**Statement of**

**William E. Kennard, Chairman**

**Federal Communications Commission**

**Before the**

**Committee on the Judiciary**

**United States House of Representatives**

**on**

**H.R. 1686 -- the "Internet Freedom Act" and**

**H.R. 1685 -- the "Internet Growth and Development Act"**

**July 18, 2000**

Thank you Mr. Chairman and Members of the Committee. I appreciate the
opportunity to testify before the Committee this morning.

I would like to state at the outset that I agree wholeheartedly with the
objective of speeding deployment of broadband services to all Americans
regardless of where they live. Nobody should be left behind in the
broadband revolution.

Despite the old saying, however, sometimes you [do]{.underline} have to
look a gift horse in the mouth, particularly if it is a Trojan Horse. I
am afraid that is what this legislation is. It appears to be a gift
horse to competition, but it is really just the opposite.

The genius of the Telecommunications Act of 1996 (1996 Act) is the
delicate balance it strikes between regulation and deregulation to
achieve competition in all forms of communications, and to deploy the
fruits of that competition to all of the American people. Indeed, the
Judiciary Committee\'s special role in crafting a dual role for the FCC
and the Department of Justice in reviewing Bell company applications
under Section 271 deserves mention. The process has worked well, and
consumers are better off as a result.

I am sure that increased competition is the well-meant intention of the
proposed legislation. Inadvertently, however, I believe this legislation
will not only upset the balance struck by the 1996 Act, but it actually
would reverse the progress attained by the 1996 Act. In an effort to
move us forward, this bill mistakenly moves us backward.

**[The 1996 Act Is A Model For the World]{.underline}**

Last week 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.

In fact, government officials from emerging and established nations
frequently visit the Commission to study the American
network-of-networks that the 1996 Act has created, and how multiple,
privately-owned service providers give consumers choices. Increasingly,
they endorse the idea of an independent regulatory agency with the power
to bust up monopolies, as opposed to relying solely on antitrust
litigation to deregulate monopolies. For example, New Zealand is
revisiting its efforts to deregulate through antitrust enforcement and
considering instead tools similar to those set forth by Congress in the
1996 Act.

We are setting the example for the rest of the world. Changing course
midstream by diminishing the BOCs\' incentives to open the local markets
would not only be detrimental to American consumers, but would also put
at risk the leadership role the United States has played in the global
telecommunications market.

**[A Fabric]{.underline}**

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.

That is my concern with the legislation before you.

Pull the thread of data traffic, and the seams of the Section 271
provisions are weakened. Pull the thread of data traffic, and the
threads of telephony, video transport, and wireless transmissions will
fray. As I tell regulators from other nations, you cannot cherry-pick
the 1996 Act. In this age of convergence, no network is an island, and
the conduit and content of each is entwined with every other.

Under our system, the 1996 Act had to be carried out in three stages:
rules had to be written, the rules were tested in court, and now the
rules are being implemented. Now that implementation is fully underway
it would be tragic to change directions.

This is not an insignificant exemption. In fact, as I discuss below,
data traffic has already surpassed voice traffic on long haul networks.
Eliminating data from Section 271 would eliminate a crucial incentive
for the incumbent BOCs to open their local monopoly markets. The opening
of local markets is absolutely critical for accelerating broadband
deployment.

My message to you today is simple: the Telecommunications Act of 1996 is
working. Because of years of litigation, competition did not take hold
as quickly as some had hoped. The fact, however, that it is now working
is undeniable. Local markets are being opened, broadband services are
being deployed, and competition, including broadband competition, is
taking root.

The Commission has a long history of fostering innovation and investment
in new technologies, such as the Internet. Specifically, we have
consistently refused to impose legacy telecommunication regulations on
providers entering new markets. For example, in 1983 the Commission
declined to subject information service providers to access charges,
concluding that such regulation is unnecessary and would be harmful to
the development of the industry. More recently, in order not to stand in
the way of successful advanced services deployment, we declined to
require incumbent LECs to unbundle packet switched and other advanced
services equipment. The Commission found that in a dynamic and evolving
market, regulatory restraint was the best way to further the Act's goal
of encouraging facilities based investment and innovation. Similarly, as
I discuss later, we have thus far refused to impose legacy
telecommunications regulation on cable broadband service providers.

**[Rapid Growth of Broadband Deployment]{.underline}**

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 broadband, high-speed
telecommunications lines that deliver service of speeds of at least 200
kbps. Two million of those lines were serving residential subscribers.
This is a six-fold increase from the previous year.

The DSL business is growing so fast that the BOCs are struggling to keep
up with demand. The Wall Street Journal reported last week 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 will have 20 million subscribers. Incumbent LECs and cable
operators are predicted to invest over 25 billion dollars in
infrastructure improvements over the next four years to bring broadband
services to their customers.

The market-opening 1996 Act sparked infrastructure investment in
telecommunications facilities by incumbent LECs as well as competing
carriers. For example:

-   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 prevented
by legal requirements from deploying new services to consumers.

The vision of the Act and the vision shared by the FCC \-- that
consumers will have a choice of providers offering a choice of pipes
into the home or workplace \-- is being realized. It is being realized
through the opening of markets required by Congress in the 1996 Act. The
rapid growth of broadband services is tangible proof that the
market-opening requirements of the Act are working.

**[The Section 271 Incentives to Open Local Markets]{.underline}**

Simply stated, the Act requires the BOCs to open their local markets to
competitors. Section 251 states the rules of the game and Section 271
provides a structured incentive for BOCs to play by the rules. At its
core, Section 271 is a simple yet clever proposition: in exchange for
opening their local facilities to competitors, the 1996 Act provides the
BOCs with the substantial reward of the long distance "carrot." Altering
this balance by exempting data traffic from the restrictions in Section
271 would inhibit, rather than further, the Act's goal of fostering
robust broadband deployment.

As local markets are opened, broadband deployment is both stimulated and
accelerated. Specifically, it is the opening of those local markets that
is driving broadband deployment and innovation. This is true because
nondiscriminatory access to the "last mile" and the ability to collocate
\-- both components of the competitive checklist \-- are critical inputs
for the provision of DSL service.

Unfortunately, the first three years of the implementation of the 1996
Act were characterized not by cooperation but by confrontation.
Litigation instead of collaboration. The result was uncertainty,
confusion, and delay. We lost valuable time. Then, in January of 1999,
the Supreme Court largely affirmed the Commission's implementation of
the market-opening provisions of the Act. Once the smoke cleared, we
began to witness a sea change. Finally, the battles began to move out of
the courtroom and into the marketplace.

Within approximately the last six months, the Commission has unanimously
approved Section 271 applications for both New York and Texas. We need
only review the state of competition in New York and Texas to know the
Act is working. More activity is on the horizon. The BOCs have indicated
that they intend to file applications for numerous states across the
nation within the next six to nine months. The Commission welcomes, and
looks forward to, these filings.

As I have stated before, opening markets can be difficult work, and
establishing competition is not easy or fast. But both Verizon (formerly
Bell Atlantic) and Southwestern Bell have shown that it is well within
the grasp and control of the BOCs. I commend both of these companies,
and the New York and Texas Commissions, for their dedication and hard
work in ensuring that the fruits of competition are enjoyed by local and
long distance consumers in Texas and New York.

As envisioned by the 1996 Act, the Section 271 carrot has fueled the
growth of local and long distance competition. Because Verizon and
Southwestern Bell opened their local facilities to competitors in New
York and Texas as required by the Act, competition in the local
telephone market has flourished in those states. One analyst estimates
that competitors will serve about 20 percent of the local lines
(approximately 3 million lines) in New York by the end of this year.
That is a substantial increase from the 7 percent of the local lines
that competitors served in New York at the end of 1999 (approximately 1
million lines). Verizon is completing over 270,000 local orders each
month for competitors in New York. Local competition is thriving in
Texas as well. The Department of Justice estimated that competitors
served over 800,000 lines in Texas at the end of last year. That is
about an 8 percent market share. Competitors' customer base, however,
has been steadily increasing. For example, in May \-- the most recent
month for which we have data \-- competitors added over 170,000 new
lines in Texas. And, I am happy to report, a large portion of the
increase in local competition in these states since Section 271
authorization has been in the residential and small business markets.

The hard work of satisfying Section 271 has not only benefited New York
and Texas consumers of [local]{.underline} services. In the first three
months after gaining 271 approval, Verizon captured over 400,000 [long
distance]{.underline} customers in New York. Analysts estimate that
Verizon will take as many as 1.5 million long distance lines in its
first year alone (about 10% of the market) \-- well ahead of the 1
million lines Verizon set as its goal for the year. Verizon expects to
capture 25 to 30 percent of the long distance market within 5 years.
Analysts predict that they will meet this goal easily. Many predict that
Southwestern Bell will have similar success in Texas. This is no small
prize. Texas alone represents about 10 percent of the nation's long
distance voice and data market.

The opening of local markets drives competition, innovation, and
produces a breadth of offerings. We have witnessed a dynamic market for
broadband services develop as a result of the opening of local markets
in Texas and New York. Although DSL technology has been available for
years, it was not until the passage of the Act that competitive
providers \-- called data LECs or DLECs \-- specializing in DSL
deployment were born and began offering DSL service to consumers.
Competitors need to collocate their equipment in BOC central offices and
require conditioned local loops before they can even offer
facilities-based DSL services. Then, to be competitive, DLECs require
timely and cost-based loops and collocation. Once the DLECs had access
to the inputs necessary to offer their DSL products to consumers, the
threat of such competition spurred the BOCs to develop their own DSL
products. Competition from the incumbent monopolies, in turn, is
spurring the DLECs to develop even more new and innovative broadband
products, services, packages, and prices. It is precisely this sort of
competitive cycle that will accelerate the availability of broadband
technology for all Americans.

Of course, competition among technologies as well as providers is also
driving this investment. Wireless technologies \-- both terrestrial and
satellite \-- are also on the scene. High-speed Internet service via
satellite is available today virtually everywhere in the United States,
including rural areas. Analysts project that wireless technologies will
have 6 to 12 percent of the broadband market by 2004. Analysts also
project that DSL will overtake cable as the overall leading technology
for delivery of broadband services as early as 2002, with cable
retaining its dominance amongst residential and small business customers
until 2004, when cable and DSL will have equal market shares.

I am proud of the FCC's record in holding firm on the requirements of
Section 271. As our experiences with New York and Texas have shown,
there is no substitute for the hard work of compliance. The rewards of
Section 271 compliance are plentiful. For the first time in history
consumers are able to choose their local service provider and take
advantage of increased competition for their long distance calls as a
strong new competitor enters the market. The rewards do not end there.
Competitive markets are also bringing consumers new choices in
technology for the 21^st^ Century.

**[Removing Incentives By Exempting Data]{.underline}**

The great competitive success stories we have been witnessing as a
result of the incentive structure established by Section 271 would be
few and far between if the proposed legislation becomes law. As
currently written, Sections 251 and 271 do not draw a regulatory
distinction between voice and data services. Carving out interLATA data
traffic from the prohibitions in Section 271 would remove a potent
incentive from the 1996 Act.

Currently, the majority of traffic travelling over long haul networks is
data \-- as opposed to voice traffic. Indeed, analysts expect that data
traffic will comprise approximately 90 percent of all traffic within
four years. The wholesale data service market is expected to generate
41.3 billion dollars in 2005, up from 9.9 billion in 1999. In a world
where data is experiencing explosive growth and is rapidly outpacing
voice traffic, allowing the BOCs to carry long distance data traffic
before they have satisfied the requirements of Section 271 would
severely undermine the BOCs' incentive to open their markets.

Changing the rules of the game at this juncture would also undercut the
substantial infrastructure investment being made by competitive
telecommunications providers. For example, competing carriers have
invested 30 billion dollars in new networks since the passage of the Act
and are now investing over 1 billion dollars every month in their
networks. In 1999, competing carriers have spent over 15 billion dollars
on overall capital expenditures, up from about 9 billion the year
before. Investors will cut off the spigot when competitors are forced to
try to compete with monopoly incumbent providers without full and fair
access to the BOC's bottleneck facilities.

I disagree with the notion that further deregulation is the only way to
enable incumbent LEC deployment of broadband services in rural and high
cost areas. The BOCs simply do not need to provide access the entire way
from the customer to the Internet backbone in order to provide broadband
access to their rural customers. Rather, they can provide such broadband
services to those customers the same way they serve their urban and
suburban customers \-- by handing data traffic that is headed out of the
LATA off to another provider who can carry it across the LATA boundary.
That provider then carries the traffic to the Internet backbone.

Is this the most efficient way to provide service to customers? No. Is
it the most cost effective? Certainly not. Does it preserve the
incentives of the BOCs to open their local monopoly markets to
competitors faster than they otherwise might? Absolutely.

The simple reason why rural customers, and other customers in unserved
and underserved areas, are not yet being served as robustly as we would
like is not caused by legal impediments. Rather it is largely about
simple economics. Providing customers with sophisticated services in
areas of low density is an expensive undertaking. As such, we are
mindful that some rural customers face more limited competitive choices
for broadband services at this time. Accordingly, to the extent that
there may be instances where a LATA boundary is standing in the way of
consumers getting broadband services from BOCs, the Commission has set
up a LATA boundary modification process. For example:

-   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

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-   A BOC may also demonstrate that it would not be able to deploy xDSL
    service to a LATA within a multi-LATA state unless the BOC is
    allowed to aggregate traffic from one LATA to another, or may be the
    advanced services provider of last resort for residential customers
    within a particular state. The BOC may then argue that it is
    uneconomical to deploy advanced services to such customers without a
    LATA boundary modification.

Notably, we have not received any requests for LATA modification since
adopting this procedure in February 2000, and have received no requests
to refile prior petitions. It is difficult to understand how LATA
boundaries are a barrier to broadband deployment when no BOCs have even
attempted to obtain such relief in the past five months. The Commission
has stated its commitment to reviewing, in an expeditious manner, all
LATA boundary modification requests that would provide consumers with
advanced services.

**[Cable Access]{.underline}**

Another important issue that the proposed legislation addresses, Mr.
Chairman, is the question of whether consumers can choose from among
multiple Internet service providers (ISPs) independently of how they
connect to their ISP. The issue is most often raised in the context of
whether cable operators offering broadband access to the Internet. This
is often referred to as the "open access" issue, though some call it
"forced access." I'll just refer to it as the "cable access" issue.

First, I agree that much of the growth of the Internet can be attributed
to the significant choices available to Internet users and the
interconnected network of networks that characterize the Internet.
Anyone can send an e-mail to anyone else on the Internet. Anyone using
an ISP that is connected to the Web can access websites anywhere in the
world. This ability is a core characteristic of the Internet and it
should continue.

The issue raised by advocates of cable access is whether regulation is
needed to ensure this kind of global interconnectedness by providing
consumers choices of ISPs if they connect to the Internet via their
cable system just as those who connect to the Internet over their
dial-up telephone lines.

Advocates of mandatory cable access want regulators to set rules
ensuring competitive access.

I believe that before we impose regulation we should see if a problem
develops rather than assume the worst and jump in and regulate.

The Commission has been consistent in its approach to cable access. It
examined the issue nearly two years ago in the AT&T/TCI merger
proceeding and in the first 706 Report to Congress. In both instances we
declined to create a new regulatory regime to address what was only a
theoretical problem. The Commission again declined to impose cable
access rules in the AT&T/Media One merger earlier this year.

We have adopted this market-friendly approach because we believe that
imposing access regulation would impose costs on any new entrants into
the broadband conduit business, thereby raising a barrier to entry to
potential competitors in this market. The Commission would like to
encourage such entry, not throttle it; if the market puts pressure on
incumbent cable firms to open up their networks to multiple ISPs,
imposing duplicative regulatory costs is simply counterproductive to
encouraging conduit competition.

Recent events have been encouraging in this regard. Over the last year,
cable operators have made public commitments to allow their subscribers
to choose among multiple ISPs. They also have entered into formal
memoranda of understanding with ISPs to permit such competitive access.
And, AT&T has announced a technical trial in Colorado in which they will
provide access to ten ISPs on over its cable network.

These developments support my continued belief that there are powerful
marketplace incentives to move the cable platform to an open platform
permitting access to multiple ISPs. But it also is time to see how these
market driven agreements are translated into concrete commercial
arrangements.

Last month the U.S. Court of Appeals for the Ninth Circuit in the [AT&T
Corp. et al v. City of Portland]{.underline} case confirmed the FCC' s
role in establishing a national policy for cable access as well as
clearly recognizing the Commission's authority to forbear from
regulation in this area. In addition, the court found that the provision
of Internet access over cable was both a telecommunications service and
an information service. The categorization of "telecommunications"
service does not, however, necessarily mean that the service is subject
to all of the traditional common carrier regulations that apply to
telephone companies. Indeed, the Commission has the statutory authority
to forbear from such regulation.

I plan to propose to my fellow commissioners that we initiate a
proceeding that will examine the implications of the
[Portland]{.underline} decision and establish a framework for cable
Internet access. While the current indications are positive, the
Commission is of the view that in this fast-changing industry, we must
constantly reassess our position on this issue, and be prepared to move
quickly should industry conditions change for the worse.

Similarly, the policy of relying on market forces in the first instance
to create a competitive dynamic in the deployment of advances services
is working in the wireless and satellite industries in which new
competitive entrants are investing in facilities for high speed Internet
access with a minimum of regulation.

This preference for a market-driven approach to cable access is often
noted by incumbent local exchange carriers to be in contrast to what
they see as requiring access by competitors to their broadband services.

The reality is that we've taken a consistent approach to new broadband
advanced services across platforms. In the Commission's Advanced
Services Order, the Commission declined to require incumbent local
exchange carriers to unbundle their advanced DSL equipment such as
DSLAMs as long as competing carriers are able to provide their own
advanced service.

The 1996 Act is clear that because of their historic monopoly status,
incumbent LECs during the transition to competition must permit
competitors to lease local loops in order to connect their own
equipment. But, once this is possible, the Commission has chosen to
encourage incumbent LEC investment in new advanced technologies and
services by not requiring that they make those new investments to
competitors on an unbundled or discounted basis.

This policy has been enormously successful. According to industry
analyst Telechoice, in the six months ending in March, incumbent LECs
more than tripled the number of central offices with DSLAMs from about
1,200 to more than 3,800 while increasing deployed DSL lines from
220,000 to 563,000 customers. The growth of broadband services is
explosive.

## Conclusion

In conclusion, the 1996 Act is working. The explosive growth in the
deployment of broadband services and the vigorous local competition in
New York and Texas prove that the Act is working. Passage of the
proposed legislation at this critical juncture would disrupt the Act\'s
delicate balance between regulation and deregulation, postpone the
benefits of competition to consumers by creating uncertainty and
litigation, curtail the flow of investment into new markets, and inhibit
the Act\'s goal of fostering broadband deployment. For all of these
reasons, I urge you let the Act continue to work.