fallen dramatically from
where they were at a penny a minute at the creation of the act
to now in some States one-tenth of a cent a minute. So the
rates for reciprocal compensation have fallen dramatically and
these are contractual relationships, and the process is
working.
Fourth, the legislation would not require one dime of new
investment in broadband facilities. Certainly it changes some
of the rules on which people operate, but it does not force
them to do more. Clearly, if that is the goal of the bill, it
does not accomplish that in our minds.
To keep the exemption for packet-switched services, the
bill requires that an incumbent carrier demonstrates after
three years that it can reach 80 percent of the customers using
an industry-approved standard and existing loop facilities. The
same is true of the five-year test.
But not all customers are served by incumbents. Moreover,
those customers can be served using existing technology. It is
the existing technology that we need access to, because we will
deliver the service using the existing technology and the
incumbents are doing it and between the two of us we will get
there.
Finally, the legislation is not needed to speed the
deployment of advanced services. As demonstrated in the press
releases of many of the RBOCs themselves, they are deploying
DSL services as fast as they can. There is no new need for
incentives from a legislative standpoint to get that to go any
faster. In fact, as we talk to the manufacturers, there is not
the availability from a manufacturing standpoint to build more
chips and to build more technology.
The limiting factor is not the regulatory impediments. It
is the suppliers, it is the labor market, it is the fact that
you guys have created a really good economy. That is the
challenge that is out there today. Deployment is occurring
under the existing laws in large measure due to competitors
like ICG, Focal, and other ALTS members. The message from this
rapid deployment is crystal clear: No change is needed in the
Act. Congress should stay the course and market forces will
provide the results that you guys are looking for.
Thank you very much and I appreciate my opportunity to
speak here and will certainly answer any questions.
[The prepared statement of Mr. Taylor follows:]
Prepared Statement of Robert Taylor, President and Chief Executive
Officer, Focal Communications, and Chairman, Association for Local
Telecommunications Services
Thank you Mr. Chairman and Members of the Committee. My name is
Robert Taylor and I am the CEO of Focal Communications and the Chairman
of the Association for Local Telecommunications Services, more commonly
known as ALTS. Focal is a facilities based competitive local exchange
carrier (CLEC) doing business in nineteen major markets across the
nation, with plans to be in twenty-four markets by the end of the year.
We were founded in 1996, and are a direct result of the enactment of
the Telecommunications Act of 1996 (the '96 Act).
ALTS represents approximately 100 facilities-based CLECs. These
include wireline companies like Focal which offer both circuit and
packet switched services, wireless companies that offer both circuit
and packet switched services, and data CLECs, which specialize in
packet-switched data and Internet services. I welcome the opportunity
to appear here today on behalf of the facilities-based local
competitors to explain why S. 2902 is anti-competitive and unnecessary,
and to show why the carefully crafted market opening provisions of the
'96 Act will continue to foster local competition and broadband
deployment without any amendment.
The '96 Act was the most important piece of telecommunications
legislation passed by Congress since the original 1934 Communications
Act, and members of this Committee should take great pride in what they
have accomplished. Thanks to the '96 Act, the competitive local
telecommunications industry has raised the capital to build over 30
billion dollars worth of new local infrastructure, the competitive
``bricks and mortar'' that mean lower prices and new choices for local
telephone consumers.\1\ Local revenues for CLECs have exploded from
less than one billion dollars in 1996 to more than 6.3 billion dollars
in 1999, access lines have climbed from approximately one million in
1996 to over 10 million in 1999,\2\ and CLEC employees now exceed
70,000.\3\ Of course, the competitive industry would prefer to move
even faster, but it is manifest that the '96 Act has jump-started
competition in local telecommunications markets.
---------------------------------------------------------------------------
\1\ The State of Competition in the U.S. Local Telecommunications
Marketplace, ALTS Annual Report, February 2000, Graphic F.
\2\ Id. at Graphics I and J.
\3\ Id. at Graphic F.
---------------------------------------------------------------------------
ALTS and its member companies believe that there is no need for new
legislation to change the '96 Act. Competition for local services is
already happening, and the incumbent local exchange carriers, and in
particular the Regional Bell Operating Companies (RBOCs), are rolling
out new competitive services at an amazing rate. For example, in one
recent financial report, SBC Corporation was listed as offering high
speed Digital Subscriber Line (DSL) service to 14.7 million customers
as of June 30, 2000, up from 12.8 million on March 31, 2000. Two
million new customers with the opportunity to purchase DSL in the space
of three months is definitely not a slow roll-out of service. The same
report states that SBC has installed DSL equipment in 75% of the 1,300
central offices in which they plan to offer DSL service.\4\ All without
any change in the '96 Act.
---------------------------------------------------------------------------
\4\ Bear Stearns Investment Opinion, as published by First Call
Research Notes, 7/21/2000.
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In fact, the best way to speed the roll-out of DSL and other high-
speed Internet services is for Congress to demand better enforcement of
the '96 Act. The biggest impediment to even faster competitive
deployment of high speed Internet access is the incumbent carriers
themselves. They have repeatedly attempted to slow down, or avoid
entirely, the implementation of the market-opening requirements of the
'96 Act. Better enforcement would speed the interconnection of networks
and the offering of new services, which will mean more choices and
lower prices to consumers.
Many of the legislative proposals pending before Congress,
including S. 2902 as introduced and as shown in various staff drafts,
will slow broadband deployment. By removing essential elements of the
'96 Act, these legislative proposals will make it more difficult for
competitors to be able to access all but the most lucrative business
markets. This in turn reduces the competitive pressure that has
prompted the RBOCs and other incumbents to offer DSL services at all.
With that background, let me turn to the subject of today's
hearing--S. 2902, the Broadband Internet Regulatory Relief Act of 2000.
Focal and ALTS are opposed to S. 2902 because it would seriously
undermine the key local market entry provisions that Congress so
carefully crafted in the '96 Act. If this bill were enacted, 30 billion
dollars in new investment and 70,000 new jobs, not to mention greater
choice for consumers, would be put at serious risk due to the near
monopoly this legislation would permit to be re-established.
Summary of ALTS' and Focal's Opposition to S. 2902
S. 2902 would eliminate many of the core market opening
requirements of the '96 Act. ALTS and Focal strongly oppose S. 2902 for
the following reasons:
First, the legislation attempts to establish different regulatory
regimes based on the technology used to deploy a telecommunications
service, under the mistaken belief that packet switching is a new
technology and that the incumbent carriers cannot use their existing
monopoly to gain a market advantage in this ``new'' service. Nothing
could be further from the truth. This approach would relegate the key
pro-competitive provisions of the '96 Act to older circuit switched
technology and would seriously undermine competition using new
technologies. This approach was firmly and properly rejected by
Congress in the '96 Act.
Second, the legislation would remove Federal and State regulatory
oversight of almost all services provided by the incumbent local
exchange carrier, even though that carrier still has a virtual
monopoly. In most markets, the incumbent carrier still serves over 95
percent of the customers in the local market. This approach fails to
recognize the tremendous market advantage that the incumbent gains from
being able to invest in new services while maintaining a captive
revenue stream from its huge customer base. That base is not the result
of competition; it is a direct and ongoing legacy of the government
granted monopoly on local communications service that was eliminated by
the '96 Act. Congress recognized that the incumbents have a huge market
advantage, and as a result forced the incumbents to provide
interconnection and unbundled access to their monopoly networks.
Third, the bill would prohibit the payment of any compensation to
competitive carriers for their costs of transporting and terminating
calls to an Internet service provider. These costs are real. In
addition to being unconstitutional, this provision of the bill would
result in decreased choices for Internet service providers and
increased costs to consumers for Internet access service.
Fourth, the legislation would not require one dime of new
investment in broadband facilities by the incumbent local exchange
carriers. As drafted, the bill provides extensive regulatory relief on
the date of enactment, without any advanced services being required to
be provided whatsoever. In order to keep that relief in perpetuity, the
bill requires that an incumbent carrier demonstrate after three years
that it can provide advanced services to 80 percent of the customers it
can reach with such service ``using an industry approved standard and
existing loop facilities.'' The same is true in the five year test. In
both cases, even if the incumbent makes no new investment, the test is
limited to 80 percent and 100 percent, respectively, not of all
customers served by the incumbent, but rather of those customers it can
reach using ``existing'' facilities and technology. In fact, the July
18 draft explicitly recognizes that many customers will not be able to
be reached with ``advanced services,'' so the regulatory relief is
expanded to include slower, 10 year old ISDN technology.
Fifth, this legislation is not needed to speed the deployment of
advanced services. As demonstrated by the press releases of the RBOCs
themselves, they are already deploying new DSL services as fast as they
can. The primary limiting factor for them is not any regulatory
impediment; instead it is the tight labor market for trained
technicians and their own failure to respond to customer demands. This
deployment is occurring under existing law, in large measure to meet
competition from providers like Focal and the cable modem services now
being offered by cable companies. The message from this rapid
deployment is clear--no change is needed in the '96 Act. If Congress
stays the course market forces will provide the result this legislation
purports to seek.
1. LS. 2902 Repeals Many of the Key Market Opening Provisions of the
'96 Act
A. LThe legislation creates different regulatory regimes based on a
confusing and unworkable hierarchy of circuit-switched, packet-
based, packet-switched, advanced services, and fiber optic
technology.
The '96 Act had two key sets of provisions designed to open up the
local telecommunications market to competition. One set is embodied in
sections 251 and 252,\5\ which require each incumbent local exchange
carrier (i.e., those that had a monopoly on local service when the Act
was passed) to negotiate agreements with competitors that permit the
competitor to 1) interconnect its network with the incumbent's network;
2) purchase pieces of the incumbent's network needed to provide service
(these pieces are called unbundled network elements or UNEs, and
include loops, switching, and transport between exchanges); 3) resell
the incumbent's service at wholesale prices; and 4) collocate equipment
needed to interconnect or access unbundled network elements.
---------------------------------------------------------------------------
\5\ 47 U.S.C. 251 and 47 U.S.C. 252. References to sections in this
testimony refer, unless otherwise noted, to sections of the
Communications Act of 1934 (codified at 47 U.S.C. 151 et seq.). Most of
the provisions enacted in the Telecommunications Act of 1996 (Pub. L.
104-104), for example sections 251, 252, and 271 referred to in this
testimony, were amendments to the underlying Communications Act.
---------------------------------------------------------------------------
The second set of key provisions are found in section 271,\6\ which
was designed to act as an incentive to encourage the largest of the
local monopolies--the RBOCs--to cooperate with competitors and comply
with the section 251 requirements. The ``carrot'' was entry into the
long distance market, which the RBOCs were prohibited by the courts
from entering prior to the '96 Act. In the '96 Act Congress agreed to
remove the court restriction, and to permit entry into the long
distance market, as soon as the Federal Communications Commission (FCC)
determined that the RBOC faced real competitors and had met a
``competitive checklist'' that demonstrates compliance with the market
opening requirements of section 251.
---------------------------------------------------------------------------
\6\ 47 U.S.C. 271.
---------------------------------------------------------------------------
S. 2902 effectively repeals many of the requirements of section 251
with respect to packet-switched network technology, and in doing so
significantly undermines the incentive for compliance provided in
section 271 by removing packet-switched technology from the competitive
checklist. Packet-switched networks have been used in the industry
since the 1980s, and packet switching is the technology being most
widely deployed by incumbents and competitors alike today. There is
nothing new or innovative about this technology--it is at the heart of
all major Internet backbones and local networks. Furthermore, the RBOCs
having been using DSL technology to provision standard T-1 service for
over a decade.
The proposed legislation creates four different--and ultimately
unworkable--standards that would be applied to different provisions of
section 251. Under S. 2902's proposed new section 652(a)(1), the
incumbent local exchange carrier would be freed from any requirement to
negotiate with competitors or permit them to interconnect their
networks with any ``packet-based functionality'' of the incumbent's
network.
This exemption would be very difficult to implement in the real
world. For example, Focal presently provides state-of-the-art circuit
switched services to our customers. Essential to providing these
services is a packet-based network largely operated by the incumbents
called Signaling System 7 (SS-7), which provides call set-up,
monitoring, and termination. If incumbents no longer have to
interconnect their SS-7 network with Focal's network, the quality of
circuit switched services would be seriously compromised.
In addition, many circuit switched networks use packet-switched
networks for calls over longer distances. ATM packet networks in
particular are designed to carry all forms of traffic, including
circuit switched voice. Today many circuit switched calls are in fact
carried part of the way to their destination on packet-switched
networks, further illustrating how difficult it will be for the FCC and
the courts to interpret this exemption.
Next new section 262(a)(2) would permit the incumbent to refuse to
provide UNEs, the essential piece parts of the network, if a UNE
``consists of or is created by a packet-switched or successor
technology.'' This standard could be argued amongst engineers for a
considerable time, and you can be certain it will take years for the
FCC and courts to determine what it means. As mentioned above, the SS-7
signaling network is a packet-switched network, and is presently a UNE
required to be provided under the FCC's rules implementing section
251.\7\
---------------------------------------------------------------------------
\7\ 47 C.F.R. 51.319.
---------------------------------------------------------------------------
Likewise, DSL service is clearly a ``packet-switched'' technology.
Under new section 262(a)(2) and 262(a)(4) it is not clear exactly how
DSL service will be able to be provided. In addition to packet-switched
UNEs, CLECs also need to collocate equipment, like DSL access
multiplexers, also called DSLAMs, in incumbent central offices or
remote terminals in order to use existing copper loops to provide DSL
services. For example, ``line sharing,'' which data CLECs use to
provide high speed Internet access to consumers over the same line that
the incumbent provides voice service, would no longer be possible under
this language. This gives the data affiliate of an incumbent a
tremendous competitive advantage, since they can provide DSL service
over the same line that an incumbent uses for voice, while CLECs must
have the customer purchase an additional line, for an additional fee,
in order to provide their DSL service.
Regardless of where the line is ultimately drawn, it is clear to me
what the intent is. That is that competitors only get access to the
monopoly network if they stick to the older, slower circuit-switched
technology that is not capable of providing the high speed, broadband
Internet access that business and residential consumers are demanding.
In the case of resale, new section 262(a)(3) proposes that
``advanced services'' be exempt from the wholesale rate obligation that
Congress decreed for incumbent carriers. ``Advanced services'' are
defined as ``any service that consists of, or includes, the offering of
a capability to transmit information using a packet-switched or
successor technology'' at speeds of 200 kilobits per second or more in
both directions. This definition includes all but the slowest of
packet-switched technologies, and is yet a third formulation of a
standard based on a specific technological criteria. Without the option
of resale as a means to expand their market presence, this legislation
removes a tool that Congress provided in the '96 Act for competitors to
test markets and offer service in areas where they may plan to deploy
facilities, but have not yet had the time or resources to do so.
Finally, S. 2902 applies a fourth standard in new section 262(a)(5)
when fiber optic wire is used. If an incumbent chooses to deploy fiber
into its network to increase its own cost efficiency or expand its
capacity, it gets an automatic exemption from the interconnection and
UNE requirements of section 251 for the area served by that fiber optic
wire--regardless of whether that wire is used for circuit-switched or
packet-switched service.
This confusing and unworkable set of standards is precisely what
Congress did not do when it enacted the '96 Act. Congress decided to be
``technologically neutral''--which is the right thing to do. This
technological neutrality is evident in the language of the statute. The
'96 Act adopted the Senate definition of ``telecommunications,'' which
the statement of managers accompanying the final legislation described
as meaning ``the transmission . . . of information of the user's
choosing, including voice, data, image, graphics, and video . . .'' \8\
Further, a ``telecommunications service'' is the offering of
telecommunications to the public for a fee, ``regardless of the
facilities used.'' \9\
---------------------------------------------------------------------------
\8\ Senate Report 104-230, p. 114 (1996).
\9\ 47 U.S.C. 153(46).
---------------------------------------------------------------------------
If Congress had intended to draw the type of distinction among
technologies proposed in S. 2902, they would have done so. But they did
not. Instead they took the opposite approach. In section 251 itself
they included two standards--the ``necessary'' and ``impair'' standards
which were discussed at length by the Supreme Court--for the FCC to use
in determining when a particular technology or facility need not be
made available to competitors under section 251.\10\ In section 254,
regarding universal service, the Congress directed the Commission to
establish an ``evolving level of telecommunications services'' to be
given universal service support based in part on how widely used those
services are in the public networks.\11\ And in section 706, which this
Committee has had several hearings on, they again made clear their
preference for technological neutrality.\12\ Nothing has changed in the
four years since the '96 Act was adopted to suggest that such a radical
change in approach is needed. To the contrary, the ever increasing
levels of broadband deployment make it clear Congress got it right the
first time.
---------------------------------------------------------------------------
\10\ 47 U.S.C. 251(d)(2).
\11\ 47 U.S.C. 254(c)(1).
\12\ Section 706 of the Telecommunications Act of 1996, codified at
47 U.S.C. 157 note.
---------------------------------------------------------------------------
B. LCompetitors would only get access under section 251 to older
circuit switched technology, which is being phased out as
networks shift to IP packet-switching.
One of the most important provisions of the '96 Act is the
requirement that incumbent local exchange carriers provide access to
UNEs, such as loops, switching, and transport needed to provide
service. In order to compete effectively with the incumbents, CLECs
need to be able to deploy the latest and most efficient technologies
that consumers are demanding. It is difficult enough to compete with an
entrenched monopolist even if the competitor has superior technology--
if Congress limits the technology that competitors can use to compete
with the incumbent, the task becomes nearly impossible.
Congress understood this need back in 1996 when it required access
to UNEs on a technologically neutral basis. Congress believed that
requiring this access was an important key to ensuring that the local
markets would eventually become competitive. If CLECs are able to
access UNEs from the incumbents, they can then combine the UNEs in the
most efficient manner in order to provide high quality
telecommunications service to consumers.
By exempting packet-switched technology from section 251, Congress
would relegate CLECs to only one of the two prevailing
telecommunications technologies, which will severely undermine
competition in the local markets. While CLECs would be able to continue
to provide fierce competition in the voice market, they would be
limited in their ability to continue to expand into data and high speed
Internet access that consumers are demanding. Without access to UNEs
competitors would have to raise even more capital than they have to
date, in order to further expand their networks in order to provide
packet-switched services. Basically, Congress would be slowing the pace
of competition for data and Internet services--it would be limited to
those areas where CLECs have their own independent networks, which are
primarily in the business districts of large metropolitan areas.
At the same time, the incumbents do not face the same difficulties
gaining access to capital. Because the incumbents already have a
network in place, which was built through years of monopoly funded
revenue, they already have the basic infrastructure needed to provide
service. In addition, they have a captive customer base from which to
obtain revenues to finance the purchase, installation, and advertising
of new packet-switched services.
Congress recognized the unlevel playing field faced by competitors
in the local market. The '96 Act required incumbents to provide UNEs so
that competitors could compete without having to build an entire
network first. At that time, Congress rightly concluded that
competitors would deploy their own facilities as soon as it was
financially possible to do so, in order to increase their revenues and
the quality of their services. It took the incumbents decades to build
out their networks with the benefit of a guaranteed monopoly. While
technology has improved, it is ludicrous to think that competitors
could obtain the capital, capture a dominant market share, or deploy
the resources needed to overbuild the existing networks completely.
C. LCompetitors would not even be able to obtain local loops for packet
switched services like DSL.
One tragic consequence if this bill is passed would be the very
detrimental impact it would have on DSL services--one of the success
stories of the '96 Act. DSL is a high-speed Internet access service
that allows telephone customers to obtain Internet access at speeds
that are 20 to 100 times faster than a typical dialup modem. S. 2902
would deny CLECs the ability to provide DSL service by removing the
requirements that incumbent local exchange carriers permit the purchase
of the high frequency portion of a loop used to provide packet based
data services (a practice called ``line sharing'').
Although DSL technology has been available for a number of years,
the incumbents had failed to bring the technology to the market. It was
not until the passage of the '96 Act that data CLECs, which are often
called DLECs, were born. The DLECs saw the '96 Act as an opportunity to
fill a missing void in the market--and their vision was sound. The
entry of the DLECs (and the fierce competitive pressure) inspired the
incumbents to begin offering DSL services as well. Today, the top eight
providers of DSL services (including incumbents and competitors)
provide service to over 750,000 customers and the numbers are growing
exponentially. Because of the appeal of the service and its rapid
deployment, over half of U.S. households are now capable of receiving
DSL services.
This service may never have been brought to the marketplace if it
wasn't for the vision and key market opening provisions of the '96 Act.
In order to provide DSL services, the DLECs need to collocate their
equipment in the incumbent carrier's central offices and the need to
obtain conditioned local loops. The '96 Act required incumbents to
provide both of these necessary items to the DLECs. Without these
requirements, DLECs would never have been able to begin offering DSL
services, and such technology would most likely still be sitting on the
incumbents' shelves.
New section 262(a)(4) would completely take the wind out of the
DLECs' sails. Because DSL is a packet-switched service, the proposed
bill would not require incumbents to continue to provide collocation
for the equipment needed to use the local loops to provide DSL service.
While the bill does continue to require that competitors get access to
copper loops, without both collocation and local loops, DLECs can't
provide DSL. This would be a particularly tragic result since DLECs
pioneered the service and currently have about 25% of the market. This
is an area in which the '96 Act genuinely spawned innovation and
competition, and this legislation would turn the clock backward on the
progress DLECs have made.
D. LCompetitors would be forced to duplicate much of the local network
in each area before they could offer service to a single
customer.
It is not surprising that most CLECs would not find it appealing to
offer service to customers solely through the use of older circuit-
switched technology. Because new section 262(a)(2) would exempt the
incumbent carriers from having to provide UNEs for packet-switched
networks, the only other choice would be for the CLECs to build the
networks themselves.
This is precisely a result that the '96 Act sought to avoid.
Congress recognized in 1996 that there are a number of reasons to
require incumbents to provide competitors with access to its networks.
Most important, is that these networks already exist. Although CLECs do
build networks, because they are able to rely on UNEs they do not have
to build networks as extensive as those of the incumbents before being
able to offer service. The incumbents were able to build ubiquitous
local networks with revenue streams generated by their monopoly
service. Since the networks already exist, it would be inefficient and
unnecessary to require every CLEC to build extensive networks that
would essentially duplicate the incumbents' network. Further, it would
raise the cost of service to consumers, who have already paid once (at
monopoly rates) to have a ubiquitous telecommunications network built.
Under S. 2902, any CLEC desiring a network based on packet-switched
technology would have no choice but to build its own network from
scratch. Not only is this an inefficient result, it is also
prohibitively expensive. Far more than the 30 billion dollars already
raised by the competitive industry, and many more years or decades,
would be required before most Americans would have a competitive
choice. By way of analogy, the approach suggested by S. 2902 would be
as if Congress told new airline competitors they can have access to the
existing airports and terminals, but only if they use propeller planes.
If they want to use jets, then they get access to the runways but not
the taxiways or terminals. Those the competitors would have to build
themselves before they could offer any jet service at any airport. The
impact of this proposed legislation would likely be to take us back to
the day where all we had was a monopoly local phone company.
E. LBy limiting the market opening requirements to circuit switched
networks, the legislation alters the ``competitive checklist''
in section 271 and significantly lowers the bar for RBOC entry
into long distance.
The '96 Act created a delicate balance in enacting section 251 and
section 271. Section 251 set forth all of the market opening
requirements, the ``stick'' so to speak. Section 271 proposed the
``carrot''--that if the RBOCs complied with section 251 and is
genuinely open to competition in its local market, it would be able to
enter the interLATA market--from which it had been barred since 1984.
Therefore, sections 251 and 271 are intricately intertwined. It is
impossible to change one without impacting the other. In this instance,
the proposed exemptions from section 251 will allow RBOC entry into
long distance prior to the implementation of real competition in the
local exchange market.
It is true that the opening of the local markets have been slower
than competitors would have liked. Much of that is due to the
resistance of the incumbents in opening their markets to competition.
Rather than embrace the opportunity for genuine competition in the
local exchange markets, the RBOCs in particular have thwarted
competition at every opportunity.
Notwithstanding such resistance, CLECs have begun to prevail and
make a genuine dent in the local markets. One analyst estimates that
CLECs 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 local lines that CLECs
served in New York at the end of 1999 (approximately 1 million lines).
Not by coincidence, New York is also the first state for which the FCC
found that an RBOC met the requirements of the section 271 competitive
checklist. The ``carrot'' worked--competitors have access to the ILECs
network to compete in New York, and the RBOC now has permission to
compete in long distance.
Not all parts of the country are progressing as well as New York.
If this proposed legislation is implemented, progress throughout the
country is sure to be halted. Without the carrot, there is no incentive
for an RBOC to comply with the market opening requirements, which is
why the RBOCs are so eager to see S. 2902 adopted.
2. LS. 2902 Provides Immediate Regulatory Relief Despite the Fact that
Incumbent Local Exchange Carriers Still Have a Monopoly
New section 262(c) would provide relief from any ``common carrier''
regulation by the FCC or any State of an incumbent local exchange
carrier's provision of ``advanced services.'' This means that all of an
incumbent carrier's new investment, and a significant portion of its
existing network, would be freed from any regulatory oversight. In
effect, for all packet-switched services over 200 kilobits per second
both Federal and State laws governing telecommunications would cease to
apply to incumbent local exchange carriers. While no State commission
is testifying at this hearing, it seems likely that the States would
have serious reservations about this blanket Federal preemption of
their jurisdiction over local telecommunications services.
Absent some common carrier oversight, incumbent carriers would be
free to decide whom to serve, at what price to serve, and
discrimination of almost any type would be perfectly legal. They could
also decide to cease or restrict the provision of services to certain
ISPs or consumers, and there would be nothing the Federal or State
authorities could do about it.
Ironically, the CLECs and long distance companies that do not have
the vast majority of the local customers would still be subject to
State and Federal common carrier requirements, including offering non-
discriminatory service to ISPs. The incumbent carriers sought very
similar relief during the deliberations on the '96 Act, and Congress
wisely rejected their request. Nothing has changed in the intervening
four years that would justify revisiting that decision.
A. LRBOCs and GTE get regulatory relief as soon as a competitor offers
advanced services in each market.
Once again S. 2902 chooses to apply different standards to the same
problem. In the case of the RBOCs, GTE, and a few other large carriers,
new section 262(c) would grant unbridled freedom on a piece by piece
basis. As proposed, whenever a CLEC begins offering ``advanced
services'' in a particular telephone exchange area to just one
customer, the incumbent is granted relief from all State and Federal
common carrier regulation in that exchange area. Once free of the
common carrier obligations to interconnect on just and reasonable terms
and not to unreasonably discriminate, requirements that still apply to
the CLEC, there is little doubt that the incumbent will be able to
dominate the local market for advanced services, just as they do today
for circuit switched voice services.
B. LAll other ILECs get immediate relief from common carrier regulation
and the market opening requirements of the '96 Act as soon as
the legislation is enacted.
In the case of the over 1,000 incumbent local exchange carriers
throughout the country who each control less than 2 percent of the
nation's total telecommunications access lines, S. 2902 doesn't wait
until a competitor arrives on the field. Instead, section 3(c) of S.
2902 would grant these ``less than 2 percent'' carriers immediate
relief from all State and Federal common carrier regulation. This
legislative relief would ensure that consumers in the markets served by
these smaller incumbent carriers never get a choice of provider.
In both cases, should an incumbent fail to provide loops to
competitors seeking to offer circuit switched services, new section
262(c) provides that a CLEC may petition to have the incumbent's
exemption removed if they fail to provide collocation for circuit
switched services or access to local loops. However, the burden of
proof falls on the CLEC to show that the incumbent has not been
cooperative, and the infractions must be proved by ``clear and
convincing evidence,'' a judicial threshold that is difficult to meet
in the best of circumstances, much less when a competitor may lack the
financial and legal resources available to an incumbent monopolist.
In contrast, if an incumbent should ever have its exemption revoked
under the ``clear and convincing evidence standard,'' that incumbent is
free to petition a State to have the exemption reinstated. In this case
the burden is on the State to show why the exemption should not be
reinstated, and if the State fails to act within 90 days, the exemption
is automatically restored. Why the legislation chooses to impose a much
easier standard on reinstating the exemption than on removing is not
clear, but if adopted it would certainly indicate a strong bias on the
part of Congress against competitive providers.
3. Compensation for ISP Traffic is Prohibited.
Section 3(a) of S. 2902 would amend section 251(b) to prohibit the
payment of any compensation between carriers for the completion of a
call from a consumer to an Internet Service Provider (ISP). Inter-
carrier compensation is necessary in competitive local markets because
the carrier serving an end user making a local call may be different
from the carrier serving the called party. Since terminating carriers
receive no additional revenue from end users, the '96 Act requires
``reciprocal compensation'' to be paid when two different carriers
complete a local call. The originating carrier, who collects a fee from
the consumer, must compensate the terminating carrier for their
variable costs in completing the call.
Reciprocal compensation applies any time one carrier originates a
call and another carrier terminates a call. The arrangement applies to
cellular calls as well as local calls. In a cellular environment, the
cellular company compensates the incumbent local exchange carrier for
its costs of terminating the call. The same regime currently applies to
calls to the Internet. If the call is originated by an incumbent
carrier's customer and terminates on a CLEC network to an ISP, the
incumbent compensates the CLEC. The same would apply in reverse if a
CLEC customer called an ISP served by the incumbent, hence the term
``reciprocal'' compensation. It is not the volume of traffic that is
reciprocal, it is the obligation to pay each other the same rate for
terminating calls on each other's networks.
By prohibiting the payment of any compensation to competitive
carriers for their costs of transporting and terminating calls to an
ISP, S. 2902 mandates the use of a ``bill and keep'' arrangement that
was considered, but not adopted, by Congress in the '96 Act and by the
FCC in implementing the '96 Act. This legislation is anti-competitive,
unnecessary, and would have very troubling consequences on competition
in the local markets.
A. LProhibiting recovery of costs for terminating calls to the Internet
is anticompetitive and possibly unconstitutional.
As the RBOCs and the FCC have recognized, ``carriers incur costs in
terminating traffic that are not de minimis, and consequently bill-and-
keep arrangements that lack any provisions for compensation do not
provide for recovery of costs.'' \13\
---------------------------------------------------------------------------
\13\ Local Competition Order, CC Docket No. 96-98, August 8, 1996,
para. 1112.
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In addition, because there are real costs involved in terminating
this traffic, prohibiting recovery of those costs would likely violate
the Fifth Amendment's prohibition against the ``taking'' of private
property. The RBOCs made this argument to the FCC when the '96 Act was
being implemented. If bill and keep is unconstitutional in regards to
the RBOCs, which enjoy many other regulated sources of revenue, it
applies with even greater force for CLECs, which have no embedded
monopoly markets or other revenue streams to fall back upon.
B. LEliminating reciprocal compensation would harm Internet consumers
and the marketplace in general.
As I stated above, CLECs incur costs of carrying calls to ISPs. If
CLECs cannot receive payment for carrying these calls from the
incumbent carrier, the CLEC will have to seek payment from someone
else, most likely the ISP itself. The ISPs may have to flow through
this cost increase to their consumers. Cost-based reciprocal
compensation ranges around $3-$6 a month for an average household using
the Internet, who pay an average of about $17 a month. Flowing those
costs through to end-users would thus mean an 18%-35% increase in the
monthly cost of access to the Internet via CLECs.
Another alternative is that, if CLECs cannot be paid for providing
this service to ISPs, CLECs may simply exit the market altogether. ISPs
would be forced to return to receiving service from the incumbent
telephone company, effectively remonopolizing the local market.
As this Committee is well aware, the Internet has become a huge
engine of economic growth in America. Passage of legislation that
either forces ISPs back to the monopoly providers, or else increases
the cost of Internet access for millions of Americans by 18% to 35% is
terrible public policy, pure and simple.
C. LIt was the RBOCs, not the CLECs who supported high reciprocal
compensation rates three years ago.
The FCC initially proposed that the rates for reciprocal
compensation should fall in the range of $0.002 to $0.004 per minute of
usage. However, the RBOCs succeeded in obtaining a stay of the FCC's
Local Competition Order in the fall of 1996. This enabled the RBOCs to
demand much higher reciprocal compensation rates--around $0.008/MOU to
.0009/MOU--believing they would terminate more traffic than they would
send to the CLECs. The CLECs had to obtain signed agreements from the
RBOCs quickly in order to start requesting unbundled elements,
interconnection, and the other facilities that they needed from the
RBOCs to begin their businesses. Consequently CLECs had no choice
except to accept the high rates demanded by the RBOCs rather than risk
delay by litigating the issue.
D. LThe CLECs have a greater number of ISP customers because they have
out-competed the RBOCs in the marketplace.
As the CLECs began to offer service three years ago, the ISPs were
among the first customers to recognize the benefits of the CLECs' new
technologies. ISPs have determined that the CLECs provide better
overall value--the combination of price and service. ISPs have
consistently ranked the CLECs ahead of the RBOCs on their most
important service parameters and have continued to award CLECs with
most of the growth in ISP lines. Indeed, a CLEC like Focal has been so
successful at meeting these needs in comparison to Ameritech that about
one-third of the dial-up traffic to ISPs in Chicago is carried by
Focal.
However, I would like to point out that the RBOCs obviously have
the financial and technical resources to provide the same services to
ISPs that CLECs provide--but have chosen not to do so. Nothing stops
Ameritech from meeting or beating Focal's ISP services, and ending the
traffic imbalance.
E. Reciprocal compensation rates are rapidly declining
Any issues regarding high reciprocal compensation rates are quickly
disappearing. Several recent state arbitrations have reduced reciprocal
compensation rates by at least 50%. Negotiated settlements reveal the
same trend. While the rates contained in settlements are obviously
driven by the needs of the particular carriers involved and do not
necessarily reflect economic cost, several CLECs have recently
announced settlement agreements with RBOCs that reduce their reciprocal
compensation rates substantially, sometimes to 10% of the former rate
level.
F. LAny legislation would be premature and would undermine work that
the FCC has undertaken.
The FCC is currently working through the issues raised by the D.C.
Circuit Court's remand of the FCC's 1999 order regarding reciprocal
compensation for calls to ISPs. Members of Congress requested the FCC
to address these issues by September 30, 2000. The FCC last week
accepted industry comments and I have no reason to believe that the FCC
will not address these issues by September 30, 2000.
4. LNo New Investment is Required to Meet the Build-Out Requirements of
S. 2902
New section 262(b) purports to establish a ``build-out''
requirement for incumbent carrier deployment of ``advanced services.''
In order to keep the exemption granted by the bill from the market-
opening requirements of section 251, an incumbent local exchange
carrier must ``make available advanced service'' to 80 percent of its
telephone exchange customers within three years, and be able to offer
100 percent of those customers such services within 30 days of a
request after five years. However, language in the requirement ensures
that it actually has little practical effect. This is the case because
both the three and five year tests are limited to serving customers
``where such services can be provided using an industry-approved
standard and existing local loop facilities.'' In other words, the
incumbent need offer advanced services to 80 and 100 percent of those
customers within a specified distance of the central office, for
example the 18,000 foot limit generally cited by the industry as the
applicable limit for ADSL service. Those outside that distance, who are
generally the customers in the less densely populated rural areas,
aren't included in the test and the incumbent is not required to serve
them. Depending on the exchange in question, 100 percent of an
incumbent's telephone exchange customers could actually mean something
much closer to 30 or 40 percent.
The legislation itself recognizes this fact explicitly, and takes
steps to ensure that even this low threshold is no bar to continuing
the exemption from having to comply with the pro-competitive provisions
of the '96 Act. In those areas ``where advanced service cannot be
provided using an industry-approved standard and existing loop
facilities'' new section 262(b)(2) simply lowers the standard to the
128 kilobits per second provided using ISDN technology. The message
here is clear for rural areas--the most advanced service consumers
there can hope to see from the incumbent carrier 10 years after the '96
Act was adopted will be ISDN--a service that was long ago rejected in
the commercial market as too slow and too expensive.
5. LThe Incumbent Local Exchange Carriers Are Already Deploying
Broadband Services Without Any Change in the '96 Act.
The provisions in the '96 Act providing access for competitors to
the incumbent carriers' networks for both circuit switched and packet-
switched services, as well as the restriction on the RBOC provision of
interLATA service, are not impeding the RBOCs' deployment of high-speed
Internet access. All of the RBOCs are in the midst of very aggressive
roll-outs of DSL service. This is in response to competition from the
CLECs, DLECs, and cable companies, and is being accomplished without
any change to the '96 Act. At the end of the first quarter of 2000
there were approximately 800,000 DSL lines in service in the United
States. Approximately 75 percent of those lines are provided by
incumbent carriers. Press releases issued by the RBOCs confirm this
deployment, and their intention to continue this roll-out as fast as
they can.
It is interesting to note that the most rural of all the RBOCs,
USWest, has been particularly aggressive in deploying DSL services.
USWest recently issued a press release announcing its intention to
offer DSL to 30 new markets, almost doubling the cities with its
``MegaBit Services'' in its region. USWest provides DSL service to over
150,000 customers and is able to provide DSL service to nearly 60% of
the population in the company's 14-state region.
The newly merged Verizon Communications, recently announced that it
was cutting the price of its most popular Infospeed DSL package by 20
percent--from $49.95 to $39.95 per month. Preliminary second quarter
results reveal that Verizon has 221,000 DSL subscribers, 47 percent
more than at the end of the first quarter. One of its subsidiaries,
Bell Atlantic-New York has announced that it is ``investing close to $2
billion a year in [its] statewide network so that it can support
exciting new technologies like DSL.''
As mentioned earlier, financial reports for SBC show that they went
from having 12.8 million DSL capable lines at the end of the first
quarter of this year to 14.7 million DSL capable lines by the end of
the second quarter. Also at the end of the second quarter, SBC reported
399,000 total DSL lines in service, for a net gain of 198,000 DSL
customers in that quarter. Finally, SBC reports that it has already
made 75 percent of its central offices DSL capable.
Late last year, BellSouth announced the successful completion of
its deployment of its Internet service to 30 cities throughout the
Southeast. The service is currently available to 7 million telephone
lines that meet the technical specifications and plans call for a total
of 11.5 million lines to be capable of delivering the service by the
end of this year.
Therefore, contrary to any RBOC claims, it does not appear that
they need regulatory or policy changes to deploy DSL services; what
they need is more competition, which Congress should not diminish with
this legislation.
Senator Brownback. Thank you, Mr. Taylor.
We will run the clock on questions, if I could, for Members
since newer Members have attended and keep this at 5 minutes
each for questions if we could. So we could turn that on.
I wanted first to congratulate all of you and anybody
associated with telecommunications in the room for the
aggressive competition that is generally happening in
telecommunications. That was what was envisioned in the Act and
much of that is taking place.
The one problem and the whole focal point of the hearing is
that we are not getting it in an area that I care deeply about,
which is the rural areas across our country. We have
historically as a nation decided as a part of public policy
that we will not leave rural areas behind. Whether it is on
rural electrification, rural telephony, any of these things, we
have decided, while there may not be as much economic activity
because of the density of population or whatever other issues,
we are not going to leave them behind.
Yet, on the high speed data transmission, Internet access,
they are being left behind. I wish that more of your testimony
had been directed at that. But I would direct this
particularly, if I could, to either Mr. Taylor or Mr. Bryan on
this question. If you disagree with this statistic, then I
would like to hear your number, because this one is so bad for
rural areas.
According to one survey, more than 73 percent of cities
with population of 500,000 to 1 million have cable modem and/or
DSL service, but less than 5 percent of towns of 5,000 to
10,000 have cable modem service and less than 2 percent have
DSL service. Those are the numbers that we have. That is what
the bill is aimed at trying to get at.
Now, could either of you tell me how we could get those
areas covered, then?
Mr. Bryan. Let me just respond----
Senator Brownback. And if you would direct it on that
question, I would appreciate it.
Mr. Bryan. I share your concern and I think one of the real
ironies is people who live in rural areas probably in many
instances require broadband more than maybe inner city
dwellers. A lot of small businesses are run out of farms. They
need this facility. It is not just an entertainment vehicle. It
is actually access to a portal that is going to help their
business. So I think you are right to be concerned about this.
I think very few people in this room would have had those
concerns that you now have about broadband access to rural
areas 4 years ago. It has only been the activity of the
competitors and the innovators that have now raised this to the
level of concern. You are concerned about it, we are all
concerned about it, because we now realize there is an
opportunity for people in the rural areas that no one would
have considered had the innovators and competitors not gotten
busy and emphasized the benefits and made these benefits
available.
Now, those of us who are competitors have only been at this
for 4 years and, as you know, 271 relief has only been given
just recently, i.e., the ILECs have not been cooperating to let
us compete in this marketplace.
Senator Brownback. In rural areas?
Mr. Bryan. Throughout the country.
Senator Brownback. You have been able to compete in the
urban and suburban ones.
Mr. Bryan. With great difficulty. Hence the reason and the
delay in getting 271 relief. I would say that any person in the
competitive telephone industry--I am sure you have heard it in
the past--has complained bitterly that at every step of the way
it has been difficult for us to deal with the incumbents.
That is now changing, but for the first 3 years of our
existence we have found it difficult to provide service in the
cities----
Senator Brownback. Mr. Bryan, if you could focus. We have
got a limited period of time. Why are you not in rural areas?
Mr. Bryan. Well, as we have started this activity 4 years
ago, we are obviously going to the markets which are going to
be initially more fertile. We have not had the benefit of being
a monopoly for 100 years, but certainly it is not our plan to
bypass the rural areas. My company actually has a nationwide
network that is both in rural and in urban areas. But it is
clear that the bulk of our business in the first 2 years is in
the more densely populated areas.
We will certainly radiate out of that area into more rural
areas over time, but we have only been in this business for a
brief time period.
Mr. Taylor. Mr. Chairman, if I could add. Since the passage
of the act there has been a lot of new companies that have been
formed specifically to go after rural areas, companies like New
Edge Networks, Jado, DSLNet, and TriVergent, all ALTS members.
In addition, having lived outside of Cedar Rapids in a
small rural town, there are places where competition in
broadband networks is being brought to rural areas. Of the 153
independent telephone companies in Iowa, all of them have
fiber. Every high school and junior college in Iowa has
broadband connectivity to it today.
Senator Brownback. But Mr. Taylor, do you disagree with
these numbers that I read of the percentages?
Mr. Taylor. I cannot disagree with those numbers, but the
problem is, if you simply take a look at a McLeod USA
securities document, the amount of litigation that they have
with US West, now Qwest, trying to get into rural markets is
significant. Companies want to get into rural markets. It is
difficult to do that.
If more enforcement of the original Act was done, we could
get in there faster. There are some companies that are
beginning to do it, but it is difficult to do it in Chicago and
New York and Washington, D.C.
Senator Brownback. Thank you, Mr. Taylor.
Mr. Ellis, how does the lack of regulation of broadband
services offered by cable companies make such services more
competitive than DSL services offered by your company?
Mr. Ellis. Senator, I will be pleased to answer that. I
would like to just make a comment, if I could, on the answers
that were just given, because I think the experience of both
these companies makes a point on reciprocal compensation. It is
not a question of these companies not serving rural customers.
These companies serve primarily and perhaps almost exclusively
businesses. They do not serve residential customers in urban
cities, and one of the reasons they do not is because of
reciprocal compensation and the way it works.
They would be disadvantaged. Every time they retain or
obtain a residential customer, instead of being able to collect
reciprocal compensation from the ILECs or the telephone
company, they end up having to pay it. They are discouraged.
They are disincented on the urban residential customers, let
alone going out to rural areas. That is a fundamental problem.
Now, in terms of how the rules, the asymmetric regulation,
affect us, it is the typical set of having to live with and
operate with a regulatory regime when you are competing with
people like cable modem that have no regulation. We are
regulated pervasively where they are not. So every decision we
make has to be in light of that, that we stand at a competitive
disadvantage, whether it be in terms of our prices, bundling,
packaging, we talked about the 271 issue, their ability to
leverage content, their ability to pick and choose what they
want to put on, what access they want to give.
All of those things put us at a tremendous disadvantage, as
does the fact we are going to pay, as I said, $750 million or
thereabouts in reciprocal compensation, moneys that could help
us go from the 80 percent of our customers that we will serve
with broadband to closer to 100 percent, to cover those rural
areas.
We want to be there. We are the only company that has made
that kind of commitment. But the asymmetric regulation has no
place in a competitive market, and that is what we suffer from.
There is no bottleneck. These people have the same options to
get to the customer that the cable people do, that we do, that
the wireless people do, and the satellite people. But yet we
suffer from, and our customers and the public suffers from,
asymmetric regulation.
Senator Brownback. Senator Rockefeller.
STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. Thank you, Mr. Chairman.
I always like to start out by pointing out that I never had
a single constituent or got a single letter, a single e-mail,
had a single conversation or a single phone call in which
anybody asked me or anybody that I know around here to
deregulate the telecommunications industry. So we did you an
enormous favor. It was not asked for by our constituents. It
was asked for by the telecommunications companies of America.
We did that and in return we extracted e-rate and some
other things, which some people in here supported and others
did not. But it passed overwhelmingly and it is probably the
future of the nation.
That is why I also disagree with you, Mr. Haynes, when you
differentiate between the FAA as being public safety and this
kind of regulation. I think there is a big comparison between
broadband distribution and public safety in the broader sense,
i.e., everybody having a chance, knowing it. Otherwise I think
this could become, the digital divide could become the next
civil rights movement on a worldwide basis, with terrorism and
all kinds of things involved. So I look upon it very
differently than you do, obviously.
My question, Mr. Ellis, is to you. You want to--having come
to us and having gotten a great deal, you want the Brownback
bill, which I do not support because I think it would undo some
of the checks that the RBOCs want so badly to undo now, having
settled for them earlier. So there is discussion about
regulation.
There are 37 co-sponsors to a bill that Olympia Snowe and I
introduced which would give tax credits that would escalate as
the broadband got more serious in its intensity for uploading
and downloading for rural areas. SBC has not actually taken a
position on this and it seems to me that tax credits are often
a good way to motivate the private sector.
Is this a bill that--as I say, it is very bipartisan. It is
very good, I think. It relates to rural areas. Is this
something that SBC would find in any way helpful?
Mr. Ellis. Senator, we applaud the intent of the bill. We
have had our tax people look at that at some length and we have
some concerns that the bill does not in its present form
accomplish what I think is intended, namely to create
incentives to assist in the deployment of broadband. I think we
certainly are in favor of the goals and the objectives, and we
will be providing some thoughts to your staff and others on the
problems that we see in its present formulation.
But the idea is a good one. We applaud it.
Senator Rockefeller. The idea is a good one, but you say it
will not work.
Mr. Ellis. I am not a tax expert, but I have been advised
by our tax lawyers and the accounting people that the benefits
are not delivered in the way I think was intended. That is,
that the incentive, the whole purpose, does not work. The idea
is a good one. We have got some ideas on how it perhaps could
be improved.
Senator Rockefeller. Could you share those ideas with us?
Because it is not often that the federal government offers to
help the private sector do what needs to be done. You I believe
said, or somebody I think said, that 80 percent of the country
was getting broadband or would get broadband. That certainly
does not apply where I come from. It is closer to 5 percent of
the geography.
Mr. Ellis. What our commitment is that, independent of this
legislation or others, we have made the commitment that we will
deploy broadband, high speed access to 80 percent of our
customers by some time next year.
Senator Brownback. Well, I congratulate you. I wish you
were working in the East.
Thank you.
STATEMENT OF HON. SLADE GORTON,
U.S. SENATOR FROM WASHINGTON
Senator Gorton [presiding]. The Senate is in a roll call
right now and Senator Brownback has left to go vote. Have
either of you?
We will try to keep this continuous. I can tell my
colleagues here, Skip Haynes is both a constituent and a
friend. Skip, I think the problems that you face may be
evidenced at least in small part by the fact that you are from
such a rural area and from so far away they do not know how to
spell the name of your company, even the staff here. It is
``Rainier,'' after the mountain.
But I am going to let you add a little bit to the
commentary that you make. You have done something that has not
happened in most of the rural areas of the country. You are
clearly a leader, perhaps in the top 1 percent. And yet what
you are asking for here is to reverse some of the genius and
the philosophy behind the 1996 Act and to restore a monopoly
situation in broadband and perhaps even in telephony as well,
directly or indirectly.
You have arrayed against you not only a number of rather
large companies, but most of the intellectual opinion, the
outside academic opinion in the country. Your testimony states
very eloquently, why should you make an investment, the kind of
investment that you have made, if you have got to give it away
essentially at less than cost?
Is there not a cure for that complaint short of recreating
a monopoly situation?
Mr. Haynes. Senator Gorton, it is great to see you, and it
is a reasonable question. But in my opinion, unfortunately, the
regulators at the FCC and in Washington State have not been
reasonable. It seems as though, while we should wear white hats
as incumbents for having provided service as well as we have
for as long as we have, that all of the advantages go to the
``new entrants.'' I think if we did have reasonable cost
procedures, reasonable prices that we could charge, that would
improve the situation. But my experience has been that the
regulators have not been reasonable with the incumbents,
unfortunately.
Senator Gorton. And you are speaking of regulators at both
levels?
Mr. Haynes. Yes, Senator.
Senator Gorton. Can you differentiate between the State and
the FCC at all?
Mr. Haynes. It has been my experience that the FCC has been
unfair and unreasonable in its treatment of incumbents and, if
anything, in Washington State it has been worse.
Senator Gorton. Would any of the other of you, any of you
who are on the other side of this issue, like to comment
generally speaking on my question?
Mr. Taylor. Yes, Senator. I think a lot of the issues that
revolve around rates, whether they are end user rates or
contractual inter-carrier rates such as reciprocal
compensation, have remedies out there today that do not need
legislation. End user rates can be raised or lowered in most
areas fairly easily today. Inter-carrier compensation,
reciprocal compensation, are simply rates that are set by the
Bell operating companies and dictated to the CLECs. The CLECs
have in the past focused on getting those down lower and we
have been successful.
I think it is also interesting to note, where I live
outside of the Chicago area I get both my phone service and my
cable service from SBC and, interestingly enough, if cable is
so well unregulated, it is surprising that SBC will not offer
me high speed access on my cable system.
But more importantly, though, I think as we look at this,
the Ninth Circuit has already decided that cable modem service
is a common carrier service. So we are beginning to make sure
that the inequities get fixed on the regulatory side, and I
think all of the companies here have the pricing flexibility to
make sure that that $15 phone line that Mr. Ellis' daughter
uses might be priced at $20 appropriately, or that the
reciprocal compensation rates that SBC set at a penny might be
appropriately priced at a tenth of a cent. Those can be done
today without any changes from the Committee.
Senator Gorton. Mr. Ellis.
Mr. Ellis. Senator, it has taken Southwestern Bell
Telephone Company 110 years to get the basic telephone rate in
Texas to $9.85. I believe it was 1979 or 1980 since the last
rate increase on basic telephone services in Texas, and then it
was like 25 cents.
I would like to take a little bit of issue, if I may, with
the idea that we are seeking to reverse the Telecom Act. At the
heart of the Telecom Act in 1996 was a concept that the local
company had a monopoly and had a bottleneck control over the
provision of basic telephone service, particularly to
residential customers. That was at the heart of it. We got it
legally. It was there because of public policy for 100 years.
What we are talking about here is something where we do not
have that bottleneck. In 1996, DSL was in the thoughts and
minds of people. So was cable modem. New service. There are
alternatives out there. There is no bottleneck. All we are
asking is, given that there is no bottleneck, given that we are
behind our competitors in the provision of advanced services--
as I said, four or five customers to one go to our
competitors--given those facts, all we are asking is for
advanced services to be treated like our competitors are, not
to be burdened.
If we have that option, I am here to tell you it will
assist in the deployment to the rural areas, the other 20
percent that my company is not reaching. But there is a
fundamental difference in voice communications, where we at one
time had a bottleneck, and advanced services where there is no
bottleneck.
Senator Gorton. My time is up. Senator Dorgan, I will leave
it with you and I think Senator Brownback will be back by the
time you have finished.
Senator Dorgan. Well, if I am left alone I may pass some
good legislation here.
[Laughter.]
Senator Gorton. All by unanimous consent.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan [presiding]. It is a rare occurrence.
I probably only have a minute as well. I think the vote is
nearly over. But I have been over in the Energy Committee this
morning and regret that I have missed some of the testimony.
I do want to just make a couple of comments, however. This
hearing I think is important and useful. Monopolies are a kind
of cholesterol to the free market system. They plug the
arteries of the system. When we passed the Telecom Act, we
attempted to unleash the forces of competition in this area. I
regret it has not worked as well as I would have liked. There
is far more concentration than I would have liked.
But I also see evidence that the act is beginning to work--
new entrants, aggressive, robust competitors coming in, new
investment money for startup companies. I think all of that is
beginning to work. And I want to let it work. I frankly do not
support S. 2902. I think it does short-circuit what we intended
to accomplish in the Telecom Act.
I must also say that selling this approach on the basis of
its benefits to rural areas is not accurate. I would say in
North Dakota, for example, U.S. West is selling off most of its
rural exchanges and it has been doing that for the last 4 or 5
years, trying to sell all these local exchanges. So I do not
think that it can be documented that this somehow would be good
for rural areas.
I have introduced legislation called the Broadband REA
Program, essentially saying that I do not think the buildout of
the infrastructure of advanced services is going to occur
unless we do something like we did with electricity or
telephone service to rural areas of the country. I support some
tax incentives. Perhaps that works. I support something similar
to the old REA program with revolving loans. Perhaps that
works.
But I do not think that at this moment it makes sense for
us to unravel portions of the Telecom Act, and for that reason
I do not support S. 2902. I think this hearing is useful,
however, to give an airing to these issues. While I have got to
be on the floor of the Senate for the next hour, I will try to
get a transcript, and I have read the testimony that you have
presented.
As you can tell from the initial discussions, this is going
to be a robust, healthy debate for some while to come. It was
our intention when we passed this Act to create a checklist by
which the local exchange carriers could go out and compete in
long distance, provided they meet certain things. Now, SBC has
met that in Texas, as I understand it. It is not our intention
to establish this as a barrier. We want the Federal
Communications Commission, the state authorities, to work with
the local exchange carriers. If they meet the checklist--and
they ought to be able to meet it; we are not creating barriers
here, we are trying to create opportunities--then we unleash
the forces of competition.
But I tell you, I have heard all over this country from
people who are new competitors that there are subtle and some
not so subtle ways for local incumbents to prevent effective
competition. That is the nature of things. That is the nature.
It is the way things work. I understand all that.
But I think to pass S. 2902 really would begin unraveling
forces in the Telecom Act that I begin to see working now in a
way that I think can be exciting, yes, even for rural areas of
the country.
I regret I cannot spend more time. I would love to ask a
series of questions, but because of the floor vote I have to
leave. Mr. Chairman, thank you.
Senator Brownback [presiding]. Thank you, Senator. If you
would like to submit some of those questions for the record, we
would be happy to have those as well. Senator Breaux.
STATEMENT OF HON. JOHN B. BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. Thank you very much, Mr. Chairman. Thank
you for having the hearing. It gives us an opportunity to
discuss a lot of the issues that have been bubbling up for a
long period of time.
I apologize to the panel for being in and out and having to
testify before the Agriculture Committee and then having to
vote. It shows you how things work or do not work around here,
coming in and out.
But I would like to talk a little bit about the reciprocal
compensation issue. Mr. Ellis, my staff tells me you addressed
this. I am sorry that I missed it. Can you give me some dialog
a little bit, Mr. Ellis? Perhaps you have already done this,
but how did it work before the Internet, the concept of
reciprocal compensation? It kind of was a wash before we got
into the new transition. We never had real strong rules with
regard to payment for the use of other lines before the
Internet came into being. How did it work back in the dark
ages?
Mr. Ellis. The concept was in the legislation simply to
compensate a carrier for terminating a call if they were not
otherwise compensated, and that call had to be, local calls. We
had other things for long distance, but if it was a local call
and the carrier was not compensated otherwise.
What we have instead is the reciprocal compensation being
paid for calls that, number one, are not local. These go to the
World Wide Web. They are not reciprocal. You never get a call
back from an Internet service provider at all. And they bear no
relationship to the cost of completing that call. In fact, if
you think about it, when a customer makes a call to the
Internet and it goes to, let us say, ICG, ICG has a
relationship with its ISP and that ISP pays ICG for one thing,
to terminate the call that we pass off.
Under the present rules as they are being applied, not only
do they collect from their Internet service provider for that
one way, because nobody originates--the Internet Service
Provider does not originate a call. So not only does ICG
collect from the Internet Service Provider, but they also
collect from the telephone company, and they collect in a
manner and in an amount that is totally disproportionate to the
cost.
We have specifically asked ICG and others, what costs,
submit cost studies that show what your costs that justify
these exorbitant rates for reciprocal compensation. I know in
three jurisdictions they have not submitted it and to my
knowledge not a single data CLEC has submitted the costs for
completing a call to justify what we believe is an unjustified
and unsustainable amount.
Senator Breaux. Mr. Bryan, why has that not been done?
Mr. Bryan. We have submitted costs to SBC. Maybe you are
not current with what is going on between the two companies.
But it is--as I said in my earlier testimony, there are actual
costs that we incur before we carry one moment of traffic on
it. We have to deploy switches that cost us about $10 million.
We have to get an interconnection or trunking that, if we lease
it from SBC, we obviously have to pay them. We then have to
connect with the ISPs and then we have to go and see if we can
market those services to the ISPs.
The reason that we have been successful--so there are
substantial costs associated with this.
Senator Breaux. Do you think nothing should be done with
regard to this issue?
Mr. Bryan. I think that, as Mr. Ellis probably knows, the
marketplace is sorting this out. In fact, with his company we
are being paid probably 15 percent of what we were being paid 2
years ago. So the rates have come down sharply and it is
envisioned will continue to come down sharply.
It is hard to imagine that any companies should deploy
equipment and save, in this case, SBC capital they would
otherwise have to pay. But there is a point here. We got in
this business because the market, the ISP market, was not being
well served by the various incumbents. We came in, we priced it
maybe slightly below the Bellco prices. But we got it because
we offered them service that the Bell companies did not want.
Senator Breaux. I understand that. I am just worried about
the compensation methodology that is being used.
Mr. Ellis, did you make a recommendation on what you think
we should do? Should this be something--I know Senator Lott and
I have contacted the FCC with regard to some of their authority
in this area to see what they might do about this. But what do
you think? Is the marketplace going to take care of this? Do we
need legislation? Do we just need to ask the FCC to make a
decision on how these imbalances can be fixed or should be
fixed? What is the solution?
Mr. Ellis. We support this legislation. But I would just
say, I think the industry as a whole agrees there ought to be
one policy, not left to individual States. There ought to be
one approach to it. That has not happened. The FCC has had it
for a long, long, long time, and there has not been a
rationalization of the reciprocal comp rules.
Senator Breaux. What happens if we do not do anything
legislatively? Then do you have 49, 50 different set-ups?
Mr. Ellis. We all have different set-ups in all our
jurisdictions. For instance, in Texas the rates have fallen
significantly. I gave an example, at one time it was $450, we
collected 15. That number is down around, somewhere around $100
versus the 15. In Illinois it is closer to $200. So in all our
jurisdictions there are different numbers.
But there is still a significant problem that cries out for
a rational resolution.
Senator Breaux. So you are satisfied with that part? I
mean, the whole bill that Senator Brownback has offered, but
with regard to the reciprocal compensation issue?
Mr. Ellis. Absolutely.
Senator Breaux. Mr. Bryan, you disagree with that?
Mr. Bryan. I disagree because it results that we deploy
capital that the Bellcos would otherwise have to deploy and we
just do not get compensated for it. There is an easy way for
SBC to solve their reciprocal compensation dilemmas if they are
concerned about it. It is the old-fashioned way: Go build a
network, put us out of business.
Senator Breaux. Mr. Ellis.
Mr. Ellis. Well, they do get compensated. I just gave an
example.
There is no reciprocal in this concept. There is no
reciprocal traffic from the Internet service providers. Their
sole purpose when they connect with ICG is to receive calls
that ICG terminates, and ICG gets compensated for that plant,
no question about it. When they collocate, as they do with the
Internet service provider, and they simply hand the call to the
Internet service provider, the Internet service provider is
paying them. When they pay them, it is for one thing: to
receive calls from them. They never pay them to originate.
There is no reciprocal here. They are getting compensated.
Mr. Bryan. May I just add one thing to that? Of course
there is reciprocity, because from inception we have used SBC's
network and we have paid them for it. There is no question, we
have always paid you on time for the use of your network. In
this transaction--and in most transactions we had to pay you
much more than you pay us. In these issues, you have to pay us
more and I know that is offensive to you.
But there is an issue here. SBC has a customer. That
customer has come and wants access to the Internet. They have
decided, because we have come in now and said to the ISPs, we
will provide you with network. We are now in the middle of
that. We did not need to be in the middle of that if they had
provided the same service to the ISPs. Well, they can start
that tomorrow. We will be put out of the marketplace.
But we are providing a service. If we were not providing
the service, then you could have deep concerns that your
customers might switch over to the cable companies that are
frightening to you.
Senator Breaux. Ain't competition great. Well, Mr. Ellis, I
happen to agree. I think that you have made some good points on
the issue. I just do not think it is a level playing field at
all and I think something needs to be done about that.
Thank you.
Senator Brownback. Mr. Bryan, let me ask you something on
the specific legislation. In your prepared testimony you
asserted that my legislation would deny the CLECs the ability
to interconnect with ILECs networks. Where in my legislation is
the interconnection requirement of section 251[a] eliminated
for the ILECs? Rather than eliminate the ability to
interconnect with the ILEC networks, does the bill not simply
put the interconnection terms on the same level as
interconnection with any other carrier and apply the same
resale rules, contrary to your testimony? My bill really does
not deprive you of selling an ILECs broadband service, but puts
it on the same regulatory level as the resale of any other
carrier's services.
If I am a carrier, why should it cost me less to
interconnect with SBC than it costs me to interconnect with
ICG, or less to resell ICG's services than ICG's?
Mr. Bryan. Well, Mr. Ellis and I agree on one point, that
this country's telecom is vital because we can use other
people's networks. No one is going to have a comprehensive
network. We have to use other people's networks.
It is I think better if we can now, if SBC develops a new
technology, if we can then avail ourselves of that new
technology and lease that capacity from them. We are happy to
reciprocate that and have them use our network. Wherever we
have network deployed, if there is a site where SBC wishes to
use our network, we will work out an arrangement where they can
then take our network and use it.
But to be foreclosed from taking over and unbundling those
elements, the very elements that are going to be the advanced
and exciting elements, I think not only is it going to be bad
for the competitive telephone companies, it is going to be bad
for the creative element, because the most creative people in
this industry are those who are thinking about new ways to take
advantage of advanced networks.
So my view is those networks need to be made open and
available to creative--let us now go back to how this country
was when each State would charge taxes. Before you could go
from Delaware to Pennsylvania, you had to pay a tax. Let us
have it be open and let us let networks be used. We should both
be compensated for the use of the network, but we should not be
able to create little feudal systems that blank it out.
Senator Brownback. Mr. Ellis.
Mr. Ellis. This goes back to one of my starting point
principles that SBC evaluates legislation. In competitive
markets, the government should not regulate rates, terms, or
conditions. The advanced services, to distinguish it from the
voice side of the business, advanced services is a competitive
market. As I have said, we do not have a bottleneck. We have
absolutely no bottleneck.
There is no regulation on the other set of wires that go
into every house or virtually every house. That is, the cable
and cable modem services are completely unregulated. They have
no interconnection obligation, no unbundling, and so forth. My
basic principle is that, given the existence of alternatives to
our DSL services, we should not be treated any differently than
those alternatives.
I believe in, as I gave the example of the wireless
industry developing without regulation, on normal commercial
transactions there would be the interconnection of networks.
There would be normal business relations. But I submit, where
there is no bottleneck and where cable modem has the exact same
set of wires going into the house and they are treated one way,
that there is no justification to treat the telephone DSL
services in another way.
Senator Brownback. Mr. Taylor.
Mr. Taylor. I certainly sympathize with Mr. Ellis' position
on that. But the great thing there is the Ninth Circuit and the
FCC are going to regulate cable modems as a common carrier
service. So that other wire into the house will be treated like
the wire that is into the house today, so that we are solving
that problem through the regulation of the cable modem, and the
Ninth Circuit Court of Appeals decided that cable modem service
was a common carrier service.
Senator Brownback. Let me wrap up with one question that I
have looking at this overall issue of how we get this deployed
to rural areas, which is what the whole focus of the bill is
about, is how do we get this out to rural areas. You are not
there right now. You cite several companies that are, but the
percentages are very low. Bob and Nancy Brownback on the farm
in Parker, Kansas, and my brother Jim, they are just not having
the access that other places do.
That is what we are aimed at and that is what we are trying
to create. Now, some people say let us create tax incentives,
other people say let us put subsidies. We are going to do
something to try to create a level field here for rural America
so that they can have the same access to the same economic
needs, and clearly we have those.
I would hope that all of you on the panel would work with
us to see the answer to that issue on through. I look at it and
I see a clear opportunity to level the regulatory playing field
here and create a system where they will reach out. In other
words, even by leveling the regulatory playing field, we even
put requirements on those people. If they want to have the
level regulatory field, they have to build out, 100 percent
buildout. So we do not even give just regulatory parity. We say
to get regulatory parity you have to do something, and that is
to invest in areas where CLECs and your companies have to date
been unwilling to do so. They have not been willing to go out
into those areas.
Now, if you were to sit here today and to promise me that
within a year or two the CLECs are going to be out there, 100
percent competitive like the bill is requiring of the ILECs to
do, I will be much more interested in what you are saying,
rather than just--it seems like more of a protective interest
in how do we address these rural needs. That is what the focus
is.
Mr. Taylor. If I could comment, I think that there are a
lot of companies--and I cited McLeod USA, which is building out
all over what I would describe as rural America. The underlying
challenge, though, is it is not a technology, it is not a
regulatory challenge. It is an enforcement challenge. Getting
into incumbent central offices to deploy DSL technology takes a
long time. If we could get faster access to the facilities
necessary to deploy broadband, it can happen faster.
But even then, it is a people and equipment challenge.
Companies like Focal, companies like ICG, quite frankly I can
imagine companies like SBC, are deploying technology as fast as
humanly possible. If you opened up every door and took away
every regulation, I am not sure that manufacturers could make
and companies could install the equipment any faster than it is
today.
Senator Brownback. But they are able to do it in the urban
areas now and you are able to get in there, but you are not in
the rural.
Mr. Taylor. There are DSL services in rural Iowa, in rural
Illinois.
Senator Brownback. Less than 5 percent.
Mr. Taylor. It is less than 5 percent in Chicago have DSL
services.
Senator Brownback. I mean, I'll just go through the numbers
with you again, but you are up to 73 percent in the urban-
suburban areas, where the market is good.
Mr. Taylor. But they do not have DSL service. They have the
potential.
Senator Brownback. Cable modem and/or DSL.
Mr. Taylor. And cable modems--I mean, cable. I have SBC
cable service. They will not offer me a cable modem.
So it is a choice, but the market is addressing it and
moving as quickly as they can. I think the example at Rainier,
they are deploying numerous different technologies and
obviously being successful at it. I think that it will happen.
It is a matter of time and enforcement of the current rules.
Senator Brownback. How much time?
Mr. Taylor. I cannot answer that because it still takes a
technician to climb up a telephone pole and you still put in a
piece of fiber optic cable.
Senator Brownback. How much time before, under the current
system, the CLECs will get these advanced services deployed in
rural areas to the 80 percent level, Mr. Bryan or Mr. Taylor?
Mr. Bryan. This is almost a bad and good answer to your
question. It is unknowable. The only hope I can give you is
this whole competition and the evolution of the Internet has
resulted in creative solutions.
Senator Brownback. In 5 years will you be 80 percent?
Mr. Bryan. Let me just give you one little tidbit and then
you will see why I am having trouble giving you a time-date. In
the last 6 months we have seen the cost of the soft switch
ports--these are not the traditional circuit switches, but the
switches that Mr. Ellis and all of us are going to deploy
starting next year--coming down sharply. We have also seen the
capacity of these pieces of equipment going up.
None of us could have predicted 6 months ago it was going
to happen this way. So I think you are going to find that, with
some somewhat traditional network deployed, by adding now new
technology we are going to be able to make these old circuits
that SBC has going into Farmer Brown's location much more
robust in a relatively short time period. I am not a
technician, but the one thing I would----
Senator Brownback. If I could, Mr. Bryan, and I appreciate
your answer because you do not feel like you can answer me. But
in the legislation we put an answer in there. If the CLECs want
this, they have got to do this within a date certain. That is
what I am asking, and you are giving me no certainty.
Mr. Haynes, let us wrap this round up, and if Mr. Breaux
wants any more questions we will give him another shot at it.
Mr. Haynes. Senator Brownback, I think one of the beauties
of this legislation proposed is it will increase the demand for
broadband services across the country. I will guarantee you
when our customers come in and start asking for services and
say they are valuable and they are willing to pay a reasonable
cost, we find ways to do it.
We pass 3 to 4,000 homes with cable. We have 1,000 cable
subscribers. We have 57 with cable modems. The way our company
is going to be more successful with cable modems and DSL is
when they are reading the advantages in the Tacoma newspaper,
where we do not serve, the Seattle newspaper, when they are
seeing the Seattle stations bragging about the value.
Furthermore, when the ISP providers complete the rest of
the chain, so when you finally get something that works fast at
home it does not get bogged down somewhere else in the network.
It is very, very frustrating to have a cable modem sitting on
my desk in my office, DSL in my home, and I get very slow
speeds at certain locations at certain times of the day.
So in my opinion, the beauty of your bill, bringing high
speed data in the major metropolitan areas to 80 percent of the
people increases the demand and gives us a better market to
bring those services in rural America. I think it is a much
bigger pie and that is where it is going to help small
companies like ours to help serve our customers.
Senator Brownback. Senator Breaux, do you have any followup
questions?
[No response.]
Senator Brownback. Mr. Ellis, and we will wrap this panel
up.
Mr. Ellis. Senator, if I may, one of the attractive
features from our perspective of your bill is the
discontinuance of the reciprocal compensation. As I said, at
both ends of the table we have companies that do not even serve
the residential customers in the urban communities, let alone
out in the rural. Why? I submit that the reciprocal
compensation system disincents them from doing that. Every time
they serve a residential customer instead of their ISP, every
single time, they risk paying the exorbitant reciprocal
compensation that we are paying. They are disincented.
In terms of demand for advanced services, it is there.
Every single day my company will sell between 3,000 and 5,000
DSL lines, every single day. Where it is available, we cannot
keep up. We cannot install as fast as we can sell. It would be
the same or even more in the rural areas.
Mr. Taylor. If I could just add for the record, Focal is
providing and in the process of building out to 300,000 homes
in rural northern California in Contra Costa County. We have
tens of thousands of residential customers up in service today,
and there are lots of residential customers being served by
CLECs. We serve thousands of residential customers in the city
of Chicago, and SBC has known that.
Mr. Bryan. May I just add one thing for the record. The
same thing for ICG. I would also add that while we are waiting
for broadband services to the rural area, I think it would be a
crime to cutoff their current lifeline, which is dial-up access
to the Internet. People in the rural areas are getting that
service to the Internet and to now place higher charges on that
service I think will do your rural concerns great damage.
Senator Brownback. Well, thank you all. Competition is
great. I hope you all will help me get my folks served with
this, because one way or the other, whether it is tax policy,
subsidy, or regulatory relief, we need to act. I think the
clear best route to go is on regulatory relief. I think it
makes the most sense and it is the fairest way to go.
I thank all the panel members for being here today. The
record will remain open if you would like to submit other
statements to be included in the record.
We next go to the second panel. That consists of: Ms. Sue
Ashdown, Co-owner, Xmission, of Salt Lake City, Utah; Mr. Tom
Duesterberg, President and CEO of Manufacturers Alliance; Mr.
James Glassman, Resident Fellow, American Enterprise Institute;
Mr. Peter Pitsch, the Communications Policy Director for
Information Technology Industry Council; and Mr. Eric
Strumingher, the Managing Director of Paine Webber.
Ms. Ashdown, let us proceed with you first on the panel. We
look forward to your statement. Could I ask you to keep your
statement to about 5 minutes so we can have as much time as
possible for questions. I would appreciate that. The floor is
yours. Welcome.
STATEMENT OF SUE ASHDOWN, CO-OWNER, XMISSION, AND EXECUTIVE
DIRECTOR, AMERICAN INTERNET SERVICE
PROVIDERS ASSOCIATION
Ms. Ashdown. Sure. Thank you. Thank you for inviting me,
Mr. Chairman and Members of the Committee. I am Sue Ashdown. I
am a Co-owner of Xmission, an independent Internet service
provider based in Utah. Xmission was founded in 1993 as the
first Internet service provider in Utah, which has plenty of
rural areas that it serves. I am also the Executive Director of
the American Internet Service Providers Association.
So I am very grateful to have the opportunity to testify on
S. 2902, the Broadband Internet Regulatory Relief Act, because
Internet service providers have been mentioned many times
already this morning and I think that it is important for this
group of Senators to remember that when we are talking about
Internet access in rural areas, it is predominantly provided by
the independent Internet service provider. We are not talking
about AOL or Earthlink that are out there providing that
access, but it is the small independent local Internet service
provider providing that rural access, and we are very concerned
about this legislation because we are concerned about the
aspects, the way that it would control our access to phone
company services that we need to be able to provide our
service.
We are excited about the opportunities that broadband
Internet access services provide to our customers and as fast
as we can get high speed digital subscriber line transport
services we are rolling out broadband Internet services to our
customers. But we are experiencing a number of disappointing
obstacles in our efforts to bring competitive broadband
Internet access to consumers.
Foremost among those obstacles are the ongoing efforts of
the incumbent local exchange carriers, and particularly in my
territory U.S. West, favoring their affiliated Internet service
provider in the provision of DSL services. In fact, the Utah
Coalition recently filed a petition with the Federal
Communications Commission asking for an investigation of U.S.
West's practices that favor its affiliate, wholly owned ISP
subsidiary to the detriment of independent Internet service
providers.
These are practices that are prohibited by FCC rules. They
include practices such as the joint marketing of a bundled
package of local, wireless, and Internet access services that
result in Internet access service being provided at prices well
below what that service costs independent competitors to
provide.
In the market today, incumbent monopoly carriers are
ignoring their common carrier obligations and dragging their
feet on opening their networks to competition as the law
requires. So as a result, we Internet service providers find it
hard to believe that Congress would consider amending the law
to reduce or eliminate entirely those legal requirements for
the very broadband services consumers are demanding. But that
is precisely what Senate bill 2902 proposes to do.
Xmission and the American Internet Service Providers
Association oppose this bill because it would make it even more
difficult, if not impossible, for independent Internet service
providers to provide high speed Internet access. Senate Bill
2902 undermines competitive ISPs in three ways.
First, the bill would exempt all incumbent carriers from
any common carrier regulation by the FCC or the States for the
provision of advanced services, which are defined as packet-
switched services that deliver 200 kilobits per second in both
directions. This definition includes DSL service, which means
that U.S. West and the other incumbents would no longer be in
violation of the law when they discriminate in favor of their
own affiliate or refuse to provide nondiscriminatory access to
broadband transport services for independent ISPs.
I might add right here that that was at the heart of our
request to the FCC to investigate the discriminatory
provisioning that was going on with the Internet service
providers in Utah.
In a perverse twist, if this bill were enacted, competitive
carriers would continue to be required to provide
nondiscriminatory access to transport service for Internet
service providers under the FCC's rules, but the monopoly
incumbent carriers would be free of this burden. It is this
rule, enacted as part of the FCC's Computer two proceedings,
that is one of the basic principles that ensures that we have a
competitive Internet today.
Second, in a competitive market ISPs might be able to turn
to other carriers in order to offer service to consumers, and
we certainly do that today whenever a competitive alternative
presents itself. For example, two reasons many Internet service
providers prefer competitive carriers are that they will sell
us collocation space for our equipment at a central point and
they will let us buy local calling numbers so that our
customers avoid paying in-state long distance charges for
Internet access. The incumbents have always had the ability to
sell us these services, but many still choose not to do that
today.
Unfortunately, there are unlikely to be many competitors to
choose from if this bill is ultimately enacted. This is the
case because Senate Bill 2902 exempts various formulations of
packet-based, packet-switched, and advanced services, as well
as the new fiber optic facilities, from the pro-competitive
requirements of section 251[c] of the Communications Act.
Competitive carriers, some of whom are testifying before you
today, depend on being able to collocate their DSLAMs, get
their access to unbundled network elements, and obtain cost-
based interconnection with the incumbent carrier's network in
order to provide DSL services independent ISPs need.
Under this bill, competitors would have to duplicate much
of the monopoly network before they could offer any DSL
services to ISPs, and the cost of this unnecessary duplication
would be astronomical. The present rollout of DSL will screech
to a halt and competitive broadband will come only to the most
densely concentrated business markets, and I do not think that
was the intent behind your legislation.
Finally, if the other two changes I mentioned were not
enough to ensure competition does not continue to grow, this
bill would prohibit the payment of reciprocal compensation for
Internet-bound traffic. I am sure we heard already from many of
the competitive carriers about this, but let me address it for
a moment from the ISP point of view if I have your indulgence.
Senator Brownback. In 1 minute here, please, because we
have got a big panel.
Ms. Ashdown. Right. Reciprocal compensation occurs when the
local carrier whose customer originates a call hands that call
off to a second local carrier for delivery to the second
carrier's customer. Wireless carriers pay incumbent carriers
for completing wireless calls to customers on the incumbent's
network and it is no different when the call goes from an
incumbent carrier's customer to an ISP served by a competitor.
These are costs for which the competitor should be compensated.
If Congress removes the reciprocal compensation obligation,
then competitors must either recover their costs from the ISP
or stop serving ISPs, and neither result is good from a policy
or a consumer point of view. If they have to turn to the ISPs
to recover their costs, just as an example, based on the
average cost for local traffic of \2/10\ of a cent per minute--
--
Senator Brownback. If you could wrap it on up, Ms. Ashdown.
Ms. Ashdown.--competitors would have to charge Internet
service providers an average of six dollars per month to cover
their costs. The Internet market is fiercely competitive right
now. We are not in the position to be able to charge, to pass
those costs on to our customers. They come out of our bottom
line. They hurt our ability to serve rural Americans as well as
urban Americans, and I hope that the Committee will not support
this bill.
[The prepared statement of Ms. Ashdown follows:]
Prepared Statement of Sue Ashdown, Co-Owner, XMission, and Executive
Director, American Internet Service Providers Association
Mr. Chairman and Members of the Committee, I am Sue Ashdown, a co-
owner of XMission, an independent Internet Service Provider (ISP). I am
also the executive director of the American Internet Service Providers
Association. Thank you for inviting me to testify on S. 2902, the
Broadband Internet Regulatory Relief Act of 2000.
XMission was founded in 1993 as the first ISP in Utah. The American
Internet Service Providers Association represents independent ISPs
serving both urban and rural consumers. Independent ISPs are excited
about the opportunities that broadband Internet access services can
provide to our customers. As fast as we can get access to high-speed
Digital Subscriber Line (DSL) transport services, we are rolling out
broadband Internet services to our customers.
However, we are experiencing a number of disappointing obstacles in
our efforts to bring competitive broadband Internet access to
consumers. Foremost among those obstacles is the ongoing efforts of the
incumbent local exchange carriers, and in particular U.S. West, to
favor their affiliated ISP in the provision of DSL services.
In fact, the American Internet Service Providers Association
recently filed a petition with the Federal Communications Commission
asking for an investigation of U.S. West's practices that favor its
affiliated, wholly owned ISP subsidiary to the detriment of independent
ISPs. These practices are prohibited by the FCC's rules. They include
practices such as the joint marketing of a bundled package of local,
wireless, and Internet access services that result in the Internet
access service being provided at prices well below what that service
costs independent competitors to provide.
In the market today incumbent, monopoly carriers are ignoring their
common carrier obligations and dragging their feet on opening their
networks to competition as the law requires. As a result, ISPs find it
hard to believe that Congress would consider amending the law to reduce
or eliminate entirely those legal requirements for the very broadband
services consumers are demanding.
Yet that is precisely what S. 2902 proposes to do. XMission and the
American Internet Service Providers Association oppose this bill
because it would make it even more difficult, if not impossible, for
independent ISPs to offer high-speed Internet services. S. 2902
undermines competitive ISPs in three ways.
First, the bill would exempt all incumbent carriers from any common
carrier regulation by the FCC or the States for their provision of
``advanced services,'' which are defined as packet-switched services
that deliver 200 kilobits per second in both directions. This
definition includes DSL service, which means that U.S. West and other
incumbents would no longer be in violation of the law when they
discriminate in favor of their own affiliate or refuse to provide non-
discriminatory access to broadband transport services for independent
ISPs.
In a perverse twist, if this bill were enacted competitive carriers
would continue to be required to provide non-discriminatory access to
transport services for ISPs under the FCC's rules, but the monopoly
incumbent carriers would be free of this burden. It is this rule,
enacted as part of the FCC's Computer II proceedings, that is one of
the basic principles that ensures we continue to have a competitive
Internet today.
Second, in a competitive market ISPs might be able to turn to other
carriers in order to offer service to consumers. We certainly do today
whenever a competitive alternative presents itself. For example, two
reasons many ISPs prefer competitive carriers are that they will sell
us collocation space for our equipment at a single central point and
will let us buy local calling numbers so that our customers avoid
paying instate long distance charges for Internet access. The
incumbents have always had the ability to offer us these services, but
many still choose not to today. Unfortunately, there are unlikely to be
many competitors to choose from if this bill is ultimately enacted.
This is the case because S. 2902 exempts various formulations of
packet-based, packet-switched, and advanced services, as well as new
fiber optic facilities, from the pro-competitive requirements of
section 251(c) of the Communications Act. Competitive carriers, some of
whom are testifying before you today, depend on being able to collocate
their DSLAMs, get access to UNEs, and obtain cost-based interconnection
with the incumbent carrier's network in order to provide the DSL
services independent ISPs need.
Under S. 2902, competitors would have to duplicate much of the
existing, monopoly network before they could offer any DSL services to
ISPs. The costs of this unnecessary duplication would be astronomical.
The present rollout of DSL will screech to a halt, and competitive
broadband will come only to the most densely concentrated business
markets.
Finally, if the other two changes I mentioned were not enough to
ensure competition doesn't continue to grow, this bill would prohibit
the payment of reciprocal compensation for Internet bound traffic. I am
sure that the competitive carriers represented here will address this
issue in detail, but let me add the ISP point of view.
Reciprocal compensation occurs when the local carrier whose
customer originates a call hands that call off to a second local
carrier for delivery to the second carrier's customer. Wireless
carriers pay incumbent carriers for competing wireless calls to
customers on the incumbent's network, and it is no different when the
call goes from an incumbent carrier's customer to an ISP served by a
competitor. There are costs associated with delivering the call for
which the competitor should be compensated.
If Congress removes the reciprocal compensation obligation, then
competitors must either recover their costs from the ISP or stop
serving the ISPs. Neither result is good from the policy or consumer
point of view. If competitors stop serving ISPs we lose the choice of
services they offer and our customers lose the reduced prices that
competition brings.
If competitors turn to ISPs to recover their costs, then ISPs must
pass that cost on to consumers. Based on an average cost for local
traffic of two-tenths of a cent per minute (as found by the Louisiana
public service commission), and an average Internet use time for a
rural user of 53 hours a month, competitors would have to charge an ISP
an average of $6.00 per customer per month to recover their costs.
This would represent a roughly 25 percent increase in dial-up
Internet rates--an increase that the incumbent would not have to impose
on calls it carries to its own affiliated ISP, since the incumbent
bills the caller and keeps all the revenue. As a practical matter, with
the incumbents favoring their ISP affiliate and almost giving away
Internet access as part of a bundled package of services, it will be
nearly impossible for an independent ISP to pass on an increase in
costs to our consumers.
In summary, this bill will stop broadband competition in its
tracks. By freeing the monopoly incumbent carriers from any common
carrier oversight, it ensures that they will favor their own affiliated
ISP. The exemption of packet-switched services from the market-opening
requirements of the Telecommunications Act ensures that competitors
will not be able to cost-effectively serve anywhere other than the most
densely populated markets. Lastly, by depriving competitors of
reciprocal compensation for their legitimate costs of carrying dial-up
ISP traffic, the bill removes an existing, narrow band revenue stream
that competitors might use to finance their own broadband deployment.
I hope that the Committee will not support this bill, and will
instead encourage the FCC and the States to aggressively enforce the
existing rules that require incumbent carriers to open their local
networks to competition and provide non-discriminatory broadband
transport services to ISPs.
Senator Brownback. I can see we disagree on this topic. I
hope we can have a discussion about how we do get things out to
rural areas. Mr. Duesterberg.
STATEMENT OF THOMAS J. DUESTERBERG, Ph.D., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MANUFACTURERS
ALLIANCE/MAPI INC.
Dr. Duesterberg. Thank you, Mr. Chairman, and thank you for
this opportunity to appear on behalf of the Manufacturers
Alliance. The Alliance represents over 400 companies across a
broad spectrum of industries from aerospace and pharmaceuticals
to telecommunications, oil and gas, and others.
I want to talk about your bill, which we support, in a
broader context. This bill is important to manufacturers and
related services. The American economy, including the
manufacturing sector, is enjoying one of the most sustained
periods of robust growth in its history and has regained the
international advantage that many thought was lost about 10 or
15 years ago.
One reason for this strong performance is the advent of
what is variously called the digital economy, the information
economy, or the Internet economy. Whatever the proper name, the
phenomenon of ever more connected and powerful information
processing is at its core. It is both the explosive growth of
connected computing and its systemwide efficiency effects which
are contributing powerfully to the low inflation, above trend
line growth we have experienced from at least 1995 through this
year.
The Internet and its predecessors have already
revolutionized the financial sector and are now increasingly
changing the manufacturing and retail sectors as well. The
Alliance recently held a conference on business to business
electronic commerce attended by nearly 150 companies. We
learned that B2B sales are expected to grow from today's $400
billion annually to nearly $2.7 trillion or 17 percent of total
sales by the year 2004. About 56 percent of U.S. companies are
conducting B2B sales over the Internet now and over 90 percent
anticipate doing so as soon as 2002.
The advent of Internet-based communications and
transactions is also adding to the efficiencies of
manufacturing in numerous ways. Auctions, better management
practices, remote training, improved customer services,
improved supply chain management and purchasing are among
these.
The application of these new information technology and
Internet-related processes in the manufacturing sector is one
reason that this sector has performed well in an increasingly
competitive global environment. Productivity in the
manufacturing sector has grown by an average of 6.1 percent for
the 3 years ending in March 2000, substantially higher than any
3-year period since 1950. Such sustained productivity growth in
turn has helped keep a lid on inflation.
Although one cannot attribute all gains in productivity to
a single factor since other technological breakthroughs,
management improvements, and more efficient financing tools, et
cetera, are also contributing to this, data from a recent study
conducted by the Federal Reserve Board indicates that up to 40
percent of the recent upswing in trend productivity growth is
accounted for by increases in the stock of information
technology.
Broadband telecommunications is playing an increasingly
pivotal role in the advance of the digital economy. As both
manufacturers and retailers move increasingly toward electronic
commerce and the use of the Internet as a management tool, the
need for ubiquitous high speed connections grows even more
crucial. High speed connections are needed not only to play
video games and communicate with one's neighbors, but to do
video conferencing, exchange design data on the thousands of
parts that go into an automobile or an airliner, conduct
auctions for raw materials, coordinate just in time delivery
systems, facilitate distance learning, promote telecommuting.
If we are to achieve the projected gains from B2B e-
commerce in the next few years, we will require high speed
connections not only in the urban environments where high speed
connections are becoming more available, but also in remote
areas where many of America's factories are now located and
where numerous American small businesses and American
telecommuters would like to be.
Powering the digital economy and maintaining the pace of
productivity enhancement responsible for this growth path will
require more rapid deployment of broadband networks in both
urban and rural environments. There appear to be few technical
and economic barriers to the deployment of broadband networks.
In fact, there are numerous technologies which are now being
tested and deployed for current use and there is a reasonable
potential to have a competitive market for broadband services.
Many of the barriers to rapid near-term deployment of
broadband services reside in the current regulation of the
telecommunications sector. We believe that broadband services
will be provided not only by the wireline providers that have
been represented on the previous panel, but also by wireless
providers, terrestrial and satellite-based providers, possibly
even electric power distribution companies. Broadcasters as
well are thinking about getting into the broadband businesses.
While all of these technologies are currently available,
they require substantial amounts of capital to develop, test
and market. About $10 billion alone is needed to upgrade copper
wire connections for DSL service. In the absence of
deregulatory parity, some systems are more likely to advance
quicker than others. Unfortunately, as the subscriber data
show, in the current environment in which some services are
subject to regulation or potential regulation, needed
investments to develop the service are discouraged or made
prohibitively risky.
It is our view that steps to remove regulatory asymmetries
and, indeed, to move to a less regulated environment in high
speed services are required to promote more rapid deployment of
these services. Because competition has already emerged in this
market sector with choices between copper wire, cable,
satellite, and terrestrial, and fixed wireless, we should move
as rapidly as possible to reduce regulation of high speed
services.
Incumbent local operating companies, however, face real
impediments to their investment in high speed services. The
current requirements under section 251 of the Communications
Act constitute a real disincentive to the types of investments
required to upgrade their systems to offer broadband services.
The CLECs clearly lag behind in building out their DSL
networks, partly because the benefits of any investment would
have to be shared with competitors.
The economist and famous deregulator Alfred Kahn made the
case for a lighter hand of regulation in a recent filing in
which he said: ``If rivals can share use of whatever network
facilities they ask for at prices explicitly intended to
recover only the minimum cost of employing the most modern
technology, it cannot but have a fatally discouraging effect on
their initiative and their innovation efforts.''
Senator Brownback. Dr. Duesterberg, if we could wrap it on
up I would appreciate it.
Dr. Duesterberg. I will wrap up by supporting your bill,
Senator Broadback--Brownback. We think this goes a long way----
Senator Brownback. Brownback.
Dr. Duesterberg. I apologize. I have the same problem with
my name.
We think your bill goes a long way toward removing the
current disincentives for investment by the CLECs. It is
especially the relief from unbundling and resale requirements
and from price regulations which are most significant for
promoting investment.
There are other steps the Congress and the FCC could
consider to advance the case of broadband deployment. These
might include making more spectrum available for high speed
wireless data services, which would be important to rural
areas, creating transferable property rights for spectrum
holders. Congress could also consider allowing more competition
in the Internet backbone market.
All these steps would increase investment in broadband and
stimulate broader competition and cannot fail but to result in
quicker introduction of high speed services at lower prices in
both urban and rural areas.
Thank you for this opportunity to appear before the
Committee.
[The prepared statement of Dr. Duesterberg follows:]
Prepared Statement of Thomas J. Duesterberg, Ph.D., President and Chief
Executive Officer, Manufacturers Alliance/MAPI Inc.
Mr. Chairman: I am pleased to appear before the Committee to
present the views of the Manufacturers Alliance/MAPI Inc. (the
Alliance) on S. 2902, the Broadband Internet Regulatory Relief Act of
2000. The Alliance represents over 400 companies across a broad
spectrum of industries, including aerospace, automotive, electronics,
defense, machine tools, pharmaceuticals, telecommunications, chemicals,
oil and gas, and many others. Since our founding in 1933, we have been
a voice for industry supporting policies which promote capital
investment, productivity enhancement, innovation, free trade, and
economic growth in our free enterprise system. We support Senator
Brownback's legislation as a means to advance the economic goals we
have promoted for over 65 years.
The Digital Economy
Before discussing some of the specific benefits of this
legislation, I would like to discuss in the general context why more
rapid broadband deployment, the goal of Senator Brownback's bill, is
important to manufacturers and related service industries. The American
economy--including the manufacturing sector--is enjoying one of the
most sustained periods of robust growth in its history and has regained
the international competitive advantage in manufacturing many thought
was lost only a decade ago. One reason for this strong performance is
the advent of what is being called variously the Digital Economy, the
Information Economy, or the Internet Economy. Whatever is the proper
name, the phenomenon of ever more connected and powerful information
processing is at its core. It is both the explosive growth of connected
computing and its system-wide efficiency effects which are contributing
powerfully to the low-inflation, above-trend line growth we have
experienced from at least 1995 through this year.
The U.S. Department of Commerce estimates that one-third of U.S.
economic growth is attributable to the sustained expansion of the
information technology sector.\1\ Of more lasting significance are the
system-wide efficiencies gained from the application of connected
computing in all sectors of the economy. The Internet and its
predecessors already have revolutionized the financial sector and now
are increasingly changing the manufacturing and retail sectors as well.
The Alliance recently held a conference on business-to-business (B2B)
electronic commerce attended by nearly 150 companies. We learned that
B2B sales are expected to grow from today's $400 billion to nearly $2.7
trillion, or 17 percent of total sales, by the year 2004. About 56
percent of U.S. companies are conducting B2B sales over the Internet
now, and over 90 percent anticipate doing so by 2002.\2\ The advent of
Internet-based communications and transactions also is adding to the
efficiencies of manufacturing in numerous ways. Some of the more
important Internet-enabled processes we discussed at our conference and
now being deployed by manufacturers are:
---------------------------------------------------------------------------
\1\ U.S. Department of Commerce: Digital Economy 2000, Washington,
DC, June 2000, p. vi.
\2\ Bruce Temkin, Forrester Research: ``What Does the Future Hold
for Business-to-Business E-Commerce/E-Business,'' presentation to
Business-to-Business E-Commerce--A Look at Manufacturers' Best
Practices for Thriving in the Digital Economy, Arlington, VA, June 8,
2000. See also, The Internet Economy Indicators,
www.internetindicators.com/facts.html.
Coordinated product design between companies and across
---------------------------------------------------------------------------
different locations,
Improved human resource functions,
Better management of inventories and supply chains,
Remote training,
Using auctions in both purchasing and selling,
Improved customer services, and
More efficient project administration and management.
The application of these new information technology and Internet-
related processes in the manufacturing sector is one reason that this
sector has performed well in an increasingly competitive, globalized
environment. Productivity in the manufacturing sector has grown by an
average of 6.1 percent for the three years ending in March 2000, which
is substantially higher than any three-year period since 1950. Such
sustained productivity growth, in turn, has helped keep the lid on
inflation, an especially difficult achievement at this late stage in
the business cycle given the low unemployment rate. Although one cannot
attribute all gains in productivity to one factor--since other
technological breakthroughs, management improvements, more efficient
financing tools, etc., also are contributing factors--data from a
recent study by the Federal Reserve Board indicate that up to 40
percent of the recent upswing in trend productivity growth is accounted
for by increases in the stock of information technology.\3\ A recent
study by Goldman Sachs estimates that total GDP growth can be enhanced
by .2 percent per year from the spread of B2B electronic commerce
alone.\4\ Anything that contributes to economic growth, higher
productivity, and lower inflation is good for the bottom line of
manufacturers as well as consumers.
---------------------------------------------------------------------------
\3\ See Jeremy Leonard, How New is the ``New Economy''? The Role of
Information Technology Investment in Recent U.S. Economic Performance,
Economic Report 498, Manufacturers Alliance/MAPI, July 2000.
\4\ Cited in: ``B2B E-Commerce About to Explode, Affecting the
Economy in Every Way,'' Daily Report for Executives, Bureau of National
Affairs, Washington, DC, July 19, 2000.
---------------------------------------------------------------------------
The Role of Broadband Communications
Broadband telecommunications is playing an increasingly pivotal
role in the advance of the digital economy. As both manufacturers and
retailers move increasingly toward electronic commerce and the use of
the Internet as a management tool, the need for ubiquitous high-speed
connections grows more crucial. High-speed connections are needed not
only to play video games and download movies but to do video
conferencing, exchange design data on the thousands of parts that go
into an automobile or an airliner, conduct auctions for raw materials,
coordinate just-in-time delivery systems, facilitate distance learning,
and promote telecommuting. If we are to achieve the projected gains
from B2B e-commerce and, if over 90 percent of businesses are to be in
the B2B environment in the next few years, we will require high-speed
connections not only in the urban environments where high-speed
connections are becoming more available, but also in more remote areas
where many of America's factories are now located and where numerous
American telecommuters would like to be. While billions of dollars have
been invested in broadband networks since passage of the
Telecommunications Act of 1996, fewer than 3 million users are now
hooked up to them.\5\ Powering the digital economy and maintaining the
pace of productivity enhancement responsible for the robust growth and
global competitiveness of our industry will require more rapid
deployment of broadband networks in both urban and rural environments.
---------------------------------------------------------------------------
\5\ Data on high-speed connections are taken from: U.S. Department
of Commerce and U.S. Department of Agriculture, Advanced
Telecommunications in Rural America: The Challenge of Bringing
Broadband Service to All Americas, Washington, DC, April 2000.
---------------------------------------------------------------------------
The Need for Regulatory Relief
There appear to be few technical and economic barriers to the
deployment of broadband networks. In fact, there are numerous
technologies which are now being tested and deployed for current use,
and there is reasonable potential to have a competitive market for
broadband services. Many of the barriers to rapid, near-term deployment
of broadband services reside in the current regulation of the
telecommunications sector. DSL (digital subscriber line) service across
existing telephone lines and cable-based high-speed service have the
most potential for near-term growth, but several satellite-based
networks are being tested, as well as fixed terrestrial wireless
systems. Fiber-optic cable directly to end users will be a viable
option for some urban or high-capacity users. The just-announced entry
of Enron subsidiary, Enron Broadband Services, and Blockbuster into the
business of delivering movies on demand via fiber-optic cable also may
portend wider use of this delivery mechanism to homes and rural areas.
In the next few years, terrestrial wireless systems will roll out
higher speed (up to 2.5 megabits per second or more) services which may
be as ubiquitous as copper wire, cable, and satellite networks.
Electric power distribution companies also are experimenting with the
use of their systems for high-speed data offerings.
Around the beginning of this year, there were only about one-half
million DSL customers, although this sector is growing rapidly. Over
1.1 million cable broadband subscriptions were in place at the same
time, almost all to homes. At the beginning of this year, only about 40
percent of all households and 57 percent of small businesses had DSL
service available to them.\6\ Fiber deployment at this point is
minimal, although several regional Bells and other providers are
experimenting with this technology. The number of wireless cable (or
fixed wireless) and satellite subscribers is in the tens of thousands,
and terrestrial wireless broadband offerings are not yet available.
Urban areas are clearly better served than rural areas. In sum, the
reality of broadband connectivity is lagging far behind its promise.
---------------------------------------------------------------------------
\6\ See Sanford C. Bernstein & Co., Inc. and McKinsey & Co., Inc.,
Broadband, New York, January 2000, pp. 27-29.
---------------------------------------------------------------------------
While all of these technologies are currently available, they
require substantial amounts of capital to develop, test, and market.
About $10 billion alone is needed to upgrade copper wire connections
for DSL service.\7\ In the absence of regulatory parity (or
deregulatory parity), some systems are more likely to advance quicker
than others. Unfortunately, as the subscriber data show, in the current
environment in which some services are subject to regulation or to
potential regulation, needed investments to develop the service are
discouraged or made prohibitively risky. It is our view that steps to
remove regulatory asymmetries and indeed to move to a less-regulated
environment in high-speed services are required to promote more rapid
deployment of these services. Because competition already has emerged
in this market sector--with choices between copper wire, cable,
satellite, and terrestrial fixed wireless now available in some
places--we should move as rapidly as possible to reduce regulation in
high-speed services.
---------------------------------------------------------------------------
\7\ Ibid., p. 8.
---------------------------------------------------------------------------
Although cable operators are potentially restrained in upgrading
their systems for high-speed data offerings by the threat of regulation
of access at the local and state levels, recent court decisions and the
restraint shown by the FCC thus far appear to create reasonable
certainty that the threat will not become a reality. As a result, cable
companies are investing billions to upgrade their systems to allow
advanced data and voice services, although most are targeted at
residential customers. Most other broadband technologies, such as the
various forms of wireless services, face few actual or potential
regulatory restraints on investment.
Incumbent local operating companies (ILECs), however, face very
real impediments to their investments in high-speed data services. The
current requirements under section 251 of the Communications Act for
interconnection, unbundling, and resale of network elements used for
advanced data services not only place the ILECs at a competitive
disadvantage, but constitute a real disincentive to the types of
investments required to upgrade their systems to offer broadband
services. It is significant to note that 22 percent of DSL subscribers
are using the services of competitive local exchange carriers
(CLECs).\8\ The ILECs clearly lagged behind in building out their DSL
networks partly because the benefits of any investment would have to be
shared with competitors. The economist Alfred Kahn made the case for a
lighter hand of regulation in a recent filing in which he stated quite
bluntly that the section 251 requirements discourage investment. Kahn
wrote: ``If rivals can share use of whatever network facilities they
ask for at prices explicitly intended to recover only the minimum cost
of employing the most modern technology, it cannot but have a fatally
discouraging effect on their own initiative and innovation efforts.''
\9\ This analysis was reinforced in a 1999 letter to the FCC signed by
the heads of 13 high-technology firms such as Compaq, Gateway, Intel,
Cisco, IBM, Novell, and Kleiner Perkins. The signers argued: ``It is a
simple but undeniable reality that new and unnecessary regulation will
diminish the willingness of capital markets to finance the construction
of new broadband networks.'' \10\
---------------------------------------------------------------------------
\8\ Advanced Telecommunications in Rural America, op. cit., p. 22.
\9\ Quoted in Adam Thierer, ``Broadband Telecommunications in the
21st Century: Five Principles for Reform,'' Heritage Foundation
Backgrounder, No. 1317, Washington, DC, September 1999, p. 19.
\10\ See Jeffrey Eisenach, ``Computer Industry Flexes Its Muscle,''
www.intellectualcapital.com, July 28, 1999.
---------------------------------------------------------------------------
The experience of cellular telephony is instructive in this regard.
After hesitating to grant operating licenses for over a decade, the FCC
originally deemed that each market would have just two competitors, and
one of these would be the wireline carrier. We now know that the
technology is much more robust and competitive than that. In the case
of broadband, I believe it would be a mistake to try to ``manage''
competition or to ``handicap'' competitors. The important thing is to
get obsolete regulatory barriers out of the way and let technologies
and markets develop, subject to the rigorous discipline of consumer
choice.
Senator Brownback's bill goes a long way toward removing the
current disincentive for investment by the ILECs in broadband
infrastructure and services. It is especially the relief from
unbundling and resale requirements and from price regulations which are
most significant for promoting investment. The Manufacturers Alliance
supports such efforts to achieve regulatory parity and gradually lessen
the regulation of the fast-moving and economically crucial high-speed
telecommunications sector.\11\ There are, of course, other measures
Congress (and the FCC) could consider to stimulate an even faster
transition to a ubiquitous broadband environment. These would include
making more spectrum available for high-speed, wireless data services
and creating transferable property rights for spectrum holders.
Congress also could consider allowing more competition in the Internet
backbone market. Such efforts to incentivize more investment in
broadband and stimulate broader competition cannot fail to result in
quicker introduction of high-speed services at lower prices. In turn,
this would lower input costs to manufacturers and facilitate the more
rapid deployment of Internet-based sales, marketing, management, and
supply strategies by U.S. firms in urban and rural America alike.
Senator Brownback's bill is an excellent first step toward this goal.
---------------------------------------------------------------------------
\11\ Thomas J. Duesterberg, Broadband Access: Do We Need a
Regulatory Solution?, BL-9, Manufacturers Alliance/MAPI, February 2000.
---------------------------------------------------------------------------
I want to close by thanking Senator Brownback for holding this
timely hearing and providing us with an opportunity to comment on this
important legislation.
Senator Brownback. Thank you, Dr. Duesterberg.
Mr. Glassman, welcome.
STATEMENT OF JAMES K. GLASSMAN, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE, AND HOST, TECHCENTRALSTATION.COM
Mr. Glassman. Thank you, Mr. Chairman, and Senator Breaux
of my former home State of Louisiana. It is an honor to be here
today.
My name is James K. Glassman. I am a Resident Fellow at the
American Enterprise Institute, and I have to say immediately I
am not an expert in the technical aspects of
telecommunications. My interests lie, as many of yours do, at
the intersection of the public policy, technology, and finance.
For that reason, in February with some colleagues I launched a
web site called TechCentralStation, whose slogan is ``Where
free markets meet technology.''
I spent the last 30 years as a journalist for The
Washington Post and others and as an analyst advocating free
market solutions to vexing public policy problems. I have
become in recent months particularly concerned about new
attempts by governments at all levels to regulate and tax the
Internet.
So you might ask, why would an ardent supporter--why would
I be such an ardent supporter of the 1996 Telecommunications
Act? For this reason: The Act provides a way to move from an
intensely regulated environment to a deregulated environment.
That is the goal and, as many others and this Congress
understood, that had to occur through a sensible transition
since the incumbent operating companies had been nourished and
protected as monopolies by government over the past century and
thus owned the final mile or so to the customer's home. I liked
Senator Dorgan's characterization of monopolies being
cholesterol to the free market system.
So a compromise was reached after years of give and take.
It was a noble compromise, a good compromise, that all parties
appeared to support. But immediately after the bill was passed,
the local monopolies began to file lawsuits. Finally, after
litigation and foot-dragging, at long last one of the Bells was
certified to have opened up in New York, where I now live. The
competition as a result has become fast and furious, where 4
years ago it was nil.
Yes, there are problems in New York, as I am sure there
will be in Texas, which is the second State to be certified.
But in New York prices are falling and broadband hookups are
proliferating. The system is working.
Now, with competition here at last, we find the ILECs
appealing to Congress to roll back the Telecom Act with such
bills as this one. No wonder. Competition is no fun for
competitors, especially for companies that used to be
monopolies. But competition is great for consumers.
In seeking political help to thwart competition, the ILECs
are not alone. Sadly, it is becoming more and more common for
high tech companies to ask government for help and for
government, unfortunately, to provide it, as I showed in an
article I wrote in April in The Wall Street Journal with the
headline ``Is government strangling the new economy?'' With
your permission, I would like to enter that article in the
record.
Senator Brownback. Without objection.
[The material referred to follows:]
Is Government Strangling The New Economy?
By James K. Glassman
04/10/2000
It's not hard to understand why Microsoft's stock price plummeted
in the wake of Monday's unfavorable court ruling, but what explains the
decline of the other high-tech companies that dominate the Nasdaq Stock
Market?
Just look at Microsoft's competitors, the companies that were
supposed to benefit from the federal government's lawsuit. Scott
McNealy, CEO of Sun Microsystems and one of the most aggressive
Microsoft antagonists, was gloating in a press release Monday after
Judge Thomas Penfield Jackson's ruling. But Sun's stock dropped $3.75
that day. America Online owns Netscape Communications, whose complaint
touched off the federal suit. AOL stock fell 7% in two days.
RealNetworks, cited by Judge Jackson as suffering from Microsoft's
``oppressive thumb on the scale of competitive fortune,'' was down 13%.
Two makers of operating systems that compete with Microsoft's--Red Hat
Software and Apple Computer--also dropped.
Changing Environment
The rout in Nasdaq stocks--which only began to bounce back a little
Wednesday--has been broad and deep. The breakdown of settlement talks
in the Microsoft case was only the catalyst. What investors are
realizing is that the environment that helped produce the high-tech
boom--low regulation, low taxes, minimal government intervention and a
low level of corporate rent-seeking--is changing profoundly.
In the past, no one told the entrepreneurs in the garages of
Silicon Valley what products to invent, how to sell them, what prices
to charge or what deals to offer. Now, the new economy is beginning to
look more like the old--an environment in which the winners are not
necessarily the companies that please customers the most but the
companies that do best at keeping government at bay--or, better yet, at
using government to thwart competitors. Stock prices are falling
because the risks to real innovators are rising.
The pundits continue to argue that tech stocks are in a ``bubble.''
They said the same thing a year ago, when the Nasdaq was 40% lower than
today--not to mention five years ago, when it was 80% lower. By this
reasoning, stock prices are falling because they are too high. It is as
if the law of gravity suddenly decided to kick in at, oh, around 5000
on the index.
But the question is why now? The answer is the increased threats of
intervention in technology markets--threats made especially vivid by
the Microsoft decision. To be specific:
Doing a Smith & Wesson. The same team that gang-tackled the
makers of cigarettes and guns is going after not just
Microsoft, but smaller high-tech companies. The Justice
Department, state attorneys general and plaintiffs lawyers are
setting their sights on such firms as DoubleClick, the Internet
advertising company accused of privacy abuses. ``We want to do
a Smith & Wesson-like thing with DoubleClick,'' said Jennifer
Granholm, attorney general of Michigan, last week.
Commenting on Ms. Granholm's statement, legal critic Walter
Olson wrote: ``We suppose this means that she and her
colleagues want to invent far-fetched legal theories to attack
business practices that have long been regarded as lawful; file
a great flurry of suits in multiple courts so as to overwhelm
the designated opponent; use the threat of bankrupting legal
expense to muscle it into submission . . . and instill fear
into other businesses that the same thing could happen to them
unless they cooperate.'' DoubleClick, by the way, is down 38%
since the onslaught began.
Biotech blast. In a statement last month, President Clinton
and British Prime Minister Tony Blair made veiled threats about
ending private ownership of human genome information. Prices of
biotech stocks tumbled one-third (though Wednesday Mr. Clinton
backtracked on his remarks).
Taxing e-commerce. Ever since Congress nearly unanimously
approved a moratorium on new Internet taxes, the National
Governors' Association has pushed aggressively to tax
electronic sales across state lines. Gov. Jim Gilmore of
Virginia, who heads the federal commission examining the
matter, worked hard for a ban but failed. Studies show that
sales taxes would throttle the rapid growth of e-commerce and
depress revenues of Internet companies.
Revenge of the middleman. One of the joys of the Internet is
that buyers can go directly to manufacturers for their
purchases, cutting costs all around. But dealers, suppliers and
agents are feeling the squeeze. Rather than devise new clicks-
and-mortar strategies, these middlemen run whining to
politicians for help.
In South Carolina, auto dealers are pushing a bill that would
prohibit car makers from owning dealerships and would
explicitly bar Internet sales unless local dealers get a piece
of the action. Charles Condon, attorney general of South
Carolina, said of the bill: ``What if we passed a statute
saying cars couldn't be sold on a particular highway? Wouldn't
there be outrage? Why is there no outcry when cars cannot be
sold on the information superhighway?''
Broadband slowdown. Companies are appealing to politicians
to increase telecommunications regulations on the Internet--an
effort that threatens to hold up faster broadband technologies,
already delayed by bottlenecks caused by local telephone
companies. For a year America Online campaigned in Congress, in
state legislatures and in city councils across the nation to
get laws passed that would force cable companies like AT&T and
Cox to permit AOL to use, at government-fixed terms, their
high-speed cable pipelines. Then, in January, AOL announced it
was buying Time Warner; suddenly the shoe was on the other
foot.
But, as George Gilder pointed out on this page recently, it may be
too late to say ``Never mind.'' The San Francisco Board of Supervisors
is on the verge of mandating cable access, and decision by a Portland,
Ore., municipal body regulating Internet-by-cable is now in the courts.
If Portland wins, thousands of local governments can become Internet
regulators.
No one ever knows for sure why a stock falls on a given day, but my
interpretation of Nasdaq's sharp decline is that investors, jarred by
the Microsoft decision, have suddenly woken up to these threats of
government intervention. If they haven't woken up, they had better. And
so should Al Gore. The Clinton administration likes to take credit for
a stock market that has quadrupled in the past decade. It can't avoid
the blame for Nasdaq's collapse.
General Carnage
While Joel Klein and his Justice Department lawyers were publicly
and distastefully celebrating Judge Jackson's decision, the market
capitalization of Microsoft was dropping by more than $100 billion.
That's not some theoretical figure. It is a loss in real wealth--in
many cases, in retirement savings--of more than two million direct
shareholders of Microsoft and of tens of millions more who have
substantial holdings of Microsoft in their mutual funds and annuities.
But Microsoft is only part of the story. The Nasdaq carnage has
been wide-ranging. And why not? The Internet intervention of
government, often in league with trial lawyers, threatens every high-
tech firm in America.
______
James K. Glassman is a fellow at the American Enterprise Institute,
host of www.TechCentralStation.com and a member of the advisory board
of Americans for Technology Leadership, a group supported by Microsoft
and other tech firms.
Mr. Glassman. Let me make a few quick points about this
legislation. First, the Telecom Act is working. Do not change
it. Two of the largest States in the country have been
certified. The Yankee Group predicts that the number of homes
subscribing to broadband services will rise from 1.4 million
this year to 16.5 million in 2004. That is an incredible pace.
Second, the CLECs are well equipped now under current law
to vastly expand their broadband services. Permit me also, Mr.
Chairman, to enter into the record a remarkable article that
appeared just last month in FORTUNE magazine by Stephanie Mehta
about SBC Communications. The headline was ``Why the biggest
Baby Bell is wild about broadband.'' That article quotes the
CEO of SBC as saying that his company has launched Project
Pronto, which will sell one million broadband DSL connections
by the end of 2000 and two million by the end of 2001, up from
139,000 at the beginning of this year. SBC is spending $7
billion to upgrade its system and it expects to get that money
back quickly and more in productivity gains. This is without,
Mr. Chairman, your legislation.
[The material referred to follows:]
Why The Biggest Baby Bell Is Wild About Broadband
By Stephanie N. Mehta
06/12/2000
SBC Communications, the runt of Ma Bell's litter, amazed telecom
rivals by devouring its siblings and becoming a giant. Now it's
attacking the cable guys with a massive rollout of high-speed phone
lines for Internet service.
Edward E. Whitacre Jr., the plain-talking CEO of SBC
Communications, is in his headquarters in San Antonio, telling how much
he likes the Internet. He volunteers that he has used his home computer
to buy shoes and books online, and to send and receive digital photos
of his 2-year-old granddaughter. That's all very charming, yet
something's wrong with this picture: While Whitacre's executive suite
has plenty of room for outdoorsy items such as golf clubs and fishing
paraphernalia, there isn't a PC to be seen. Asked about it, Whitacre
seems unembarrassed. He just shrugs and says he's not in the office
enough to need a computer; his secretary and other aides handle the e-
mail.
You'll find similar disconnects--is it e-schizophrenia?--all over
SBC. As recently as two years ago, a visitor to the company's
nondescript corporate offices wouldn't have heard much talk of the
Internet; Whitacre and his lieutenants were focused on buying other
phone giants, hawking second phone lines to households, and imploring
regulators for permission to offer long-distance calling services. Such
concerns are still crucial to SBC's lucrative $50-billion-a-year
business, but they're no longer what the executives want to talk about.
They steer the dialogue to nerdy topics such as Web hosting and the
superfast online connections the company is unleashing across the
country. ``SBC is going to be a major player in e-commerce and the
Internet,'' Whitacre declares. ``We are not just caretakers of the
network.''
Investors, unsurprisingly, are skeptical at the notion of a Baby
Bell morphing into a broadband data company that can compete with, say,
MCI WorldCom or Qwest. In the midst of the Internet boom, SBC stock has
remained a stubborn underachiever, trading recently at $42 a share with
a lackluster P/E ratio of 22 times trailing earnings.
Yet something strange has happened in recent months: By combining
local monopoly power, marketing ingenuity, and financial brute force,
SBC has emerged as the most formidable challenger to cable-TV companies
in the race to deliver broadband Internet access to the home. Whitacre
has declared that SBC will spend $6 billion over the next three years
to make fast Internet connections available to most of the company's 36
million business and residential customer locations.
Quaintly named Project Pronto, the plan calls for SBC to sell and
install a million connections by the end of this year alone, up from a
mere 139,000 on Jan. 1. If Pronto works, it will open the way for SBC
to add billions of dollars in annual revenues. The typical household
that today pays SBC $20 a month for plain-vanilla local phone service
could fork over $40 a month more for fast Internet service, plus money
for add-on fare such as online 3-D games and even movies.
Of course, every Baby Bell would love to transform itself from
staid telephone monopolist to player in the Internet economy. But some
smart money in telecom and on Wall Street is starting to like SBC's
odds. Janus Capital, the Denver mutual-fund company, which manages over
$270 billion, recently bought more than three million SBC shares for
some of its growth-oriented funds. Analyst and portfolio manager Matt
Ankrum thinks SBC will succeed in shifting revenue growth from
traditional phone service to broadband. ``What got us interested in SBC
is that through its broadband initiatives it will increase the return
on investment capital over time,'' he says. ``That ultimately drives
stock-price performance.''
The smart money also likes SBC's size: With some 61 million access
lines in 13 states, SBC can absorb the cost of deploying high-speed
lines while driving suppliers to quickly develop cheaper, more reliable
gear for its data networks. And it can leverage its relationship with
millions of households to push fast phone connections and other
services into the mass market. ``SBC can dramatically change the market
conditions in terms of Internet momentum,'' says Don Listwin, executive
vice president of Cisco Systems, which recently formed an alliance with
SBC under which the telco will buy $1 billion of Cisco data-networking
gear and help develop new products. While SBC may not be Cisco's most
technologically advanced customer, Listwin explains that its size makes
it an attractive partner: ``If you remember your physics, momentum is
mass times velocity. They have a lot of mass.''
Fifteen years ago, the old Southwestern Bell might have been voted
the telco least likely to succeed. The smallest Baby Bell, it emerged
from the breakup of AT&T with operations in just five states--Texas,
Arkansas, Oklahoma, Kansas, and Missouri. Two of the region's main
industries, oil and real estate, were in the dumps, and SBC's growth
prospects were as flat as much of the terrain. While other Baby Bells
moved to buy cable companies or contemplated making bids for Hollywood
studios, SBC's big plan for growth was to create a national yellow-
pages business--a scheme it quietly abandoned after a few years. Yet in
1986 SBC stunned Wall Street by making an aggressive $1.4 billion bid
for Metromedia's cellular-phone operations. It showed that this
seemingly dowdy carrier could dance. The deal made SBC an overnight
leader in wireless, now a $7-billion-a-year franchise for the company.
The pace of change picked up when Whitacre took over as CEO in
1990. Born in Ennis, Texas, and schooled at Texas Tech, Whitacre is a
flinty 37-year telco veteran who started as a facility engineer. One of
his first moves was to relocate Southwestern's headquarters from St.
Louis to San Antonio, where the company could be closer to TelMex, a
south-of-the-border telco in which SBC had an investment, and where the
CEO thought SBC's best growth opportunities lay.
Under Whitacre, SBC quickly went from milquetoast to industry
intimidator. Like most Bell CEOs, he had served a stint in the
company's regulatory affairs department, and he immediately set to work
getting the goal posts moved in SBC's favor. While some Baby Bells were
grudgingly opening their markets to competitors, SBC spent heavily,
successfully lobbying Texas legislators to pass a law making it harder
to compete against SBC in its new home state.
The growth strategy that Whitacre would use to transform SBC from
the smallest Bell to the biggest was born of necessity. In February
1996, President Clinton signed sweeping legislation that nixed SBC's
guard-the-monopoly approach by forcing all the Baby Bells to open their
markets to rivals. Faced with the prospect of losing market share, the
Bells set out in different directions. BellSouth, in Atlanta, and
Ameritech, in Chicago, invested heavily in telecoms abroad.
Whitacre saw no reason to go that far afield. Days after the law
was signed, he assembled his top managers at an Ojai, Calif., inn and
declared that the way to grow would be to buy more local telephone
lines in the U.S. and reduce costs by eliminating overlapping
operations. Using its stock as currency, SBC made a bold $17 billion
bid for sibling Pacific Telesis just a few weeks afterward. It later
also acquired Southern New England Telecommunications, gaining a
foothold in the Northeast, and last year--after 18 months of regulatory
hearings--completed a $72 billion acquisition of Ameritech. The deals
expanded SBC's reach to 13 states, a power base from which to pursue
the ambition that Whitacre had laid out for a visitor in 1997.
Predicting that the telecom industry would consolidate into a handful
of international full-service companies, he promised then that SBC
would be one of them.
SBC digested its acquisitions with the efficiency and coolness of a
true predator. Whitacre typically has little use for the senior
officers of the companies he acquires; he doesn't try to blend
management teams the way his counterparts at Bell Atlantic and AT&T
have. At headquarters he is surrounded by trusted, like-minded no-
nonsense executives. Few high-ranking SBC executives have fled to dot-
coms or telecom startups--they are fiercely devoted to Whitacre, who
enjoys a sort of Clint Eastwood status among his direct reports. A lot
of statements at the San Antonio offices start with some variation of
the phrase, ``Ed says.''
Whitacre's prediction that the phone business would boil down to a
gang of giants has become reality--and they are all gunning for SBC's
most lucrative customers. Bell Atlantic, on the verge of completing its
merger with GTE, has vowed to enter some of SBC's markets. MCI WorldCom
and Sprint hope to combine in a deal that would create a formidable
provider of data, phone, and wireless services to U.S. businesses and
households. AT&T has spent more than $100 billion amassing cable-TV
systems over which it will offer phone, entertainment, and broadband
services. ``We are going to lose market share in our traditional
businesses over time,'' says SBC vice chairman Royce Caldwell. ``It's
almost preordained.''
Like most telecom and cable companies, SBC sees broadband as
essential to growth in the competitive crush. The Internet's
popularity, even via slow, clumsy dial-up connections, makes it a cinch
that demand for fast, convenient broadband access will be huge. A study
by the Yankee Group, a consulting firm in Boston, predicts that in 2004
more than 16.5 million households will plug into the Net via some
broadband connection, vs. just 1.4 million at the end of last year.
Eventually, when such high-speed services are ubiquitous, the broadband
battle will be fought with weapons such as price and marketing. But for
now, the technological challenge of delivering broadband to households
is so formidable that large tracts of the market lie open to whichever
competitor can get there first. ``The early race is just to sign up
customers,'' says Tod Jacobs, a telecom strategist at J.P. Morgan.
``Whoever locks up the customer early will clearly have an advantage
going forward. The customer experience tends to be so good in broadband
that customers don't easily switch.''
Without question, cable companies have the lead in this giant land
grab. Their cable modems were delivering broadband Internet service to
about one million households by the end of last year. The phone
companies, meanwhile, reached about 300,000 households using a rival
technology called digital subscriber line, or DSL, which hooks up to
ordinary copper telephone wire. From a user standpoint, cable modems
and DSL are roughly equal. Both are ``always on,'' which means the
connection to the Internet is instantaneous. Both are plenty fast, even
for demanding tasks like downloading video. Cable companies claim their
modems can receive data at up to three megabits per second (about 50
times faster than a standard 56K dial-up modem), but industry
executives privately admit that, in practice, customers never pull
stuff off the Internet at those speeds. SBC's DSL offer pledges speeds
of 1.5 megabits per second--half as fast as cable broadband
advertises--but the company says that in some neighborhoods downloads
will be much faster.
Project Pronto is designed to overcome DSL's major shortcoming: The
technology works only on ``clean,'' relatively short copper lines that
don't stretch more than three miles from the customer to the telco's
central office. Part of the $6 billion price tag involves building
curbside switchlike facilities in far-flung neighborhoods. With this
investment, SBC believes it can reach 80% of its customers with DSL.
So far, by analysts' estimates, the company has reached the 250,000
mark in installed lines--good, but a long way from the million it needs
to meet Whitacre's goal. SBC has been hooking up customers free and
giving away the expensive DSL modems. And in an un-Bell-like concession
to consumers' busy lives, the company recently launched Saturday
``drive ins'' in some cities. Customers sign up to bring their computer
to an SBC facility, where a technician will equip the PC with the gear
it needs to receive DSL service. Thus, working folks don't have to take
a day off to wait for a technician, and SBC saves money by avoiding a
costly truck roll.
Users' experiences ordering DSL from SBC are far from hassle-free,
however. Customers complain of having to wait weeks to get the service,
even if they live close to a central office. They also give SBC low
marks for the ordering process. ``The bad news is that, prior to your
installation, the people you talk to are clueless,'' groans Bob Watson,
a 46-year-old Los Altos, Calif., resident who ordered DSL from SBC's
Pacific Bell unit last year. The good news? Since the installation,
Watson says, ``It's been working great.'' SBC has launched a training
program to get its order takers up to speed on Project Pronto.
Such glitches haven't kept SBC's marketers from attacking its
cable-TV rivals. SBC's advertising takes potshots at cable-modem
systems that, in theory, can bog down if too many users in a
neighborhood do things like download video at once. A clever commercial
that has aired in several SBC states depicts discord in a suburb where
the residents have cable modems. A homeowner laments in a voice-over
that before cable Internet service, the fictitious town ``used to be a
nice place to live.'' Onscreen a man surreptitiously snips his
neighbor's cable line with gardening shears; neighborhood kids taunt a
frazzled-looking adult, screaming, ``Web hog!''
Cable operators aren't happy about this negative campaigning. AT&T,
one of the largest cable providers, says that while traffic jams are a
potential problem for its broadband systems, they can easily be
remedied by adding extra equipment at the ``node'' serving a
neighborhood. And AT&T scoffs at SBC's technology. ``You never see [new
competitors] try to build over us with a copper-loop network,'' sniffs
Tony Werner, chief technology officer of AT&T's broadband unit. ``This
is really an effort to spruce up a 100-year-old network.''
In the broadband war, cable operators can be hyperaggressive too.
Time Warner Cable (which belongs to the same company as FORTUNE) caused
a flap in May when its managers in Houston asked employees to order,
then cancel, broadband service from SBC. The idea was to find out
exactly which areas SBC could and could not serve. Higher-ups quickly
squelched the scheme; SBC complained to federal regulators.
The question now is whether SBC can move fast enough to impress an
increasingly fickle Wall Street. So far, Project Pronto hasn't budged
the share price. ``Our stock has not reflected the value we're
creating,'' says CFO Don Kiernan. ``Investors like what we're doing,
but they're saying, `Prove it, give us evidence.' '' SBC figures its
stock should trade between $73 and $82 a share, based on a sum-of-the-
parts valuation. Kiernan likes to point out that SBC has delivered on
promises before. It achieved cost savings from the Pacific Bell merger
faster than expected, and it hasn't missed analysts' earnings estimates
since Whitacre took over as CEO. That's a big reason Janus Capital
bought the stock. The broadband story is ``what got us interested,''
says portfolio manager Ankrum. ``Then you ask, `Do they have the right
management team with the right strategy?' We think the answer is yes.''
Even though SBC's bread-and-butter local telecom business continues
to generate billions of dollars in cash each year, the company needs
Project Pronto and other growth schemes to attract investors. SBC has
been working on plans to sell phone and Internet service to customers
outside its 13-state footprint. It forged a joint venture with
BellSouth to combine their cellular operations, boosting SBC's wireless
reach by 50%. SBC continues to fight for permission to offer long-
distance services in its home regions. And as SBC becomes a national
company, it expects to sell DSL services to corporations that want
employees to work from home. (It has a contract with IBM to provide
residential DSL for some 15,000 telecommuting employees in California,
Texas, and Connecticut.) Within just a few years, SBC says, all these
new lines of business will represent 50% of its revenue, up from about
a third today. ``We believe SBC is one of the clear surviving telecom
companies,'' says J.P. Morgan strategist Jacobs.
SBC is already thinking beyond Pronto. Indeed, a time will come
when consumers will expect more from their speedy Internet hookups than
from always-on eBay. To keep its customers happy, and to attract a new
breed of broadband junkies, SBC will have to start pushing attractive
fare through those big pipes. Movies would be a natural, but games and
home-security systems are also under consideration. ``We're looking at
a whole palette of applications to help customers manage their
lifestyles,'' says Abha Divine, a member of SBC's corporate-strategy
team. She is helping develop an ``online home'' product that acts as a
sort of electronic mom, keeping track of appointments and phone
messages, and paying the bills electronically. Divine hopes to see a
version of the service available to consumers next year.
SBC employees may not know it yet, but Whitacre has already picked
a goal for next year's DSL deployment. ``We'll get a million customers
this year, and double that next year,'' he vows. And for anyone who
doubts that SBC's future is firmly hitched to the Internet, he has a
message. ``Broadband will be indispensable, and it's going to happen
pretty quickly,'' says Whitacre. He pauses, then draws a comparison
with a technology he knows pretty well. `'It will be as basic as
telephone service.'' Maybe there's a good reason after all to listen to
this guy without a PC.
Mr. Glassman. Third, changing the Telecom Act will
necessarily produce uncertainty in the minds of investors.
Thanks to the Act, in just 3 years 300 CLECs have sprung up
with $100 billion in market value. They are investing that
money in new, deeper, broader systems. You in Congress should
be proud of this Act that has made this possible.
Uncertainty is the enemy of investors and of companies
needing to raise capital. This bill will produce uncertainty.
That is the lesson about uncertainty of a book that I co-
authored with Kevin Hasett called Dow 36,000. The point we make
about the stock market is that as uncertainty has diminished
stock prices have risen.
But if you fiddle with this legislation, with the Telecom
Act, make no mistake, if this bill passes the flood gates will
open and other legislation will pour through. I believe that
investment will slow sharply. Who will suffer? Consumers, your
constituents.
Fourth, this bill will just about assure that CLECs will be
limited in sharing old-fashioned technology or they will just
have to build out their own networks at prohibitive cost. That
was not the intention of the Telecom Act. In effect, this bill
brings back the old monopoly that we thought the Telecom Act
had buried.
Fifth, the Telecom Act is not holding back the deployment
of new technology by the ILECs. In the first place, before the
law, even though DSL had been available for many years, it was
not deployed. The Act itself touched off competition from
cable, from fixed wireless, from satellites, and as a result we
now have a boom in DSL. As Senator Lott, the Majority Leader,
said, deployment is happening not despite the Act, but because
of the Act.
Finally, just very briefly, Mr. Chairman, to refer to your
question about rural constituents, how can your rural
constituents be served. Basically, by the same way that they
are served by Coca-Cola or Ford or buy clothes provided by
Walmart--through market forces. The question really before us
in the public policy sense is how to unleash those market
forces, and I believe the Telecommunications Act does that.
In short, Mr. Chairman and Members of the Committee, the
Telecommunications Act of 1996 is working. As a fierce advocate
of free market solutions and a believer in the power of
technology to improve the lives of all Americans, especially
disadvantaged Americans, I say do not change this Act; if
anything, enforce it.
Thank you.
[The prepared statement of Mr. Glassman follows:]
Prepared Statement of James K. Glassman, Resident Fellow, American
Enterprise Institute, and Host, Techcentralstation.com
Don't Roll Back the Telecom Act. Enforce It.
Mr. Chairman, Members of the Committee, I appreciate the
opportunity to share my views on the bill under consideration today.
My name is James K. Glassman, and I am a resident fellow at the
American Enterprise Institute. I am not an expert in the technical
aspects of telecommunications. Instead, my field of interest is
intersection among technology, finance and public policy, including
such issues as Internet privacy, high-tech antitrust, Web taxation,
and, of course, dissemination of broadband technology. It is to examine
such issues that, with some colleagues, I launched a website in
February called TechCentralStation.com
My background is as a journalist. Many of you will remember that I
was editor of Roll Call from 1988 to 1993. For six years after that, I
was a columnist on financial and economic issues for The Washington
Post. It is no secret that I have spent my 30 years as an analyst and
journalist advocating free-market solutions to vexing public-policy
problems.
My aversion to unnecessary government regulation is exceeded only
by enthusiasm for the New Economy--an economy made possible by new
technology delivered in an atmosphere of healthy competition, with
minimal political involvement.
Our country and our economy have come a long way since Ronald
Reagan was credited with saying: ``If it moves, we tax it. If it's
successful, we regulate it. And if it fails, we subsidize it.''
But the journey is not over. And this new economy of which we are
so justifiably proud is facing a threat.
I'm not talking about the precipitous drop in NASDAQ prices this
spring or the shakeout in dot-com companies. Those are just symptoms.
The threat that disturbs me is the recent trend for some companies
to use the power of government to thwart competition--even if that
means increasing government's involvement with the business of
technology.
That is what's going on right now in the telecommunications
industry. The industry that's the delivery vehicle for the Internet--
the enabling industry of the new economy.
The grandly named Broadband Internet Relief Act is pretty clearly a
device for rolling back the competitive provisions of the Telecom Act
of 1996. Instead of rolling back the Telecom Act, we need to enforce
it.
That Act was a remarkable accomplishment--a solid initiative, a
gesture of statesmanship and compromise by government, to get itself
out of a vital national industry. It was designed to replace regulated
monopoly in the local telecom services industry with vigorous
competition. And vigorous competition is the only guarantee for the
rapid deployment of advanced technology at the lowest possible prices
to all areas of the country.
The best thing I can say about the Telecom Act is that it's
working. It took a while, but it is working.
A new class of competitive local exchange carriers has been
created, known as the CLECs. And even though the incumbent regional
monopolies still control 90 percent of the total market and as much as
98 percent of the voice market, the new competition is turning up the
heat. These CLECs, some 300 of them, have a market value of more than
$100 billion. They did not even exist before the Act.
The presence of competition is finally having the classic economic
effect that Congress intended. We're seeing an upsurge in deployment of
broadband Internet services, by the incumbent companies as well as
their new competitors. The Yankee Group predicts that the number of
homes subscribing to broadband services will rise from 1.4 million this
year to 16.5 million in 2004, an incredible pace.
The ILECs are dusting off the DSL technology they have had
available for 10 years and installing it in the marketplace. Why?
Clearly, because of competition. Look at SBC Communications. A June 12
article in FORTUNE, headlined, ``Why the Biggest Baby Bell Is Wild
About Broadband,'' discussed SBC's Project Pronto, a plan to install 1
million broadband connections by the end of this year and 2 million by
the end of 2001--from just 139,000 on Jan. 1, 2000. ``SBC believes it
can reach 80 percent of its customers with DSL,'' said the article.
SBC's CEO said earlier this month that his aim was ``to completely
transform SBC and its companies into a data-centric business.'' And--
understand--these claims were made, and well received by Wall Street,
without the expectation that the legislation under consideration here
would become law.
For as long as anybody can remember, the local services market was
the equivalent of a no-substitutions box lunch served up by the
incumbent telephone companies. But now that market is beginning to seem
more like the food court at the mall. Not only a choice in menu, but a
growing choice in providers.
The job of public policy right now is to see that everybody in this
country has access to this smorgasbord, not to shut it down. But make
no mistake about it, passage of S. 877 would close the food court
before most Americans get a chance to fill their tray. This bill would
tell America that the promise Congress made in 1996 has been
rescinded--just as we were beginning to feel the tangible benefits.
Customers and investors won't stand for that. Competition in the
local services market is crucial to delivering advanced services. And
advanced services are crucial to the growth of the new economy. We
can't afford to drop competition in the local telecom market as though
it were last year's fad.
But S. 877 would come dangerously close to doing just that. Its
basic provisions amount to a recipe for concentrating market power back
in the hands of the ILECs. The danger of re-monopolizing the market
can't be overlooked. And if the agreed-upon requirements for local
service competition were dropped, it would open the possibility for the
ILECs to make a back-door entry into the long distance market, where
they could leverage their monopoly position in local service to
compromise the surging competition in long distance.
This bill would basically excuse the incumbent monopolies from
their obligation to provide new competitors with interconnection to the
ILEC networks at reasonable prices under reasonable conditions. That
obligation and the checklist that goes with it are central to the
success of the Telecom Act. Take away these competitive requirements
and you take away the ILECs' incentive to deploy new technology.
Of course, well-intentioned advocates of S. 877 would say just the
opposite. They see this bill as providing an incentive for the big
incumbent companies to deploy broadband technology faster by freeing
them from burdensome regulatory requirements. This is nonsense.
Mr. Chairman, I stand second to no one in my contempt for
burdensome regulatory requirements. But I also recognize that the local
telephone monopoly was established and enforced over the past century
by government. And no such monopoly will open its market to competition
without a firm push. The competitive requirements of the Telecom Act
provide that push.
Those requirements are not holding back the deployment of new
technology by the ILECs. To the contrary. The incumbents are deploying
the technology now and will continue to deploy it for two fundamental
reasons: One, the prod of competition. And, two, new technology like
frame relay, packet switching and other applications generate billions
of dollars a year in productivity improvements.
Just look at SBC's Project Pronto. It's a $7 billion investment in
broadband. Advocates of S. 877 would say that SBC needs freedom from
competitive requirements to finance the cost of this investment. But
the view on Wall Street is that SBC's ambitious $7 billion investment
will bring the the company $9 billion in productivity improvements.
And on the subject of technology, the proposed bill just about
assures that any new competitor who did get access to the incumbent's
network would be limited to sharing old-fashioned circuit-switched
technology. Anything newer than that would be excluded under the
heading of ``advanced services.''
If a new competitor wants to offer the advanced services that we
all want, that competitor would have to build its own network, which is
a prohibitive cost for most new competitors. This is an approach that
was specifically rejected by Congress when the Telecom Act was drafted.
It would be nothing more than a roadblock to competition, and our goal
should be tearing down roadblocks, not installing them.
Let's review some history. It was not easy to get the Telecom Act
passed, but all parties to the act agreed to its provisions. Then, the
lawsuits from the local telco monopolies began. Finally, after much
litigation and footdragging, a local Bell was certified as having
completed its interconnection requirements in a single state, New York,
where I live. I can tell you that the competition there--for local
service, broadband, long distance, you name it--is hot and heavy. DSL
rates are falling sharply. Now, Texas has been approved. We are on our
way. But it is at just this time that the local incumbents want to roll
back, to gut, the Telecom Act. Why? Maybe they don't like the heat of
competition. I can't blame them. Competition is no fun for longtime
monopolies, or for any company, for that matter. But it is wonderful
for consumers. They are the winners.
The legislation under consideration would have another effect: It
would increase uncertainty in the markets. Investors need assurance
that the rules of the game will stay the same. When they commit
billions of dollars, they need to know that Congress won't change the
competitive climate by passing bills that favor one group of companies
over another. Why was investment put on hold for about three years
prior to the passage of the Telecom Act of 1996? Because few investors
wanted to put their money down if they did not know what game they were
playing. Now, they know. Don't change the rules of the game in the
middle, or the investors will find another game--perhaps in another
part of the world. And American consumers will suffer.
Let me also comment on one other specific provision of S. 877, the
issue of reciprocal compensation.
Like so many other telecom issues, reciprocal compensation is
complicated in the details, but simple in its fundamentals. It says
that one communications carrier should be fairly compensated when it
handles incoming calls from another communications company.
But now, this proposed bill would deny reciprocal compensation to
the CLECs who handle the calls coming in to Internet Service Providers
from ILEC customers. Mr. Chairman, this provision is the public policy
equivalent of spot zoning. It is public policy targeted for the special
interests of the few, instead of the general good of the many.
In effect, this accommodation of the ILECs' wishes would drive up
the cost of Internet access for millions of users. That's not a legacy
that this or any other Congress wants to pass along to the American
people.
In summary, Mr. Chairman, I would urge the Senate to stay the
course with the Telecom Act of 1996. It needs to be enforced, not
destroyed. We're seeing progress now. We'll see much more in the years
ahead. Real competition in local services will speed the arrival of
21st Century technology to American homes.
And it will create major growth opportunities for companies in the
telecom market, including the very same companies who are now looking
to government to throw competition into reverse.
Thank you very much.
Senator Brownback. Thank you, Mr. Glassman. I look forward
to some questions to engage you as one who is for deregulation,
and the bill directs that way as well.
Mr. Pitsch.
STATEMENT OF PETER PITSCH, COMMUNICATIONS POLICY DIRECTOR,
INTEL CORPORATION, ON BEHALF OF THE
INFORMATION TECHNOLOGY INDUSTRY COUNCIL (ITI)
Mr. Pitsch. Thank you, Mr. Chairman, Senator Breaux. My
name is Peter Pitsch. I am Director of Communications Policy at
Intel. I am here today to testify on behalf of ITI, the
Information Technology Industry Council. ITI is an association
of leading information technology companies, the leading
computer hardware, software companies, the leading ISPs, and
Internet networking companies. Our companies employ over a
million people in the United States and our annual revenues in
1999 were over $460 billion.
On behalf of ITI and its member companies, I want to thank
you for this opportunity and I want also to endorse S. 2902,
the Broadband Internet Regulatory Relief Act. In my oral
testimony I want to make four main points.
First, that ITI believes that the rapid deployment of
broadband, affordable broadband technology, is absolutely
crucial to the achievement of the full potential of the
Internet and absolutely crucial to the success of high tech
companies, and that the best means of achieving that goal is to
rely on market-based competition unless there is a competitive
bottleneck, a substantial competitive bottleneck.
Second, ITI believes that S. 2902 meets this deployment
goal and these competitive principles precisely because if it
were enacted it would encourage more rapid deployment of
broadband technology to consumers through deregulation without
undermining the competitive process. Unbundling the ILECs'
packet services and freeing them from unbundling regarding
fiber deployed to residences would clearly increase the
incentive to deploy. Today if they make investments and they
fail, they deploy in marginal markets, in medium or small size
markets, that fails, their shareholders take the entire loss.
If they succeed, they have to share that success with
competitors at some regulated, forward-looking economic cost.
Third, while S. 2902 does remove significant regulatory
barriers, we believe, ITI believes, that it sufficiently
protects or safeguards competition because it requires the
existing network to be unbundled. I think this is a very
important point which I want to amplify on or, as we at Intel
say, drill down on, because I do not think that a lot of the
testimony to this point has really hit this crucial aspect of
the bill.
To get deregulated, an ILEC first must meet very important
buildout benchmarks. Essentially, it must make advanced
services available to 80 percent of its customers within 3
years and 100 percent within 5 years. Now, besides directly
benefiting consumers, this may actually increase the number of
DSL-capable loops available to competitors.
Also, deregulation is conditioned on the ILECs complying
with Commission and State collocation and loop provisioning
requirements. ITI has long maintained that the incumbents have
to make these essential facilities available to their
competitors. Indeed, this legislation would increase the
incentive to be in compliance with these very rules, which are
essential for them to compete.
Indeed, the Act, this bill, goes so far as to require the
telephone companies to, upon request, make existing copper
available even where they have deployed fiber into the
distribution network. Thus, on balance we think S. 2902 is a
very sensible, balanced approach that removes regulatory
barriers on the one hand and keeps protection for the
competitors on the other by making the essential facilities
available.
The fourth and closing point I want to make is that in
these broadband policy disputes ITI has not sided with any one
camp. When I hear these debates I sometimes think the warring
factions could not agree on a recipe for ice water. ITI has
sided with the CLECs and back in December of 1998 when we
reached an accord with the ILECs we insisted that the ILECs
make their networks available to the CLECs, open up the loops
and the collocation. That was something that we supported at
the Commission. Of course, the Commission agreed.
We also supported the ILECs before the FCC and said their
packet switches or DSLAMs should not have to be unbundled, and
that was the first step in the direction I think this
legislation goes. But at the same time, we insisted that the
CLECs have access to these essential facilities.
Last, in the area of high speed cable access, ITI has
supported the FCC in foregoing from injecting itself or
regulating mandatory cable access, again for the very same
reason, that we think it is crucial that we have the right
incentive structure, particularly when we are not talking about
bottlenecks, to encourage all players to deploy.
So as you can see, Mr. Chairman, we have been actively
involved in the broadband policy disputes and debates. We have
consistently supported one goal, which is let us get a policy
framework in place that encourages all the players, whether
they be CLECs, ILECs, cable companies, to deploy broadband so
as to get the cheapest, fastest, broadband to all Americans.
We believe that your bill moves us, would move us in that
direction, and I will be glad to take questions.
[The prepared statement of Mr. Pitsch follows:]
Prepared Statement of Peter Pitsch, Communications Policy Director,
Intel Corporation, on behalf of the Information Technology Industry
Council (ITI)
Mr. Chairman and Members of the Committee,
My name is Peter Pitsch and I am Communications Policy Director for
Intel Corporation. I am here today to testify on behalf of ITI, the
Information Technology Industry Council. ITI is the association of the
leading information technology companies, including computer hardware
and software manufacturers, networking companies, and Internet services
companies. ITI member companies employ more than 1.2 million people in
the United States and exceeded $633 billion in worldwide revenues in
1999.
On behalf of ITI and its member companies, I would like to thank
you for this opportunity to testify before your Committee and express
our support for S. 2902, the Broadband Internet Regulatory Relief Act,
introduced by Senator Brownback.
ITI believes that the rapid deployment of affordable broadband
technology is a key component to continuing the dramatic growth of the
Internet and e-commerce. Consumers don't want to wait 15 minutes, or
even one minute, for a website to download--they want high-speed
Internet services that will make their online experience more
convenient. There is no doubt that the Internet economy has grown
faster and larger than anyone imagined. Today, according to recent
study by the University of Texas, the Internet economy is valued at
over $500 billion and is growing at an astounding 62% a year. Moreover,
the impact of the Internet on our lives and our businesses has been
tremendous. According to Duke University, 56% of U.S. companies will
sell their products online by 2000, up from 24% in 1998. But for this
growth to continue we need to have policies that support competition
and encourage companies to develop the necessary high-speed
infrastructure.
The core telecom policy mission of ITI is to promote the rapid
deployment of affordable broadband technology, providing all consumers
access to the full potential of the Internet. In pursuit of our policy
goal, ITI has adopted the following broadband principles:
1. LMarkets, not regulators, should drive the deployment of
broadband technology. To that end, ITI supports the deregulation of the
telecommunications industry and the continued non-regulation of
information services.
2. LMarket-based competition among all channels of the
communications marketplace is the best way to promote rapid deployment
of broadband technology.
3. LGovernment intervention in the market is appropriate only where
a competitive bottleneck exists.
4. LITI does not endorse any single broadband technology and
believes deployment of multiple technologies will benefit consumers.
Consistent with these principles, ITI is proud to endorse S. 2902,
the Broadband Internet Regulatory Relief Act of 1999. ITI believes that
this bill, if enacted, will encourage rapid deployment of advance
services to consumers through deregulation without diminishing
competition for broadband services. Furthermore, ITI believes this
legislation is another important step in removing barriers to
competition in the telecommunications markets, which in turn will
stimulate investment, spur technological innovation, reduce prices, and
increase consumer choices.
ITI believes that S. 2902 would eliminate many of the incumbent
local exchange carriers' (ILECs) disincentives to deploy digital
electronics and transmission facilities to consumers. Specifically, by
eliminating interconnection and unbundling requirements for new packet-
based equipment and fiber loops deployed to residences, this
legislation removes a deployment disincentive that ILECs face--being
required to allow competitors unbundled access to this new high-speed
equipment. ITI believes that removing this disincentive will lead ILECs
to deploy more quickly high-speed services such as DSL, bringing the
benefits of broadband technology to more consumers. At the same time,
ITI believes that eliminating these requirements will not undermine the
ability of other competitors to provide their services so long as ILECs
continue to comply with the collocation and loop provisioning rules.
Unlike the existing local loop, ILECs do not have a legacy advantage in
newly installed advance services and this equipment is readily
available to competitors and ILECs alike.
While S.2902 removes significant regulatory barriers, ITI is
satisfied that it provides important safeguards to ensure the removal
of those barriers has the desired effect and does not adversely impact
competition. First, to get deregulated an ILEC must meet important
build-out benchmarks. Essentially, it must make advanced services
available to 80% of its customers within 3 years and 100% of its
customers within 5 years. Moreover, obtaining these goals will
significantly increase the number of households served by DSL-capable
loops which could benefit all competitors. Second, deregulation is
conditioned on the ILECs complying with Commission and state
collocation and loop provisioning rules, which will ensure competition
can continue to thrive. ITI has long maintained that it is important
that the competitive local exchange carriers (CLECs) have access to the
ILECs' loops and central offices. Indeed, in December 1998, it reached
an accord with the ILECs that conditioned deregulation of their
advanced services on their making these essential facilities available
to the CLECs. Finally, in the case of new fiber loops, ILECs can be
required, upon request, to maintain the existing copper local loop, so
competitors do not lose access to the home capable of providing
advanced and other telecommunications services.
In sum, ITI believes that S. 2902 take a sensible step-by-step
approach to eliminating regulatory barriers that will encourage rapid
deployment of advance services to consumers through deregulation and
competition. ITI's support of S. 2902 is one part of a consistent set
of policies that we believe will increase the deployment of a variety
of competing broadband technologies.
For example, ITI has recently endorsed S. 2698, the ``Broadband
Internet Access Act of 2000'', introduced by Senator Moynihan. This
technology-neutral legislation would provide tax incentives for the
deployment of broadband technology to urban and rural areas that today
are often not served by high-speed services, as well as for the build-
out of very high-speed, next generation broadband services to
residences. Like the legislation before us today, S. 2698 recognizes
the need for this investment in our IT infrastructure so all Americans
can realize the opportunities of broadband technology and the Internet.
However, S. 2698 does not eliminate the need to make necessary
regulatory reforms addressed in the current bill, S. 2902.
In the area of high-speed cable access, ITI has supported the
Federal Communication Commission's decision to forego regulatory action
to mandate cable access. Last year, ITI wrote to FCC Chairman Kennard
in support of the Commission's amicus brief in AT&T v. City of
Portland. ITI argued that because cable Internet access is an emerging
service and the providers currently lack market power in the Internet
access market, they should not be subject at this time to open network
requirements. Furthermore, ITI agreed with the position taken by the
FCC that the question of whether cable companies should be required to
open their cable modem services should be addressed at the federal
level. Apart from legal arguments over federal and local jurisdiction,
ITI believes that there are compelling economic and business reasons
for developing a national policy on this important issue.
ITI has also advocated regulatory relief for ILECs before the FCC.
Last year, ITI argued, and the FCC agreed, that certain high-speed DSL
equipment installed by incumbent local phone companies should not be
required to be unbundled. ITI submitted comments to the FCC on this
particular matter because we believe that it will enhance the
competitive growth of the broadband market by providing an incentive
for ILECs to deploy DSL quickly. At the same time, however, the FCC
also agreed with the position taken by ITI that the local loop must
remain open to all competitors.
As you can see, ITI has been actively involved in broadband policy
issues. ITI has not sided with one camp or another, but instead it has
supported and opposed the positions of all of the major players at one
time or another. Throughout this policy process, ITI has supported the
same basic goal; namely, rapid deployment of widespread, affordable
broadband for consumers.
We would encourage the Committee to be as forward-looking as
possible when it examines broadband issues. As we all know, the
telecommunications debates of the latter part of the 20th century often
involved pitting entrenched business interests against each other, or
they focused on the competitive deficiencies of one communications
medium or another. We have today a far different landscape, one that
has emerged only in the last several years. With the Internet achieving
status as a mass medium, consumer demand for broadband data service has
grown exponentially. All major communications infrastructure providers
should be incented to meet that demand even if, in practice, that means
the government will be loosening some of the regulatory restrictions
that may have made sense in a prior era. As this debate continues, I
would urge you to turn to ITI and the high-tech community as an
impartial voice on these important issues.
On behalf of ITI, I would like to thank the Committee for its time,
and I would be glad to respond to any questions.
Senator Brownback. Thank you, Mr. Pitsch.
Mr. Strumingher.
STATEMENT OF ERIC STRUMINGHER, MANAGING DIRECTOR,
PAINE WEBBER INCORPORATED
Mr. Strumingher. Thank you, Mr. Chairman and Senator
Breaux. My name is Eric Strumingher. I am the Managing Director
at Paine Webber in New York.
Senator Breaux. Still Paine Webber?
Mr. Strumingher. Not for long. I think it is going to be
UBS Warburg Paine Webber or something like that. But we will
just go with Paine Webber for right now.
My specialty there is in equity research, specifically in
the telecommunications services area. I give investment
recommendations to both large institutional investors as well
as retail investors on telecommunications stocks. I hope that I
am not representing any particular bias here in my oral
testimony and in my written testimony. At times I will have
positive recommendations on incumbent local exchange carrier
stocks, at times I will have negative ones. The same for AT&T
and other industry participants. So I hope that with that
background you will agree that this is at least plausibly
unbiased testimony.
I want to give you observations on three issues that I
think may help you to evaluate the merits of the proposed
legislation as they pertain to deregulation of the incumbent
local exchange carriers. The first is the challenges faced by
these companies in making large investments, such as those
required for consumer broadband and also rural broadband
initiatives. Second, how regulatory uncertainty complicates the
analysis of investment returns, and here I will have some of
the same assumptions as Mr. Glassman, but some different
conclusions in this area. Then last, the ramifications of the
proposed legislation on investment in both consumer broadband
and rural broadband by non-ILEC companies.
So first of all, there are certain challenges in making
large investments about which I would like to elaborate, that
are faced by the large ILECs. Just by way of background, some
basic premises, for an army to be successful in war the
soldiers must have confidence in the general. This kind of
confidence is bred by battlefield success. Well, the same is
true in a publicly traded company. For a publicly traded
company to be a successful competitor in the marketplace,
employees must have confidence in the CEO. This comes through
the performance of the stock price. That is a basic premise
through which I attack this situation.
Now let us consider specifically the issue for the large
incumbent local exchange carriers. One, broadband initiatives
such as consumer broadband and rural broadband require large
up-front investments. SBC Communications, for example, is
investing $6 billion by the end of next year in its Project
Pronto initiative toward this end.
Number two, these investments typically eat into earnings
initially because of the large up-front expenses. The first
costs of building a new network are dilutive to earnings in the
near term.
Now, last, the ILEC shareholder base is very focused on the
consistency of earnings growth, I would say more so than that
for a cable TV company shareholder or even a CLEC shareholder,
both companies that are competing in this space for capital.
The willingness of these companies to ignore, for example--or I
should not say ``ignore'', but put less emphasis on--
depreciation expense, that expense associated with initial
investments in plant, is not the same for the investors in the
large ILEC stocks.
That is very important. I think, to summarize here, Wall
Street makes it tougher on these companies than on other
companies to make these similar kinds of investments. Maybe
this is part of the reason why companies like Verizon and Bell
South and U.S. West have not adopted the same aggressive
rollout strategies as SBC Communications.
A case in point here on the effect that this has had on SBC
stock. Last year in the middle of the year, the stock was
trading as high as $59 per share, but it has traded in the low
to mid-forties for the first half of this year, and I believe
that this is in no small part due to this Pronto initiative
that I have just mentioned to you and the dilutive impact on
earnings.
Now, in particular SBC has a CEO who I think has a lot of
respect from his employee base, so he may not suffer these kind
of reputational damages of the falling stock price. But other
companies may not have the same type of situation there, and I
would just submit to you that this is an important issue to
take a look at.
Now, the second question--this really leads into the second
point that I would like to make, is that big ILEC CEOs--it is
one thing for them to face this challenge in the marketplace if
just leading a company and going into risky investments, but to
face this challenge with the additional uncertainty about
earning a return on the investment is something altogether. The
basic return analysis, I would submit to you, is really
complicated by regulatory uncertainty.
Three areas in which the regulations may cause some
problems here. One, additional costs may be imposed on the
large ILECs to modify their network. They may be asked to build
new and different networks for the CLECs. Two, these companies
may be forced to bear risks of market adoption not only for
their services, but for CLEC services as well as a result.
Last, potential delays in implementing these first two things
that I just mentioned will potentially hurt the large ILECs in
terms of their competition with cable companies and other
operators who do not face these same regulatory restrictions.
You do not have to be an expert in math to know that it is
hard to solve an equation with so many moving variables, so
many unknowns, and I would submit to you that it is really hard
for investors to do this.
Now, last I would like to conclude by saying that there is
a risk or perceived by some to be a risk that investment will
dry up if the ILECs are required to offer extensive
interconnection with an unbundling of new infrastructure built
for advanced services. I do not think that this is really true.
Broadband, especially consumer broadband, is an exciting growth
area. It has attracted lots of investment in infrastructure by
cable companies, by wireless companies, and I think that there
will be more investment of this nature over the course of the
next couple of months and in fact the next couple of years.
We will have a very competitive market just by companies
who are owning and investing in different facilities than the
ILECs to compete with them in the marketplace.
So with that, I will conclude my testimony and be happy to
take any questions if you have them.
[The prepared statement of Mr. Strumingher follows:]
Prepared Statement of Eric Strumingher, Managing Director, Paine Webber
Incorporated
Thank you for inviting me to offer some observations on S. 2902,
the ``Broadband Internet Regulatory Relief Act of 2000''. I am a
securities analyst specializing in the telecommunications industry, and
I am here to offer my opinion on three issues that are related to this
proposed legislation: 1) the challenges faced by incumbent local
exchange carriers (ILECs) in making large investments; 2) how
uncertainty surrounding the regulatory treatment of broadband
infrastructure frustrates the analysis of returns on this investment;
3) the ramifications of the proposed legislation on investment in
consumer broadband services. The ILECs face specific challenges in
executing a consumer broadband investment strategy that are worth your
consideration. The success of any publicly traded company is in no
small part a function of the success of its stock price. In order to
marshal the troops into battle, a general must have the confidence of
his soldiers. On the battlefield, this confidence is bred by a
general's success in combat. In a publicly traded company a CEO must
have the confidence of his employees. This confidence is bred by the
performance of the company's stock price. The problem for large ILEC
CEO's is that the stock market generally does not respond well to
significant increases in investment spending like that required for
consumer broadband. While such investments may bear fruit over the
long-term, the investment community tends to focus on the reduction to
near-term earnings growth caused by the investment and sells the
shares. I believe that large ILECs are particularly vulnerable to this
kind of reaction to investment because their primary shareholder base
has a sharp focus on consistency of earnings growth. SBC Communications
is a case in point. The company's stock price, which has traded in the
low to mid $40 per share range for most of this year, has not recovered
to the high of $59 per share reached in mid-July 1999. I think that
this is in no small part a function of the ``Project Pronto''
initiative announced in the fourth quarter of last year.
This leads to my second point about the difficulty in estimating
investment returns. What is particularly agonizing, from the standpoint
of a large ILEC CEO, is that his investor base has to deal not only
with the up-front cost of the investment in consumer broadband services
but also the uncertainty about the ability to get a return. I mean here
not the uncertainty about the market-place demand for the service that
many new investments entail but uncertainty driven by the specter of
regulation. I find that the following unknowns complicate the return
analysis: 1) additional costs may be imposed on the ILEC to modify its
network architecture to accommodate competitive local exchange carriers
(CLECs); 2) ILECs may be required to bear risks of market adoption for
CLEC services; and, 3) that there may be delays in implementing the
service based on mandated changes to the technology and network design.
The last of these is especially risky given the very competitive
environment that is emerging in consumer broadband services. The point
is that there are so many variables in this equation that it's very
hard (maybe impossible) to figure out. The approach adopted by many
investors is to avoid the ILEC stock. Many prefer to invest in consumer
broadband by investing in shares of companies that are attempting to
deliver these services through cable or wireless infrastructure because
the return analysis is less complicated. I'd also be surprised if the
uncertainty created by the regulatory risks doesn't also frustrate the
ILEC business planners who must justify the investment in consumer
broadband services to their respective boards of directors. The current
regulatory ambiguity simply does not lend itself well to stimulating
investment in consumer broadband. Maybe this is why only SBC
Communications has launched an aggressive rebuild of its outside plant
to deliver broadband services.
The last point that I'd like to make concerns the perception that
competition in consumer broadband services will slow if regulators do
not require extensive interconnection with and unbundling of new
consumer broadband investments that the ILECs make. My view is that
consumer broadband represents one of the great growth opportunities for
the telecommunications and media industries and that there will be no
shortage of competition here. Cable operators are spending tremendous
sums of money to upgrade their networks to provide broadband services
and have targeted consumer broadband services as among their brightest
growth prospects. Just yesterday, AT&T indicated that the plant serving
more than 60% of its 28 million home cable footprint has been upgraded
for broadband services. The company plans to be at 80% by year-end. In
addition, owners of satellite-based distribution systems, MMDS
frequencies, and PCS frequencies are all investing heavily to provide
consumer broadband services. There also appears to be a concern about
the fate of CLECs as a result of this legislation. Business plans that
are based solely or in great part on obtaining access to new ILEC
investment in advanced services facilities are very high-risk business
plans in my opinion, and the investment community is well aware of
these risks. Companies relying heavily on this source of revenue are
having a much harder time raising money today than they were a year
ago.
Senator Brownback. Thank you very much, Mr. Strumingher. We
appreciate that. We appreciate all of your testimony. It is
thoughtful.
I disagree with some and I wonder how well the bill has
been actually reviewed. The purpose of the bill is to expand
these services and get them out to rural areas. Mr. Pitsch I
think hit the point of what his group is after is what I am
after. We want as much deployment out there as we possibly can
have.
It is a deregulatory approach that we are taking on this.
Others would take the tax subsidy approach--others would take
the subsidy approach, others would take a tax cut approach.
This is a deregulatory approach to it, and it is not taking
place today in the rural areas.
Dr. Duerstberger--Duersterberg. Sorry, I did that to you as
well, so I apologize. It was not intended, to do that.
You are representing the manufacturers and retailers. They
are moving to use the Internet as a management tool. Would you
say that from an economic development perspective an entire
community or region that lacks access to broadband services
would be at a disadvantage compared to communities and regions
that have such access? Is this going to impact your
manufacturing in rural areas?
Dr. Duesterberg. Well, let me answer by saying that in the
abstract, if there were an area that totally lacked broadband
connections, that would be a severe disadvantage, for two
reasons. One, companies that are already located in an area
would lack the ability to expand their services. For instance,
the automobile industry is going to an on-time delivery system
and on-time interactive auction type system for all of their
suppliers. If you cannot be connected via broadband connections
to the original equipment manufacturers, then you are at a
severe disadvantage because you cannot share in the design
phase, you cannot share the quality data that they require on a
real-time basis. So that is a severe disadvantage.
In terms of economic development, companies that would have
to go into an area underserved by broadband access would simply
have higher costs. They would have to run a line in at much
higher cost than if it were generally available in that area.
So the short answer is yes, I think it does make a
difference.
Senator Brownback. It strikes me in my communities that I
represent we have a lot of manufacturers in these rural
communities and this is a decided disadvantage and probably
going to increase in its nature of impact on the companies in
the future as these services are not available in many of the
rural areas.
Mr. Pitsch, in your group's efforts they want deployment of
services as broadly and as rapidly as possible, because you put
forward a lot of the equipment and the services associated with
broadband. You have heard the testimony of a number of people
here that feel as if this will not help in the deployment of
these services, may actually hinder some CLECs from offering
these services. Yet you have appraised the bill and do not deem
that it would do that.
What in your appraisal is different from what you have
heard in the CLEC testimony or those supporting keeping the
current regime?
Mr. Pitsch. Mr. Chairman, our view is that competition
primarily is going to drive this, that market forces and the
profit incentive are going to drive companies to invest. So
when we look at the effect of this legislation, we believe that
it is crucial that it provide still stronger incentives to the
ILECs by eliminating regulation where it is not necessary. So
that is the key to understanding our position, is focusing on
our belief that competition, unless there is a bottleneck, is
the best way to encourage companies to deploy.
For example, as long as the competitors have access to the
existing customer lines and the companies, the incumbents,
central offices, then they will be able to compete. But if the
ILEC now takes a risk and employs fiber and upgrades its
network, maybe that is going to drive the cable company to
deploy more quickly. Maybe it is going to incent the CLEC to
deploy additional facilities.
We want not just ADSL, 1.5 megabits per second. We want
VDSL, we want 20 megabits per second. We want people putting
more and more fiber, more and more radio equipment out there,
and the primary motivation is going to be a competitive threat,
and therefore that is where we think policymakers should put
their primary emphasis.
We in my written testimony point out that we do support
Senator Moynihan's investment tax credit as well. We believe
you can make other arguments. However, from a regulatory
standpoint, focus on incentives, require regulation only where
there is a bottleneck. We think that exists for loops and
central office space.
Senator Brownback. Senator Breaux.
Senator Breaux. Thank you very much, panel, for being with
us.
Mr. Glassman, Jim, I was trying to look at what you were
saying about SBC's Project Pronto and what Mr. Strumingher was
saying about it and it seemed like, at least I take it you have
two different opinions. I think, Mr. Glassman, you were saying
that SBC's Project Pronto is a $7 billion investment and the
view on Wall Street is that that $7 billion investment would
bring $9 billion in productivity improvement. But Mr.
Strumingher, it seemed like you were saying that SBC has never
recovered in their stock and it is trading in the low to mid-
forties, has never recovered to the high of $59 a share, and
you think that is in no small part a function of their Project
Pronto initiative. It seems like you are saying that Project
Pronto has had a negative effect on the stock. And Jim, you are
saying that this is a great example of a very good thing for
the company.
Can you both comment on your perspective on this?
Mr. Glassman. What I was going to say was, look, in the
short term, to quote the great Burton Malkiel of Princeton
University, the market is a random walk. We do not know what is
going to happen tomorrow or really in the next few months or
over the course of a year. But it seems to me that over the
long term--and I am not endorsing SBC stock--that this kind of
investment is going to pay off.
That is what the folks at SBC think and I think it is
actually paying off already quickly. It does not necessarily
immediately show up in the stock, however. If there is a
difference between the two of us, I may have a longer term
perspective about the stock and about this kind of investment.
Senator Breaux. Mr. Strumingher, is broadband a good
investment?
Mr. Strumingher. Oh, I think it is a very good investment
for SBC, notwithstanding some of the regulatory issues that are
out there. The question is more how difficult is it to make
this kind of investment, which requires major initial spending
that will have an initially dilutive impact on the earnings of
a company like SBC or any company that makes that.
While it is true that this will probably make the stock go
up over the long term, another great commentator on the market
I think said in the long run we are dead. There is a--the CEO
of any big company has a very hard time rallying the troops to
do well and selling his vision of the company to Wall Street
when the stock is underperforming. This is now a year later and
the stock is still well below where it was at the high, and it
could well extend for another half a year, a year, who knows.
The point is that it has been rough sailing for the company.
I do not want to excuse SBC or try to rationalize anything.
I am just telling you this is tough, and when we add additional
complications like regulatory uncertainty that makes it even
tougher.
Senator Breaux. Mr. Strumingher, I guess Senator Brownback
would argue that his legislation is trying to clear up some of
that regulatory uncertainty. In your opinion as one who follows
this very closely, can the RBOCs and the regulated companies in
this area under the current regulatory scheme make the billions
of dollars of investment in broadband under the current system
and do it effectively from a market standpoint? Or would
something like Senator Brownback is suggesting make that market
situation more predictable and stable for them?
Mr. Strumingher. I think it would clearly make it more
predictable. The problem, as I mentioned in my remarks, is that
it is very difficult right now to try to estimate the returns
on the investment when you do not really know what the
requirements are going to be of you. You may be asked to
redesign your network in a totally unanticipated way to
accommodate competitors, for example. The providers of the
technology to you may be asked to change the way the technology
looks or the way the technology functions in order to satisfy a
competitor.
All the while, the cable operators, the companies that are
using MMDS and PCS frequencies, the satellite operators, who do
not face similar types of regulatory hurdles, are charging
ahead fast and furious.
Senator Breaux. The cable companies, for instance, which
are not common carriers, is that a significant economic
advantage to them as they move into broadband applications?
Mr. Strumingher. In a word, yes.
Mr. Glassman. Senator Breaux, can I just add something? It
seems to me that perhaps it is true that Senator Brownback's
bill will be beneficial to the ILECs, but I do not think that
it is the function of this Congress--maybe it is a function of
Mr. Strumingher--to pick winners here. Maybe this will be good
for the ILECs, but it is not good for other competitors, and I
do not think we should choose.
My point in my testimony was quite simple, that even absent
Senator Brownback's bill SBC has invested $6 billion. That is a
lot of money, and I think we are going to see more investment
from ILECs and CLECs under the current regime.
Senator Breaux. Mr. Strumingher says that investment has
contributed to their stock being very low.
Mr. Glassman. Look, you know, I long ago gave up trying to
figure out the short-term movements of the stock market. I do
not think anyone can explain why a stock moves in the short
term the way it does. I do not think, if I can put in a plug
for my book or my basic philosophy of investing, I do not think
anybody should try, really. I think you should buy good
companies that have good leadership and stick with them for the
long term.
Senator Breaux. Mr. Strumingher.
Mr. Strumingher. If I could just have one more opportunity
to clarify what I am saying here. The argument here is not
whether investing for the long term is good or not. It is just
a recognition that short-term variations in the stock price can
have a meaningful impact on a company's willingness to make
certain investments. While SBC has in fact invested or
committed to making this investment, it conceivably could have
been a lot more, a lot faster.
We have not seen Bell South, we have not seen U.S. West, we
have not seen Bell Atlantic, et cetera, step up to the plate in
the same way. While there may be a myriad of reasons for this,
I would not be surprised if one was the issues that are being
raised here, today.
Senator Breaux. Ms. Ashdown, let me ask you a question.
Bell South has stated that they are paying about $500 million
or so to smaller telephone companies. This is more than they
receive from their usage fees versus the flat fees. Mr. Ellis
before I got here, talked in terms of it costing them $450 for
installing his daughter's Internet line and getting $15 back
from his daughter for the usage on the flat fee basis.
Is there not an inequity here that needs to be addressed? I
mean, those numbers are just astronomical.
Ms. Ashdown. Are you suggesting that Internet prices need
to be higher? I just want to make sure I understand the
question.
Senator Breaux. No, I am just suggesting that--the argument
I think that some would make is that what they are able to
receive as opposed to what they pay is vastly out of any kind
of realistic proportions. The FCC, I know I have asked them
along with Senator Lott to try and look at some ways to address
the reciprocal compensation issue.
Is there not a need to do that? I mean, it seems like they
make a very good case about the inequities that they have right
now.
Ms. Ashdown. Well, I notice, though, that they are not
asking to eliminate reciprocal compensation across the board.
They are just asking to eliminate it where it is bothering them
the most right now. They still want, I think--if they were
asking for zero across the board, that would probably hurt them
in terms of the competitive companies that are going to be
dealing with a smaller base of subscribers, where all of their
calls are going to be terminating on the network with the most
market share. There they stand to do very well on reciprocal
compensation.
So where it is not hurting them they do not want to get rid
of it, and where they have to pay they do want to get rid of
it. As far as how that affects the consumer, I think that it
definitely is a concern for the Internet service provider if it
means that we are burdened with the cost of terminating those
calls and we have to pass that along to our subscribers
because, as you know, the average price for Internet service in
this country is around $19, $20 a month. There is a reason for
that, and if I have to add $6 a month to my prices on average
that comes straight out of my bottom line.
I cannot compete with--and I think Bell South is a very
interesting example now that you mention it, because Bell
South, for instance, is offering $39.95 DSL access. With that
DSL access they are throwing in a free modem, they are throwing
in the phone line, they are throwing in the Internet access.
Then on the wholesale model that they are presenting to the
Internet service providers in Bell South territory, they are
selling the wholesale DSL loop to the Internet service
providers for $39 per month and telling the Internet service
providers: Go ahead and sell all the Internet access you want
at 95 cents a month.
I think that is a definite reason that Internet high speed
DSL access is being deployed more slowly than it could be.
Senator Breaux. So your recommendation is that we do not do
anything in this area, either the Brownback bill or----
Ms. Ashdown. Well, from what I have been able to observe
and in my dealings with CLECs and buying phone services from
them, what they have told me is that the reciprocal
compensation issue is contractually agreed to between them and
the phone companies, and of course the incumbent phone
companies, thinking that all the traffic was going to be ending
over there, insisted on a very high rate in the beginning, and
that rate has come down quite a lot since they realized what
was going to happen with the Internet traffic.
I do not think that there are very many CLECs that are
counting on that continuing to go away. But I do not see why it
should go away for them and not go away for the incumbents.
Senator Breaux. Thank you.
Thank you, Mr. Chairman.
Senator Brownback. I want to make clear, because there have
been some assertions of what the bill is aimed at. The effort
of the bill is not to advantage one company or another. The
effort of the bill is to get these services out to rural areas.
I have a problem. These services are not in rural areas. You
have great robust competition in New York City, Mr. Glassman. I
am glad you do. God bless you for it. I wish we had it in rural
parts of Kansas, and we do not have it.
The numbers again: 73 percent have these sort of services
in cities with populations over half million, less than 5
percent in cities 5 to 10,000. So that is the target. That is
what we are trying to aim at, is how do we get these services
there.
I think most of you heard the last panel, where the CLECs,
I asked them: When are you going to be there? When can we
expect you? Not certain, we do not know, maybe some changes in
technology, maybe some possibilities here.
The bill has a buildout requirement. To be able to get the
regulatory relief, you have got to build out 100 percent within
5 years to be able to get that. So that is my focus with this,
and it is a deregulatory effort.
I would hope that if you do not agree with this, that you
would come back and say, well, OK, but we could do it this way,
we could get the buildout that you want by going this route.
And Senator Moynihan's approach is one way to do that, which is
to say let us provide a tax credit or a subsidy in some way
through the tax code of doing that. I happen to think that
going the regulatory relief is the way to go.
But if you have a better way, I am all ears to be able to
hear that, because we are being left behind New York City in
this, and we take some umbrage about that occurring. We have
not in the past left rural areas behind. So this is the effort,
and if you have a different way to go to get this done--I do
not know if you have, Mr. Glassman or Ms. Ashdown, now a way
that we can go at that. I would appreciate the suggestion.
Ms. Ashdown. I actually do have a suggestion, Mr. Chairman.
Senator Brownback. Good.
Ms. Ashdown. That is that enforcement of the existing
regulations would be a big step in getting Internet access out
to the rural areas. My big concern with the bill is that
removing the obligation for incumbent carriers that, as you
know, have been selling a lot of rural switches off, but in the
areas where they still are in the rural areas and they own the
switches, if this bill passes they are under no obligation to
provide nondiscriminatory provision of the lines that Internet
service providers need to be able to get to the phone company
for access.
Senator Brownback. Ms. Ashdown, if that is the case why has
that not been a problem in urban areas, where you have 73
percent penetration, and it has been a problem in rural areas?
Ms. Ashdown. It actually is a problem in the urban areas.
Senator Brownback. Well then, why have you busted through
there and not in rural areas?
Ms. Ashdown. I would submit to you that the Internet
service providers are not busting through very well in the
urban areas at all.
Senator Brownback. 73 percent. I will be happy with that in
rural areas if you will give me that.
Ms. Ashdown. Right, I understand that. But I am not very
happy with 73 percent when the lion's share of that market has
gone to the incumbent by their violation of Federal
regulations. Letting them continue to violate Federal
regulations in order to get them to have the same kind of
monopoly market share in the rural areas is not, I think, what
you want to see. What you want to see is more competition in
the rural areas.
Senator Brownback. I want some service.
Ms. Ashdown. Yes, but are you saying that you want service
and you are happy to have a monopoly and you do not care
whether it is competitive service or not? Because that is what
this bill is going to do.
Senator Brownback. We want some service and we do not
presently have it.
Mr. Pitsch.
Mr. Pitsch. Thank you, Mr. Chairman. I want to emphasize
that ITI wants competition. We want multiple providers. We
think that is key. If we thought this bill would undermine the
possibility of multiple providers, we would not be supporting
it. We think that the bill prudently makes essential facilities
available.
But the goal should not be, to use Mr. Glassman's phrase,
to favor one sector of the industry over another. I think the
logic of the Telecommunications Act, 251[d][2], is this
necessary to competition, I think speaks on behalf of the
approach this legislation is taking.
I think, to answer your question before perhaps more
bluntly, different sectors of the various factions here arguing
have very concentrated economic interests. They happen to be
narrow. CLECs do not care how the ILECs do, ILECs do not care
how the CLECs do. In fact, probably it is inverse, and the same
for cable. I want to emphasize, we have been looking at this,
we have a very intense interest, and, to put it perhaps
uncharitably, we are arms merchants. We want all of them out
there, we want them succeeding, and we want them going at
loggerheads.
We believe the best way to do that is to rely on
competition and deregulation, but, very importantly, also make
those essential facilities available. As long as that is the
case, I think we will have robust competition.
Senator Brownback. Mr. Glassman.
Mr. Glassman. Mr. Chairman, I think sensible people want
exactly the same thing, Mr. Pitsch, and I just think there are
different ways to go about it. Now, I have a great deal of
respect for you, Mr. Chairman, in sticking up for your rural
constituents. But of course, as you know, there are Senators
who have large rural constituencies, like Senator Stevens of
Alaska, Senator Dorgan, who was just here, from North Dakota,
who differ with you and who agree with me that the best way to
get service to your constituents is through the competitive
process that was set in motion by the 1996 Telecommunications
Act.
But I think we should not be naive about this. The truth is
that rural areas are not going to be served as quickly as urban
areas and suburban areas. As you said, I live in New York City.
My block on Amsterdam Avenue, there is a Korean restaurant and
there is an Italian restaurant and there is a Spanish
restaurant, on and on and on. I am sure that is not true in
most rural areas. However----
Senator Brownback. That is not necessary for competition.
For us, what we want is to be able to have access to be
competitive. That is why we did rural telephony, that is why we
did rural electrification.
Mr. Glassman. But you are getting that and you are going to
get that through the competitive process. Do not forget that
the world's largest retailer is a company that started in
Bentonville, Arkansas, serving rural communities. There are
lots of businesses out there and we heard from the first panel
about numerous CLECs that want to serve these underserved
areas.
I really think that we have a process that is working and
to interfere with it at this point would be, I believe, a
mistake. It has been a mistake throughout the history of this
country, quite frankly, for government to intervene in markets
when there is no one who has more incentive to provide services
to someone who is going to pay for it than a business. We just
should not be getting in the way of those businesses, even if
we are extremely well intentioned in wanting to help them.
Senator Brownback. Walmart would not be there without rural
electrification years ago, nor without rural telephony.
Mr. Glassman. I would agree.
Senator Brownback. You can question whether that should
continue today.
Mr. Glassman. Right.
Senator Brownback. I think there is a legitimate question
about that. But my point is we have never tried to create a
Swiss cheese across the country on competitive abilities and
that is why you can get a Walmart in Arkansas, in rural
Arkansas. I do not want the same here, but I would appreciate
any thoughts that you would have, anybody, on this. If you see
ways that we should tighten the bill down, that we can still
deal with the rural competition and yet address the concerns
that you have, Ms. Ashdown, anybody else, I am very open to
doing that.
My objective is quite specific on this and if you see that
we are having negative impacts in other areas because of the
way it is drafted, let me hear of how we could tighten that
focus so that we still hit the target that we are aiming at
without addressing your concerns. I know there are a number of
different economic issues and interests that are here.
I do appreciate the panels traveling here, your time, your
interest, your intensity. The record will stay open for the
requisite number of days.
The hearing is adjourned.
[Whereupon, at 12:07 p.m., the Committee was adjourned.]