UNDERSEA CABLE PUBLIC FORUM )

Pages: 1 through 93

Place: Washington, D.C.

Date: November 8, 1999

Before the

FEDERAL COMMUNICATIONS COMMISSION

Washington, D.C. 20554

UNDERSEA CABLE PUBLIC FORUM )

)

Commission Meeting Room

The Portals

445 12th Street, S.W.

Washington, D.C. 20554

Monday,

November 8, 1999

The parties met, pursuant to the notice of the

Commission, at 3:05 p.m.

BEFORE: REBECCA ARBOGAST

Chairperson

APPEARANCES:

REBECCA ARBOGAST

PAT DEGRABA

JACKIE RUFF

DONALD ABELSON

BRECK BLALOCK

ELIZABETH NIGHTINGALE

KENT NAKAMURA

JIM TALBOT

GORDON MAXSON

JUAN CARLOS VALLS

PETER COWHEY

JOHN MULETA

MINDY GINSBURG

KERRY MURRAY

TOM MC INERNEY

[P R O C E E D I N G S]{.underline}

3:05 p.m.

MS. ARBOGAST: We\'re going to get started, because we\'ve got a lot to
cover today and I think Don Abelson is on his way down and had a few
opening remarks. Do we know how quickly?

I think we\'ll start and let him come in and add his thoughts once we
get going. Why don\'t we start by identifying the people who are at the
table from the FCC and then I\'ll make some preliminary remarks about
how we\'re going to proceed today.

Rebecca Arbogast, Chief of the Telecommunications Division at the
International Bureau at the FCC.

MS. RUFF: I\'m Jackie Ruff. I\'m Senior Legal Advisor in the
Telecommunications Division.

MR. DEGRABA: Patrick Degraba, Deputy Chief of Commerce with the FCC.

MR. BLALOCK: Breck Blalock, Chief of the Policy and Facilities Branch.

MS. NIGHTINGALE: Liz Nightingale, attorney in the Telecom Division.
There are FCC people who are back here.

MR. NAKAZALA: Benji Nakazala, legal advisor with the Wireless
Communications Division.

MR. URETSKY: Marc Uretsky, International Bureau.

MS. KIMENICHI: Helen Kimenichi, International Bureau, Telecom Division.

MR. WEBBING: Doug Webbing, chief economist in the International Bureau.

MS. SIMON: Marilyn Simon, International Bureau.

MS. ARBOGAST: We also have with us today Ken Shagren and Cathy Wasluski
from the Commerce Department, from MTIA. I don\'t think anybody is here
\-- I don\'t recognize anybody here from the State Department or from
DOJ \-- oh, okay, great. USGS said they were going to follow this in the
press.

(Laughter.)

MS. ARBOGAST: So I think that\'s the government. Obviously, there are
too many people here to go through and identify yourselves individually,
but what I would ask is that before people speak, they identify
themselves and who they\'re representing.

We are here today as another piece of the process that we\'ve been going
through, largely following the JUS application that I think a lot of you
know about that was filed with us this last year and that we issued the
order on this summer.

We had been, even before that, thinking about ways that we might try to
reform, regularize and improve our regulation of undersea cables. And
the JUS proceeding added another overlay of competitive issues that had
been filed in that proceeding. And the Commission \-- here is Mr.
Abelson \-- the Commission, in that proceeding, announced that it was
going to look at those issues more closely in a further proceeding. This
is part of our preparation to get the information we need to make
recommendations to the Commission for that further proceeding.

You should feel free to \--

MR. ABELSON: Go ahead.

MS. ARBOGAST: Submarine cables, I think, for a long time have been a
fairly neglected area of regulation, in part because historically it was
pretty standard. And what\'s happened, I think, in very recent times is
the regulation has become more standard, creating more questions for us
about how we should do things on a going forward basis.

And the market itself has become much more critical, because it is, the
demand has been skyrocketing, because that is a primary piece of the
international Internet backbone. And so it\'s become increasingly
important because the Internet has become more important.

The Commission\'s policies, of course, are to try to promote competition
in telecommunications and that is the overriding policy that guides us
in making recommendations to the Commission, and that obviously guides
the Commission in making its decisions.

The purpose of today\'s forum is to give the wider public an opportunity
to give us their views on a variety of issues that are raised by our
regulation of undersea cables. What I would like to do is give a couple
of cautions before we start on what we hope to get out of this and what
we hope not to get out of this.

What we really want is for folks to feel free to use this as an
opportunity to say new ideas. It\'s not going to be useful for us for
you all to recite to us how you interpret our precedent, because we\'re
not viewing this as something that requires us, unless our precedent was
right, requires us to follow our precedent. The point of this proceeding
is to try to decide how we should do things going forward. And so please
be forward-looking in your comments to us.

I also have to say these magic words. The purpose of this meeting is not
to come to any conclusions or reach any consensus. What I also am hoping
we don\'t do today, and it\'s not the purpose of the meeting, and I\'ll
try to move us along if anybody tries to raise it, is discuss any
proceedings that are currently before the Commission. This is not the
purpose to rehash anything that\'s on recon. That would subject this
proceeding to our ex-parte rules, and that\'s neither the purpose of
this proceeding nor do we want to make the subject ex-parte rules. So
please keep your comments restricted to things that would not require us
to file ex-parte. If you do violate that, be sure you file an ex-parte
with us.

(Laughter.)

MS. ARBOGAST: We changed the format a little bit from how we put out the
public notice, initially we had invited people to come in and make
prepared statements. After we thought about it, we realized that we
don\'t think you all and we don\'t think we would find that as useful as
if we just framed some questions and gave you all the opportunity to
comment.

So for those of you who had given us presentations, don\'t feel like
your client\'s money was wasted in paying you to do that. We are going
to use those in our deliberations and we\'re going to pay very close
attention to them. If people want to get them from each other, you\'re
free to ask each other, but they\'re not going to be made publicly
available to us at this point.

Also, as you see from the public notice, we are hoping to discuss a wide
variety of issues today. Some of them don\'t have anything to do with
competition square, in the sense that they aren\'t competitive issues
that were raised, for example, the JUS proceeding within consortia
ownership or any of those other issues.

What we would encourage people to do, we have an allotted period of time
to discuss some of those issues. We have been meeting informally with a
variety of companies on an individual basis and we found those meetings,
as I say, very helpful. We found some of them very helpful. We would
encourage you all to continue to meet informally with us, because
that\'s an opportunity for the staff to get in more in-depth discussion
on some of these competition issues and other issues, more in-depth than
we can do today.

So we will still have a period of time, probably over the next three
weeks, I would say, that we would encourage people, if they have things
that they would like to follow up on, or some thoughts that would take
more than 15 minutes, to set up meetings with us.

Another change from on our format from the one that we had issued, the
public notices, we\'re not going to videotape this, we\'re going to do a
transcript. So just be advised that anything you say today will appear
on the transcript. The purpose was to try to make this open to people
who are outside the Beltway, so that people can get a record of what
happened today and it\'s a good resource for us.

The question process will have an agenda that I think you all should
have gotten when you came in, is that right? Nod yes, no? Okay. We\'re
going to follow that and we have an allotted amount of time for each of
the general areas.

Liz Nightingale is going to be the sergeant at arms and keep us moving.
And what I\'d like to ask people to do is, I\'d really like to encourage
the people who are not up at the table who have something to say not to
feel chilled because you\'re sitting back there, but to step up and say
something. Obviously, again, identify yourself and who you are
representing.

One final preliminary request is, when I had learned of the process of
going through this issue, I think sometimes the conversations that
we\'re having with the public and with each other get confused because
the term \"private\" cable has come to, I think, have two different
meanings. One is as opposed to, one is a regulatory meaning, so it\'s as
opposed to the common carriers\' regulatory categorization. The other is
an ownership term, so it\'s opposed to consortia ownership.

When we have conversations and people use private, it sometimes muddies
the analytic waters, because the regulatory characterization and the
ownership need not, and obviously have become not, identical. So instead
of using private, could you use non-common carrier or non-consortia, so
that we know whether you\'re talking about ownership or whether you\'re
talking about regulatory status?

MR. ABELSON: The only two cents I add is to reassert the importance that
the International Bureau places on this activity, this investigation,
this look-see about submarine cable policy and a commitment to keep
going if it turns out that we believe it would be something \-- after
this conversation and our private conversations \-- something that would
be of value. We should know within a short period of time what we will
be doing next, and look forward to the conversation today.

MS. ARBOGAST: All right, why don\'t we start? We have, we might need to
abbreviate these a bit. We\'re supposed to, I think, be concluded by
five o\'clock. Let\'s start with the first topic, which is streamlining
and simplifying the Commission\'s cable landing license application and
review process.

What we were hoping to do was give you all an opportunity to tell us how
we can do things better from, primarily, a process standpoint. Are there
questions that we\'re asking in our application process that nobody even
remembers why we\'re asking them anymore or they don\'t need to be asked
anymore? Are there ways that we can speed up our review of the
applications? Is there any way that we can make life easier for you, as
applicants, and so I throw that open to commentors.

Great.

MR. ABELSON: We did everything perfect.

MR. NAKAMURA: I\'m Kent Nakamura from Sprint. Having filed a couple of
these cable applications on behalf of some joint clients recently, I was
wondering if the Bureau would entertain the thought of an auto-grant for
some of these if they\'re complete, you know, they\'re on a post and
they don\'t raise any unusual issues in the same way that we do the
auto-grant for a lot of these 214s?

MS. ARBOGAST: What do you mean when you say auto-grant?

MR. NAKAMURA: They go on public notice and if no one opposes it within a
certain amount of time or if there are no problems that the staff
identifies independently, that the license would be considered granted
after the passage of 30 days or 45 days or whatever the Bureau feels is
appropriate.

MS. ARBOGAST: My understanding is that, you know, this, I imagine, was
something that was considered and rejected in the past, if for no other
reason than the fact that we\'re not operating under our regular organic
statute here, but under the Cable Act. And I think that before we would
seriously entertain that, we would need to consult with the State
Department. Because right now, I\'m delegated authority that
contemplates that there needs to be approval granted by the State
Department.

MR. MULETA: Now that you mention the State Department \--

MS. ARBOGAST: Could you identify yourself?

MR. MULETA: Oh, I thought everybody knew. Just kidding, John Muleta from
PSINet. Now that you mention the State Department, I think working with
the State Department to establish some sort of procedural, some time
lines as to when the responses would come out, would be a helpful thing.
Just a thought that, now that you brought it out.

MS. ARBOGAST: Nothing else? All right. The next \-- I am, I guess,
taking away from this that people don\'t have huge problems with this,
with the time that we\'re taking on these and how we\'re asking you to
provide us information and the sorts of information we\'re asking you to
provide. And so if people later have thoughts that they would like to
give us outside this forum, you know, you\'re of course welcome to do
so.

MR. MULETA: Rebecca, I think if I can just, I mean, you know, we\'re
afraid to misstate the obvious, but I think some of us here would
probably feel that time is of the essence when you\'re dealing with
these projects and the faster you can make a decision, regardless of
whatever the filing burdens are, the happier we are, since most of us
are committing a significant amount of capital. So to be held up for a
few months is significant, from our perspective, especially when most
other \-- especially when you do an apples to apple comparison over
other cable systems that have been granted and you don\'t see any sort
of obvious faults.

So that\'s something to keep in mind, but it sounds so obvious that I
think some of us just don\'t want to repeat it.

MS. ARBOGAST: Thanks.

MS. GINSBURG: This is Mindy Ginsburg with Via-Tel. I would echo what
John said and also endorse the Sprint proposal. I think whenever
possible putting these applications on streamline would be very helpful
and would improve the predictability of when they\'d be granted.

Maybe one area to think about for streamlining could be as with ISR,
where the Commission has found a route to be highly competitive or
competitive, automatically put the relevant application on streamlining.

Just one smaller issue on these applications. I think there may still be
a requirement that companies disclose interlocking directorates and
that, for large, for cables with a lot of companies on them, that can be
a fairly lengthy undertaking. So maybe you can form that rule to the, I
think the Common Carrier Bureau\'s new interlocking directorate rule,
which just requires whether it\'s foreign, a foreign affiliate or a
foreign, interlocking directorate, rather. That may be something worth
thinking about.

MS. ARBOGAST: Okay, thanks. Let\'s move on to the next category of
issues, which is the common carrier versus non-common carrier
distinction. Obviously, that\'s one that has become fuzzy over time and
as we\'ve been meeting informally with some of you, we\'ve heard
different views. Some people say that we\'ve essentially eroded the
distinction. Others \-- and think that the distinction could be
completely abolished. Others find that a distinction that has, still has
a place in a regulatory scheme primarily, or at least in one area where
there is a lack of competition of facilities, competition on a route,
there\'s a suggestion that we should maintain it there. And so I throw
the question out broadly. In particular, I\'d be interested in hearing,
I guess, answers or responses to two issues.

One is, should there be a distinction and second, what should follow
from that distinction?

MR. TALBOT: Jim Talbot from AT&T. We think that the Commission \--

MS. ARBOGAST: Can you speak up a little?

MR. TALBOT: We think the Commission\'s existing distinctions do have
merit. Otherwise, you could end up with a situation where the only cable
on a route potentially could be a private cable. Currently, the
Commission looks at whether or not the cable is going to be a bottleneck
facility. If it is, it\'s automatically subject to common carrier
regulation. If it\'s not, and there\'s an application for a private
cable, provided you\'re not going to hold out to everybody
indifferently, then you can become a private cable. We see no reason to
move away from that threshold task.

MR. COWHEY: Peter Cowhey, representing Global Crossing. I guess I would
just make a couple of observations here. The first is, it\'s not clear
that the common carrier rules, at least as they\'re used by the
International Bureau, have a range of remedies that are often valuable
as safeguards, particularly in this context.

They may, but it\'s not clear that they really speak to the issues that
have emerged in the various proceedings about cable licenses, such as
chronic capacity problems and market power issues.

But the second point, I really think, is that the one issue about the
common carrier rule that the Commission\'s noted in the past is the
Section 202 prohibition on unreasonable discrimination. And certainly
from the viewpoint of Global Crossing, a number of Global Crossing\'s
customers find that to be an important issue. So whatever is done
generically about this, I think the 202 measure is an interesting one.
It has something that seems to be of greater pertinence than many of the
other common carrier safeguards. And that\'s not a judgment about how to
use it or, you know, in the end, how you would balance it. But I just
note that it seems to me to stand out among the remedies suggested by
the common carrier.

MR. NAKAMURA: Kent Nakamura from Sprint. Just looking at the Submarine
Cable Landing Act, it doesn\'t distinguish between common carriers and
private carriers and probably one of the reasons for that is historic.
It goes back to even at least the U.S. and I think the only people who
don\'t do things and who applied for these things were the common
carriers. There were no entrepreneurs or anything like that.

It was not until, oh, I think it was the mid-1980s when the first
private, private cable, the PTAP, went in. And at that point, I think
the link between the landing license and the 214, which, you know, that
all has gone together, was broken. You didn\'t get anymore private
cables for a number of years after that. But I think, you know, you\'re
starting to see more and more of them now, so that, you know, the two
halves begin to diverge. And now they can stand independently, one from
the other.

MS. ARBOGAST: And does that seem right? Is that diversion, do you think,
a healthy one?

MR. NAKAMURA: It seems to me that as long as you can regulate the people
who are putting the service over the facility or if you can turn the
facility itself into a common carrier, which, being the old \-- versus
FCC court case, they can do, strike the significant danger.

MS. ARBOGAST: John?

MR. MULETA: I\'ll wait until you ask the question again.

MS. ARBOGAST: No, go ahead.

MR. MULETA: Okay, our view is to look at the marketplace first and then
decide what rules would apply, especially in these circumstances. You
know, that\'s what we think.

In, you know, in areas where there\'s stiff competition, there\'s no
real need to place common carrier regulations on the carriers. But the
competition, or let the players decide what regulatory environment they
want to play in. And I think, though, in thin routes, where there is
lack of facilities development for whatever reason, and you know, our
desire would be to make sure that we don\'t create, you know, captive
players, because of the enormous amount of capital that\'s required to
develop these things. And what essentially happens is, somebody is able
to capture a monopoly for a duration. It could only be for a few years,
but it could also be for a lengthy time period. And in those instances,
I think some sort of intervention to make sure that the facilities are
available on a non-discriminatory basis would be a good approach.

What we would like for the Commission to do is decide these on a
case-by-case basis. There is no, you know, general rule that you can
sort of throw out there and capture all of the instances of how the
marketplace develops.

MS. ARBOGAST: Of course, what we\'ve typically looked at is the test of
whether or not there is alternative capacity on a route and that seems,
did that seem like the right test, to you?

MR. MULETA: I think it is. I think you, in my, again, I think you have
to look at perspective. You know, you have to look at the individual
circumstances of what\'s taking place on a particular route. You know,
the fact that there is some amount of capacity, alternative capacity
available, might not be a significant factor if that capacity can be
outpaced, you know, 100-fold by the new capacity that\'s coming in, you
know.

So those are the kinds of comparisons that you have to look at. Again,
what we don\'t want is for the marketplace to be, you know, to be
constrained artificially just because of, you know, the fact that there
is a thin route, you know. It\'s a vicious circle that we see in our
business. You know, if you have a route and then lots of traffic will go
to it and you know, you want to make that affordable for American
companies and I think that\'s the intent here of the Commission\'s
regulations is to grow and the business of American companies and these
particular route and how we can facilitate that. Giving somebody an
absolute monopoly for a couple of years doesn\'t make any sense to me,
but, you know, I\'m also a former Commissioner person, so my thinking
might be skewed in that way.

MR. VALLS: I think I\'d like to add to that. My name is Juan Carlos
Valls from Facilicom. And what I\'d like to say is that on thin routes
you do have alternative technologies, such as satellite services that
can assure that you can have access to thin routes at reasonable prices.
So that I think that my company\'s position would be that as little
regulation as possible would be what we would look at, and to encourage
competition in general. So we don\'t only have a cable issue, but we do
have alternative technologies we can deal with.

MS. ARBOGAST: Okay.

MS. MURRAY: Karen Murray with MCI World Com. On a side point here, if
you do decide to maintain that distinction, we would recommend that you
get rid of the 214, the requirement that for common carrier facilities
you need to file a 214 for that facility. We think it\'s unnecessary and
carriers that are common carriers should be getting 214s separately.
There\'s no need for an additional 214 for that particular facility.

I know in the past the Commission has looked at this and decided that to
maintain that requirement because there\'s a fee differential between
non-common carrier facilities and common carrier facilities. And the 214
actually makes the fees more equal. But we\'d recommend that the
Commission look at changing that fee structure in order to get rid of
the 214 requirement.

MS. ARBOGAST: And you probably remember that at the last order we talked
about making a proposal for a legislative amendment, which is what it
would take.

MS. MURRAY: Right, and is the Bureau planning to do that, to make a
proposal?

MS. ARBOGAST: I knew someone was going to ask me that question. We need
to check with the legislative folks and find out if that\'s been done.

MS. MURRAY: Okay.

MR. MULETA: Just if I could add, Facilicom\'s point is noted and I think
what we seek is a full comparison of the technologies. On certain
routes, the availability of alternative technologies might not be
sufficient, so it has to be a full inquiry into whether the available
capacity on different technologies is equal and for what purposes
that\'s being used. You know, if you use it for voice, it was one thing.
If you use it for data, it\'s another.

MS. ARBOGAST: And presumably, that\'s the sort of inquiry I\'m assuming
people would accept would not be done on a grant stamp 214. You would
need to be getting public comment on that. But I think your point may be
worth us thinking about, that we could do it like we do with IRS, which
is declare at one time that a particular route is competitive.

Somebody mentioned to me in one of the informal meetings that we\'d had,
questioned the whole approach of looking at whether an applicant who
seeks to provide service to private carriers should be able to do that
if they were the first cable coming in. And the argument was, if you
haven\'t had anybody else providing service on that route, why wouldn\'t
you welcome anybody who\'s providing service? Wouldn\'t someone
providing service on a private basis be better than nobody, with the
assumption being that if we forced them to do it on a common-carriage
basis, they might not go forward and do that. And I just wondered if
there were any reactions from this group on that point?

MR. MULETA: John Muleta from PSI. I\'ll react to it. I\'m very reactive
today, but I think the dynamics from our point of view is that it
doesn\'t mean demand is not out there. It might be the ability, it might
be the ability to construct the system. You know, for example, pick a
very thin route, let\'s say the Polynesian Islands and the U.S. I mean,
you know, the fact of building a cable system out there might be an
expensive proposition and if allowed, people might be able to take an
equity position. It\'s something we would talk about later, I know, in
this discussion.

But that very few parties could, by themselves, build a facility of that
magnitude or that sort. It doesn\'t mean you should not allow the system
to be built or that you shouldn\'t allow it as a private cable. I think
what we\'re asking is, you should make an inquiry as to what is the
systemic problem that\'s prohibiting this sort of development to take
place? So we\'re not foreclosing a Commission decision as to whether it
should be private or non-private, whatever. I think all we\'re saying is
those are the sort of particular situations you ought to make an inquiry
about as opposed to granting everything as a blanket license or
something like that.

MR. TALBOT: I think our concern would be that private cables, by their
very nature, are unregulated, required to discriminate, and that that
could be a very dangerous precedent when you\'re creating what you
describe as a bottleneck facility. I mean, that really is the foundation
of most regulation of utilities. And if there is no competition on the
route, the obligation to hold oneself out indifferently would appear to
be a fundamental requirement.

MR. MULETA: I think we want to distinguish between AT&T\'s statements
and ours. From PSINet\'s point of view, you should have the inquiry.
We\'re not making any suggestions as to what the outcome should be. We
think the Commission on an informed basis should decide whether this is
any, this one particular instance should be regulated in one fashion or
another. And the warning signs for us are a thin route where the capital
markets are speaking about something, so, you know, maybe there\'s an
inherent advantage, for example, as to the landing license on the other
side is what\'s giving the party an advantage. You know, there are
certain things that would reduce the sort of barriers to entering a
particular market, and the Commission should investigate those and see
if there are barriers that should be put down.

But we\'re not suggesting that the Commission make any particular
decision. We just suggest that those are the symptoms that you ought to
be aware of.

MR. COWHEY: Peter Cowhey. The one point I\'d just make is that the
common carrier issue is not just about thin routes. The Commission has
expressed a concern about traffic beyond a U.S. to a foreign landing
party, that is, to a third market, and it\'s used the common carrier
rules to some extent to try to discuss that issue of beyond traffic.

And, again, without trying to take any judgment about that, the point I
just want to make is that the Commission used that particular tool in
the common carrier arsenal to address that and it\'s something the
Commission, I know, is going to have in front of it in the future,
because there are a number of U.S. carriers who worry about traffic in
other parts of the world, moving traffic outside of, let\'s say, to the
U.S. and back. And so I just think that that\'s something you need to
think about.

MS. ARBOGAST: On a more specific question, if there were a situation
where an undersea cable was going to be regulated as common carrier,
either because they came forward and applied on that basis or because we
found that there was a need on that particular route to have them
provide service on a common carrier basis, what do you think we should
do in terms of the question of whether every owner on that undersea
cable, should every owner on that undersea cable also have a 214
authorization? Or could you, should we allow companies to come in, for
example, an Internet service provider that was only doing data, didn\'t
need a 214 from us, would they be required to get a 214 because they are
one of the owners and licensees of a cable that\'s being operated as a
common carrier cable? If you have any further comments, come back to us.

One last general question, to repeat a question on the private carrier,
common carrier distinction. Would anybody have anything to add to my
question of what obligations should flow from being designated as a
common carrier? What conditions should we impose? What should we be
looking at? How should you be operating differently if you are a common
carrier as opposed to a private carrier?

Hearing nothing, I will move on to the next category of questions,
issues, which is looking at a fairly precise question, which is of the
owners of an undersea cable, which of those should be required to file
as applicants and thereby become a licensee? Should it be every owner,
no matter how small their ownership, no matter how they, themselves, are
providing business that becomes an applicant? And thereby becomes a
licensee and thereby is required to come file if they want to transfer,
just to spell out what the real world implications are on that.

MR. NAKAMURA: Kent Nakamura from Sprint. I\'ll take a shot at that one.
In looking at the Landing Act, it requires a license to land the
submarine cable. It\'s not the ownership that has to be licensed. It
seems that the entity or entities who are actually landing the cable are
the ones who have to obtain the license.

Now, I don\'t know that much about the private cables, private, private
cables, if you will. But on the consortium cables, if you look at many
of these construction maintenance agreements, you will see that the
terminal party or the owner of the landing station owns not only the
landing station, but all the way down to what they call the beach joint,
which is where the cable comes out of the water.

So that being the case, I think there\'s very good argument to be made
that it is only the terminal party who is landing the cable. They\'re
the only ones who are landing the cable. They\'re the ones who have to
obtain the landing license.

MS. ARBOGAST: Any contrary views?

MR. MULETA: John Muleta from PSINet. I think our thoughts on that is
that if you have anything to do with control or operation of the system,
then you have to be a licensee. I think that\'s a distinction that we
like to bring it in. I think I wouldn\'t simply look at the CNMA, but I
would also look at, you know, what the role of the licensee is in
determining \-- or the role of the particular entity is in determining
whether they should be a licensee or not. So I don\'t think we have a
disagreement. Maybe I\'m a little less granular about it.

MR. COWHEY: Peter Cowhey. I think that there are two different issues
posed here. The first is an informational issue for the purposes of the
tools of the regulator. To some extent, it\'s at that licensing moment
that you get a lot of the key market information that is relevant to
judging the nature of concentration of market power and the rest.

This is just simply a factual problem. You may be able to separate it
somehow from this particular way of gathering the information, but right
now, this is where you get a lot of the key ownership information that
is vital to doing market analysis of the economics of the market.

The second point I\'d just make is that it may well be that for the
purposes of regulating the market to promote competition, that the right
thing to do is to focus on, as Kent suggested, the cable landing parties
as the most significant parties on the cable. But that\'s separate from
the issue of how do you get the types of information about the
combinations of ownership on the cable that are also important to your
economic analysis?

MR. TALBOT: Just a comment, that the Commission has never required that
every owner be a licensee and that if it was to go in that direction,
this would greatly increase the burden of what are already very
burdensome applications.

The key thing, and ownership information, though, is supplied, so the
Commission certainly knows who all the owners of the systems are. The
key thing really is whether or not the Commission has jurisdiction over
some parties at the USN, so that it has jurisdiction over the cable. And
that is exactly what it\'s getting now. So we really see no reason to
change existing practices.

MS. ARBOGAST: When you\'re saying that we have not required it and it
would be a substantial increase in the burden, are you saying that there
have been U.S. owners that have not been coming in and filing as an
applicant or foreign, on the foreign side, that they have not been
coming in and filing? Because I think it\'s the latter.

MR. TALBOT: We believe it\'s the latter.

MS. ARBOGAST: Okay, take the question as we\'re keeping on the U.S. side
of it, what would your answer be?

MR. TALBOT: I don\'t think we\'d change that response.

MS. ARBOGAST: Any other comments?

MR. NAKAMURA: Kent Nakamura from Sprint. I actually had this discussion
with the Bureau when we were trying to figure out how to file the Tab 14
application. And at first, the indication was that the Bureau wanted
everybody on the thing. But that didn\'t seem to make a lot of sense,
because I don\'t know how to get a certification out of Cypress Telecom
or Ross Telecom or some of these people who own, you know, one tiny
circuit on these things.

Then, after discussing that further with the Bureau, they indicated that
it would probably make sense to get certifications and applications from
every one who was also a U.S. carrier, and that seemed to make sense,
some sense.

MS. ARBOGAST: Every 214 holder.

MR. NAKAMURA: Yes, yes.

MS. ARBOGAST: Why does that make sense?

MR. NAKAMURA: The Commission, I don\'t think, would have jurisdiction
over some of these owners just as owners. I mean, they don\'t provide
service, they don\'t have anything except own, you know, interest in the
there own plant. But when you have people who hold 214s, then they\'re
subject to the Commission\'s jurisdiction.

So that, it seemed to me, rational and at least one way to look at this
thing. Another way might be, as I said, to look at it from the
standpoint of who\'s landing these things and offer \--

MS. ARBOGAST: Would your position be that if you\'re landing it and
you\'re not a 214 holder, that we don\'t have jurisdiction?

MR. NAKAMURA: If you\'re landing it, you have to get a landing license,
no matter who you are.

MR. MULETA: Rebecca, this is John Muleta. I think the question is, what
do you plan to do with the capacity once it gets to the U.S.? If you
plan to use it in the U.S., instead of \-- there are situations where
you might use the capacity from the landing station to interconnect to
another cable, to go into another place, where you\'re really, let\'s
say, where you\'re really not terminating in the U.S., per se.

What you\'re doing is trying to get, for example, you take a cable and
you want to go to Mexico. And you simply just need to land it on the
seashore. I think in that case, that capacity is not really being
terminated for use in the U.S., which means that that carrier should
probably not be burdened with having to become a 214 licensee, simply
for getting to the shore to interconnect in another capacity to another
cable, to go to another location.

If, however, that capacity is being terminated at the seashore for the
purpose of being used within the U.S., then I believe they have to
become a 214 and subject to the U.S. laws.

So what I would be concerned with is that the U.S. extends it to the
former situation I described. The U.S. asserts its jurisdiction over
carriers that are simply terminating in the U.S. just to interconnect.
That would cause an issue for us overseas, where it would allow other
countries to assert jurisdiction over us, where we\'re simply using that
for transit services. All we want to do is, you know, get to Hong Kong
so we can get to Singapore and those are the circumstances.

You know, we don\'t want to be subject to very burdensome rules on the
other end, simply because we\'ve now changed how the U.S. treats
capacity that\'s transiting at a landing station.

MR. NAKAMURA: This is Kent Nakamura from Sprint. We would concur with
what John sent and point out that the definition of foreign
communication originate or terminate in the United States, at least
since 1987, as I recall. The Commission said we don\'t regulate traffic
that neither originates nor terminates in the U.S. but just goes on
through to somewhere else.

MS. RUFF: I had a follow up question for the conversation that is going
on between Kent and John. The model seems to be that if you have U.S.
entities landing owners, etc., and putting aside the sort of scenario
where you\'re just coming through, really, to get to someplace else,
that then those entities should be licensees.

But, Kent, you used the term carrier, and I\'m wondering if there\'s a
possible scenario where one of those entities is not a 214 carrier.
It\'s, for example, a very large ISP that is not a 214 entity, and if
so, how does that factor in?

MR. NAKAMURA: I am aware of situations where you have, in fact, large
carriers, capacity or at least cables. But they\'re not providing
communication services, so they take the position that they don\'t have
to get any license.

MS. RUFF: Okay, so that\'s a possible argument there, that they would
not have to be a licensee, even though they might be a large owner?
Okay.

(Pause.)

MS. ARBOGAST: Could I just follow up with Mr. Talbot and just ask a
question? I understood you to say that it would not be reasonable,
there\'s no policy that\'s served by requiring every owner to be a
licensee and that you would say that that\'s true even if we were just
talking about the American side of this.

Should we have any rule at all as to who should have to come in and be
an applicant, you know, a licensee, or should we leave it entirely up to
the parties to decide who they, of all their owners, who they want to
file?

MR. TALBOT: We think we should leave that largely to the parties. In
fact, the major parties usually do file, but that gives you jurisdiction
over the system, which is, we think, all you need.

MS. ARBOGAST: Because in practice, I think we\'ve also seen many of the
very minor parties file and I wondered if you all are doing that because
you think you have to or because you just want to?

MR. COWHEY: Again, I want to emphasize that I think you would be best
served to separate the question of what information the act of the
filing yields today, the purposes of giving you meaningful information
for regulating the market. The question of the particular vehicle,
whether, for example, you need a 214, you have the right, even if you
don\'t require a 214, to require different types of information as part
of the licensing application.

So I don\'t think that we should equate the two. And the point I\'m just
making is that the information you were gathering at the time of
licensing is important information for the Commission\'s ability to
monitor and assess the market. And it should be careful about losing
that information.

That is separate from the question of whether or not you insist on a 214
for everybody involved.

MR. MULETA: Rebecca, I think I concur with Peter. This is John Muleta at
PSINet. I\'m not knowledgeable on the econ-speak, but I think what
we\'re also seeking is transparency. I mean, I think that it\'s very
important to have transparency, especially when you have very large
systems with very big owners that could tend to dominate the
proceedings.

So everybody, I think, should be after transparency, if we could get it.
I think the test for us, from PSI\'s point of view, is what do you plan
to do with the capacity? If you plan to terminate it and use it in the
U.S., you should be a licensee or at least should be acknowledged as
part of the licensing procedure. What form it takes, you know, or not,
it\'s up to the Commission to decide what\'s efficient. But we want
transparency as much as possible in these systems, at least today.

MS. ARBOGAST: One thing that I\'d just throw out for people to think
about is if we separated it out and received, required certain
information upfront on the application and don\'t require 214, that\'s
the second stage of the transfer, and that\'s when, if you care about
who\'s owning it, you care about who comes in and succeeds in the
ownership. And so it\'s not just enough to get it the first time and if
you don\'t also track transfers.

Moving on to backhaul. I think I\'d like to separate this to backhaul in
the U.S. and backhaul in foreign countries, because one of the things
that we\'ve heard from a lot of folks who have been in, talking to us
informally, is that they\'re having in some important markets a terrible
time getting backhaul and I\'d like to start out by talking about
whether there\'s anything that you think we ought to be doing, where the
problems on backhaul in the U.S. that we should be taking a look at, and
if so, what should we be doing? And then move to problems that there may
be in backhaul in other countries.

So, starting with the U.S., any comments?

MR. NAKAMURA: This is Kent Nakamura for Sprint. As I think some of the
people here know, Sprint has been raising issues about backhaul in the
U.S. for some time now. We think the Commission has done a good job on
some of these things. We probably haven\'t told you enough about it.

I\'ll give you an example. In the AT&T International non-dominance
proceedings, one of the commitments that AT&T agreed to as a condition
of being regulated as non-dominant, was to put out for public bid the
so-called terrestrial restoration network. And what that network is is a
land network that links all the cable stations on the East Coast of the
U.S. with the consortium cable stations, so if one of them gets cut or
goes out, you can cut over. You know, on a hot standby, to a back up
cable.

Until the Commission got involved in this, this provision of service was
not there, not regulated. They\'d send a bill and we would pay it. But
after AT&T put this function out to bid, in Sprint\'s case, at least, we
are saving in excess of \$1 million a year as a direct result of doing,
having that bid put out competitively. And that, we think, is the kind
of thing that the Commission can do, should do, and is good at.

MS. ARBOGAST: Thank you.

MR. TALBOT: Could I just comment generally about U.S. end issues here?
If you look back over the past four years, the Commission has now had
four major proceedings that have looked in great detail at market power
issues on the U.S. end of submarine cables, beginning in the AT&T
non-dominance proceeding that Kent referred to, to the AT&T BT
proceeding which has just concluded.

And the findings in those proceedings are consistent and very clear,
that no U.S. carrier has any market power on the U.S. end of submarine
cables. No U.S. carrier has any market power over cable stations and
backhaul is competitive. And that the issues regarding cable stations
really raise contractual matters, not competitive issues.

Those findings really resolve a lot of these issues and really leave
very little to be the subject of any further proceeding.

MS. ARBOGAST: Thank you. Any other views?

MR. MULETA: I think from PSINet\'s point of view, it\'s the whole
inquiry has to go as to the design of the system that you\'re approving
at that point. For example, if there\'s no commitment in the CMNA for,
you know, just readable or non-discriminatory access to backhaul
facilities that, again, would throw a signal about the market power
that\'s being exercised by the persons providing the backhaul
facilities.

From our point of view, we spend a significant amount of time as a
contractual matter getting those things down on paper, as an enforceable
right that we have in a cable system. Currently in the system that
we\'re involved, we have not seen a problem on the backhaul side. But
that doesn\'t mean it won\'t rear its ugly head, but it\'s just
something that the Commission ought to be aware of, and review as it
reviews its application, to be looking at for certain things, like are
there two separate parties who are providing the backhaul or is it a
single entity at all points? You know, that makes a difference about the
market power that they\'re exercising over that particular cable system.

MS. ARBOGAST: Do you or anybody else have any thoughts on what we should
do? We look at this and we find something, we find that the CMNA
doesn\'t allow collocation in the U.S. or we find that there\'s only one
backhaul provider that\'s allowed. Should we do anything?

MR. MULETA: I think from our perspective, that\'s when you should ask,
start asking questions and, you know, that\'s when the inquiry goes
into, for example, is this a thin route or is it a very competitive
route? If it\'s competitive, then I would have lesser concerns about
there being a problem. You know, people are willing to take on
contractual risks, even though it\'s apparent on its face that there
are, you know, systemic design issues and that\'s fine, you know.
That\'s a risk they\'re willing to take. But if it happens to be a thin
route, and maybe this is how people are exhibiting their market power,
you know, we ought to be worried. As a matter of policy, as a business
\-- as a business issue, you know, we\'ll deal with that separately. But
as a Commission reviewing it as a potential action, those are evidences
of a systemic problem that might take place.

MR. COWHEY: I have no wish to relitigate various matters about cable
landing licenses of the past. I do think the fact that we\'re here today
indicates that the Commission felt that investigation of these matters
suggested that there were competition problems in the market that still
required further understanding and analysis and possible action.

Having said that, as a prelude to saying that I don\'t think the past
decisions have disposed of these questions, there are just two points I
want to make. The first is that an undue emphasis on backhaul overlooks
the fact that, at least in my judgment, it is the totality of the
control over the various inputs to the provision of international
transport services that have to be looked at, not just one segment such
as backhaul. Although certainly backhaul is one of the worst problems in
the marketplace.

The second point I would make is that as you rightly said, you would
expect that all other things being equal, that the U.S. market is better
than foreign markets in regards to this input to the market,
comparatively. It does not say that the U.S. market operates perfectly,
to say that it is better. Then the question becomes in regards to the
foreign market backhaul, which performs worse, in general, than the U.S.
market, what measures would best address that? And I think that one of
the very difficult problems for the Commission is the one that it
perennially faces when it tries to undertake regulatory intervention in
foreign markets in order to insure competition.

It is that these measures are often hard to monitor compliance with,
hard to enforce, and even to the extent that the Commission both has the
means and the will to do so, there are ramifications politically that
make this as an ongoing task, difficult for this Commission to maintain.

So while the Commission is not helpless, this is a very messy job. And
if it is difficult to maintain conditions about the availability of
critical infrastructure in the United States and the local exchange
market, it is even more difficult to do so in foreign markets.

So it\'s for that reason that Global Crossing, at least, thinks that the
backhaul problem should be viewed as part of the package of the inputs
to production and the Commission should be looking for a method of
encouraging competition that will be less intrusive in terms of
day-to-day intervention in the marketplace of foreign countries while
still providing the right incentives. We\'ll get to that later, I have a
feeling, but that\'s simply the point I want to make about backhaul.

MR. NAKAMURA: Kent Nakamura from Sprint. I wanted to echo a lot of
Peter\'s thoughts because I took a look at the legislative history of
the Landing Act. And there was a very interesting quote from Senator
Kellogg who introduce the bill, and I thought it was worth repeating. He
said, \"Let me give the senator an illustration. The first thing that
occurred to the committee was that we should make a general rule that no
cable should land in the United States which connected with a cable
having a monopoly in a foreign country. It immediately was seen in some
cases that it not only would operate against American interests, but
would be impossible to comply with at all, because a monopoly to the
foreign country was neither under the control of the American country,
who were the American government, and we found in several cases where it
was necessary either to grant such landing licenses or deprive ourselves
of cable facilities.\" Not a new problem.

MS. ARBOGAST: Kerry?

MS. MURRAY: Kerry Murray from MCI World Com. I will say I think the
Commission\'s policies have served the market quite well and the market
is becoming more and more competitive. There are more carriers that are
building cable landing stations and, for example, in U.S. cable, we\'ve
got seven backhaul providers on the U.S. side, and actually seven on the
Japan side, which is completely unprecedented. That means you\'ve got
seven carriers competing for backhaul traffic.

And I don\'t know where you would draw the line between consortium
cables and non-consortium cables. I\'d be curious to hear about what
Global Crossing does in terms of making cable station access available
and competitive backhaul. I mean, I don\'t know how you make this
distinction between consortium and non-consortium cables and how is it
valid?

MR. MULETA: Before Peter is writing his notes, I\'ll just make one
point. One of the things that happened on Japan U.S. was that there were
parties that were not the traditional carriers, that insisted very
strongly that there be a diversity in backhaul providers and minimum,
especially at the landing station side.

So this is something that the Commission ought to encourage and ought to
be taking a look at as they\'re reviewing, if it has a chance to review
these applications. But I think what we want to make sure of is that
this is not something that people willingly did, but it was a matter of
the market dynamics and of certain, you know, carriers insisting that\'s
the way they\'re going to invest their capital.

So what we want to do is not have the Commission set rules that prevents
that sort of behavior not to happen again. I mean, so JUS is very
unusual and we hope it continues in that direction with other cable
systems.

MS. ARBOGAST: Could you just restate the last sentence again? You want
the Commission to \--

MR. MULETA: I mean, what we want is the Commission to encourage people
and I think this is about the structural ownership issues. When you\'re
financing a cable system and essentially you\'re raising a lot of equity
in the marketplace. And what that allows various actors to do is be able
to exert the power of their capital in the way this system is designed.

So, for example, if it\'s entirely a private cable, what happens is the
design is the design. You know, whatever that person wants to insist on,
whatever backhaul they want to put in it, you\'re sort of captive to
that design. If it\'s a more public, let\'s say, more consortia-like
cable system and it is more open in terms of equity investments, and so
your dollars actually really count, then you can insist on certain
behaviors on the, for example, on the side of the landing station
providers. You know, that they have backhaul providers that are
competing, that they have a couple of diverse or multiple diverse
landing stations. These are all, and that there be non-discriminatory
access to those facilities, okay.

And we can enforce those through contractual terms. So that\'s something
that the Commission has to keep in mind as it looks through the
structural ownership issues. Is that behavior being allowed to take
place? And we should not set any rules in place that will prevent that
sort of activity from taking place.

MS. ARBOGAST: Thank you. Peter?

MR. COWHEY: I had a feeling you were looking at me. Let\'s start with
the question of how robustly competitive is this market today in
backhaul and in cable landing stations? Again, without trying to
relitigate past proceedings here, I think that the point that I would
simply suggest that the International Bureau staff look at is the
current degree of concentration of ownership of cable landing stations
and a backhaul in the key, let\'s say, European and Asian markets. And
take a look at the ownership by parties of those cable landing stations
and of backhaul, and see how much structural diversification there
really is.

If, for example, you looked at the United States, the United Kingdom,
France, Germany and Japan, would the Commission find a significant
degree of control or cable landing stations by a handful of parties? I
would suggest that the record would show that without dragging us
through all the specific numbers.

The second question that the Commission might ask itself, to the extent
that it decides to focus on this input to production is whether or not
the weights and prices charged for backhaul, let\'s leave aside the U.S.
market for the moment, for informed markets for backhaul, are truly
competitively priced. And one has to recognize that the amount of money
involved in the pricing of backhaul is a very significant revenue pool.

For example, if you took a look at a typical modern cable, let\'s choose
a random one, JUS, there are about 2,500 STM1s on the cable. And the
revenue pool off those cables is potentially quite significant.

Again, without trying to estimate the precise size of the revenue pool,
if you were talking about revenue for backhaul of, let\'s say, \$1
million a year for STM1, that would be a revenue pool of \$2.5 billion
per year. This is a lot of money on a cable that for the transoceanic
link only costs \$1.2 billion to build. It gives you some sense of the
magnitude of the pools of revenue involved.

Again, I\'m not trying to actually get to the point where we\'re
relitigating the past. What I\'m really trying to do is lead to my final
point, which is that I think on the face of it, you would find that this
market remains significantly concentrated. Then the right question for
the Commission is, well, how do you think about this in terms of
competition? The point that at least Global Crossing has been making is
that the traditional consortium cables have a combination of all
ownership that have the ability to coordinate and an incentive to
coordinate their control of inputs to production in such a way as to be
able to exercise market power.

It would be highly unusual in terms of the Commission\'s traditional
economic analysis to believe that the newcomer entrant in the
marketplace should be analyzed within the same framework and has the
same ability to exercise market power. But those are the questions the
Commission should be asking itself.

MS. GINSBURG: Mindy Ginsburg with Via-Tel. A few points, I think, for
what Peter said and some of the other comments we\'ve heard. Via-Tel is
usually described as a new entrant, small carrier, maybe even the
smallest carrier at this table. I would urge in this whole process that
when you start to look at the aggregate market power on a cable, you
then take the next step of whether there\'s harm in the market, as a
result of the ownership structure. And it seems to me on, certainly to
us on the transatlantic route, that with the incredible number of new
entrants, not just Via-Tel, but the incredible number of new carriers on
cables providing service in Europe, with the decline in prices on the
major routes, perhaps there isn\'t harm in this market. And doing
sweeping, conducting a sweeping examination of the ownership issues may
not be a productive endeavor.

And that brings me to a point that Jim made earlier, which is remember
to keep in mind the international implications of anything the
Commission does. Even the simple asking of a question raises an
expectation that the Commission is going to regulate a market. And I
cannot overstate that. So I know who witnessed evidence of that is the
European Commission\'s Receipt Study, where they\'ve said they\'re going
to watch what the FCC does closely and examine whether they need to do
some regulating, do additional regulation and take steps that may affect
the entrancability to obtain market access there.

So I would urge you throughout this process to think carefully and
consider carefully that sometimes the asking of a question is not merely
the asking of a question, but that bringing me back to Peter\'s point
of, it is the fact of ownership structures, the various models that
exist today on undersea cables, we\'re seeing a lot of change. It
isn\'t, there\'s no longer just the large carriers on cables. You have
Global Crossing, you have companies like Via-Tel on Global Crossing as
well as the JUS cable.

So, again, asking to focus on what\'s the harm that we\'re seeing before
we sort of leap into a broad examination of whether the fact of multiple
owners on a cable causes a problem.

MR. TALBOT: Jim Talbot of AT&T. Just a couple of points. You know, the
Commission has been dealing with market power issues in international
telecommunications for 50, 60 years now. And has a no special
concessions rule that we think deals very effectively with the kind of
issues that Global Crossing has raised in the past. The Commission
placed prime reliance on this in the Japan U.S. proceeding and we think
that is the way to go forward.

Regarding arrangements with foreign, non-dominant carriers, in the
traffic area, you\'ve reached the conclusion that that can largely be
left to the marketplace and we think that is the right way to look at
it.

Arrangements on cables are also changing. One reason why all of this is
coming up is that the practice for the past two or three years has been
for U.S. carriers to buy end-to-end capacity on cables. This means that
U.S. carriers are in foreign markets, looking for multiple cable
stations, competitive provision of backhaul. And that is a very
pro-competitive thing. It\'s consortium cables where U.S. carriers are
able to negotiate these arrangements with foreign carriers. On private
cables, U.S. carriers don\'t do the negotiating. It\'s the private cable
operator and, in fact, those cables at the foreign end are frequently
far more restrictive than consortium cables.

One final point. Under the old Ecko test, we didn\'t used to let foreign
carriers with market power into the U.S. market on their route, where
they were closed at the foreign end. That was how we dealt with foreign
market power problems. If you step back and think about what we\'re
doing here is, we\'re potentially limiting foreign market access by
non-dominant U.S. carriers, unaffiliated with any carrier on the foreign
end. This is a very perverse, reverse kind of Ecko test, that would
actually limit U.S.\'s carriers access to some of the most
cost-effective arrangements for getting their traffic into foreign
countries.

This is not what any of us intended, we believe the USDR Commission
intended, in encouraging us to open our markets under the WTO agreement,
and we think would actually impede our ability to take advantage of the
benefits, the hard-won benefits we got through the WTO agreement.

MS. ARBOGAST: Could you just spell out your thinking a little bit on
how, what actions would make it harder for U.S. non-dominant carriers to
enter the foreign market?

MR. TALBOT: Well, it appears that the direction that Peter\'s comments
would push you would be in looking critically at foreign-end
arrangements for things like backhaul and cable station access and
conditioning or denying applications, based on how competitive they are.
That basically is pushing you in a kind of reverse Ecko position, where
you\'re limiting U.S. carrier\'s ability to go on cables that offer them
the most cost-effective means to get their traffic into foreign markets,
even though they have no market power in the U.S., no market power on
the route, and no affiliation with any carrier with market power at the
foreign end.

MS. ARBOGAST: I think John had something, then I assume Peter?

MR. COWHEY: Thank you, John. If only the Redskins had such an effective
defense. There are several things I think that were just said by Mindy
and Jim that I think are worth thinking about very carefully.

The first is the question of changes in the marketplace and the
implications of any decision by the FCC to undertake a further action in
this area, for either promoting or retarding changes in the marketplace.
The second point is the point about whether there are differences in the
world among different routes and different parts of the world market.
And the third question is whether or not the FCC, if it undertakes
further action, should focus on trying to micromanage the foreign end of
a U.S.-originating and terminating cable. Let me speak to each of those
very briefly.

First, as to the implications of the FCC deciding to undertake further
action, I think that Global Crossing would agree that we are in a world
where there are winds of change. There are currents that are opening
possibilities. But it is equally true that there are significant profits
and incentives for resisting speedy change in the marketplace, and where
we are is in a balance between these two sets of forces.

Now, any economist at the Commission would tell you that you should
always look forward and then look back in good strategic analysis. And
essentially, if the major players in the marketplace with market power
believe that going forward there is significant Commission scrutiny,
attention and seriousness, as might be indicated, for example, by
undertaking an MPRM, they will start to recognize that the winds of
change are winning. That the status quo is less viable.

If, on the other hand, they look forward and see a world in which the
Commission has said that it is concerned, but not going to undertake
meaningful action, there is a greater temptation to see if you can show
off the status quo to slow down change in the marketplace.

Now the way in which Commission action would be read depends on what the
Commission does in an MPRM. For example, the European union study did
say that it would look carefully in the future at what the FCC was
doing. The same study noted that it was costing more to build out
terrestrial networks in Europe than it takes to build an undersea cable
between the United States and Europe, and it noted, curiously enough,
that individual carriers are willing to do this in terrestrial Europe,
but you seem to still have consortia dominating the building of
international cables.

So it\'s not clear that the European union would read an action by the
FCC that really was designed to deal with the structural problem of
competition in an adverse way.

Now the second point, the difference in routes. Indeed, I think that
everyone here can agree that there is some variation among regional
routes. I certainly heard agreement that thin routes were different than
high traffic routes. But I believe that there is also a significant
difference between some very selective high traffic routes and most high
traffic routes. There are a few places in the world where there is more
advanced competition, mainly in the North Atlantic, than in the rest of
the world. And an FCC proceeding should be able to deal with that
distinction.

The final point is the question of should the FCC introduce some sort of
a perverse, reverse effective competitive opportunities test that leads
it to deny foreign carrier entry in the U.S. or micromanage foreign
markets. You know, we completely agree with this point. The FCC
shouldn\'t be engaged in micromanaging the foreign market. That is not
the same as the notion that the FCC should stand pat or do nothing.
There are other alternatives available for FCC action, and that\'s where
I hope we turn to later.

MR. MULETA: I think PSINet would like to add one thing to this
discussion which is, if you can eliminate the notion of half circuits,
that would really help. Because that\'s one of the fictions that causes
an imbalance in the marketplace. If a foreign carrier has no interest in
terminating capacity into the U.S., then they can sort of avoid coming
under the purview of competitive rule, you know. I\'m assuming that the
U.S. has good competitive rules. But, you know, if they can have a
half-circuit mechanism that allows them to say that\'s your problem on
the U.S. side, you guys deal with it, we\'ll keep our markets closed
off.

Our preference, as noted by AT&T and you see a lot of American carriers,
we want to go whole hog, we want to buy the whole piece, and we want to
force the foreign carriers to open up their markets, okay. And
interestingly enough, people who are in the Internet business, know that
the U.S. is a very important market to the foreign carriers. So that is
what\'s forcing a lot of change in the marketplace.

So the fact is the U.S. is where everybody wants to get to on the
Internet, for whatever reasons, is causing people to want to buy the
whole circuits and keep them, you know, keep the inputs to themselves.
And if we can force the foreign carriers to act that way, that will
force their governments and their sort of closed systems to open up
their markets for competitive backhaul landing station access.

Our belief, our experience, tells us that Japan, okay, is beginning to
change in that sort of way. We see other markets where we don\'t see
that happening and we sense it\'s because people are allowed to keep
with the half circuit fiction that goes on. So, in particular, one that
I\'d like to bring up in a public forum is Hong Kong, just to be noted,
okay.

MS. ARBOGAST: What I\'d like to do is I\'ve just been passed a note that
says we\'re, I think, out of time on this topic. This topic,
predictably, has sort of slopped over into the next one, which is
ownership structure. What I\'d like to do before moving into discussing
more some of the economic issues of the ownership structure that are
keyed up for the next one, is take that comment and move off of it to
talk about problems that folks are having in foreign markets and ideas
that you have of things that we can do, either in the context of this
sort of proceeding, or any other forum that we have for action that
would help do things like eliminate the half circuit model or open up
backhaul cable landing competition in general in the foreign markets.

What could we do to eliminate the half circuits?

MR. MULETA: I think as a condition of granting the license, you can ask
people that they have full capacity on it, that they have to own it end
to end. There are commercial ways that you can get rid of \-- I mean, if
a company, for one reason or another would prefer only to have a half
circuit, there are commercial ways of dealing with that. So I don\'t
think it\'s a barrier for doing business. But it certainly, this would
send a signal towards opening up the other side of the market. That\'s
when we really see where the problem is from PSINet\'s point of view, is
on the foreign side on backhaul. And things that cannot be dealt with on
a contractual manner.

You know, when you have a regulation that says, oh, you have to be a
national carrier to terminate the capacity in that carrier, and then you
have ownerless conditions for becoming a licensed carrier, a Type 1,
whatever. That creates a huge barrier for succeeding in that
marketplace, for opening a backhaul and landing station access.

MR. NAKAMURA: Kent Nakamura from Sprint. I\'m not sure what kind of
problems that John is referring to, which I think are very real
problems, are really, you know, the problems of the cable systems. Tom
McInerney is here. He can correct me if I\'m wrong. But I think the way
most of these modern consortium cables are organized is that you have
new points. You know, it\'s like money. You buy, with the new points,
you buy halves, you buy wholes on these things. You spend it any way you
want. You can buy it on particular segments. I think that\'s right,
isn\'t it, Tom, you can put it wherever you want to terminate it? I
mean, once you get to the other side, you may have a problem with the
kinds of things that John was talking about, but I\'m not sure that
it\'s a problem of the cable systems\' organization, per se.

MR. MULETA: If I can just make a comment towards that, I mean, I think
what we were trying to answer is the question of where do you have
problems with backhaul and landing stations? And what we see is where
the players have no incentive to be in a competitive market. That causes
a problem.

You know, if you have one of the landing station parties that simply
refuses to play on both sides of the market and they say, well, you
know, we\'ll just buy our own half circuit, whatever, and that\'s the
only thing we need out of this, whether they do it through the new
process, you know, however they get to it, as long as they have no
incentive to be in a competitive market, that creates a problem. That\'s
what we\'re trying to push for, and that\'s something that the FCC can
help.

I\'m just throwing out one concept, that maybe there could be a better
way of doing it.

MS. ARBOGAST: Any thoughts or comments on problems people are having on
the foreign end and things that we can do to help?

MS. GINSBURG: Mindy Ginsburg. What was done, frankly, in the JUS cable
was very helpful. The discussion and examination of the agreement that
ended up clarifying the availability of backhaul was incredibly helpful
to small carriers. And as Kerry noted earlier, you know, we see seven
backhaul options on the Japan side. That\'s great. So we would endorse
continued more of a case by case examination of issues like that.

MS. ARBOGAST: Even though I have the scars to show for that. Any other
thoughts?

MR. NAKAMURA: Kent Nakamura from Sprint, again. My understanding and
again I\'d ask Tom to confirm this is that the three landing stations
owned by separate owners in Japan and the two landing stations in the
U.S. were set up only for the application, never showed up at the
Commission. I mean, the Commission shouldn\'t, at least from what my
internal clients are telling me, is that the Commission shouldn\'t
underestimate the power of that competition is bringing, even to the
world of submarine cable systems.

I think on China U.S., the Commission encouraged the applicants to
reopen the cable systems through the initial parties, but really, that
wasn\'t driven as much by the Commission as it was by, you know,
commercial imperatives. We saw that they weren\'t getting the business
and that if they didn\'t sell off this capacity, they\'d be stuck with
it, paying the operations and maintenance for 25 years while Japan U.S.,
which was, you know, eight times bigger and much, much cheaper was
coming along right behind it. So the competitive process is very, very
important and should not be underestimated.

The other thing that Sprint, at least, is afraid of is that if the
Commission gets into the role of trying to extract concessions from
foreign countries in exchange for allowing the cable landing license, in
addition to the, you know, legal problems with the WTO agreement and
what have you, our business here is that, you know, these foreign
carriers are going to say you are too hard to do business and we don\'t
want to do business with you anymore. We\'ll land the cable in Canada or
we\'ll land it in Mexico and we\'ll just bring it over terrestrial
facilities, so that we don\'t have to deal with, you know, these
difficult problems anymore.

And then if that happens, the danger ends up, the U.S. carriers will be
excluded potentially as initial parties on some of these cables. And if
you can\'t get in as an initial party, a lot of times, you know, you
don\'t get the best pricing on these things. You have to come in later
and pay more, in which case the Commission would end up raising prices
for the U.S. carriers and, ultimately, for the consumers.

MS. ARBOGAST: Any other comments?

MR. MC INERNEY: Tom McInerney from AT&T. I just want to support what
Kent just suggested. I think the current environment right now is one
that allows what I consider to be a non-dominant U.S. market right now,
not dominated by any one carrier, to be very competitive in the open
market.

I think that the negative side of that would be that very much in that
position, we can\'t have a situation where temporary delays or
significant delays occur with a questioning nature of the Commission.
The Commission should make decisions, in my mind, very, very quickly.
And the complication with that is that we have a world that changes
very, very quickly and is a little misleading in its data.

The example that I\'ll highlight for this is, I\'ll go back, I know
we\'re not doing any pleadings here, but since we\'ve brought it up a
number of times right now, Peter has, we\'ll look at the marketplace in
the Trans-Pacific. What we had to do in Trans-Pacific was compare a 400
gigabit cable that was announced to an 80 gigabit cable that was
announced. Now even in the meetings, we knew that they were both
technology equivalent, but yet, we were challenged why we weren\'t
moving to 640 with the 400 gigabit, instead of looking at the 640 for
the 80 gigabit, okay.

The complication with that was that the foreign end just couldn\'t
understand the direction competitively when a larger cable with more
competition was being put into the marketplace, okay. So the
understanding of the environment in the foreign end was very difficult,
okay. Likewise, the leveraging that we were doing already, and John
mentions the truth \-- I mean, it was very much a U.S. battle into the
foreign end. We had already moved to three landing points, much more
competitive than the current offer from PC-1 on a competitive basis for
backhaul. So they just couldn\'t understand our definition of
competition.

They clearly didn\'t understand the foreign markets of looking at what
the definition of the carrier ownership was. At the time they were both
filed as private, so clearly that wasn\'t a definition they even
understood. So it\'s really the effect on the marketplace that we have
to take a look at.

One other thing. Things are changing and one of the comments I want to
make right now is that we really do need to look at where these
marketplaces will be going. Many times, the filings that are associated
many of these cables are filed at a very low level, not including and
incorporating the upgrade. So if you look at a filing, Trans-Atlantic,
originally, in a private cable environment, it might look like the
equivalent of the Trans-Atlantic capacity when it\'s first originally
filed. But the Commission isn\'t told where that capacity might go and
it isn\'t told what the level of upgrade is capable of doing.

So we also have to watch the timing of the data that is coming into the
Commission on market power, etc. And the complication I have right now
is that the foreign end many times understands that and knows that
technology and can\'t understand the logic behind the Commission\'s
conclusion. They think that there will be more capacity, therefore, more
competition, and clearly, in many cases, they see more participants as
more competition. Thank you.

MR. COWHEY: I don\'t think it would be appropriate to get into an
argument about the amount of capacity and how these things are measured
at the moment. The point I simply want to make is that there\'s
something ironic to some of the conversation here. The irony is the
following, that many of the long distance carriers in the United States
would tell you, rightly, in my judgment, that it is not sufficient to
say that there are winds of change in the local exchange market.

They would say, instead, that there are structural reasons and
capability why local, incumbent local exchange carriers will exercise
market power in a way that will slow the evolution of competition and
improvement in consumer benefits.

Similarly here, we have the beginnings of some competition in the
marketplace, much like MSF and Teleport in the 1980s. But we have
something that is far short of a robustly competitive market. And we
still have a common practice of the largest carriers in the market
combining into common cables, in which there is an ability and an
incentive to exercise market power. So that there is change, no doubt,
but to conclude from that that there is sufficient change that meets the
goals of the Commission, I doubt.

MR. NAKAMURA: If I could, Kent Nakamura from Sprint. First, I think the
situations are distinguishable. Of course, the ILEC industry is one over
which the Commission has full jurisdiction because of the \'96 Telecom
Act. And second, when responding to Peter\'s second point, speaking only
for Sprint \-- maybe they\'re not one of the largest carriers \-- but
our incentive, our desire, is to obtain high quality facilities at the
lowest possible cost and that\'s it.

I was talking to an internal client, asking about this. He said we\'re
agnostic. He said if it helps our bottom line to buy capacity on a
private cable, we\'ll do it. We own a lot of NECI one and \--

MS. ARBOGAST: I think we\'re moving into a different topic and I\'d like
to stay for a minute on \-- we\'ll get to that, but I\'d like to stay
for a minute on any other comments that people have about what could be
done legitimately and effectively by us to respond to the problem.

Frankly, we\'ve heard from virtually every one of you who have come in
and talked to us, which is problems of getting into the foreign market
and having competition on that foreign end. So, can we just stay on that
for a minute and then we\'ll switch to the other competition issues?
I\'d just like to ask if people have any other thoughts on the issue of
what we can do?

MR. COWHEY: Rebecca, you can tell me if this moves into the other topic
you want to avoid. But the point I\'d just make is that there is an
assumption that you have to micromanage the foreign market in order to
address the competition problem, that is, you have to impose a continued
condition, like JUS or even greater and stronger measures of
intervention in the foreign market, and I don\'t believe that assumption
should be made.

MR. MULETA: PSINet would like for you, the Commission, to take decisive
action in marketplaces where we\'re not allowed to own whole circuits.
That is affecting our business. We are aware of certain international
carriers that are wanting to keep the half circuit regime and apply it
to new products or new services, such as data. We think that\'s a
mistake and we ask the Commission to act decisively in that area,
because that\'s a fiction that does not allow the benefits of
competition to come to the various players.

MS. ARBOGAST: I take it you\'re not in favor of the argument that we
should apply the counting rate regime to the Internet backhaul?

MR. MULETA: My chairman has efficacies that he uses with that counting
regime, so we\'d like for you to get rid of that, as well.

MS. ARBOGAST: Any other comments about the problems folks are having on
the foreign half of this?

MR. NAKAMURA: Question for you. Some of these things I thought had been
addressed by the WTO and is the Commission talking to some of these
foreign regulators?

MS. ARBOGAST: Oh, we do all the time. Yeah,w we do and all the time,
yes. But, it\'s usually \-- we talk to them, that sort of action that I
think is very important. We\'ll continue to do it. It\'s an educational
process. It is talking to them about why it is at the end of the day
fundamentally in their own interest to liberalize and open up their
markets to competition.

Just this month we\'ve met with Singapore. We\'re going to be meeting
with Hong Kong. We had a video conference talking about competitive
safeguards with Japan that was scheduled for tonight, but that will be
postponed. We had bilats in Europe. I know you know, many of you know,
that we\'ve been working extensively with the German regulator on this,
the Italian regulator. I mean, that is a big piece of what we do and we
continue to do it, and we will continue to do it. We\'re very committed
to that.

Good question and I guess I assumed that everybody in this room knew
those efforts that we had been taking, that we continue to take with our
counterparts in other countries. And I was asking whether there were any
other vehicles that we might appropriately use in addition to that,
which is, as I said, work that we do that we will continue to do.

MR. TALBOT: And just to, I guess, point out the obvious that, of course,
the underlying problem in many markets that although the WTO agreement
on basic telecom was a good one as far as it went, there are still many
countries out there that are non-liberalized. And it\'s certainly our
hope that in the next round, there will be some focus on telecom that
will get more countries opening up and we\'ll have more accelerated
commitments by those that have opened up.

MS. ARBOGAST: And we, of course, completely agree with that. I think
that where we have focused our efforts is on recognizing that no matter
how good that agreement was, if implementation is less than vigorous,
the agreement that\'s done at the end of the day isn\'t going to do much
but open up our market. And so that\'s why we\'ve been working very,
very aggressively. And many of the regulators come to us and seek our
help in trying to figure out how to put in competitive safeguards. So I
think that we have been focused very much on implementation, helping
other countries implement.

All right, we\'re going to move to structural ownership. I think Pat a
couple of questions. We\'re coming into the middle of a conversation
that\'s been going on that I interrupted a bit to get us back on track.
But let\'s go back to the issues of whether there are certain ownership
structures that raise competitive problems.

MR. DEGRABA: I think a start way of putting it is to note that in the
domestic markets we have in the U.S. probably seven or eight
independently owned small business networks and a lot of providers who
don\'t own any of the networks were able to then buy capacity on these
independent networks, that can also independently increase capacity.

If you\'ll look Trans Pacific, you see a very different structure. You
see sort of everybody or virtually everybody who wants to go across the
Pacific all owning one network that then expands capacity, sort of as
one unit, rather than a lot of independent capacity owners that can
expand capacity unilaterally. So there\'s two questions.

The first is, why should undersea cable look so much more different than
domestic terrestrial cable? And the second one is, should we be worried
about it?

MR. MULETA: Can I go?

MR. DEGRABA: Sure.

MR. MULETA: I think the ownership issue recently has become one of
financing, not of \-- I mean, it\'s really driven by financing and where
the demand of new services, such as the Internet are taking various
players.

We don\'t think, for example, what happened in the Pacific is, from our
understanding of in the marketplace, there was a period, a time lag,
between the delivery of new capacity and where the market was heading.
So things became very tight and people looked out and forecasted the
capacity they needed and joined various systems, because there wasn\'t
time to wait to design it yourself and build the third or fourth or
fifth cable system.

There is a lot of issue that people were trying to determine. For
example, is it easier to outsource project management of a construction
of a cable, even if you have the capital? Is it cheaper to pull your
capital to build a system than it is to go on it by yourself? What sort
of risks are you willing to take? Should you let somebody build it and
then take resale rights as you describe the U.S. to be?

So I think various players made their decisions. And as it happens,
given the situation in the marketplace at the time the decisions had to
be made, the one that seemed the best optimization of risk of capital
was the one to join a consortium type of cable. Because it gave you both
the benefits and \-- the benefits of equity participation, which is that
it allows you to have some control, some say over the capacity of being
built and designed. And second of all, it provided you a better price,
because you could negotiate \-- well, let me step back a minute. Because
you were providing capital, you could design the system in a way that
allows you to have competition on the backhaul side, which, in effect,
lowers your unit cost for the system.

So there\'s a whole bunch of factors that came together as to why
certain parties made decisions in the Pacific. So I think our answer is
that the ownership issue is really one of capital today, how fast you
can assemble it, how much risk you\'re willing to take for your equity,
for your capital contribution. And I don\'t think we should foreclose
consortium types of bills, because it is a response of the marketplace
to share risk. And I think that\'s what\'s taking place today.

MR. DEGRABA: Peter seems to be antsy here.

MS. MURRAY: This will just take a second. I think you need to look at
the fact that in Asia, there really aren\'t that many markets that are
open. You have Japan, Australia, but when you look at the Atlantic
Russian region, you\'ve got basically all of Europe is open, compared to
Asia. And so you\'ve got a lot more cables, you\'ve got a dozen or more
cables on that route, current and proposed.

And Asia, we hope will look more like that, the Asia Pacific region, we
hope will look more like that in the future, but there\'s a high amount
of risk in the Pacific Ocean region right now, because, you know there
are very few markets that are open. And to require carriers to put out
\$1.2 billion for one route, it seems to be a little excessive.

I don\'t know that we would personally be willing to take that risk.
We\'re not primarily in the business of building cables, unlike Global
Crossing.

MR. DEGRABA: Let me suggest one thing before I move on to Peter, and
that is, there are various kinds of risks back when I was in business
school we learned. One of them is the market demand might not show up to
meet the capacity you decide to build. With the forecasts of the demand
that\'s growing, that\'s probably not a huge risk in this market. Of
course, it\'s not my money out there, so maybe I\'m wrong.

The second thing, you just don\'t know what your competitors are going
to do, but if they decide to extend their capacity, well, you\'re not
spending yours, that might be a problem. The first kind of risk we\'re
sort of happy to see protected against. The second kind of risk, if you
tell me that I joined the cable in order to sort of guard against the
second kind of risk, for public policy reasons, we may not sort of be
all that happy with that kind of answer.

You know, \$1.2 billion sounds like a lot and maybe it is and maybe
it\'s not. I\'d be sort of more interested in over the course of time,
to sort of look more deeply into what other kinds of risks that are
being assuaged by having every single carrier be a part owner on the
same facility.

MR. MULETA: I think the problem I\'m having is not every carrier, at
least in the Pacific, on the inquiry in the Pacific, not every carrier
decided to join the consortium. What happened was that one carrier, one
potential player, decided to build their own. Which is great, that\'s
what we want competition to do, take the risk. The risk is that
everybody else might want to also build their own system, and they might
build it by participating in a consortium kind of cable. That is the
risk that, you know, that\'s the risk people were taking when they
decided to build the system.

And what we don\'t want to happen is for the Commission to step in and
say, well, it\'s wrong for you to share risk where you find it
appropriate. Again, there\'s no collusion, the parties are not trying to
carve up the market, all those kind of fears are addressed and are
taking place. I think it\'s great to have somebody take all the risk and
for another players to take parts of the risk, okay, where their capital
allows them to take the risk.

So I think what we want is both kind of systems to take place, okay, so
long as it doesn\'t foreclose from either system taking from ours. So I
think from our point of view, the second risk we say that there is a,
you know, your competitors might increase your capacity and you\'d be
left. That\'s a real risk in our business, because that means you\'re
dead. If you don\'t have capacity on business, you\'re dead. So that is
something, a significant risk, that we try and offset.

I think you\'re asking the question in a different manner, but from our
point of view, that\'s a real risk of being locked out of a marketplace
because there\'s no available capacity. Okay, because the demand is
always there, we just can\'t get the capacity.

MS. MURRAY: I think, Pat, you should be a lot more concerned if there
are resale restrictions, but in the particular consortium cable on Japan
U.S., there were no resale restrictions. You have 45 carriers that are
free to resale capacity and compete against each other that way. And
I\'m not sure that the competitive cable market has, I think they may
have resale restrictions.

So, you know, I think that\'s quite pro-competitive.

MR. DEGRABA: Peter?

MR. COWHEY: Well, I think, Pat, you\'ve made the right point, which is
there\'s exploding demand and there is no difficulty in financing a
\$1.2 billion venture nowadays. You take out a non-recourse loan to do
this and it is a risk for a company, but it is a perfectly viable
financial project.

So, clearly, these consortia are not existing because there is no way to
finance cables except with a consortium. It is true that companies and
carriers will vary in their preferences about different types of
financial risks for different purposes, and that\'s why a competitive
marketplace offering lots of alternatives is what you want, so that
people can take different alternatives.

Now the right question, I think, to ask is, does an FCC effort to try to
further enhance competition in infrastructure in the international cable
transport market require an end to all consortium arrangements? In our
view, it does not. What it does require, just as in many forms of
competition rules, is a limit on certain types of combinations in the
marketplace, not an end to all consortium relationships. So that there
should be maximum flexibility while having selective intervention to
limit particularly overly excessive combinations of market power.

MR. VALLS: I think I\'d like to add a little bit of private sector
reality from a smaller company. \$1.2 billion is a lot of money and
it\'s very difficult to get that kind of money in any marketplace to
finance a cable system.

I also would like to add that, in our particular case, we participate in
cable consortiums and we also purchase from private providers of cable.
And we really like to have the choice to be able to do both cases, so
that we would inspire the Commission to do anything necessary to keep
our choices open.

MS. ARBOGAST: Can I follow up with just a question which is, assuming,
you know, that we agree that it is desirable to allow folks to have the
choice of how they\'re going to do their ownership structure, whether
they\'re going to spread the risk, is there anything we should do to
guard against the possibility, or is it even a real possibility that the
folks, say you\'ve got A, B and C carriers that are on the consortia
carrier, on the foreign end, you\'ve got someone who\'s either a
monopolist or a dominant carrier. Should we worry about the fact that
the other carriers that are not on that consortia might be discriminated
against by the folks who have the ability to discriminate in the foreign
market? Should we be worried? If we should be worried, is there anything
we can do?

MR. MULETA: Can you say the hypothetical? I was just trying to
understand the hypothetical. Could you restate it?

MS. ARBOGAST: Well, you might just have said the hypothetical. You have
five companies that are U.S. companies that have decided to become
members of a consortia, and you\'ve got five others that did not, for
whatever reason.

On the far end of the consortia, you\'ve got folks, you have companies
that if they\'re not monopolists, they have very important market power
and the ability to discriminate. Should we be worried that they may
discriminate against companies that are not part of their partners on
the cable?

MR. MULETA: Oh, some sort of collusive behavior between the people that
are in the consortium about how they allow access to the facilities on
the other end, on the foreign end?

MS. ARBOGAST: That discrimination in terms of the ability to
interconnect, once you get to the foreign end, either of those others.

MR. MULETA: From PSINet\'s point of view, that is a real risk of all of
this, is power that\'s exerted on the foreign end. Cause, you know, if
you guys can\'t influence that, you know, that is a real risk. But I
don\'t think it\'s necessarily a behavior of the U.S. carriers that are
part of the consortium. It\'s not an obvious conclusion for me to say
that the U.S. carriers are sort of, you know, pushing for this sort of
behavior to take place.

And part of your investigation ought to be, you know, what does the
arrangement allow for, does it allow for resale rights? Does it allow
for competitive access to backhaul facilities, all those kind of things?
Because what the consortium members might actually be doing is opening
up the market for those who, for one reason or another, could not
participate because they didn\'t have the capital, for example, to
participate in this \$1.2 billion or \$1.5 billion bill.

So it\'s not an obvious conclusion that there\'s bad behavior on the
U.S. carrier\'s point of view.

MR. VALLS: I think I would also like to add, in our particular case,
where we are a carrier\'s carrier, we\'re typically negotiating
agreements with operating companies at foreign ends, a lot of times
it\'s easier for us to be able to negotiate an agreement if we already
participate in a consortium. For example, we participate in the FLI
consortium today, so it\'s sometimes easier for us to go into a country
and say we\'re participants in a consortium and so that we can work with
you easily, because the facility is already alive in your country.

And we know that in those cases, for example, into Egypt and into India,
it\'s unlikely that we\'re going to overcome the monopoly power of the
foreign partner for a long time to come. So participating in a
consortium does give us, it gets us a certain perimeter when we walk
into a country, to be able to negotiate an agreement with that foreign
country.

I also like the fact that when we are participating in a consortium, as
you mentioned before, we are basically buying credit that I could spend
to develop a circuit into Egypt or develop a circuit into India or
develop a circuit into Thailand, which allows me to negotiate with three
entities with the possibility of reaching an agreement with one entity,
and then using my credits to go into that country where I have had a
successful negotiation. Because any of you who have tried to negotiate
with foreign entities know that it\'s a very tricky situation.

So that I do believe in that sense, the consortium cables provide us
with, it provides us with a flexible mechanism to be able to enter into
several markets when you\'re dealing from a carrier\'s carrier point of
view.

MS. ARBOGAST: Thank you.

MR. TALBOT: Jim Talbot with AT&T. I\'d just like to go back to Pat\'s
earlier question for a moment. As Ken mentioned earlier, U.S. carriers
need low cost capacity. We\'re competing in a highly competitive
upstream market, and what we need from our consortium cables is the
lowest cost capacity we can get.

And the consortium cables provide this. And the reason they do so is
that unlike private cables, consortium cables are not profit making.
They allow all carriers to take equity positions without the huge risk
exposure that you have if you build your own cable. The risks are
greater on undersea facilities. The Commission has recognized this in
its endorsement of consortium cables for some 35 years.

Unlike terrestrial cables, you can\'t build and use consortium undersea
cables on an incremental basis. You can\'t turn them on until you\'ve
fully built. Once they\'re built, there\'s very limited things you can
do to reflect latest technological developments. There was a huge
technology risk. All capacity can become outdated very, very quickly.
Per SDM costs as a result of changing technology have come down from
well over \$50 million back in the late 80s to \$10 million to just a
few years ago with TAT 12, 13. When TAT 14 is turned up for service in
2001, the per SDM are going to be something like \$400,000. You\'ve got
to plan your investments extremely carefully, to make sure that you can
take advantage of the lowest cost capacity to provide the services, the
low-cost services that your customers require.

Global Crossing is well aware of this. They told the FCC in \'98 that,
in fact, there were very substantial barriers to entry on building
undersea. And it\'s those kind of realities that have formed the
Commission policies for many years.

MR. DEGRABA: I would throw out one last question, I guess, at least for
this part, to kind of push the analysis one step forward and don\'t
expect an answer today, but perhaps in the future, which is, there are
compelling stories about why consortium cable, in general, are good and
sort of I understand them. But I guess the piece that\'s missing is, and
this is sort of the symbol of my earlier, perhaps, economist question.
There\'s nothing that I\'ve heard so far \-- maybe the answer is out
there and I\'ll get it later \-- about why there just needs to be one
consortium cable of 480. All the stories I\'ve heard today are
consistent with two consortium cables of 240 each.

So that\'s at least one piece of the analysis that I think is still
missing. If you want to make a compelling affirmative case for a single
cable with a large number, and the vast majority of the carriers on it,
as opposed to a few independently owned consortia.

MR. MULETA: This is John Muleta. I think what we\'re trying to describe
is that this is a very dynamic marketplace in which in the Pacific, for
example, what happened was that there was a very, very narrow window in
which people had to make a decision. It was either build or not build.
There was one alternative that was announced, and people were coming up
and saying, let\'s build another one.

And what happened was that a lot of players said, this is a good way of
diversifying our capital. They didn\'t foreclose buying on the private
cable. All they said was, this would be a good way of getting, of
diversifying our capital. And if, you know, System A comes in first,
we\'ll buy in System A if it\'s priced right. And if System B comes in
and if it\'s priced right, we\'ll use that. You know, in essence, you
make that capital commitment.

So I don\'t think there\'s been any discussion that it should only be a
single cable, a single consortium. It can be multiple consortiums. But
the question is, assembling the consortium takes time. You know, this is
a lot of negotiations that have to go on. People have to negotiate among
themselves, among multiple parties. So when you have a narrow window, it
happens that only one was built in that instance, and only one
consortium and another cable system, which was a private cable. Okay, so
what it gave was two alternatives into the marketplace. Okay, that\'s
the important thing to note in that instance.

If you look across the Atlantic, there are consortium cables. They are
not called consortium cables. There are, for example, there is at least
one that has been announced which sounds like a consortium cable, but
it\'s under the guise of several partners working for a joint venture.
Okay, so it\'s not clear as to whether it\'s a consortium or not. There
are other cables that are being designed the same way, and then there is
a public consortium like TAT 14 in which, you know, it\'s declared
itself as a consortium.

So I don\'t think your statement that we\'ve been talking about one or
nothing is true. The one thing that I\'d like to note is, in any
instance where you have a consortium, the key thing to keep in mind is
that there should be transparency. Okay, that is one of the things that
the Commission should strive for, the information is public, that people
are aware that who the parties are and sort of what are the deals that
are being struck, just so that the Commission can have an indication
about what\'s going on in the marketplace.

MR. DEGRABA: Thank you.

MS. ARBOGAST: Yeah, one more comment on this topic then we\'ve got two
other topics that I want to leave some time for and we\'ve just about
run out of time.

MR. COWHEY: My points will be appropriately brief. The first is, this
question of requiring a consortium to handle risk is one that I would
hope at this point should be a dead question, in the sense that we have
evidence already that the marketplace will finance non-consortium
arrangements to lay full capacity undersea cables, number one.

Number two, the problem for undersea cables is not substantially
different from global satellite systems, where they have to have the
system up before you turn on the services in full, but you have the
ability to finance those systems, as well. Whether they succeed or fail
in the marketplace is a separate question.

The third point I want to make is that the notion that we need a public
utility model here both goes back to the false notion that public
utilities are the best way to build out capacity, competitively and in a
technologically innovative way. And also speaks, carries forward the
myth that these consortium were offered at cost. For example, on
backhaul, they were not offered at cost traditionally. And I might note
that AT&T was always a landing party on these cables. I\'m thus able to
make the margins that came from non-competitively priced backhaul.

But the real point I want to conclude with is that, in fact, much of the
discussion here is really about two points. One, that the Commission
should have a clear set of guidelines to the marketplace on an aid
priority basis about what is likely to be permissible or not. It is
possible to negotiate a joint venture in a timely, efficient way to
share costs among parties if they knew what types of joint ventures are
acceptable.

And that leads to the final point which is the Commission should be
focusing on what constitutes an overly inclusive joint venture to build
a cable and defining that clearly for the marketplace so the marketplace
knows how to deal with that. They can build joint venture, club cables,
consortium cables, but not overly inclusive ones.

MS. ARBOGAST: Wait, wait, if we keep on, we\'ll be here all night and
ten seconds, ten seconds, then we\'re going to move onto the next thing.

MR. MULETA: Okay, ten seconds. Beware of inputs into the cable
construction, so the manufacturers and those parties actually exert a
great deal of influence into the availability of cable systems, so
people that have control over inputs are people you should be taking a
look at, as well. Not necessarily asserting jurisdiction, but just
taking a look at.

MR. TALBOT: There is significant competition in the undersea cable
market. There\'s a huge amount of capacity going in, both public and
private. In fact, we\'ve had the leading builder say to us that 80
percent of new capacity is now private. There is no evidence of any
competitive harm to private cables. The Commission really should not
proceed without facts and I\'d submit we\'ve really seen no facts today
that provide a basis for launching a proceeding to look at policies that
have worked well for years and continue to work extremely well in giving
U.S. carriers a choice of different arrangements to meet the needs for
cheap capacity for their customers.

And particularly in launching any kind of inquiring to rules, the just
dependency of them would effectively chill consortium cables until the
issue was resolved, thus helping \-- meaning that U.S. carriers could
lose critical planning windows, unable to pursue the consortium option,
because they wouldn\'t know what the rules of the game would be going
forward.

MS. ARBOGAST: Thanks. I just want to throw out one question that I
don\'t even want comments on right now, because I want to move to the
other topic. But one of the things that had been triggered on something
that you had mentioned, Kerry, about that the resale, one of the things
that we should look at are whether there are restrictions on the ability
to resell at capacity.

The question I just have for folks, that you can get back to us later,
is one of the things that we should also be looking at whether there are
serious restrictions on a resale until the pool capacity is sold? And
I\'d just like people\'s thoughts on that, but not now.

We have two more topics to cover and I think we\'re going to need to
give each about five minutes. The next one is, on a going forward basis,
again, not looking at any past or pending proceedings that we have, but
on a going forward basis, are there any circumstances where we should be
somehow wary of taking a close look at or otherwise constraining price
differentials, especially volume discounts?

MR. NAKAMURA: This is Kent Nakamura from Sprint. My understanding from
our business people about the submarine cable business is in some ways,
it\'s sort of like building a big shopping mall. You need anchor tenants
and you need it so that you can get the money to build the thing. And
the anchor tenants, however, are also in a position to extract very good
prices, just like Nordstrom\'s or Bloomingdale\'s, you know, you can be
sure will pay cheaper rent than, you know, a small fast food place in a
big shopping mall.

So volume discounts doesn\'t necessarily mean that there\'s a
competitive problem.

MS. ARBOGAST: Is there a volume discount, is there an obscene volume
discount as someone had once said in our meetings? Is there anything
that would be so outrageous that we should take a look at it?

MR. MULETA: I think where I would be worried would be where essentially
they\'re getting the capacity for free.

(Laughter.)

MR. MULETA: And where there has been no \-- you know you guys try to do
that. No, but I think in essence where the upgrade rights would
essentially reflect the total first that\'s available. I mean, in that
instance, I think you\'d be worried about, and that also, you have to
add into it how much control do they have over the upgrade rights? Okay,
as part of the VPA, if they get a right to upgrade it or they have the
majority and if the ownership is structured not on, you know, percentage
of capital, but let\'s say, percentage of capacity, you know, there are
things that you can monkey around with to allow you to essentially have
control over the system. That\'s really the driver for us to be very
concerned as a private party to this is, if we see that the VPA is
really structured as a way of giving all control to one or two \-- one
or a few players.

MS. ARBOGAST: Okay, any other comments on volume discounts?

MR. TALBOT: Without getting into the pending proceeding on that issue,
just to point out that you have dealt with these issues on a case by
case, you look at a variety of factors. The one that Kent mentioned, the
competitive nature of the route, and we think those rules are really
adequate to deal with those issues.

MS. ARBOGAST: Okay, anything else?

MR. COWHEY: I think that if you look at the size of the differentials
that exist in the market on pricing today, you might reasonably suspect
that they reflect some elements of market power at work inside the
pricing system and I suspect that that\'s what John was trying to point
us to gently \-- or not so gently, maybe.

But, in the long run, of course, an efficient market may have
differences in pricing for different parties, and so it would be better
if you had the market structurally competitive with multiple systems out
there, so that the pricing differentials reflect more efficient economic
incentives, rather than just simply market power.

MR. NAKAMURA: This is Kent Nakamura from Sprint. I am aware of at least
one situation on these new cables where several carriers came together
to combine their needs in order to get a better discount on the price
was essentially arbitraging the price structure.

MR. MULETA: Any system, private or common carrier, that disallows
parties to, non-dominant players, to take advantage of discounts by, you
know, sort of enjoying either joint venture partners or some other form,
I think I would be very concerned with, as a public policy matter, you
know. Allowing people to pool their capital to reduce their costs on
either private or consortium cable, common carrier or non-common carrier
cable, should not be outlawed, so long as it\'s within the, you know,
anti-trust laws as their behavior.

MS. GINSBURG: If I may also add, the Commission recognized in the
context of submarine cables the benefit of volume discounts in the Guam
Philippines order just a year and a half ago, two years ago. So there
are benefits, I think, and the Commission has recognized that.

MS. ARBOGAST: All right, let me move on to the next one, the last one,
which is conditions. Any of you who have a license know that there are a
set of conditions that we routinely impose on both private and common
carrier licensees. And I would just like to give folks an opportunity to
tell us which of those you think are no longer necessary, or maybe never
were necessary, that we should consider doing away with? Are there any
that you think we should be considering adding on as routine conditions?

MR. NAKAMURA: From Sprint, Kent Nakamura, again. A couple of them like
the defense or the Secretary of the Army moving the cable. Maybe it made
sense when there were very, very few cables so each one was really,
really important strategically. I\'ve been in this business a long time.
I\'ve never been aware of a situation where they ordered that the cable
be moved. Maybe it\'s a good one to look at, ask the Defense Department.

The second one was, you know, the boilerplate about accepting the
conditions in the license within 30 days. I mean, why not just let them,
if somebody doesn\'t like it, let them petition for reconsideration the
same way they do from all Commission orders if you don\'t like it.

MS. ARBOGAST: Anything else?

MR. TALBOT: I think we concur with that. There\'s really no evidence
that these conditions are really causing any problems in the market, and
if applicants want to be relieved of standard conditions, they could
request that, perhaps in their application, and other parties could
comment.

MS. ARBOGAST: Okay, does anybody have a desire to say something on
undersea cables in general that hasn\'t come up in the topics that
we\'ve covered today, within reason?

(Laughter.)

MR. MULETA: It has actually nothing to do \-- we have prepared a
statement that we would like to hand to the Commission and announce to
whoever else wants a copy, we\'ll leave it here.

MS. ARBOGAST: Okay, thank you.

MR. NAKAMURA: I have a leave behind on some of the local and state
permitting problems that are starting to show up. Just by way of
example, the State of New Jersey was intimating to Sprint that maybe
they wouldn\'t let us put in the segment of capable between Manasquan,
New Jersey and Puckerton, because they wanted the thing to go on the
land instead of, you know, undersea. It was our impression it was the
Commission, not, you know, the New Jersey Department of Environment, who
decided whether submarine cables were in the public interest.

MS. ARBOGAST: Let us know, now we\'re running out of time, but are those
sorts of comments designed to ask us to somehow pre-empt, do something,
get involved in this?

MR. NAKAMURA: Be aware of it.

MS. ARBOGAST: All right, okay. Anything else?

MR. COWHEY: Rebecca, I have a question on how you\'d like to proceed.
There is a point I want to make about what I think is the right approach
for the Commission, which I don\'t think has come out here. But on the
other hand, you may want to open this up to a question and ask for a
last thought or so later on.

MS. ARBOGAST: Say what you have to say and let\'s give folks an
opportunity to respond briefly to it. And then what I would like to do
is either close up or give folks an opportunity to just address issues
that haven\'t come up so far.

MR. COWHEY: What we\'ve heard today is that a number of parties have
suggested that there may still be problems in the market from their
viewpoint. Clearly, Global Crossing believes that there is a significant
problem with the performance of this market.

Without going into the details of what we think would be a good remedy,
I would emphasize a couple of simple points about what the Commission\'s
options are. The choice is not between the status quo and detailed
micromanagement of conditions in foreign countries. There is another
alternative available to the Commission. That alternative would be to
focus on ways of defining what constitutes an impermissibly broad
ownership structure for consortium cable. That is, to set an ownership
cap for a cable, similar to the types of spectrum caps that the
Commission uses in the wireless market.

I would suggest that such a measure would focus upon the control of
market power as measured by control of circuits and half circuits, of
full circuits in the market, of the cable landing parties were the
parties who, after all, do the planning of the cable systems and are the
most influential players in the market.

And I would suggest that such a rule, if adopted, could allow also for
the fact that we have heard parties express an observation that there
are variations in the world market. For example, a limit on ownership
combinations might be forborne for thin route markets and other measures
used, in order to allow a balancing between the desire to get new
capacity out there in the marketplace and, at the same time, still have
some safeguards.

Similarly, such a rule might be forborne if the relevant market was not
a country-to-country market, like the U.S. to the U.K., but was,
instead, a vigorous regional market, perhaps, such as the North
Atlantic, where there is a cost effective hubbing mechanism. And thus,
in that way, the Commission could both deal with variations in regional
markets and at the same time have a clear guideline to the market about
how it can put together consortium arrangements or purely private single
investor arrangements.

So the one point I would like to be carried away from today is the
choices, not between the status quo and overly intrusive intervention
overseas, nor denying entry to foreign carriers to the U.S. market.
There is a third way, well grounded in competition tradition and
available to the Commission.

MS. ARBOGAST: Would anybody like to respond?

MS. MURRAY: Yes, if I could just say a word? We would oppose overly
intrusive intervention in the U.S. domestic market when you\'re talking
about non-dominant carriers. And I don\'t accept that the spectrum
analogy, when you\'re talking about scarce resources. There may be a
reason to have a cap there, but we\'re not talking about scarce
resources here.

MR. NAKAMURA: I just wanted to paraphrase, to close something that Dan
Campbell, whom some of you may know, who\'s in the submarine cable
business with AT&T for many years, told me a couple of times. He said, a
consortium is a great way to organize people to build a cable. He said
in a competitive, in a market that\'s becoming competitive, it\'s not a
good way to proceed. It\'s very slow, it\'s very cumbersome, just
doesn\'t function very well in competitive markets.

He thinks that we may have seen the end of it and so far as Sprint is
concerned, if the consortium cable doesn\'t change, cant\' change in
response to developing competition worldwide, then it will die.

MS. ARBOGAST: Going, going \--

MR. TALBOT: I\'d just like to add a couple of points. The approach that
we\'re hearing from Peter would raise costs to all carriers. I mean, the
effect would be to limit the number of U.S. carriers that could go on
any one consortium cable, leaving the choice, either you have to build
on your own, thus expending much greater capital than you otherwise
would, or purchase more expensive capacity from private operators like
Global Crossing. The price is two to five times cost, instead of the
cost-basis level they put consortium\'s price level at.

The Commission cannot proceed without facts. And Global Crossing
provides absolutely no basis for any departure from the well established
basis on which the Commission has proceeded in this area case by case.

And just a more generic point at close. The Commission has done a
tremendous amount in recent years to remove unnecessary regulation in
the international market. With a foreign participation order, you no
longer have the pervasive regulation of foreign entry into the U.S.
market. With the ISP order, you have removed a lot of regulation of U.S.
carrier\'s traffic relationships with foreign dominant carriers, relying
on things like competition in the foreign market and the no special
concessions rule.

There is absolutely no reason to reverse course and go in totally the
opposite direction to introduce much greater regulation of non-dominant
U.S. carriers that have no affiliation with the foreign market power
that Global Crossing has pointed to.

MS. ARBOGAST: Thank you. I\'d like to close by thanking everybody for
their long attention, for no break, for many of the thoughtful comments
that came through today. I\'d like to just repeat the invitation that if
in the next short, relatively short period of time, two to three weeks,
if people would like to come in and set up meetings with staff to talk
about any of these issues or any other issues that you\'d like us to
consider, to please do so through Liz Nightingale. Do you want to give
your phone number?

MS. NIGHTINGALE: Yes, 418-2352.

MS. ARBOGAST: And again, thank you, everyone.

(Whereupon, at 5:15 p.m., the hearing in the above-titled matter was
concluded.)

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[REPORTER\'S CERTIFICATE]{.underline}

**FCC DOCKET NO.**: N/A

**CASE TITLE**: Undersea Cable Public Forum

**HEARING DATE**: November 8, 1999

**LOCATION**: Washington, D.C.

I hereby certify that the proceedings and evidence are contained fully
and accurately on the tapes and notes reported by me at the hearing in
the above case before the Federal Communications Commission.

Date: \_11-8-99\_\_\_ \_\_Sharon Bellamy\_\_\_\_\_\_\_\_\_\_\_\_\_

Official Reporter

Heritage Reporting Corporation

1220 L Street, N.W., Suite 600

Washington, D.C. 20005-4018

**[TRANSCRIBER\'S CERTIFICATE]{.underline}**

I hereby certify that the proceedings and evidence were fully and
accurately transcribed from the tapes and notes provided by the above
named reporter in the above case before the Federal Communications
Commission.

Date: \_11-16-99\_\_ \_\_Diane Duke\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Official Transcriber

Heritage Reporting Corporation

**[PROOFREADER\'S CERTIFICATE]{.underline}**

I hereby certify that the transcript of the proceedings and evidence in
the above referenced case that was held before the Federal
Communications Commission was proofread on the date specified below.

Date: \_11-18-99\_ \_\_Lorenzo Jones\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Official Proofreader

Heritage Reporting Corporation