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76–759 2002

SMALL BUSINESS ACCESS TO COMPETITIVE

TELECOMMUNICATIONS SERVICES

HEARING

BEFORE THE

SUBCOMMITTEE ON REGULATORY REFORM AND

OVERSIGHT

OF THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

WASHINGTON, DC, NOVEMBER 1, 2001

Serial No. 107–34

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

DONALD MANZULLO, Illinois, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVE CHABOT, Ohio

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

JOHN R. THUNE, South Dakota

MICHAEL PENCE, Indiana

MIKE FERGUSON, New Jersey

DARRELL E. ISSA, California

SAM GRAVES, Missouri

EDWARD L. SCHROCK, Virginia

FELIX J. GRUCCI, JR., New York

TODD W. AKIN, Missouri

SHELLEY MOORE CAPITO, West Virginia

BILL SHUSTER, Pennsylvania

NYDIA M. VELAZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

BILL PASCRELL, JR., New Jersey

DONNA M. CHRISTENSEN, Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

JAMES R. LANGEVIN, Rhode Island

MIKE ROSS, Arkansas

BRAD CARSON, Oklahoma

ANIBAL ACEVEDO-VILA, Puerto Rico

DOUG THOMAS, Staff Director

PHIL ESKELAND, Deputy Staff Director

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

MIKE PENCE, Indiana, Chairman

LARRY COMBEST, Texas

SUE KELLY, New York

SAM GRAVES, Missouri

ROSCOE BARTLETT, Maryland

TODD AKIN, Missouri

PAT TOOMEY, Pennsylvania

ROBERT BRADY, Pennsylvania

BILL PASCRELL, JR., New Jersey

CHARLES GONZALEZ, Texas

DAVID D. PHELPS, Illinois

JAMES R. LANGEVIN, Rhode Island

ANIBAL ACEVEDO-VILA, Puerto Rico

BARRY PINELES, Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on November 1, 2001 ........................................................................ 1

WITNESSES

Gregori, Joseph A., CEO, InfoHighway Communications Corp. .......................... 3

Burk, Richard E., President and CEO, NII Communications .............................. 6

Curtis, Robert A., President, Z-Tel Network Services, Inc. .................................. 7

May, Laurence, Partner, Angel & Frankel ............................................................ 9

APPENDIX

Opening statement: Pence, Hon. Mike ................................................................... 16

Prepared statements:

Gregori, Joseph A. ............................................................................................ 20

Burk, Richard E. ............................................................................................... 27

Curtis, Robert A. ............................................................................................... 36

May, Laurence .................................................................................................. 52

Additional Material:

Letter to Committee from ALTS ..................................................................... 59

(1)

SMALL BUSINESS ACCESS TO COMPETITIVE

TELECOMMUNICATIONS SERVICES

THURSDAY, NOVEMBER 1, 2001

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT, Washington, DC.

The subcommittee met, pursuant to call, at 2:15 p.m. in room

2360, Rayburn House Office Building, Hon. Mike Pence (chairman

of the subcommittee) presiding.

Chairman PENCE. I would like to welcome everyone, especially

our witnesses, to this fourth in a series of hearings on telecommunications which is being conducted by the Subcommittee on

Regulatory Reform and Oversight of the Committee on Small Business here in the House of Representatives.

This hearing is on the subject of small business access to competitive telecommunications services, and I will welcome each of

the witnesses individually. I thank you very much for being here

and for your interest in participating in the public process.

I will alert you as a housekeeping matter that we have votes that

are expected to imminent, and in the event there are votes, we will

adjourn and the Chair and any of the other members that are

present will simply recess and return in the hopes of not inconveniencing any of our witnesses or those in attendance any further.

Let me also say for those of you that are aware of the anthrax contamination in my office that I am confident the attending physician

has urged me that I am not contagious in any way, in any way carrying any airborne antibodies with me, so those of you in the back

of the room can move forward and make yourself comfortable.

Five years ago the Telecommunications Act of 1996 was signed

into law. When it was enacted, promises from congressional leaders, the President and industry was that the legislation would create a revolution in the provision of telecommunications services.

A revolution certainly has occurred and an entirely new economy

based on the Internet has developed in the past five years. Hundreds of new companies have been formed to break into what was

once perceived as an impenetrable monopoly, the local telephone

market, unfettered competition in the telecommunications market,

and the benefits of lower prices and better services, particularly for

small business owners throughout the country, remains a distant

goal, not a near-term reality.

Some experts believe that the competitive goals in the ’96 Act

will not be met without facilities-based competition. There is no

doubt that facilities-based competition will play a key role in proVerDate 11-MAY-2000 03:39 Jan 11, 2002 Jkt 076759 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HR\OC\A759.XXX pfrm02 PsN: A759
2

viding competition to the incumbent local telephone companies, yet

facilities-based competition is not the only option.

As the Supreme Court noted in AT&T v. Iowa Utilities Board,

the 1996 Act ‘‘imposes no such limitation; if anything, it suggests

the opposite.’’

Three of the witnesses today are competitors of incumbent local

telephone companies that started after the enactment of the 1996

Act. Their business models are based on the fact that the facilitiesbased competition is not mandated by the act. They will explain

how they purchase unbundled network elements that constitute the

foundation of local telephone service from incumbent local telephone companies, reassemble those elements along with elements

that they provide themselves, and sell that package to provide competitive local telephone service.

A key component of providing local telephone service is access to

switching so that telephone calls can be routed properly. In its initial order implementing the 1996 Act, the Commission designated

switching as an unbundled network element that incumbents must

sell to competitors should they so request it.

The Supreme Court determined that the Commission misinterpreted the ’96 Act and forced the agency to develop a new list of

unbundled network elements. The Commission did that, and determined that incumbents would no longer be required to sell switching as an unbundled network element to competitors who wish to

serve customers with more than four telephone lines. The Commission determined that switching service was sufficiently available

from sources other than incumbents for all customers except small

businesses and residents.

The decision violated the Small Business Act, plainly put, and

the Regulatory Flexibility Act, as was pointed out in a detailed letter by a predecessor in this subcommittee, and the immediate past

chairman of the Small Business Committee, the Honorable Jim

Talent.

The Commission failed to follow the Small Business Act when it

determined that small businesses were only those businesses that

have fewer than four telephone lines, nor did the Commission properly assess the economic impact of the decision on small competitors, and whether there were any potential alternatives that might

be less burdensome on them.

The telecommunications companies will explain how their businesses are dramatically and adversely affected by the Commission’s

decision, and how they have been now waiting for nearly two years

to get a decision on the reconsideration of the issue.

During the pendency of this proceeding, they have been unable

to expand because the rules governing their businesses remain in

flux. In turn, this harms the ability of these companies to provide

service to many small businesses. More importantly, if the Commission decides to extend its current rules to all areas of the country rather than the central business districts of the 50 largest cities, it could prevent competition from flourishing in many smaller

cities like Muncie and Anderson, that represent hubs of the congressional district that I serve.

The final witness will explain to us that the needs of a small law

firm or any other small business do not necessarily comport with

3

those of larger businesses or residential customers. That conclusion

appears to be obvious to everyone but the Commission, which historically fails to distinguish between small businesses and residential customers. The proceeding at issue here simply continues that

illogical and unsupported precedent.

A bit of a personal word. There has been some concern expressed

to this committee in the days preceding this hearing that this hearing may turn into an opportunity to attack the RBOCs. Allow me

to say that this is not a hearing held for that purpose. It is not held

for the purpose of allowing competitors of RBOCs to do that. Rather, this hearing is specifically and exclusively about the regulatory

actions of the FCC.

The Commission as of today should be on notice that this Chairman and this subcommittee expect the laws of this Congress to be

obeyed. If the Commission fails, the commissioners can expect that

they will be explaining their decision to this subcommittee in the

near future.

Let me thank the witnesses again for taking time out of their

busy schedules and making a trek to Washington, D.C. under these

unusual circumstances and during this unusual time in our history. And with that, I will introduce our first witness who will be

recognized for five minutes, and I believe it is Gregori, I always

ask.

You activate your microphone, Mr. Gregori, on the pad, and the

lights in front of you, by way of housekeeping, will notify you when

you get within about 30 seconds of finishing with the yellow and

the red. It does not mean immediately stop. It means you can wrap

up your comments in an orderly way.

Joseph Gregori is the chief executive officer of InfoHighway Communications Corporation, which is an integrated communications

provider, offering voice data and end communication services to primarily small and medium-sized business customers. The company

offers competitively priced, high quality one-stop shopping for local

and long distance telephone services, high speed data, and network

design and wiring services.

Prior to joining InfoHighway in September of 1998, Mr. Gregori

was the chief operating office for Price Cellular Corporation, a publicly traded wireless communications provider with operations in

over 20 markets throughout the United States of America.

Mr. Gregori is a CPA, and an honors graduate of Adelphi University. He began his professional career in public accounting, and was

employed in the audit division of Deloitte & Touche.

And Mr. Gregori, you are most welcome and are recognized for

five minutes.

STATEMENT OF JOSEPH A. GREGORI, CHIEF EXECUTIVE

OFFICER, INFOHIGHWAY COMMUNICATIONS CORP.

Mr. GREGORI. Thank you. Good afternoon.

You now know I am Joseph Gregori and I am the CEO of

InfoHighway Communications. I would like to thank the Chairman

and other members of the committee for allowing me the opportunity to speak with you today.

Our company is one of the many CLECs that provide telecommunications alternatives to the small business community. The

4

FCC currently has rules in place that limit our ability to serve the

small business market, and worse, is considering new rules that

could further limit our ability to compete for small businesses. This

limitation will in fact threaten our entire industry’s existence as a

competitive alternative for the small business community.

A quick further overview of our company. As you heard, we provide telecommunications services, primarily in the northeastern

part of the country, from Massachusetts down through New York,

New Jersey, Pennsylvania, Baltimore, Washington and right here

in the D.C. area.

According to the New York State Public Service Local Competition Report for the year ended December 2000, InfoHighway Communications was the twenty-third largest competitive provider in

New York State, out of over 100 responding companies. Currently

we have in excess of 5,000 customers that are mostly small businesses. Our typical customer might be the local print shop, the

neighborhood travel agency, or your doctor’s office.

Our strategy has been to bundle together local and long distance

voice services while we slowly and deliberately build out our own

data network to deliver high speed internet access utilizing digital

subscriber line technology, also known as DSL.

This smart build approach allows us to build market share and

cash flow while making the necessary long-term investment in

building networks. To date, we have invested over $7 million in

network facilities.

Our company does not have the resources to build a ubiquitous

voice and data network to compete with the incumbents. Those

companies, as you know, have had over 100 years to build that,

most of the time protected by regulation from any competition.

We now hear from the likes of Verizon that they welcome competition—but only from competitors their own size, those companies able and willing to duplicate their network. Of course, no company can do that, especially in today’s environment.

Further, Wall Street and the private equity markets have no appetite today for ‘‘Field of Dreams’’ type builds, build new data networks, build new voice networks and we will finance them. That

era is gone.

The FCC needs to hear from you and others concerned about the

state of, or lack of, competition in the local markets, particularly

for the small business customer.

We lease facilities from Verizon and utilize unbundled network

elements, commonly referred to as UNEs, combining UNEs in what

is referred to as the unbundled network element platform, or UNEP. These offerings are expressly provided for in the 1996 Act and

time and time again state and federal regulatory bodies have ruled

they must be offered to competitors.

Let me share with you a little bit about the state of competition

in New York which has many times been showcased as the success

story for local competition.

My view is that New York State probably is the most competitive

state in the nation. However, if you examine the facts and put

them together, rather than look at them just simply as statistics,

and consider especially the huge role of UNEs and UNE-P, you

come away with a very different perspective.

5

The New York State PSC issued this yearly report titled ‘‘Analysis of Local Exchange Competition.’’ On the surface, the report

looks encouraging, but closer examination, coupled with the state

of our economy, tell us competition is in trouble.

The report indicates, as you would expect, Verizon-New York still

accounts for most of the local revenues; in fact, $5.1 billion or 82

percent, and AT&T ranks number two. No surprise. However, what

is startling is that AT&T is a distant second with $168 million or

approximately 2.7 percent of the total revenues in that market. In

over five years, AT&T has less than three percent share of the New

York local telecom market.

If a company the size of AT&T with its resources and brand recognition cannot obtain more than 2.7 percent, one has got to ask

why.

By contrast, the same report indicates that Verizon-New York

has now captured 20 percent of the long distance residential market in the first year since it entered that market. Are they that

good at marketing and everyone else so inept?

The irony is that what is pointed to as competition from the

CLECs in New York has resulted primarily from the use of leased

facilities from Verizon. Approximately 80 percent of all the competitive lines in New York use leased facilities, and this is precisely

the option that the FCC is foreclosing.

I implore you to take up our case. Thank you. I appreciate your

time.

[Mr. Gregori’s statement may be found in the appendix.]

Chairman PENCE. Thank you, Mr. Gregori, and we will hold any

questions about your testimony until after we have heard from all

of the witnesses.

Richard Burk is also with us today. Mr. Burk began his telecommunications career with Southwestern Bell in 1978 as an account executive in Southwestern Bell’s marketing group. In 1984,

Mr. Burk joined Value Line of Longview, a competitive long distance company. As president there, he honed the skills of technical

operations, regulatory affairs, accounting, finance, marketing and

other aspects of operating a competitive small business.

From Longview, Mr. Burk went on to become vice president of

operations for American Telco, a Houston, Texas-based privately

held regional long distance provider. While there, he negotiated the

first post-telecommunications act local interconnection agreement

with a Bell Company.

In 1996, Mr. Burk joined USLD Communications in San Antonio,

Texas, which is a Texas-based long distance provider. As vice president of strategic development, he oversaw the company’s pursuit of

authority to enter local markets in 22 states and negotiated interconnection agreements with Southwestern Bell, Pacific Bell and

others. Under Mr. Burk’s direction USLD purchased and implemented a state-of-the-art local switch and was in the process of developing a strategy to convert its resale customers to UNE–P when

it was acquired by Qwest.

After leaving Qwest in 1998, Mr. Burk started Network Intelligence, Incorporated, the company known today as NII Communications. He is the president and chief executive officer of NII,

6

which is a competitive local exchange carrier serving nearly 7,000

small business customers throughout the State of Texas.

And Mr. Burk is most welcome to the subcommittee and is recognized for five minutes.

STATEMENT OF RICHARD E. BURK, PRESIDENT AND CEO, NII

COMMUNICATIONS

Mr. BURK. Thank you very much, Mr. Chairman. I appreciate the

opportunity to speak to the subcommittee.

I have been characterized as a veteran of the industry. I have

been around it a long time. But in 1999, my wife and I invested

our life savings in starting NII, which is really a small business

still today, probably one of the smaller companies up here. We are

going to do about $20 million in revenue this year. We are real

proud of that. But relative to telecom companies, that is not real

big.

But I also think we are probably, as of the last few months, kind

of operating on a break-even basis. We are not losing money, and

that is also fairly unique in the telecom business, and we are real

proud of that as well. And one of the reasons that is the case is

that UNE–P has been offered in Texas on pretty much an unfettered basis as a result of the 271 negotiations and what is known

as the T2A. However, that is in jeopardy now. Some time limitations have expired and the commission there is considering whether or not it should now adopt the restrictions placed on it by the

FCC.

And those restrictions are very onerous to us. They cloud your

ability to go into the major markets, and we are very concerned

that they may spread to all markets.

Our 7,000 customers are spread across approximately 250 small

towns in Texas. I have a lot of customers and employees in the districts of Representative Combest and Representative Gonzalez, who

are on your subcommittee, and it matters to them.

Rather than reiterate all of my testimony, attached to my testimony is letters from 22 of our customers which we did not spend

a lot of time obtaining; we just asked some of them what they

thought, but I want to read you some excerpts out of three of them

because I think they really speak to the issue.

Mr. Jim Gerab, who is the president of Prestige Home Health

Care wrote me this letter, it is handwritten, and it is in your testimony. It says, ‘‘Dear Richard: As you know how important competition is, I wanted to take out the time to thank you. NII has allowed

my company enough savings to be able to put in place a health

care package for our employees. Keep up the good work. Thank

you.’’

Drew Longmeyer of Longmeyer Plumbing in Abilene, Texas, just

part of their letter says, ‘‘Well, the second bill of NII is in and you

are not right about the savings. We saved even more than you said

we would. Spending 70 to 80 dollars more a month might not seem

significant to a larger company, but it makes a big difference to our

small company. In our case, it is the payment for equipment we

have needed but could not afford.’’ And he goes on to talk about

some other aspects of our service.

7

And in these letters you will find the customers like us to varying degrees, but a common thread among all of these customers is

that they are very adamant and appreciative of the fact that they

have had a choice as a result of what is going on. In fact, John

Timms, the president of Isabelle’s European Day Spa, Inc. says,

‘‘As an owner and operator of two successful Day Spas, I tip my hat

to whoever has made it possible to finally get out from underneath

the thumb of Southwestern Bell.’’ And he says some other things.

But those are just example—I really recommend that you read

all of those letters because it really speaks to what is going on out

there. The reality is that the economic model that produces the

benefits for the small business today is UNE–P.

Now, my company offers a fully integrated set of services. We

provide local service, long distance, and dial-up internet access in

places where many other companies do not provide it. We also offer

broad-band DSL, web hosting and web site design. So it is a complete package for small businesses, but the fact of the matter is

they do not really have a choice absent what the UNE–P providers

are providing.

The statistics that Mr. Gregori quoted awhile ago relative to the

long distance penetration in local competition in Texas are very

similar to what they are in New York, and these are the two best

markets in the country for competition.

Our plan was to be in a number of states other than Texas, and

we have had to rethink those plans based on the availability of capital and that capital is restricted by the regulatory cloud that

hangs over our industry, particularly if you are using the UNE–P

strategy.

So thank you for hearing us, and I will be glad to answer questions when it is time.

[Mr. Burk’s statement may be found in the appendix.]

Chairman PENCE. Thank you, Mr. Burk.

And we will enter all the correspondence into the record without

objection.

Mr. BURK. It is attached to the testimony.

Chairman PENCE. Mr. Robert Curtis is with us. He is currently

president of Z–Tel Network Services, and has served as senior vice

president, strategic planning, since July 1999. From May 1998 to

June 1999, Mr. Curtis was vice president for business development

and legal affairs at Z–Tel. From September of 1995 to April of

1998, he was an attorney at the Houston office of Fulbright & Jaworski, L.L.P., where he specialized in antitrust and complex federal litigation. Mr. Curtis graduated from Duke University School

of Law in 1995, and like the Chairman, started his career in the

legal profession, but then got an honest job. At least in Mr. Curtis’

case, that is true. [Laughter.]

Mr. Curtis, you are recognized for five minutes.

STATEMENT OF ROBERT A. CURTIS, PRESIDENT, Z–TEL

NETWORK SERVICES, INC.

Mr. CURTIS. Thank you, Mr. Chairman, for the opportunity to

testify today.

I would like to talk today about an FCC rule that denies small

businesses access to services which, if they were available, would

8

increase their efficiency, profitability, and the service quality they

are able to provide their customers.

Z–Tel is one of the largest competitive providers in the telecommunications industry. We have 250,000 subscribers today. We

are in 35 states. In the last two years, we have grown our revenue

from about zero to $300 million a year.

We are a child of the Telecom Act of ’96. Although we began life

as a software development company, with the goal of developing

and providing innovative software applications to end users, we

quickly discovered that the best way to do that was to provide contact with our software to the end users’ telephone. So we are really

a company that tries to combine two worlds; existing telephone

with new and creative software applications.

Consequently, we have invested over $100 million in software investment, and employ about 85 software development engineers in

our offices in Atlanta.

But that business plan could not exist without something like the

unbundled network element platform. There are two ways that a

telecom company can choose to deploy capital today. It can either

choose to rebuild an existing legacy network, which is a fine business strategy, but not Z–Tel’s.

Or you can choose to take that same capital, deploy it in a different way, try to create innovative things, whether it is an innovative billing system, whether it is a different data network, or

whether, in our case, there is simply innovative software applications to ride on top of the existing network, and that is really the

method we have chosen to take.

So Z–Tel is here to explain how this ill-conceived FCC rule

harms and discriminates against small businesses, because the

rule prohibits these small businesses from receiving our services.

First of all, this rule arbitrarily denies access to some of Z–Tel’s

services simply based on how many lines they have, whether it is

three or more, or whether they are in some areas but not others.

Consequently some small businesses have access to applications

that we think would enhance their businesses while others do not

through, as far as we can tell, arbitrary factors. We think that is

discriminatory.

But there are also some breeds of service that Z–Tel has on the

drawing board, applications that we more or less have working in

our development shops that we cannot deploy right now. One of the

things we really want to try to solve is the problem with many

branch offices in disparate parts of the country. Because we have

a footprint in 35 states, we would be able to connect insurance

branch offices with a voice recognition platform so that insurance

agents could be reached by intelligent messaging capabilities, by

voice recognition communicate with themselves, and communicate

with different insurance branches. But we are not able to offer a

ubiquitous solution to the insurance agent industry—State Farm

would be an example—because some of those branch offices have

more than four lines in the top 50 MSAs, so we cannot offer a ubiquitous solution.

Same sort of thing with the banking industry. We would love to

take our software and deploy an application that would send a

message to every person who receives their social security check on

9

the day that check clears the bank. But to do that we have got to

offer the application to the entire industry, not just the small

branch bank that happens to be in Waco. That is where a tremendous amount of our advantage could come from, offering ubiquitous

service in small towns where other companies are not deploying

any facilities at all. But to make this work at all, you have got to

be able to provide the service to all business of that type, whether

it is in Waco or whether it is in downtown Manhattan, and the existing FCC rule completely prohibits the roll-out of that service.

It also prohibits the growth of a company like Z–Tel because

telecom is very much an economies of scale business. If we are required to develop a product which we can only hope to offer to a

subset of the small business market, it really decreases our incentive for developing products that would be good for businesses

wherever they are and however many lines they have. It also,

frankly, is a scary thing for a company like Z–Tel to have to consider selling phone service to a company who may actually grow because if we sell phone service today to someone who is in Manhattan and they have three lines, we actually would have to give them

back to Bell Atlantic or to Verizon when they got their fourth line.

That is what the FCC rule requires. It certainly does not promote

us competing for small business customers in New York.

So we think this rule is bad policy, it discriminates against small

businesses, and it precludes companies like ours from being even

more aggressive in our development of innovative services for those

businesses.

Thank you for your time.

[Mr. Curtis’s statement may be found in the appendix.]

Chairman PENCE. Thank you, Mr. Curtis.

Our final witness on this panel before the Chair has some questions for our witnesses is Laurence May who graduated from

Franklin Marshall College in 1972 with a B.A. in government, Phi

Beta Kappa. He is a 1975 graduate of New York University School

of Law where he was business editor of the New York University

Law Review.

And for the past 14 years, 12 as a member of the firm, Mr. May

has been associated with Angel & Frankel, P.C. It is a boutique

law firm located in New York City which specializes in business reorganizations, and creditor and debtor rights.

Mr. May has served on various committees, including the committee to review civil procedures for the United States District

Court for the Eastern District of New York, and has widely lectured on bankruptcy-related topics.

And it is delightful to have you here, Mr. May, and you are recognized for five minutes.

STATEMENT OF LAURENCE MAY, PARTNER, ANGEL &

FRANKEL

Mr. MAY. Thank you, Mr. Chairman. I am still searching for my

honest job, but I would like to thank you, Mr. Chairman, and members of the committee for offering me this opportunity to speak to

you this afternoon.

10

Our firm is a small business operating in New York City. We employ approximately 20 people, including the attorneys on staff, and

we have four partners, and I am one of the four partners.

Our local telephone service is now being provided through 16 or

17 local business lines by InfoHighway Communications, Mr.

Gregori’s company. In addition, InfoHighway Communications provides us with our high speed internet access and our e-mail service

as well. And we anticipate that when our long distance contract expires next month we will probably transfer our long distance service to InfoHighway as well.

InfoHighway also provides us with credit card service on long

distance calling which has been rather important for us in the fact

that we have been doing a lot of traveling in our practice recently,

and at rates that we were never offered by any other carrier.

As a small law firm with, I think, a fairly sophisticated practice

in the area of business reorganization and debtor and creditor

rights, we find ourselves competing constantly with much larger

firms. We have to distinguish ourselves based upon our pricing and

the service that we can provide to our clients, and in fact, we use

that as a test to the vendors that we hire to provide services to us.

Prior to InfoHighway, local telephone service had been provided

to us by Verizon or one of its pre-merger predecessors. We generally had the sense that our account, we thought fairly sizeable,

was of insufficient size to be of particular importance to such a

large company. When InfoHighway approached us to provide local

phone services to us, it took the time to understand our business,

to explain how we can control our costs. It took the time to prepare

a very detailed cost analysis for us, and met with me and members

of our firm and people on our staff to explain how our services

could be enhanced and how we could have services provided to us

at a lower rate.

Our firsthand experience with InfoHighway led us thereafter to

transfer our data services to the company. I have no recollection in

all the years that we have been dealing with various phone providers of any other representatives coming to us and discussing our

account or suggesting ways in which we could better manage our

costs.

We really did not think we had a viable alternative in local service until we met InfoHighway, and we are pleased that they are

around to offer us this alternative.

We find it convenient, moreover, and efficient to deal with one

representative telecom vendor, one who can handle all of our various requirements. I think other small businesses need and want

the same kind of services that we now enjoy from InfoHighway. We

do not have the resources and I suspect others in our situation

have the same issue, or the staff to deal with telecom communication issues which would arise and do arise when we have multiple

vendors. We have less influence, obviously, than larger firms, so it

is important that we have vendors who are attuned to our problems and help us compete in the legal marketplace.

When we have questions or when there is a service problem, we

have over the past several months and years found InfoHighway’s

response to be the best of any provider that we have experienced

either before or since.

11

Let me give you an example of one way in which InfoHighway

has helped us save money. Our local calling plan has line fees

which are a lot less than we previously were paying with our other

providers. Our prior calling plan incorporated three-minute requirements which InfoHighway does not.

Given that we are a law firm that does thousands of phone calls

each year, many of which are less than one minute in time, the fact

that we are able to be billed on a minute-by-minute basis rather

than the three-minute minimum saves us substantial amounts of

money.

With InfoHighway, we have a choice as to local phone service

providers. But it is equally important to us that we can look to

InfoHighway for high speed data services through its DSL lines. As

you may or may not be aware, the United States Bankruptcy Court

for the Southern District of New York is a pioneer in the electronic

filing of documents. Much of our practice is with that court, and

it is critical for us that we have access to reliable and reasonably

priced high speed data services so that we can file and retrieve documents and keep apprised of developments in cases in which we

are involved. InfoHighway has admirably addressed our needs in

this respect.

I do not claim, Mr. Chairman, to understand all of the issues before this committee, but I do know that as a small business having

a choice for local phone service has proved important to us. I encourage you and the members of this committee to take the necessary action to be sure that in the future there is more, not less,

competition in this marketplace.

Thank you, Mr. Chairman.

[Mr. May’s statement may be found in the appendix.]

Chairman PENCE. Thank you. The Chair very much appreciates

Mr. May’s presentation, and especially his sense of humor. Let me

begin with some questions for our last witness, except I have a series of questions for some of the competitive providers that are here

to help me understand this a bit better.

But from a practical standpoint, how did you come to find out

about InfoHighway at your firm.

Mr. MAY. Well, I had known Mr. Gregori before he was with

InfoHighway. I believe we had used some of his services at Price

Cellular. And through that connection and prior connections, he

came to us and explained to us what he could offer with

InfoHighway.

Chairman PENCE. Just as a curiosity, when you told Verizon that

you were planning on switching, did they—in the economic model

that you are operating in, did they respond in a competitive way?

Did they offer any of the incentives that were on the table with

InfoHighway?

Mr. MAY. Not that I can recall, Mr. Chairman.

Chairman PENCE. How many law firms that you deal with in

your practice have more than three telephone lines?

Mr. MAY. I imagine almost every one; the substantial majority of

the firms have multiple, multiple lines; even smaller firms.

Chairman PENCE. Would you characterize those nonetheless as

small law firms, small businesses?

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Mr. MAY. Well, we deal quite frequently with large firms, but

firms that I am familiar with of our size and small firms of say five

to 30 lawyers, which I would clearly characterize as small business

firms, have multiple lines, and most of them which do bankruptcy

work in the Southern District also require the high speed DSL

services as well, and have multiple lines as well.

Chairman PENCE. Well, so by inference, I sense that you would

answer affirmative to the necessity of DSL services and this kind

of service to be in the business you are in?

Mr. MAY. Yes, it is essential.

Chairman PENCE. Thank you.

To Mr. Gregori, a very broad question, and I may pose this to

some of the other competitive providers that are here, if the FCC

maintains the current restrictions on the availability of switching

as a UNE, how would it affect the plans of UNE–P carriers to expand?

Mr. GREGORI. Well, I am going to hone in on the last phrase. To

expand?

The industry today is struggling to survive. So under the current

guidelines, the current rules, we are hanging on. The people before

you are very experienced, seasoned individuals that have been

through it before, and we are executing at the very, very basic levels to struggle through it and give life. We need relief in this area.

Any further restrictions, candidly, we close up shop.

Chairman PENCE. Same question to Mr. Burk, and feel free to

elaborate.

Mr. BURK. Well, a lot of our customers are outside the top 50

MSAs, although we do have customers in—quite a few in San Antonio, Houston and Dallas, but a large percentage of our customers

are outside that area.

And having a significant portion of the lines in those areas not

available to us makes it very difficult to market there. We market

with a direct sales force and it is hard to tell a salesman you can

sell the guy on this side of the street, but not on that side of the

street. If a guy has got three dry cleaners, you can say, I can provide service in two of them, but not in the third one it is nonsensical to the customer, and it makes it very difficult to market in

those areas.

But from a cost standpoint, our costs are de-averaged, so our

costs for UNEs are lowest in those largest markets and highest in

those smallest markets. And like the RBOC, the revenues that you

get in the largest markets help you to be able to provide service

in the smallest markets.

So the net effect of it is that we have had to restrict our marketing into the smallest towns in Texas because of the cloud over

our ability to provide service in the largest towns. We do not want

to get what I would call exposed by adverse selection in the cost

model, because the retail pricing works exactly the opposite. The

lowest rates are in the smallest towns, and the highest rates are

in the biggest towns.

So it kind of puts you in a bind, and so what I would say is if

you wanted to do away with barber shops, you do not have to outlaw barber shops, you just have to tax scissors. And so what hapVerDate 11-MAY-2000 03:39 Jan 11, 2002 Jkt 076759 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\A759.XXX pfrm02 PsN: A759
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pens here is that marginal difficulties in providing this service impact the overall business model.

As you can see in my experience, I have done resale, and there

is not enough margins to sustain that in the competitive business,

and I have done facility-based competition. And facility-based competition is a great idea, but it does not work for all customers because it does not have any ubiquity that was spoke of by some of

our competitors. Regardless of the size of town, there is no economic model that I have been able to look at, and I have looked

at a bunch of them, that says you can provide service to small businesses on your own switch no matter what city you are in if you

are providing just analog telephone services, which is what most

businesses still need primarily.

Hopefully, we will have a broad-band solution that allows us to

provide this service economically on a broad scale, but you need

competitors and a market for the technologists to build that equipment for. If the competitors go away, that technology is never coming on line.

Chairman PENCE. Mr. Curtis.

Mr. BURK. Long answer to a short question.

Chairman PENCE. It is a good answer. Thank you.

Mr. CURTIS. Same question?

Chairman PENCE. Please. Would you like me to restate it?

Mr. CURTIS. No. No, thank you.

We would probably focus on the residential market, which we are

already in. We would probably either completely rethink our business strategy in most states, again because our product is set and

the way we approach a problem really requires ubiquity at the moment.

There are a few states where state legislators appear to have

been taking, and state PSCs—have been taking, a lead. Illinois recently passed a wonderful telecom bill which removes the restriction.

As I think Richard had mentioned earlier, Texas, at least until

recently, had no restriction. That is a bit in doubt. And while there

is some restriction, it is modest in New York. So we could focus on

states that are taking a leading role instead of having to depend

on the FCC.

But if the FCC restriction stays in place, we would not be able

to offer the kinds of services that customers have asked us to provide, and it would dramatically curtail a plan to expand in to the

business market.

Chairman PENCE. My question to Mr. Gregori would be how has

the delay—specifically the delay in the FCC’s decision-making affected your business plans?

Mr. GREGORI. Well, the uncertainty of the decision, which way is

it going to go, has a direct impact on the capital markets. There

are specialty lenders into our group who understand exactly what

the limitations are and are kind of waiting in the wings to determine what is the outcome. Should they continue to support and

lend into this sector to help grow the marketplace, or should they

kind of curtail now their lending and stand on the sidelines until

it is resolved?

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It also impacts the amount of dollars we are willing to commit

to marketing, and just how fast we could grow the business. We

think we deliver a really terrific set of value proposition to our

small business customers, both in terms of price and service, and

at the end of the day we think we could win provided the restrictions were lifted.

Chairman PENCE. I know we have a vote imminent, and we will

adjourn the hearing a few minutes after that call comes.

But let me ask Mr. Curtis for starters, but anyone of the providers can grab at this. What evidence does the FCC have that you

are aware of, if any, to demonstrate that small businesses are only

those with less than four telephone lines? Can you inform the

Chair of the Commission’s view of this?

Mr. CURTIS. Be happy to take a swing at it, Mr. Chairman.

First of all, let me say that whatever was the case in 1999, when

this rule was imposed, I think most of us can agree that the world

is a dramatically different place for telecom providers in the winter

of 2001 than it was in 1999.

Let me also say the best evidence I have seen and the most thorough study of what constitutes in the telecom world a small business, and there are differences based on the sort of circuit that one

provides, or the number of lines that one would provide, things like

that, the best evidence I have seen is in a document filed by the

PACE Coalition that argues for 24 lines, which is the digital level.

I think that is overwhelmingly the strong evidence in the record,

and I would encourage you to take a look at that.

Chairman PENCE. Mr. Burk, same question.

Mr. BURK. Yes, I would agree. As well as belonging to PACE, I

have been actively involved in this for quite awhile, and I am unaware of any substantial evidence that supports the three-line restriction.

The one piece of evidence that I would also like to point to that

I think we would all agree with, given the state of competition

today, I cannot understand the rationale for limiting access to any

UNEs anywhere. There is no real basis to do that. I would like to

know just exactly where it is that we have too much competition.

Mr. GREGORI. If I could state——

Chairman PENCE. Please.

Mr. GREGORI [continuing]. What I perceive to be the obvious. I

have three children. I have an internet line at home, a fax line, and

three phone lines. I have already exceeded as an individual the

limitations imposed by the FCC for small businesses. I do not think

they make any sense in today’s world.

Chairman PENCE. Well, judging from the buzzers our time has

passed very quickly. I do want to make a formal note that any of

the witnesses or any interested parties, that this hearing record

will be open for 14 days after the hearing to submit additional remarks, and witnesses and interested parties are encouraged to do

so.

I am extremely grateful to the competitive providers and to Mr.

May for all of your practical experience in this regard. Though a

freshman in Congress, I follow in the footsteps not only of the

former Chairman of the Committee on Small Business, Jim Talent,

who had a passion and a burden for seeing to it that small busiVerDate 11-MAY-2000 03:39 Jan 11, 2002 Jkt 076759 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A759.XXX pfrm02 PsN: A759
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nesses could compete in the regulatory morass that this city tends

to create, but also I follow in the footsteps of Congressman David

McIntosh, who was Chairman of the Regulatory Reform and Oversight Subcommittee of the House Government Reform and Oversight Committee, and I want to assure you that we are going to

proceed with the very simple business of making sure that the

Commission is held accountable, that they respond to former Chairman Talent’s inquiry, and that we move this process along to the

extent that it is within our power to encourage that happening.

Your testimony today has contributed very significantly to my

understanding and appreciation of that. It is important that you all

know that I am a real believer in the free market. I greatly admire

all four of the entrepreneurs that are represented here, having

started a small business in my basement 10 years ago, with more

than three phone lines. I appreciate what you do, and particularly

Mr. Burk, you sharing those heartfelt comments from your customers. I know the value of that to you, it was very meaningful.

It was meaningful to me.

But know that in this competitive marketplace, I do not see good

guys and bad guys, apart from the government. And what I want

to make sure is that the government does not become the bad guy

but lives up to the obligations of the law, and you have assisted

us in very meaningful ways today to see to it that the FCC does

just that.

So thank you very much for being here, and this hearing of the

Subcommittee on Regulatory Reform and Oversight stands adjourned.

[Whereupon, at 3:30 p.m., the subcommittee was adjourned.]

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